When In Doubt, Consider A Simpler Answer

I left a comment over at Boak and Bailey in response to their noting this week of that Cloudwater cask story which whipped the British beer discussion out of its holiday slumber. That being said, I am still not sure the Cloudwater story has been properly framed so I am unpacking the comment a bit more here.  For starters, here are two tweets from Jeff that I think better get to a key factor underlying the situation:

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The Cloudwater press release was issued on 1 January 2017. They’ve been brewing for 22 month and have announced they are stopping cask production, stating:

We worry that cask beer has backed itself into a corner that risks becoming unattractive to modern breweries. 

I never trust that sort of use of “modern” as it smacks a wee bit of assumed superiority, echoing the new e-conomy of the late 1990s or at least a shortcut being taken. Especially as they don’t quite say they don’t make a profit – just an “insufficient” margin. Then, as you consider that, compare it to the to the brutally honest but tougher news from Dave at Hardknott on the one hand and how under capitalization can force a good brewery to face difficult decisions. Next, consider the positive story from Hawkshead which runs 65% cask that they also call modern beers.

It seems from those business stories that the question could be better asked as why Cloudwater took on cask without the full resources – or apparently a full plan to make it succeed as other success. Is it as simple as that?  I did find Eddie Gadd of Ramsgate Brewery’s tweet a bit telling:

…most new brewers (inc me) don’t look too closely at the numbers during start-up – we don’t want to be put off the dream!

I notice that the Cloudwater press release mentions they are working with Shelton Brothers and I have a suspicion that I have had their beer at the Allen Street Pub in Albany, a cask specialist, where, due to actual friendships, I do not seem at risk of ever being shelted.  Perhaps it was that pint of Black IPA with a balancing splash of someone else’s brown ale to give it some joy.

In any event, the idea that a firm representing about 1/3000th of British cask production not succeeding is cause to raise prices generally is a bit off. It seems from what we are actually being told is that cask places natural productiondistribution and even geographical constraints on the market that the ambitions of international craft can’t overcome or at least cannot easily reconcile without focus and extra capitalization. Makes sense. It is a thing unto itself. Should have been self-evident from proper initial market research.

There is nothing wrong with changing course. Do what makes you money and what you are interested in. But don’t slag the successes of others or blame the market. Congratulate others who succeed where you can’t or shouldn’t have tried.

The Fluidity Of Good Beer’s Paradigm Shift

Two bits of related US big craft beer industry news this week. First, Japan’s Kirin has acquired about 24.9999% of Brooklyn Brewery for an undisclosed sum on largely undisclosed terms. Second, Stone Brewery is laying off 5-6% of their workforce. How about we look at the latter first. Part of the news release states in part:

…the onset of greater pressures from Big Beer as a result of their acquisition strategies, and the further proliferation of small, hyper-local breweries has slowed growth. With business and the market now less predictable, we must restructure to preserve a healthy future for our company…

This is interesting. For some time I have been going on about the schism in craft beer. So long I bored myself with the obviousness of it. This statement confirms it. There are three sorts of craft: macro craft, big craft and micro craft. The one in the middle has the shortest shelf life. Boosters will deny it, but the sales slump for big craft has been a thing for a while. So steps have had to be taken and this is what it looks like after things change at the heart of a business. They are not alone. Remember, just last April, Stone tried to suggest that the outside investment funds they took on were “craft” investments. Silly PR committee. No one believed it. The immediate response today from Jason Alstrom reflected what might be going on: “Typical corporate response … Does not sound like Stone at all. They are having a tough time wearing those bigboy pants.” The CEO is blamed but the Board and ownership set out the tasks for the CEO to complete. Likely for very good reasons given the tired brand and founders.

In the other notable story, Brooklyn has taken Kirin’s cash. The transaction’s obvious and awkward effort to avoid hitting the 25% share level led me to review the Brewers Association’s definition of craft. An American craft brewer must be independent and to be independent…

Less than 25 percent of the craft brewery is owned or controlled (or equivalent economic interest) by an alcohol industry member that is not itself a craft brewer.

Notice that careful placement of “or” in that definition. Clearly, it is possible to control more of a craft brewery than owning the same relative measure in shares. How does that occur? By the transaction for the sale of shares including a shareholders’ agreement that effectively bars the corporation from doing many things without consent of the otherwise minority shareholder. As a result, the BA’s 25% ownership rule is meaningless in the world of creative financing and investment. Strings shall be both pulled and used to tie things down. Jason Notte commented on Twitter on the distinction between ownership and control as a factor in establishing the independence of a brewery:

I often wonder how deeply @BrewersAssoc dives into the details. They have a lot on the plate without auditing every deal.

