The South gets in on the craft beer boom

Diamond Bear Brewing Company
Source: Diamond Bear Brewing Company | Facebook

Russ Melton heard mostly skepticism when he started a craft brewery in Arkansas.

"I remember bankers saying, 'You're going to do what? This is Arkansas. People drink Bud and Busch,' " said Melton, president of Diamond Bear Brewing Co. and the Arkansas Brewers Guild.

After 15 years—in most of which the award-winning brewery failed to break even—craft beer has started to catch on in Arkansas. Melton first brewed in a space he jokingly described as "not much bigger than a telephone booth," but this year, he expects Diamond Bear to produce nearly 7,000 barrels.

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Melton estimates that 20 breweries now operate in the state, up from six in 2011. Arkansas' growth isn't unique; states across the southern United States have caught the craft beer wave in recent years.

Only one in a group of seven southern states—Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi and South Carolina—saw less than 20 percent production growth from 2012 to 2013, according to the Brewers Association's most recent state statistics. Considering 2014's national craft beer growth of 18 percent, "it's pretty safe to assume" that production has continued to surge in the region, said Bart Watson, chief economist at the Brewers Association.

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Still, the area lags well behind more established U.S. regions in production. Seven individual states—including industry leaders California, Colorado and Washington—trumped the combined production of that group of southern states in 2013.

"Colorado, Washington and Oregon are naturally slowing down a little bit. It's getting harder to grow. The South is a little farther behind so it's easier to double production," Watson said.

Southern states have growth potential mainly because they're far from saturation, Watson said.

For decades, Louisiana's largest brewery, Abita Brewing, was "the only game" in the state, said Andrew Godley, president of the Louisiana Craft Brewers Guild. The state now has about 15 breweries.

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Godley started Parish Brewing in 2009, making 18 kegs per week with equipment he welded in his garage. He would brew on Saturdays while working as an engineer on weekdays.

Demand for Parish's signature Canebrake wheat ale was steady in small Broussard, Louisiana. Parish broke even by 2012, and Godley expects the brewery to produce about 13,000 barrels this year.

"There's not a single brewery in the South that can make enough beer," he said.

Though consumers have warmed to craft beer in the region, breweries face difficulties in continuing to expand. Many states in the region levy greater excise, or "sin," taxes on beer than the national average, said Nick Petrillo, an industry analyst at market research firm IBISWorld.

The U.S. average is about 28 cents per gallon of beer this year, according to the Federation of Tax Administrators. That number doesn't include the federal beer excise tax or other fees.

Additionally, the Brewers Association's Watson and Diamond Bear's Melton contend that brewers in the region generally have to deal with a tougher regulatory environment than thriving craft beer regions such as the West Coast.

For instance, Mississippi and Georgia are two of the five U.S. states that don't allow some form of retail or on-site sales for craft brewers, said Matthew McLaughlin, general counsel for the Mississippi Brewers Guild. The "direct" sales laws in some states are an exception to the U.S. alcohol industry's three-tier distribution system of producers, distributors and retailers.

Proponents say that a direct retail aspect can drive higher profit margins for brewers.

"The folks here in Mississippi have to be very creative in order to survive," McLaughlin said.

North Carolina is the production leader among Southern states. It currently boasts 125 microbreweries and brewpubs, said Margo Knight Metzger, executive director of the North Carolina Craft Brewers Guild.

Prominent craft brewers Sierra Nevada, Oskar Blues and New Belgium have planted East Coast locations in the state, as well.

Metzger partly attributes North Carolina's growth to "relatively progressive" laws. Still, she noted that "we have work to do."