BILL ANALYSIS                                                                                                                                                                                                    Ó






                                                       Bill No:  AB  
          779
          
                 SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
                       Senator Roderick D. Wright, Chair
                           2013-2014 Regular Session
                                 Staff Analysis


          AB 779  Author:  Bocanegra
          As Amended:  June 11, 2013
          Hearing Date:  June 25, 2013
          Consultant:  Art Terzakis

                                     SUBJECT  
                              Alcoholic Beverages

                                   DESCRIPTION
           
          AB 779 adds a new provision to the Alcoholic Beverage  
          Control (ABC) Act that grants  beer manufacturers producing  
          more than 60,000 barrels of beer per year the privilege of  
          also manufacturing "cider or perry" at their licensed  
          premises and to sell the product to any licensee authorized  
          to sell wine.  Specifically, this measure:

          1)Authorizes a licensed beer manufacturer that produces  
            more than 60,000 barrels of beer a year to manufacture  
            cider or perry, as defined, at the licensed premises of  
            production and to sell cider or perry to any licensee  
            authorized to sell wine.

          2)Specifies that "cider" and "perry" have the meanings  
            provided in Section 4.21(e)(5) of Title 27 of the Code of  
            Federal Regulations.  [Cider and Perry are fruit wines  
            derived wholly (except for sugar, water, or added  
            alcohol) from apples or pears.]

          3)Also, makes minor technical and code maintenance changes  
            to existing provisions of law. 

                                   EXISTING LAW

           Existing law establishes the Department of ABC and grants  
          it exclusive authority to administer the provisions of the  
          ABC Act in accordance with laws enacted by the Legislature.  




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           This involves licensing individuals and businesses  
          associated with the manufacture, importation and sale of  
          alcoholic beverages in this state and the collection of  
          license fees or occupation taxes for this purpose. 

          Existing law authorizes a licensed beer manufacturer, at  
          the licensed premises of production, to sell to consumers  
          for consumption off the premises beer that is produced and  
          bottled by, or produced and packaged for, that  
          manufacturer.

          Existing law also grants licensed beer manufacturers the  
          following privileges: (1) selling beer to any person  
          holding a license authorizing the sale of beer; (2) selling  
          beer to consumers for consumption on the manufacturer's  
          licensed premises or on premises owned by the manufacturer  
          which are contiguous to the licensed premises and which are  
          operated by and for the manufacturer; and, (3) selling beer  
          and wine, regardless of source, to consumers for  
          consumption at a bona fide public eating place on the  
          manufacturer's licensed premises or at a bona fide public  
          eating place on premises owned by the manufacturer which  
          are contiguous to the licensed premises and which are  
          operated by and for the manufacturer.

          Additionally, existing law provides that licensed beer  
          manufacturers and holders of out-of-state beer  
          manufacturer's certificates may be issued and may hold  
          retail package off-sale beer and wine licenses.  The law  
          also stipulates that alcoholic beverages produced or sold  
          at or from the off-sale premises which are not produced and  
          bottled by, or produced and packaged for, the beer  
          manufacturer must be purchased by the beer manufacturer  
          only from a licensed wholesaler.

          Existing law, known as the "tied-house" law, separates the  
          alcoholic beverage industry into three component parts, or  
          tiers, of manufacturer (including breweries, wineries and  
          distilleries), wholesaler, and retailer (both on-sale and  
          off-sale).  

          Tied-house refers to a practice in this country prior to  
          Prohibition and still occurring in England today where a  
          bar or public house, from whence comes the "house" of tied  
          house, is tied to the products of a particular  
          manufacturer, either because the manufacturer owns the  




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          house, or the house is contractually obligated to carry  
          only a particular manufacturer's products.   

          The original policy rationale for this body of law was to:  
          (a) promote the state's interest in an orderly market; (b)  
          prohibit the vertical integration and dominance by a single  
          producer in the marketplace; (c) prohibit commercial  
          bribery and protect the public from predatory marketing  
          practices; and, (d) discourage and/or prevent the  
          intemperate use of alcoholic beverages.  Generally, other  
          than exceptions granted by the Legislature, the holder of  
          one type of license is not permitted to do business as  
          another type of licensee within the "three-tier" system.  

          Existing law defines an "on-sale" license as authorizing  
          the sale of all types of alcoholic beverages: namely, beer,  
          wine and distilled spirits, for consumption on the premises  
          (such as at a restaurant or bar).  An "off-sale" license  
          authorizes the sale of all types of alcoholic beverages for  
          consumption off the premises in original, sealed  
          containers.  