The Devil is in the details, they say. If the Brewers Association is not able to keep up with the implications of the realities of business like investment terms why bother having the definition at all. Maybe that is the plan for 2017. These are, after all, the days and months of change. The big names of big craft are mostly moving out as the money moves in. It seems that only the man of yogurt is sticking around to bask in the twilight of these dusky days for big craft even after cashing out in his own way. He must be holding out for something more – but what?

Signs Of The Panic Of 1819 In 1820s NY Brewing

Not the cleanest image but obviously something was up in New York in the spring of 1820 if we are to believe the New York Mercantile Advertiser of 13 May 1820. What was up was the after effects of the Panic of 1819, the high point of a depression that hit the US after the end of the War of 1812 in 1815 leaving Britain even less interested in helping its former colony as well as the end of the Napoleonic Wars which saw Europe less interested in American wheat. While the Whig and Federalist brewers are in or past their last days, some still seem to be relying on status to soak the marketplace. After all, this is old New York and not some Jeffersonian frontier. The reign of the patroons just a little up the Hudson still has decades to play out.

schencab31may1820pricedrop

nydailyadv15may1820ininglass

schencab16jan1820beercandles

 

 

 

 

It goes both ways. Some elsewhere in the state did drop their prices as you can see in the ad to the left placed starting in December 1819, continuing deep into 1820. And people tried to barter with brewers like the guy placing the ad in the middle from the Daily Advertiser the same day as the meeting of the tavern keepers. [How much ale does 300 lbs of isinglass clear? And, come to think of it, I had no idea brewers in that era was worrying all that much about isinglass. Seems to put the whole “lager creating clarity mania” theory in perspective.] Hmm… and how about the brewer who placed the ad to the right, in Schenectady’s Cabinet, to advise he’s gone into business with a candle maker… although in a heroic effort to preserve the very elusive now extinct double double – clearly an ale quite distinct from the mere double ale. Trouble since Shakespeare’s day.

schencab02aug1820duanesburghYet, the future was now. Science was coming to agriculture in upstate New York. Ben Franklin’s dream of advanced husbandry which took a foothold in Philadelphia after the Revolution finally found fertile ground in the race west – even before the Erie Canal. See? The 1820 Duanesburgh fall fair was giving out prizes for the best acre of spring wheat. Twice the prize for the best acre of barley. Then as now – Duanesburgh looked to the future.

Is 2016 The Year That Craft Beer Became Boring?

It’s a concern if this recent report is anything to go by:

In the last four weeks, he added, the largest four BA-defined craft suppliers — Yuengling, Boston Beer, Sierra Nevada, and New Belgium — were down a combined 4 percent. “I don’t think IRI has Yuengling in their craft, but the other three are 33.9 percent of IRI’s craft cases right now,” he wrote in an email. “Add in Blue Moon and Shock Top and you’re looking at 48 percent of IRI ‘craft,’ which is down 8 percent in the last four weeks. That’s going to pull hard on any number.” Indeed, volume sales of mainstream craft flagships like Sierra Nevada Pale Ale, Boston Lager, and New Belgium Fat Tire were down 5.9 percent, 13.8 percent and 5 percent through May 15, respectively.

Not to come off as being all neg on craft beer, it’s good to note that cider is bottoming out, too. I was thinking about that while I was reading Bryan Roth’s bit about selling to Millennials, aka thems who everyone else used to call Gen Y. The Roth report warns that craft brewers fail to focus on this era’s set of young, fun, unburdened, disposing of disposable income cohort at their peril. Yet half way down the argument there is one of the scariest statements I have seen embedded in an info-thingy from the BA: half of craft beer purchases by Millennial males are brands the buyer never heard of before. Holy frig.

I am told the Cedar Waxwing is a bit of a rarity among bird. They lack a strong sense of territory. “Nomadic, moving about irregularly; both breeding and wintering areas may change from year to year, depending on food supplies.” Drifty drifters, they can take off in a flock heading in one direction and, if there is enough food on the path, keep on for miles. Then they shift aimlessly off onto another path, happy as long as there is something new to chew. Were they the cider drinkers? The buyers of big craft flagships? Are they now making 2016 the summer of hard soda?

If I am honest, I am one of them. Gen Y yoof is just Gen X yoof with more money. Hard to shake the drift habit. Other than a modest if constant Dewar’s habit, I hardly ever get only the same strong stuff on my weekly trip to the power house. I’ll buy anything in a pretty wrapper from any brewer with a reasonable reputation – except if it’s fruit flavoured, of course. No one needs that. Being an early Gen Xer, I have shared with my Gen Z teens a sense of disorder and unreliability. Both Ramones and tweed. The garden remains half planted. I root for whoever’s doing well in the NBA.

