The Dark Side

Mexico’s craft beer is booming. And screwed


Published:

Edgar Martinez
Edgar Martinez, owner of The Beer Box in Tijuana

The ceviche on the bar does dead fish proud. It’s from Tijuana’s famed strip of taco carts, Las Ahumederas, a block away. There’s a 4-ounce glass of “Santa’s Red,” a yeasty, seasonal gem from Cerveceria Insurgente, brewed with oat chips for winter comfort. Not a Corona or lime in sight. It’s only 3 p.m., but the Beer Box is dark, so each new person makes an imposing entrance—silhouettes with full-body halos of daylight.

Large, dark body with a fringe of light. Just like the Mexican beer industry.

In December, Baja’s most established craft beer—Cucapá—crossed the border again, selling its Chupacabras Pale Ale and Runaway IPA in 30-plus San Diego outlets. Cucapá’s first trip here in 2008 didn’t last. But things have changed. The US now has nearly 2,800 breweries, the highest number since the late 1800s. The craft beer industry is growing at about 14 percent a year. And San Diego, with 50-plus breweries like Stone Brewing Co., Green Flash, Ballast Point, and Lost Abbey, is arguably the country’s craft beer capital.

Simply put, Americans want fancy suds. And, having been raised on Mexican beer, we’re primed to appreciate cerveza artesanal.

“We’re next to San Diego, the beer mecca,” says Ivan Morales, a Chula Vista/Tijuana native who formed Insurgente with his brother, Damian, while attending USC business school. “People here got exposed to that, opened up their palates. That’s why Baja—Ensenada, Tijuana, and Mexicali—is going to be the hub of Mexican craft beer.”

Every year, Modelo and FEMSA buy nearly all the liquor licenses in Mexico and divvy them out to bars and restaurants. If Tecate gives you a license, you can’t sell Modelo, or the Brutal Imperial Stout from Tijuana’s rising star, Border Psycho Brewery.

Since its formation in 2010, the Association of Baja California Craft Brewers (ACABC) has doubled in size each year. It launched the Baja Beer Fest, which doubled in attendance and will hit four cities this year. Mexicali is even making local craft beer a lynchpin of its downtown redevelopment. And the country’s duopoly of beer giants—simplified as Corona and Tecate—are one anti-trust investigation away from total European control.

Mexico’s craft beer moment is now! Chocolate-coffee stouts and yerba santa porters! Viva la revolución!

Only one thing’s missing: A new government.

 

The Beast with Two Beers

Beer is big business south of the border. Corona is the leading imported beer in 38 countries, and Dos Equis’ Most Interesting Man in the World is the most popular beer icon since Spuds MacKenzie. The average Mexican drinks 16 gallons of beer a year, making it the world’s fourth largest market, at $15 billion. And beer consumption in Mexico is rising three percent a year—unlike the US, where it declined from 2009 to 2011, according to Plato Logic Ltd. in London.

Meanwhile, Baja cuisine is making international headlines, and Ensenada’s Valle de Guadalupe wine region is being recognized as world-class. Even with a less affluent population, that should translate into a ripe market for the Stones and Ballast Points of Baja, right?

Yes. Except for two massive, massive details.

Just about all of Mexico’s beer money goes to two companies: Grupo Modelo and FEMSA. They’ve formed a near-total duopoly that controls every aspect of the industry, from raw materials to bars and politicians. Founded in 1925, Modelo’s beers (Corona, Modelo, Pacifico, etc.) take about 60 percent of the market. Most of the remaining  40 percent is owned by FEMSA, with classic suds like Tecate, Dos Equis, Sol, and Bohemia.

So, using the Star Wars model: Mexican craft beer is the idealistic upstart Luke going up against two-headed Darth Modelo-FEMSA. Mexican government officials are the sickly-looking generals who fear Darth MF, and therefore assist him in his quest to enslave the beer universe.

That is, of course, an incredibly skewed view. After all, Darth MF provides jobs and support local businesses. They give them interest-free loans, refrigerators, tap handles, barstools, glassware, and, most importantly, liquor licenses. Smokey’s Grill and Cantina in Los Barriles sums up the relationship on its website: “Grupo Modelo agreed to sponsor Smokey’s. What that means is we don’t need to purchase a liquor license. It also means we are not allowed to sell any cerveza other than Grupo Modelo brands.”

Every year, Darth MF buys nearly all the liquor licenses in Mexico and divvies them out to bars and restaurants. If Tecate gives you a license, you can’t sell Modelo, or the Brutal Imperial Stout with star anise from Tijuana’s rising star, Border Psycho Brewery.