                                    BACKGROUND
           
           Purpose of AB 779  :  According to the author's office, cider  
          is the nation's fastest-growing beverage category yet it  
          makes up only a very small portion (less than 1%) of total  
          U.S. alcoholic beverage sales and thus has the potential  
          for greater growth.  

          The author's office references the fact that existing ABC  
          law establishes a number of licensure categories for  
          alcoholic beverage manufacturers.  For example, breweries  
          must possess a Type 01(Beer Manufacturer) license for the  
          production of beer while wine producers must possess a Type  
          02 license.  In some cases, a beer manufacturer may have  
          the capacity, technology and workforce to produce more than  
          one type of alcoholic beverage (e.g., beer and cider) yet  
          the law limits that licensed manufacturer to only one type  
          of alcoholic beverage per licensed manufacturing site.  

          The author's office states that this measure is intended to  
          simplify the licensure process for alcoholic beverage  
          manufacturers who can produce more than one beverage type  
          by allowing the holder of a Type 01 license to produce not  
          only beer but also cider and perry.  The author's office  




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          believes that the growth of the cider market in California  
          will occur at bars and restaurants in light of the fact  
          that they have more open taps for various craft beers and  
          also because they've shown a willingness to expand their  
          alcoholic beverage offerings.  

           What is Cider?   Cider is a fermented alcoholic beverage  
          made from fruit juice, most commonly and traditionally  
          apple juice.  Cider varies in alcohol content from 2% ABV  
          to 8.5% or more in traditional English ciders. In some  
          regions, such as Germany and the United States, cider may  
          be called "apple wine."  Cider is often stronger than beer,  
          and is frequently over 6% alcohol by volume - common    
          eating apples are generally unsuitable for cider making,  
          being low in tannins; specific apple cultivars bred  
          especially for cider making are preferred.

          In California, hard ciders are considered wine because  
          they're fermented from fruit and thus can only be  
          manufactured by a holder of a Type 02 ABC license  
          (Winegrower).  Existing law explicitly limits an alcoholic  
          beverage manufacturer to only one licensed type of beverage  
          per manufacturing site.

          Industry studies show that volume sales of cider in the  
          U.S. grew by 20% in 2011.  This growth was largely  
          attributed to the popularity of craft beer in the U.S. and  
          consumers' desire to try new flavors and tastes.   
          Familiarity with the wide variety and tastes of craft beers  
          has allowed consumers to venture into giving other  
          alcoholic beverages a go.  Some craft breweries have also  
          begun to add a cider offering to complement their craft  
          beer portfolio.  Cider volume sales are projected to grow  
          well over 10% during the next 3-4 years.  More sales have  
          also resulted in greater product offerings by  
          manufacturers.  For example, in 2011, the Boston Beer  
          Company, maker of Samuel Adams, entered the cider market  
          with its Angry Orchard brand.  In February 2012,  
          MillerCoors' Tenth and Blake craft-imported unit purchased  
          Crispin Cider Company of Minneapolis and the brand volume  
          more than doubled.  In May 2012, Anheuser-Busch InBev (A-B)  
          also made a play with Michelob Ultra Light Cider, a  
          low-calorie entrant, which accounted for 350,000 cases.   
          This year, A-B expanded its presence with the launch of  
          Stella Artois Cidre.  Constellation has also entered the  
          market through its Crown Imports division, which began  




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          importing Carlsberg-owned Somersby Apple Cider into the  
          U.S. last year.  Mike's Hard Lemonade Co, in April launched  
          Smashed Apple Cider.  The U.S. market's top cider brand by  
          sales, Woodchuck, produced by the Vermont Hard Cider Co.,  
          grew 25% last year. 
             
           What is Perry  ?  Perry or pear cider is an alcoholic drink,  
          made from pressed pears, especially grown for this purpose.  
           Traditional perry making is broadly similar to traditional  
          cider making, in that the fruit is picked, crushed, and  
          pressed to extract the juice, which is then fermented using  
          the wild yeasts found on the fruit's skin. The principal  
          differences between perry and cider are that pears must be  
          left for a critical period to mature after picking, and the  
          pomace must be left to stand after initial crushing to lose  
          tannins, a process analogous to wine maceration.  After  
          initial fermentation, the drink undergoes a secondary  
          malolactic fermentation while maturing.

          Perry pears often have higher levels of sugar than cider  
          apples, including unfermentable sugars such as sorbitol,  
          which can give the finished drink a residual sweetness.  
          They also have different tannin content to cider apples,  
          with a predominance of astringent over bitter flavors.

           SUPPORT:   As of June 21, 2013:

          Anheuser-Busch In Bev
          California Chamber of Commerce
          California Manufacturers & Technology Association

           OPPOSE:   None on file as of June 21, 2013.

           FISCAL COMMITTEE:   Senate Appropriations Committee

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