Tennessee's Craft Beer Industry Rises to a Head

Despite the state's 17 percent beer wholesale tax, craft beer is slowly coming into its own

TENNESSEE BREW STARS: Dave Ohmer is head brewer at Knoxville’s own craft-beer brewery, Saw Works Brewing Company.

Photo by Shawn Poynter

TENNESSEE BREW STARS: Dave Ohmer is head brewer at Knoxville’s own craft-beer brewery, Saw Works Brewing Company.

Married co-owners Anne Ford and Matt Pacetti share the joy of craft-brewed beer at their Gay Street bar, Suttree’s High Gravity Tavern.

Photo by Shawn Poynter

Married co-owners Anne Ford and Matt Pacetti share the joy of craft-brewed beer at their Gay Street bar, Suttree’s High Gravity Tavern.

It’s your average Thursday night crowd at Suttree’s High Gravity Tavern, the newest bar on Gay Street. The space is bustling but not too crowded; there’s an NFL game on the flat-panel televisions, and most of the seats at the long wooden bar are filled.

But it’s Dave Ohmer who’s the real center of attention. The 32-year-old blond is standing next to an elevated table that’s been outfitted with an old-fashioned beer engine—a pump that draws the liquid out, instead of relying on the gas pressure associated with regular taps. The beer, a cask-conditioned hazelnut coffee brown ale, is under the table.

One by one, customers step up to Ohmer with drink tickets they’ve purchased from a bartender. He picks up a pint glass and inserts the spout of the beer engine. Dark brown froth emerges at the bottom of the glass, slowly bubbling to the top. Some people walk away quietly, new drink in hand, but others stay and chat.

“So how long was this aged?” one woman asks.

“Tell me about the flavors. Are they infused or what?” another man queries.

Ohmer can’t answer their questions fast enough. His genuine enthusiasm for the topic peppers his answers, as one question leads to another and then another. Ohmer loves beer, and he loves talking about it, and he loves making it, just as the patrons of Suttree’s love drinking what he’s made.

Ohmer is the head brewer at Saw Works Brewing Company, the latest and most ambitious brewing concern in Knoxville. Saw Works came on the scene in the spring of 2011 as Marble City Brewing Company—legal issues forced a name change earlier this year—but they’re just one of a handful of new fledgling breweries in the state.

“It’s growing fast all of a sudden,” Ohmer says.

Although Tennessee is 36th in the nation in breweries per capita, there’s change a’brewin’ (pardon the terrible pun). The craft-beer market segment keeps expanding, and industry insiders say there’s no reason why Tennessee can’t be a player—that is, with a little bit of luck and a few laws rewritten. There’s still a long way to go, but all in all, it’s not a bad time to be an aficionado of ale in the volunteer state.

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There is this persistent false stereotype of Southerners, one in which we are all bourbon-swilling gentleman and ladies. It’s true, of course, that some mighty fine whiskies are produced in Kentucky and Tennessee, some perhaps finer than those barreled anywhere else in the world. (Heart you, Pappy Van Winkle!) But when it comes down to it, the fact of the matter is this: the South is beer-drinking country.

As a region, the Southeast has the second-highest per capita beer consumption, behind the Midwest. In Tennessee in 2010, the average per capita consumption of liquor and wine was 1.24 gallons and 1.3 gallons, respectively, per year, compared to 19 gallons of beer.

And it’s no wonder, because it’s a hell of a lot easier to get beer than wine or liquor. Grocery stores, convenience stores, drive-through beer marts—beer’s cheap, cold, and ready for the taking, even in a lot of so-called “dry” counties. In fact, the state doesn’t even consider beer to legally be alcohol, unless you’re talking about the high-gravity stuff.

Beer’s popularity is long-standing—recipes for turning a barley bread into a beverage have been found in ancient Sumerian and Egyptian ruins, but the drink is likely older than that. Some scholars think certain American Indian tribes made their own beer long before the European settlers brought their favorite beverage over the seas.

