The great malternative scam: Hidden, untaxed liquor

WHAT, IN THE name of the late, great Adolphus Busch, is Bacardi Silver?

And what makes Skyy Blue?

These clear, soda-like alcoholic beverages hit the shelves last month and, backed by millions in slick marketing campaigns, are vying to become the Trendy Booze of ’02.

Though their labels imply they contain distilled spirits, Bacardi Silver isn’t rum, and Skyy Blue isn’t vodka.

And, though they’re made by America’s two biggest brewers – Anheuser-Busch and Miller – they aren’t beer, either.

Instead, they are part of a growing wave of alcoholic drinks that are the artificially flavored, chemically treated equivalent of a boilermaker: a beer spiked with a shot of hard liquor.

Known as malternatives, the drinks are a troublesome hybrid that federal authorities have yet to fully define or regulate. And that’s allowed brewers to:

  • Avoid paying millions in higher taxes on hard liquor.
  • Advertise distilled booze on TV, in violation of most network standards.
  • Sell liquor alongside beer in delis and, in other states, in grocery stores and pharmacies.

So-called malternatives are slightly more potent than a typical lager but as sweet as Mountain Dew. And that has some parent and anti-alcohol groups worried.

Their advertisements are sometimes misleading, and that has competitors crying foul.

And their ingredients are so secret, state officials are uncertain how to tax and regulate the stuff.

Yesterday, the U.S. Bureau of Alcohol, Tobacco and Firearms finally reacted to some of the complaints with a crackdown on deceptive labels. Anheuser-Busch and Miller were ordered to remove the words “rum” and “vodka” from the bottles.

“It tended to be confusing,” said ATF spokesman Jim Crandall.

He also said the agency would begin a full-scale investigation of malternatives.

“Just what kind of product is it? ” Crandall said. “Either it’s a malt beverage or it’s a distilled spirit. You can’t have it both ways. “

Never mind that enough of either gets you equally drunk: the distinction between beer and liquor today is grafted into the American subconscious.

For more than 100 years, U.S. brewers have sought to distance their product from hard alcohol. As the nation marched toward Prohibition, St. Louis brewing patriarch Adolphus Busch protested that his brew was a “light, happy drink,” a beverage of refreshment, not intemperance. And when the 18th Amendment was repealed, the industry won exemptions from the controls placed on distilleries.

Today, the difference is reflected on TV: no hard-liquor ads on the networks. And it’s part of the tax code: beer and malt-based beverages pay less than half the rate of taxes on distilled alcohol.

But malternatives – especially the new breed with hard-liquor labels – muddy that distinction.

Technically, they’re malt beverages, because they contain federally mandated minimum quantities of malt and hops, the ingredients that give beer its sweetness and bitterness.

Brewers, however, have devised a method to strip out the color and all remnants of taste by filtering the brew through activated carbon. Then, with a colorless, tasteless liquid as a base, they add assorted chemicals and other ingredients to flavor the beverage. Those flavorings, not coincidentally, often contain high levels of distilled alcohol (think vanilla extract).

And that’s the loophole.

Brewers can’t spike their beer by dumping a gallon of rum into a keg. That would violate a federal requirement that “the alcohol present in a malt beverage must be the result solely of fermentation at the brewery. “

However, if they call the distilled alcohol a so-called “non-beverage flavoring,” it’s legit.

Initially, the flavorings were a minor ingredient.

But the ATF now acknowledges that some of the flavored malt beverages on the market derive 100 percent of their kick not from fermentation but from the distilled alcohol in the flavorings.

So, if it doesn’t taste like a malt beverage, doesn’t look like a malt beverage and doesn’t get its alcohol from malt fermentation, is it really a malt beverage?

The ATF said it’s not sure. The distinctions between flavored malt beverages and hard booze, the agency said in a 1996 report, “are becoming increasingly blurred and undefined. “

It vowed then to begin writing new rules “to prevent consumer deception. ” It took no action till this week’s order.

“They thought the products were going to go away,” said one beer-industry lobbyist who spoke on condition of anonymity. “A flash in the pan. “

Said Crandall: “For some reason, the rule-making never happened, and now we’re stuck with these products. “

As a result, malternatives escape the network-TV ban, and they can be purchased at delis, not liquor stores.

The inaction also has been a multimillion-dollar windfall for the producers, because malternatives are taxed at the same lower rate as beer.

Industry leader Smirnoff Ice, for example, pays about $25 per 31-gallon barrel in state and federal excise taxes. Had Smirnoff Ice been classified as a distilled alcohol, though, it would have been taxed at more than $70 per barrel.

The favorable classification meant that, last year alone, Smirnoff Ice’s maker reaped tax savings of more than $80 million. Industrywide, experts believe, the tax break next year may reach a quarter-billion dollars.

Two years ago, flavored malt beverages were virtually nonexistent. Wine coolers were passe and Coors looked ready to pull the plug on Zima.

Consumer tastes are nothing if not fickle, though, and by 2000 a new class of fruity, soda-like drinks – known as alcopops in England and Australia – was emerging overseas.