 

“Tecate and Corona own around 90 percent of the permits,” says Mexicali’s tourism director, Omar Dipp.

That’s how it works. The exclusive deals are called “tied house,” explains Greg Koch, founder of Stone Brewing Co. “It’s illegal in the US, post-Prohibition. Those laws have helped level the playing field and allowed the US to become the world craft-beer leader.”

The US prevented the tied-house practice by instituting a three-tiered system. Basically, it divides the alcohol industry into producer, wholesaler/distributor, and retailer. If you make beer, you can’t distribute it or sell it (exceptions are made for small operations like tasting rooms and brewpubs). Even with this law, about 75 percent of the market is owned by AB InBev (47 percent) and MillerCoors (28 percent), with US craft beer slowly eroding their market shares. And 75 is much, much different than 90-plus.

“I have brewer friends in San Diego who have 1,000 accounts,” says Cucapá’s CEO, Mario Garcia. “We can only have 30 or 40 because of the duopoly.”

“It happens in Belgium and the UK, too,” says Sonny Jensen, GM of The Beer Company in San Diego. Jensen’s been actively supporting Mexican craft brewers, most recently with “Hecha en Mexico,” a gathering of Baja talent.

Darth MF is able to snag all those licenses thanks to help from the government, which prices them so high that only Darth MF can afford them. Cucapá’s license cost more than $30,000. The license for its brewpub was $100,000. To sell its own beer on premise in San Diego, a craft brewer’s beer-and-wine license would cost somewhere in the ballpark of $1,200. “See the difference?” says Garcia.

Multiple small brewers have filed lawsuits against the government for this practice. “Somehow,” Garcia laughs, “they always lose.”

Taxes are also a huge obstacle for Mexican craft breweries. Federal tax on beer is 26.5 percent, plus local sales taxes are anywhere between 10 percent and 16 percent. “Tell me one business that can increase the cost of its product by 40 percent and survive,” explains Insurgente’s Morales, whose La Lupulosa Pale Ale won Best of Show at the 2011 Baja Beer Fest. “Which is why there are so many under-the-table brewers.”

 

Darth MF, meanwhile, gets tax break after tax break. Because its watery lagers are so cheap ($2 as opposed to $5 to $6 for craft beer), it pays less (3 pesos per liter). The company also gets a 60 percent tax credit for using returnable bottles. The duopoly owns most local retail outlets. That forces craft brewers like Cucapá to find customers in far-flung cities, making it almost impossible for them to retrieve their bottles. So, no tax credit. “All told, we pay about 300 percent more tax per liter than they do,” Cucapá’s Garcia says.

Still, the Baja craft beer scene is growing by the minute, especially at border towns with access to US supplies and consumers. Another twist: In 2010, Heineken bought out FEMSA for $5.7 billion. Last year, Grupo Modelo agreed to sell to AB InBev for $20.1 billion, although US antitrust forces have sued to block that acquisition. Some predict European ownership would slowly erode the duopoly.  

Garcia laughs. So does Dipp, the tourism director. “They’re coming into a great duopoly! Why would they change it?” says Dipp. (Calls and emails to InBev and Heineken were not returned.)

There are other hurdles for craft beer. Mexico is not a very wealthy country; how are you going to sell a $6 Dunkelweisen from Tijuana’s Cerveceria Kudos? And is the Mexican palate ready to go from light pilsners to chewy, yeast-spackled craft beer?

Every craft brewer replies the same: They can’t keep up with demand.

The Revolution

Mauricio Peralta, an aeronautical engineer, took second place at last year’s Baja Beer Fest with his Black IPA. He runs Zombie Brew Labs out of a warehouse in downtown Ensenada. Situated behind the microbrew-friendly bar Distrito, the warehouse is a hub for the craft scene. Anyone can brew there for free if they buy supplies at Brewmaster Shop, Baja’s first homebrew supply store.

Supplies are a huge issue in Mexico. Only Darth MF produces malted grains. The hops industry is in the US and Canada. The only available yeast is dried into powdered form, whereas San Diego’s White Labs sells the superior live, liquid slurry. Most Tijuana brewers either live or work in San Diego, so they can bring back bags of supplies without paying taxes (another reason Tijuana and Mexicali are primed to become the craft beer hubs). But that’s impossible for brewers from Ensenada to Mexico City, so they have to import it in bulk and shell out the 40 percent tax.