In any case, beer has been a part of the nation’s history since its earliest days. According to statistics from Beer Advocate magazine and information from the American Brewers Association, colonists in Virginia were brewing beer by 1587. The first North American brewery opened in 1612 in what was then New Amsterdam (current-day Manhattan). By the 1870s, there were more than 3,200 breweries in the United States.

Then came Prohibition. While some of the larger breweries were able to stay afloat producing “near beer” and cereal malts, the majority of the nation’s breweries were forced to shut their doors. Beer was once again legalized in 1933, but a year later, just over 700 breweries were in existence.

As industrialization and consolidation increased in the decades that followed, the number of breweries kept dropping and dropping. By 1983, only 80 breweries remained in the U.S. But just under the noses of the big brewing concerns, a revolution was already underway.

In 1976, Jack McAuliffe opened the New Albion Brewing Company in Sonoma, Ca., the first modern microbrewery in the country. It existed for just a few years, but its influence can still be felt today—New Albion reportedly inspired a homebrewer named Ken Grossman to start his own brewery in 1980, a little outfit called Sierra Nevada.

After Congress legalized home brewing in 1978, interest in non-traditional beers began to grow. In 1982, the first legal brewpub since Prohibition opened its doors in Yakima, Wa. By the mid-1990s, the microbrew and brewpub craze had exploded. The number of breweries more than doubled in one year, between 1995 and 1996, to over 1,100.

The trend tapered off a bit after that, but the craft beer market has continued to expand. As of August this year there are now 2,126 breweries (including brewpubs) in the U.S., with another 1,252 breweries in the planning stage; 97 percent of those businesses are craft brewers.

Still, only 22 of those craft breweries are in Tennessee, and the majority of them are brewpubs. However, the Brewers Association says there are at least 17 breweries in the “planning stage” of opening across the state. Of course, the city of Asheville, N.C., alone has a dozen or so breweries scheduled to come online in the next 18 months, in addition to the dozen it already has, so it’s possible that soon one small city just across the state line could have more breweries than all of Tennessee.

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TENNESSEE BREW STARS: Linus Hall is the president of Nashville’s Yazoo Brewing Company , the state’s largest brewery.

Photo by Shawn Poynter

TENNESSEE BREW STARS: Linus Hall is the president of Nashville’s Yazoo Brewing Company , the state’s largest brewery.

So what is craft beer anyway? Is it just beer made with tender-loving care, as opposed to mass-produced swill geared towards the lowest-common-denominator drinker? That’s the definition a lot of brewers like to promote, but the truth is more complicated.

There’s a reason the preferred term has changed over the past decade from “microbrews” to “craft beers”—marketing. A microbrewery is defined by federal tax law as a brewery that produces fewer than 15,000 barrels of beer per year, with at least 75 percent of its beer sold off-site, while brewpubs are defined as breweries that sell at least 75 percent of their beer on the premises. Under these conditions, microbreweries and brewpubs pay less federal tax on their products than large-scale breweries.

But the Brewers Association, the trade association representing the majority of U.S. brewing companies, says that a so-called “regional craft brewery” can produce up to 6 million barrels of beer per year, although the brewery must still be independently owned and traditionally operated (i.e., over 50 percent of its volume produced must be malt beer as opposed to other beverages).

However, that 6 million number is still a long shot. The Boston Beer Company, maker of Samuel Adams, is the largest craft brewery in the country, and it brews just over 2 million barrels a year. (A cynic might note that the Brewers Association has adjusted the upper limit of what constitutes a craft brewery to be higher so that BBC can continue to be considered a craft brewer.) In fact, the total number of craft beer sales in 2011 was just over 11.4 million barrels—only 5.7 percent of the almost 200 million barrel U.S. beer market. More than 90 percent of that market belongs to just three brewers—Anheuser-Busch, MillerCoors, and Pabst.

