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Uncle Sam’s revealing wine and spirit report card
TL;DR TTB's Annual Report 2020
Welcome to the latest edition of TL;DR.This is where I provide a summary of a recent industry report or survey and share my own commentary. Think of it as Cliff Notes for wine and spirit professionals. Today we’re looking at the Alcohol and Tobacco Tax and Trade Bureau's Annual Report Fiscal Year 2020.
What it is
I recall a distillery owner in the early 2000s telling me that the “TTB is one of the US government’s most helpful bureaus to call if you don’t mind being put on hold for hours at a time.” The owner wasn’t being facetious. He was able to get the answers he needed. One tends not to be as lucky with the IRS; give them a call and you only have a 1-in-50 chance that a human will pick up the phone. The consistently underfunded TTB was and is run as efficiently as any other arm of the government.
Every year the TTB—the bureau responsible for collecting taxes on alcohol and overseeing wine and spirit labels—writes a report card of itself for the benefit of the American taxpayer. While the report amounts to a self-evaluation, one can glean some unique insights into broader alcohol trends. The report for the TTB’s 2020 fiscal year runs 118 pages long. Here’s what you need to know in less than 700 words.
What it says
The report was published in February and reviews the year ending on September 30, 2020.Get past some of the self-congratulatory rhetoric and you uncover some interesting if unexpected takeaways relevant to suppliers, importers, distributors:
For FY 2020, “the overall volume of alcohol beverage label submissions began to decline,” though “over the last 10 years, the total number of label applications has increased nearly 40 percent.”
“Total formula submissions increased more than 20 percent in FY 2020, indicating that industry members continued to innovate and create new product lines throughout the pandemic, with malt beverage formulas increasing at the fastest rate. In the last two years, malt beverage submissions have nearly doubled.” Thanks, hard seltzer boom.
Despite the above fact, more alcohol permits (for producers, wholesalers, and importers) were issued in FY 2020 than either FY 2019 or 2018.
“Since FY 2016, the number of authorized wineries has increased 60 percent. The growth rate for brewers and distillers has been far greater, at roughly 80 percent for both business types.”
“In FY 2020, alcohol revenues [from Federal Excise Tax collection] increased, despite the extension of CBMA provisions [which greatly reduced the rate at which some alcohol was taxed] and the impact of the COVID-19 pandemic, and represent approximately 41 percent of total excise tax collections.”
The TTB believes its greatest operational risks are evolving cyber threats, outdated technology, tax reform implementation, the meteoric growth of the alcohol industry (and trying to keep pace with it), and workforce readiness (it faces issues with staffing and retaining employees with high levels of institutional knowledge).
Why it matters
The TTB has the numbers to back up or refute trends touted by stakeholders who only cite the anecdotal evidence. Here are a few worth noting:
COVID meant that many producers and importers pumped the breaks on introducing new products as evidenced by a decline in new label applications (COLAs). The exception was for spirits, where new label submissions had a slight uptick from the previous year. My guess is that this now means the rest of 2021 and all of 2022 will see a deluge of previously postponed releases enter the market.
More companies are making alcohol, importing it, or wholesaling it. While recessionary periods, usually spell out a period of contraction, M&As, and general consolidation, the unique circumstances of the pandemic, found more people confidently striking out on their own.
“In FY 2020, alcohol revenues [from Federal Excise Tax collection] increased, despite the extension of CBMA provisions [which greatly reduced the rate at which some alcohol was taxed] and the impact of the COVID-19 pandemic, and represent approximately 41 percent of total excise tax collections.” Wow.
The TTB is going to be strained. The business is evolving faster than the bureaucracy that oversees it. The revenue from excise tax on alcohol saw “an increase of 3% over last year and no change from 2016.” The TTB’s budget and size of its workforce are stagnant, while the number of stakeholders it regulates is growing.
What it means for you
If you’re a supplier or an importer… don’t expect processing times to get faster. The TTB caught up on a massive backlog in 2020. With labeling processing times already between 3 and 5 business days, and lots of products likely in development, it’s worth building a cushion around ETAs on approvals. Compliance is going to take longer. Also, prepare for there to be a lot of new small players in town. They might not be visible yet, but the competition is coming.
If you’re a sales rep… any advantages you had from 2020’s growth in alcohol sales and some competitors being driven from the market will soon be erased. Buyers will be spoiled with choice. Remember that no one must work with you unless they want to.
If you’re a portfolio manager… you have options. There are more homegrown producers than ever (or at least the end of Prohibition). If you need to add a new producer to your catalog, the current market offers tremendous opportunities in the choices that will be available to you.
TL;DR = Too Long; Didn’t Read
The names of reports like this one warrant executive summaries. Who can bother to get past the cover of these things with their “seductive” and “snappy” titles?
With 521 employees, 11 office locations, and a budget of nearly $120 million, it collected $20 billion in tax revenue during its 2020 fiscal year. For more on the pros and cons of the TTB, read Ah So Insights’ “What the TTB won’t tell you.”
Note that all quotes are pulled directly from the report.
To be exact, “the total volume of label applications down 8 percent this year. Distilled spirits applications were the exception, which increased 4 percent over FY 2019.”