Does the wise business person chase that market or aim for something a little duller and more reliable? You know, soon Millennials won’t be the new market entrants. My kids will. Millennials? They’ll start having kids and paying the bills. Settling and settling down. Maybe by then they’ll need a flagship of their own. Something to remind them of when they were young. Or maybe sherry. Maybe the 2010s are the decade of fino sherries. Maybe.

This Is Reasonable Proof That Big Craft Is Losing It

This first hint something stunned was up came in a tweet from Andy Crouch:

Ha ha ha true craft beer. I give up.

Now, before you jump to “haters gonna hate” have a look at this response to that tweet: “Stopped saying “craft”, feels good.” That from the first guy I heard “haters gonna hate” from. You know big graft has already lost its grip when a man of faith such as an Alstrom mocks it. What’s the news they are discussing? This:

…Stone will be participating in True Craft as a founding member. The new venture has received an initial $100,000,000 brought forth from an investor group committed to the long term model. True Craft will welcome a handful of the best craft brewers in the business alongside Stone Brewing. Each brewery may participate in True Craft and in turn the company will provide minority investments to its members with minimal stipulations. All breweries will be aligned in the philosophical mindset of banding together to preserve craft while retaining full soul and control of their businesses for years to come. “This is about setting up a consortium so we can not just survive, but continue to thrive in a world in which craft is being co-opted by Big Beer,” said Steve Wagner, Stone President and co-founder. “This allows companies like Stone to follow an ethos that involves independence and passion for the artisanal. By investing in True Craft now, we can be confident that our vision is locked in beyond our professional lifetimes and we feel privileged to help others in our industry do the same.”

One of the more disappointing things about writing about beer for over a decade is how many folk writing about beer have little interest in studying history or understanding business – let alone tackling the reality that beer and brewing sits in an very wide intersection of human activity that has been regulated in our tradition for at least the best part of a thousand years. It’s a story like this that has the wheels, however, to interest an amateur brewing historian who practices in public construction and commercial law. Let me explain.

See that figure up there? $100 million. Sounds like a lot. Sounds like someone thinks that will make some sort of change. Don’t count on it. Long time readers will recall an early post of mine sweetly titled “Beer is Bigger Than…” in which I pointed out that all beer in Canada in 2003 was worth $7,864,437,000.00. It was bigger than wheat, charity and the Government of Nova Scotia. Thirteen years later, not much has changed. Beer is big and $100 million USD probably now represent maybe 1.5% of the Canadian brewing market. Expect the US market to be ten times that and in the NATO region market maybe double that again. In the global marketplace the fund is piddly. About the cost of building two 18 story apartment buildings or one water treatment plant for a small city. And that’s in Canadian funds – which is about 80% of US right now.

Not only is the fund small, notice also that it is an investment fund. It’s not a grants fund. The capital is to be recovered. A month ago, Jim Koch of Boston Beer was telling a tale of woe about the effect rapacious private equity will have on craft beer. We are toldFunds have finite lives…When those fund lines get to the end, [fund managers] have got to sell those assets.” It’s reported as doomsday. They sky is falling. Well, if it’s true of a professional fund then that reality is going to be true of this one, too. Interest will have to be paid and at some point the fund will cash out. These monies, too, will need to be repaid – passion or no passion.

And it’s also up against clever competition. Recently, the Boston Globe profiled private equity firm Fireman Capital Partners, the investment folk behind the expansion of Oskar Blues and the cash injection into Florida’s Cigar City Brewing. You think those guys are shaking in their boots over the prospect of a rival fund based on Stone’s ethos? Hardly. The experienced private equity players will out bid and out run their deals. It’s their business, not a hobby or a faith-based act of grace. While True Craft may “welcome a handful of the best craft brewers in the business alongside Stone Brewing” we are all too well aware that many of the best craft brewers have already made their minds up and moved elsewhere – whether under the wing of big beer or in partnership with existing private equity.

Finally, look again at one last loony line in the press release: “This allows companies like Stone to follow an ethos that involves independence and passion for the artisanal. By investing in True Craft now, we can be confident that our vision is locked in beyond our professional lifetimes…” Question #1: is Stone the central recipient of funding or an investor in the dreams of others? What is really going on? Question #2: can you see the oxymoron? How can one be independent and also go along with a “vision… locked in beyond our professional lifetimes” when that vision is someone else’s vision? The guy looking forward to retirement’s vision. Who needs that? The greatest thing at the moment in good beer are the thousands of actual small brewers coming forth independently in a complex wave of entrepreneurial vitality. They don’t need Stone or its money. It is a rather modest proposition to set up a small brewery and, in the right market, one that usually is greeted with enthusiasm by the buying public. Unless you suck.