Yet in a flat market, small breweries are a bright spot in the industry. While beer sales overall have declined 7 percent since 2007, the craft-brewing market segment has continued to rise and shows no sign of slowing down.

“I don’t think craft beer is going to lose ground ever again,” says Bailey Spaulding, the co-founder of Jackalope Brewing Company in Nashville. “There’s tons of room in the market.”

Her neighbor Linus Hall, the president of Yazoo Brewing Company, is slightly more cautious. (The two breweries are just two blocks apart in the Gulch neighborhood of Nashville.)

“There’s a huge growth bubble right now. A lot of people I talk to think it can’t continue at this torrid pace,” Hall says. “Just in the Southeast there are over 2 million barrels coming online in the next couple of years. … Grocery stores can only expand their beer selection by so much.”

But in Knoxville, at least for now, the market is booming. There are the brewpubs—Downtown Grill & Brewery and the Calhoun’s/Smoky Mountain Brewery locations. There’s the Bearden Beer Market, and there are the two Casual Pints, all stacked with hundreds of obscure bottles. There’s Suttree’s and old staples such as Barley’s and Sunspot, each with dozens of taps. Even grocery and convenience stores, from Earth Fare to Aisle Nine, provide a surprising selection. The beer choices in this town trump the wine options by a wide margin.

“People are looking for something new, something unique, something different,” says Nathan Robinette, the owner of both Casual Pints.

He means people like Louis Kittrell, 47, who says he got hooked on craft beers about five years ago because the beers were better, fresher, and, in some cases, local or regional.

“I own a small business—I can relate to the whole small brewers-versus-the-big guys thing,” Kittrell says.

But the more Kittrell has learned about beer, the more often he finds himself stymied by the lack of availability of certain beers in Knoxville.

“It’s catching up,” Kittrell says. “But we’re still limited in what we can get, unfortunately.”

***

FEELING CASUAL: Beer shops like the Casual Pint not only sell exotic bottles of brew, they also serve up drafts, as demonstrated by “Ratchet.”

Photo by Shawn Poynter

FEELING CASUAL: Beer shops like the Casual Pint not only sell exotic bottles of brew, they also serve up drafts, as demonstrated by “Ratchet.”

There’s a reason Kittrell and other beer snobs often drive out of state—North Carolina, Kentucky, Georgia, even Ohio—to buy certain beers that aren’t available in Tennessee. Many of the country’s most prized (and top-selling) craft beers can’t be found here. Beers like those from Bell’s Brewery in Michigan or Dogfish Head in Delaware, the latter of which pulled its distribution from Tennessee last year.

It’s not just because people in the state don’t want these beers, even though the Southeast, as a whole, drinks less craft beer than any other region of the country. And it’s not just because Tennessee requires any beer with an alcohol content of more than 5 percent by weight to be sold in a liquor store, meaning that it can be more of a hassle for breweries to deal with distribution.

No, the main reason some of the country’s best beers can’t be had within state borders is because Tennessee has a 17 percent beer wholesale tax.

Tennessee, like much of the country, has a three-tier system of alcohol distribution. Producers of alcohol must sell their wares to a wholesaler, which then sells it to a retailer. Brewpubs are exempt from this system in the state, but breweries are not. This results in the somewhat absurd scenario in which breweries that want to sell their own beer on site, or simply provide tastings, must first sell their beer to a wholesale distributor and then buy it back. After paying that 17 percent tax.

“Tennessee has the highest beer taxes in the country. … It’s kind of hidden, so the consumer doesn’t see that on the receipt,” says Hall, sipping a glass of freshly brewed ale in the Yazoo taproom.

Hall is the president of the board of directors of the recently formed Tennessee Craft Brewers Guild, which is hoping to raise enough money to hire a lobbyist at some point during the next two-year legislative session to try to get the law changed. Yazoo is the state’s largest brewery, with an output of more than 13,000 barrels last year, a number that’s been growing exponentially every year since Hall started the company in 2003. But Hall says the wholesale tax is an unfair burden on all the small breweries of the state.

