UPDATED: Keg Deposit Cost Hikes Result in Boycott by Several Houston Bars

There are 12 beers that The Hay Merchant has on tap year-round. Right now, seven of those aren’t available, including those from local Houston breweries Karbach and Saint Arnold. The missing brews include Saint Arnold Lawnmower, Karbach Hopadillo, Sierra Nevada Pale Ale, Sierra Nevada Hop Hunter and Firestone Walker Union Jack. Additionally, about 15 rotating and seasonal beers from these breweries and others are unavailable.

The reason? A $10 per price hike on keg rentals that unexpectedly appeared on The Hay Merchant’s invoice from Silver Eagle Distributors. Keg deposits went up from $50 to $60.

According to The Hay Merchant’s proprietor Kevin Floyd, there was no warning or discussion beforehand that prices were going up. As an analogy on a much smaller scale, it would be like a customer ordering their $10 burger and finding out when getting the tab that they were being charged $12 instead—a 20 percent increase. "The lack of communication just speaks to the complete lack of respect that Silver Eagle has for the craft beer community," says Floyd.  

We contacted several affected parties on all three levels of the beer distribution tiers who all either declined to comment or failed to provide a response over the past few days, including Silver Eagle, Flying Saucer, Karbach, Freetail Brewing and Saint Arnold. Updated, 6/16/2015: Scott Metzger of Freetail Brewing has been in touch and didn't receive our original phone message. His comments are integrated into the story below.

A $10 per keg increase might not seem like much, but when considering the number of kegs a beer bar like The Hay Merchant has on-hand, it has an impact that ties up thousands of dollars of operating capital. “At any given point in time, industry-wide, a bar like Hay Merchant is floating between 300 and 400 kegs. Some people will argue that’s a one-time expense, but now, all of a sudden, $3,000 that was in my operating account is no longer there. That’s equivalent to raises for two of my managers,” says Floyd. 

Floyd’s response was to boycott buying kegs from Silver Eagle, one of the biggest beer distributors in the United States, excluding multi-state distributors. Several other craft beer bars in the Houston area have joined the boycott, including Petrol Station, Hughie's and the Flying Saucer locations in downtown and Sugar Land. The boycott does not include individually-packaged beers in bottles or cans, so The Hay Merchant was still able to offer Saint Arnold Bishop’s Barrel 10 when it was released on June 10.

“This is not a ‘damn the man’ boycott of Silver Eagle across the board, although some of [the bars] doing this have gone to a complete boycott. I haven’t made that step. I’m just doing draft,” says Floyd.

There are no plans to offer those seven permanent placements in the bottle or can at The Hay Merchant, though. “Honestly, it would be like a 10-to-1 replacement,” says Floyd. The reason is because his bar doesn’t sell nearly as much packaged beer as it does draft.

Caught in the middle are the brewing companies with contracts with Silver Eagle Distributing. Once a brewer signs a distribution contract, they literally cannot get out of it unless some very specific and unlikely conditions apply, like the distributor fails to sell their product for two years straight. It's not like they can just hire a distributor that charges less for keg rentals.

San Antonio-based Freetail Brewing just entered the Houston market a few months ago only to find their sales prematurely curtailed by the boycott.  In fact, founder Scott Metzger told us by phone that his business is "tremendously" affected, saying, "The bars doing this are the places most likely to sell the most of our beer. Being shut out hurts a lot, especially given the investment we made to come into the Houston market, including ramping up our production."  He wrote an essay in response called, "That’s not your keg: Some thoughts on deposits, boycotts, and everything in between." In the essay, Metzger voices some of the concerns on the brewery side, including the cost of lost, damaged and stolen kegs that affects the bottom line.

Metzger additionally points out that Silver Eagle itself is responsible for paying deposits. "Lastly, many have said this is about greed from Silver Eagle. The reality is that Silver Eagle pays keg deposits too," he writes. "Every week when they come pick beer up from me, I charge them a deposit on kegs and give them credit for returns. If they never return a keg, they lose their deposit. The system of deposits rolling downhill keeps accountability on the person who last “rented” the keg."

