GOVERNMENT PROPOSES MALTERNATIVE REGULATION

Carol Angrisani

WASHINGTON -- The U.S. Treasury Department's Alcohol and Tobacco Tax and Trade Bureau has proposed a regulatory change to flavored malt beverages that could affect how FMBs are produced, marketed and distributed.

At issue is the amount of distilled spirits flavoring in the beverages, often called malternatives. As much as 99% of the alcohol in many of these products is derived from the distilled spirits found in the added flavoring, and not from the brewing process, according to the TTB. This would make the beverage more in line with a distilled spirit, not a beer, as malternatives are currently marketed, the TTB states.

"The big question is, 'Is it still a beer when it doesn't taste like beer, look like beer or get its alcohol from fermentation?"' said Jim Crandall, spokesman, TTB and the Bureau of Alcohol, Tobacco and Firearms, the predecessor agency to TTB.

Under the proposal, malt beverages would be defined as those in which less than 0.5% of total alcohol content is derived from distilled spirits. Those with more than 0.5% could be either reformulated to remain within the standard, or reclassified as distilled spirits, and consequently taxed, marketed and distributed as such.

"We're not saying you can't put in flavorings. But how much is enough and how much is too much?" Crandall said.

The situation could have implications for supermarkets that cannot sell distilled spirits. At present, 19 states have laws that allow grocery stores sales of distilled spirits by off-premise retail licensees; allow local governments to decide whether to allow or prohibit such sales; or allow sales in grocery stores subject to physical separation, such as walls, according to the Distilled Spirits Council of the U.S., a trade association here. The proposal has been put up for a 90-day public and industry comment period. The TTB will take comments into consideration before it makes a final ruling. According to the TTB, proposed rules are often modified or even withdrawn as a result of this open process. Another option the TTB has considered is defining malternatives as those in which 51% of the alcohol comes from fermentation.

At least one state is already acting on the TTB's inquiry into FMBs. The Oregon Liquor Control Commission may notify retailers that under current state law, malt beverages cannot contain over 0.5% distilled spirits. Those that do should be sold only in state-owned liquor stores, not in supermarkets or convenience stores, according to the OLCC.

The Oregon state attorney general's office is reviewing the letter. If approved, it could be mailed in early April. The purpose of the letter is to put the industry on notice. No enforcement is expected until 2004, said Ken Palke, OLCC spokesman.

A bill that has been introduced could stall enforcement even longer in Oregon. Under the bill, malt beverages may continue to be sold and taxed as malt beverage until July 1, 2005, even if they contain more than 0.5% of distilled liquor. Nevertheless, the situation is far from good news for a category that has already shown some weaknesses. Beverage Marketing Corp., New York, a market research company, expects sales to be flat at best this year, according to Gary Hemphill, senior vice president.

Several Oregon retailers polled by SN said they don't foresee much growth this year. While the market has been flooded by numerous brands and flavors, Roth's Family Markets, Salem, Ore., has begun to cut back on several stockkeeping units due to poor performance. The retailer now only offers the category leaders, which include Smirnoff Ice and Mike's Hard Lemonade, according to Tim Jennings, sales and marketing director. But other Oregon retailers report brisk sales.

Malternative sales are especially significant during the summer and holiday periods at Manzanita Fresh Foods, a two-store operator in the resort area of Manzanita, Ore., said Jim Welsh, owner. In the summer, Manzanita sells about 20 to 30 cases of malternatives a week. Welsh said his business would be adversely affected if malternatives were limited to liquor stores.

While malternatives aren't big sellers Food4Less in Portland, Ore., Mike Leech, store owner, doesn't like the idea of the OLCC addressing the 0.5% issue, saying, "It's more a matter of semantics than anything else."

Gary Galanis, spokesman for London-based Diageo, questioned why the TTB is making a case about malternatives now, being that they've been on the market for the last 10 years. Diageo markets Smirnoff Ice, the No. 1 flavored malt beverage, along with other brands. "Malt beverages don't have more than 5% alcohol by volume, just like beer, so does it matter from a consumer standpoint where the alcohol is derived?" Galanis asked. He said research has shown consumers don't care about alcohol derivation, only about alcohol-by-volume content.

Miller Brewing Co. and Anheuser-Busch are among the brewers that produce and distribute malternatives. Miller declined to comment, referring questions to the Beer Institute, Washington. Representatives from Anheuser-Busch were unavailable for comment.

Senior members of the Beer Institute here, a trade association for the malt beverage industry, support the 0.5% standard of identity proposal, according to Jeffrey Becker, president. The Beer Institute says such a standard of identity will not adversely affect U.S. or international beverage producers or flavor manufacturers.

But the Flavored Malt Beverage Coalition objects to the 0.5% proposal, said Greg Altschuh, administrator of the coalition, an eight-month-old group formed in response to the TTB's scrutiny of malternatives. The coalition currently has eight members, including Diageo and Mark Anthony Brands (Mike's Hard Lemonade). Altschuh is a lawyer in private practice in Greens Farms, Conn., and also former chief regulatory counsel for Seagram's. The reason for the objection is that if FMB producers don't reformulate, sales of their products would be limited in many states to liquor stores -- a move that could alienate many consumers, and consequently hurt the category. Altschuh acknowledged that FMB companies could reformulate to stay within the 0.5% standard. But, aside from the expense involved, he said research and development officials at FMB companies have tested a reformulation, and the end result was a beverage that didn't taste good. The Beer Institute maintains, however, that a good-tasting product can be produced within the 0.5% standard, Becker told SN.