 

Brewmaster Shop owner Eduardo Nuñez, a mechanical engineer who also brews Cerveceria MX, spearheaded the supply chain by calling the top SD companies. “At first, they didn’t want to make deals with Mexico over the phone.” To convince them he was for real, Nuñez made multiple trips across the border to places like White Labs and Homebrew Mart with his computer and business plan.

Now Nuñez is literally harboring a craft beer scene in his warehouse, which supplies progressive bars like Distrito, Pelicanos Gastro-Pub, and Cerveceria Wendlandt. Distrito is taking a risk, since it got its liquor license from Tecate. More and more sponsored bars are taking that same gamble. In Tijuana, both Beer Box and craft-beer boutique La Tasca have contracts through Modelo. La Tasca co-owner Omar Monroy isn’t too concerned. “We created a really nice place to sell [Modelo], and we sell it,” he says. “We just sell other beers, too.”

Nuñez and Morales, however, see a war coming.

“Right now we don’t sell enough beer to be a threat,” says Morales. “But eventually, we will. And that’s when they’ll just start pulling back those licenses.’”

By that time, Mexican craft beer might have other alternatives. The newly opened Blind Burro in downtown San Diego has Cucapá on tap. “It’s a really good pale ale,” says GM Frank Miller. “Plus, I just like the movement in general—food, art, and spirits in Mexico. In most people’s minds, TJ has been banned. But [Tijuana’s] Querencia is probably my favorite new restaurant.”

The future might lie in the hands of the Association of Baja California Craft Brewers, much like homebrewing in the US (illegal until 1978) depended on the Brewers Association. Carlos Castillo, the president of ACABC, is a corporate lawyer who spent four years helping Baja wines get a Certificate of Origin. In a 53,000-square-foot warehouse in Ensenada, he brews about 300 barrels a year of Cerveceria Costa Azul, with plans for a taproom and brewhouse.

“Ensenada is very well known for wine and gastronomy,” Castillo says. “Now we have beer.”

Castillo’s work for the Baja wine region taught him how to get the government’s attention. “In our first year in 2010, there were 20-something brewers in ACABC. Then 34 in 2011, and currently 46,” he says. “That could’ve changed by the time I said that. Nothing would’ve happened without legally incorporating.”

 

It was Castillo and ACABC who first discussed the idea of special liquor licenses with Dipp, the tourism director for San Felipe and Mexicali. Mexicali is a Tecate town, with about 70 percent of the beer sales. Yet in late January, the city broke ground on a $1.5 million redevelopment project of downtown—using craft beer as the attraction.

“I walked into the mayor’s office and said, ‘What if, instead of charging $100,000, we give licenses for $500 a month, and that money will go into a development fund for the downtown area?’” Dipp recalls.

He got approval from young Mexicali mayor Francisco Perez Tejada, a possible 2013 candidate for governor. The special liquor licenses will belong to the city. Anyone using them is required to sell at least five different kinds of Mexican craft beer. According to ACABC’s Castillo, a similar craft beer zone will be built in Ensenada and Tijuana. Dipp is also helping ACABC host four versions of the Baja Beer Fest in 2013—one in each city (Tijuana, Ensenada, Mexicali, and San Felipe).

Darth MF has taken notice. “One of my councilmen got a free case for his wife’s birthday. His wife’s birthday,” says Dipp. “They’ll try and buy out the alcohol council. But I’m not prohibiting Corona or Tecate from selling beer there. I’m just not giving them the exclusive anymore.”

“It’s progress,” shrugs Cucapá’s Garcia. After 12 years, his brewery is ready for Main Street, not a “redeveloping” zone in Mexicali.

For Cucapá, the real saviors might come in the form of two US companies that don’t have the craftiest reputation in the States—Walmart and 7-Eleven. Unlike on-premise accounts (restaurants, bars, anywhere you drink the beer on-site), retail outlets (off-premise) aren’t owned by Darth MF. On March 1, Cucapá and Mexico City’s Cerveceria Minerva will be part of Walmart’s new craft beer initiative, and 7-Eleven will stock Cucapá around the same time.

Ask anyone about the larger picture—about breaking down the duopoly—and you can really hear just how touchy the situation is.  

“We need to be very, very clear on this—the duopoly is dependent on help from the government,” says Garcia. “The actual government needs to change.”

Insurgente, somewhat kiddingly, declares revolution: “We are a group of rebels dedicated to liberating you from the tyranny of flavorless beer.”

“Oh… I don’t know,” a mayoral aide tells me, sadly aversive. “Why don’t you talk to the Tourism Board?”

And Dipp accepts the whole scene with resigned humor: “We have a saying in Mexico: ‘It’s crap, it’s disgusting, I love it!’”

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