During a phone call, Metzger says that he's a supporter of higher deposit fees because they are important in ensuring he gets his kegs back. He just, in fact, placed a new order for kegs this morning to assist with Freetail Brewing's expansion into new markets. The cost: a whopping $40,000, and Metzger says that this was a "relatively small order." He says prices tend to fluctuate, but the cost on his most recent order, including screen printing and delivery, comes to $124.68 per keg. "I see higher keg deposits as key to preventing loss. What would really stop keg loss is a $200 deposit. I bet I'd get my kegs back, but it's always a balancing act and we're not really looking to tie up a bar's resources like that."  

It’s not that The Hay Merchant, one of Houston’s largest and most successful beer bars, can’t afford the increased deposit. To Floyd, it’s about a bigger concern on the expensive direction the normally approachable, community-centric craft beer market is heading in.  

“What we were told is that the company that sells kegs to Silver Eagle (Anheuser-Busch) raised its prices to $70, so Silver Eagle raised theirs to $60. When I was told this by Silver Eagle, I said, ‘Really? So, you were planning on taking us from $60 to $70 in September?’ They just kind of stared at me but it was pretty clear that was the case. So, I was like, ‘Oh, if we hadn’t have said anything about the $60, you’d raise it to $70 in exactly the same way.’”

Beer bars, unlike cocktail bars, do not run on huge margins. “That’s a conversation that Bobby and I have all the time. [Bobby Heugel is one of Floyd’s business partners in Anvil Bar & Refuge, among other endeavors.] He crushes margins. Percentage-wise, he’s way more profitable than I am but, by volume, I’m doing more gross. So, basically, the concepts bring the same money in but the concepts are completely different.” So, having big chunks of operating expense being tied up matters a great deal.

“Once one distributor does it, they all move to match,” continued Floyd. “We were at $30 a couple of years ago. Now, everyone is at $50 and Silver Eagle led the pack on that increase as well. Within a year, I’d then have $6000 dollars in my operating budget that I wouldn’t be able to get back. That’s a raise for two managers. That’s a lot of different things.”

Metzger's response: "$6,000 is a bummer, but he does get his deposit back. I don't get my $40,000 [keg purchase] back. It's an investment in equipment and I only get a fraction back through deposits. 

With an increased cost in doing business, why not just pass along the higher costs to customers? “So, in five years are you going to be okay paying $12 for a Lawnmower pint?” asked Floyd.

Well, no. However, that is exactly where Floyd fears the craft beer market is headed and that consumer response will be to turn to less expensive libations. “Honestly, this doesn’t really hurt Hay Merchant very much,” explained Floyd. “I’m pretty able to accommodate these things, but it’s very damaging to the craft beer community as a whole”

Metzger doesn't agree that beer price increases will be the result of higher deposit fees. "More likely, that will happen if there continues to be keg theft and loss. I have to incorporate that in the price of my beer. That cost has to be made up somewhere." He's not yet able to say if he has actually suffered any losses. Freetail is a relatively new brewery and won't know that until they audit their keg inventory this fall.

Interestingly, Houston may have been paying a premium on beer and keg rentals all along. Floyd asserts that, while he hasn't had time to look into the numbers in detail, Houston bars pay more than those in Austin and Dallas. "If you look at three core brands that are distributed state-wide—Firestone Walker, Saint Arnold and Sierra Nevada—you're going to see that Houston pays more. When I ask Silver Eagle about this, they say, 'Well, it's what the market will bear.' We pay more for Saint Arnold in Houston than they do in Austin. This is basically the market saying, 'We will not bear this anymore.'"

Floyd is optimistic about finding a resolution, pointing to the otherwise good relationships within the craft beer market. "Individually, all of us still have great relationships. I've had very heated discussions with some of the upper guys from Silver Eagle. We vehemently disagree on this issue, yet we shake hands and say, 'Good day. I'll talk to you more about this tomorrow.' No matter what happens, it's not going to damage our ability to do business." 

Metzer is also confident that there will be a solution to this issue and seems to hold no grudges, despite the impact on his brewery. "I understand [Floyd's] perspective. Keg loss sucks for the whole industry and it's a problem we need to all work on together. Kevin and Ben [of Petrol Station] are doing good things to ensure that all three tiers operating smoothly." 
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Phaedra Cook
Contact: Phaedra Cook