Mark Anthony International of Canada was first to jump into the American market with a brew called Mike’s Hard Lemonade.

The next year, Britain’s Diageo PLC conglomerate – the owner of Guinness and Burger King – joined the game. Diageo also owns Captain Morgan rum, Crown Royal Whiskey and America’s best-selling vodka, Smirnoff.

In a remarkably successful launch last year, Diageo began selling a new, sweet-tasting malternative with the familiar Smirnoff label. In its first year, Smirnoff Ice sold an astounding 1.8 million barrels – about 1 percent of the $26 billion domestic beer industry, according to Modern Brewery Age magazine.

First-year sales were so strong, Guinness last fall bought an old Pabst brewery outside Allentown just to make Smirnoff Ice.

Diageo says its success is due to Smirnoff Ice’s light, sweet flavor, which appeals to those who do not like the taste of beer. But competitors complain the brand name attracts consumers who believe the beverage contains Smirnoff vodka.

“It’s deceiving,” a spokesman for Mike’s Hard Lemonade said of Smirnoff Ice. “They’re misleading consumers. “

Whatever drives sales, Smirnoff Ice caught the attention of the world’s biggest brewer.

Last month, Anheuser-Busch – the company that 100 years earlier had kept distilled alcohol at arm’s length – climbed into bed with one of the biggest names in hard liquor: Bacardi.

This wasn’t a merger. A-B merely borrowed the Puerto Rico-based rum-maker’s name and trademark bat symbol, and plastered it on bottles of its own malternative. Confusingly enough, even its name, Bacardi Silver, mimics the former brand name of Bacardi’s clear rum.

Miller, the No. 2 U.S. brewer, is doing the same thing with Skyy vodka, and has plans to produce other malternatives with Sauza tequila, Jack Daniels whiskey and Stolichnaya vodka brand names.

Suddenly, what the ATF and others in the industry thought was a passing fad had become its own market sector.

According to the Beer Institute, the industry’s main trade group, malternatives now account for 2.5 percent of beer sales, about the same as microbrews. Analysts think it could rise to 10 percent.

“If history is any example,” said Jeff Becker, the institute’s president, “the category is probably here to stay. “

Others doubt it. They say malternatives merely cannibalize the light-beer market.

“Plus,” said former beer importer Philip Van Munching, “once the consumer is really aware that there’s no rum in Bacardi Silver, they’re going to start making fun of it, and the category is really dead. “

If not rum, then what exactly is in Bacardi Silver?

Anheuser-Busch says in internal documents that rum is “an ingredient in one of the flavors” of Bacardi Silver. An A-B fact sheet says it’s made “with the flavor of Bacardi Rum. “

Miller likewise says “Skyy Blue’s flavor system includes a flavor that is Skyy Vodka. “

If that sentence parsing is confusing, it’s also a necessity.

A-B can’t come out and boldly proclaim there’s a shot of Bacardi in every bottle. Under ATF rules, remember, any distilled alcohol must be a “non-beverage flavoring,” not a stand-alone liquor.

Still, they get close.

Miller, for example, initially told distributors in a brochure that its Skyy Blue contains “natural flavors, including real Skyy Vodka. “

When Arkansas’ Alcohol Beverage Commission got wind of the brochure, it immediately put a hold on Skyy Blue sales.

“Miller was saying it can be sold wherever beer is sold,” said an Arkansas ABC official who asked to remain anonymous. “Wrong, wrong wrong. If it contains vodka, it’s a spirit. “

The confusion stems from the secrecy under which brewers operate. Beer is one of the few consumer products that is not required to list its ingredients on the label.

No wonder. Beer makers promote an image of themselves as traditional artisans using only malt, yeast, hops and water in their brews. However, the truth is many of the biggest sellers use a wide range of chemicals to flavor, stabilize and preserve their beer. The Beer Institute maintains a list of permitted additives that could fill a phone book.

Outside the breweries, though, only the ATF knows what’s inside malternatives. Brewers must file a statement that outlines ingredients and brewing methods, but those statements are kept secret from the public.

Though Miller and A-B say they meet ATF’s definition for malt beverages, several states are starting to question the federal standards.

“If all the alcohol is coming from the flavoring, I would question whether this is any longer a malt beverage,” said Randy Yarbrough, assistant administrator at the Texas Alcohol Beverage Commission.

Texas has requested the ATF turn over the closely held formulas for the top 10 malternatives, “to determine exactly what these products are,” Yarbrough said.

“We’ve got concerns they may be misleading the public. “

In Pennsylvania, Liquor Control Board chairman John Jones said he was reluctant to push for a redefinition of malternatives.

“Before, everything fit into a niche,” said Jones. “But this is really a different kind of hybrid product . . . There’s going to have to be some scrutiny and a thought that there should be some different regulations. “

But it’ll have to be the ATF or lawmakers who make those changes.

“One of the problems with a state-control agency is if I, as chairman, say these products ought to fall in the realm of spirits, it looks like I’m empire-building,” Jones said. “And I risk the substantial wrath that would be generated from the beer industry.”


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