“The net effect is that it pushes down the revenues of breweries in Tennessee,” Hall says. “We make more selling our beer in Mississippi than in Nashville, even with freight—and not just a little bit more, but significantly more.”

With more revenue from lower taxes, Hall says he could hire more employees and expand his production. Saw Works co-founder Adam Palmer agrees.

“It seems very clear that right now the tax structure is the most prohibiting factor for those who are thinking about producing beer in the this state,” Palmer says.

And with lower taxes, more small out-of-state breweries would distribute in Tennessee. They don’t right now, according to Hall, because “margins are too thin because of taxes.”

Trying to convert the 17 percent tax to a flat tax per volume that wouldn’t proportionally affect smaller breweries more than larger breweries is the Guild’s first item on its agenda, but it’s not the only one. Spaulding, another member of the board of directors, says she’d like the regulations around bar licensing changed. As it now stands, if Jackalope were to brew high-gravity beers, it couldn’t sell them in its taproom without getting a bar license. But if the taproom had a bar license, then it couldn’t do growler fills, which Spaulding says is a large part of her business.

“It just makes no sense. It’s just a lot of hoops to jump through. It’s really hard to compete with out-of-state breweries who do double IPAs and imperial stouts. I can’t sell a bottle of low-gravity beer for $12,” Spaulding says.

But Spaulding is hopeful the lure of new jobs will persuade the Legislature to change things around.

“Other states have shown craft brewing can be a really big industry, and I think it can be a really big industry in Tennessee if we can get a couple of things changed in our favor.”

The Brewers Association says craft brewers provide an estimated 103,585 jobs in the U.S. (that number includes wait staff in brewpubs), which Yazoo’s sales and marketing director Neil McCormick says is 50 percent of the jobs in the brewing industry in the country.

“Imagine if we just doubled our output. Imagine all the new jobs,” McCormick says.

Given that craft beer sales nationally have already risen 14 percent in the first half of this year, it’s not hard to imagine at all.

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MARKET WATCH: The Bearden Beer Market was Knoxville’s first dedicated craft-beer shop, and features an outdoor patio that hosts beer-centric events, like its Oktoberfest celebration with all-German brews, on Sunday, Sept. 23, 2-6 p.m.

Photo by Shawn Poynter

MARKET WATCH: The Bearden Beer Market was Knoxville’s first dedicated craft-beer shop, and features an outdoor patio that hosts beer-centric events, like its Oktoberfest celebration with all-German brews, on Sunday, Sept. 23, 2-6 p.m.

Most of the state’s new breweries in the planning stages are in the Nashville area, but at least one new taproom is heading to the Knoxville vicinity soon—the Bluetick Brewery is set to open in Maryville in February. Blackberry Farm has also recently started making its own beer, although sales are are currently restricted to a select mailing list.

Still, the best news for Tennessee’s craft beer lovers remains the growth of the market. The more consumers buy craft beer, the more types of beer distributors will carry, and the more bars will stock odd and unusual brews. That’s why Matt Pacetti, 32, says he, along with his wife Anne Ford, decided to open Suttree’s. Pacetti was a longtime employee of Downtown Wine and Spirits, and he says that it was conversations with his customers that gave him the idea for the tavern.

“I knew [the market] was there, and I knew I wasn’t the only person driving out of town to go buy beer and to go to beer bars,” Pacetti says.

Ford says she hopes the market continues to grow, not just so that Suttree’s will remain a success but also so that Knoxville can—dare we say it—become a tiny bit more like Asheville, at least in terms of its beer appreciation.

“I think the more beer bars there are downtown, the more beer drinkers will come downtown and it will become a destination,” Ford says.

In the meantime, back in a hidden corner of the cooler, there will remain a stash of Budweiser tall-boys.

“That is the only macrobrew in the bar,” Pacetti says. “I don’t understand who’s buying it, but every few weeks I need to order more.”

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