It’s the same as it ever was. Same as it ever was. At the macro level, brewing is a business that undergoes continuous change that is usually misinterpreted as failure. Folk say temperance caused the collapse of breweries leading up to prohibition. It was actually the explosion of the railroad network in the latter 1800s which unleashed basic commercial efficiencies. Hooray for cheaper good beer for all! Folk suggest the old guard of big craft represent some sort of guru class who carved a niche of good beer forgetting that the entire world of consumer goods has raced towards diversity and excellence over the last four or five decades. The big craft era of 2005-15 is relatively late to the game. And, let’s be honest, if these guys didn’t become the millionaires and billionaires someone else would have. It’s not like they invented beer. Folk will say that good beer is in crisis and point to this odd news as some sort of life raft in an ocean of evil big beer and big money. Have none of it. This is just the new boss meeting the old boss all in the great cause of money. Which is good. Because that is success.

Rejoice. Big craft is dead. Brewing continues to move on and on, becoming more affordable and more excellent and more diverse and more interesting because this era of craft is dead.

Is That A Downward Or Sideways Craft Trend?

More bad news for craft in the media today. Over on Facebook, Lew shared stats reporting that on-premise US drinks sales were weak during the first 13-weeks of 2016. Total beer sales were particularly slow, declining 3.1% year-over-year. This was against particular trends showing Mich Ultra up 6%, Corona brands up 3.5% and Stella up 3.7%. Blue Moon dropped 3% while Sam Adams lost 13%. Conversely Goose Island was up 18% and Ballast Point a whopping 42% on-premise. That’s a pretty major set of shifts in the hospitality side of the beer trade. The not-good-news for beer continues as the Wall Street Journal tolds us late this afternoon that:

…for the first quarter ended March 26, Boston Beer reported a profit of $7 million, or 53 cents a share, down from $13.7 million, or $1 a share, a year earlier. Net revenue slipped 5.4%, to $188.8 million. Core shipment volume decreased 6%, to about 830,000 barrels. Boston Beer said it would focus increasingly on finding ways to cut costs and become more efficient after several years of rapid growth and capital investments.

That’s not good either. Big sales drop. Cutting costs and making efficiencies is not a growth strategy so much as one to slow a retraction. The article suggest job cuts are coming. No wonder James has been “trying to silently decrease his company’s share” as I noted last MayStaff, too.* I followed up with Lew and wondered if it was possible to break out the numbers he had into three classes – macro owned craft, big BA craft and little local craft – to see how broad this pattern was. But numbers are not kept like that given, as Lew said, I just made those classes up. To be fair, I didn’t just make them up but point taken.

Does this matter to you, the beer buyer? Likely not. This is not a bubble bursting. It’s a market shifting as they do. The sky’s perhaps not the limit quite as the BA promised in 2014. That’s fine. Many assumptions usually do not hold and the assumption that craft is marching in a straight line directly towards a 20% market share by 2020 is likely one of those that won’t pan out. But perhaps it’s still going to turn out to be the limit in a way – except that it’s made up of macro owned Goose Island instead of big craft’s Sam Adams. Would you care?

But maybe things develop in a different direction. Lew’s best point was in his reply to a comment: “I think it’s spirits that are taking the share. The thousands of smaller brands are still pretty damned small, and bourbon/Irish is on fire.” Change always comes and usually does so in large part unexpectedly. Craft beer could well split into local and macro with only big craft fading, too big and familiar to be considered authentic as the WSJ suggests. Link that to a far greater shift to wine or spirits coming out of nowhere. Could happen. Macro craft would like it to happen. Could be working towards just that right now. Will that matter much to you? Likely not other that it will be you buying the macro craft, wine or hard liquor. You’ll be happy.

*Shares dropped over 3% while the markets were open today and then another 10% after hours.

Are We Approaching Peak Hard Cider?

The All About Beer column by John Holl posted today begins “[h]ard cider continues to climb in popularity and now the largest producer in the country, Angry Orchard, has its own place to welcome customers….” This is odd because of the following news as reported by The Motley Fool a few weeks ago:

Similar to last quarter, Boston Beer’s founding chairman, Jim Koch, opted to be the bearer of bad news: “Our total company depletion trends of 6% in the third quarter of 2015 matched our year to date trends, but represent a slowing from our expectations, primarily as a result of weakness in our Samuel Adams brand due to increased competition and a slowing in the cider category”… Boston Beer CEO Martin Roper elaborated: “During the third quarter, we […] saw a slowing of the cider category, but believe Angry Orchard maintained its share even as competitors continue to enter or increase investment. We remain positive about the long term cider category potential, but short term growth is less certain. We are planning continued investments in advertising, promotional and selling expenses, as well as in innovation, commensurate with the opportunities and the increased competition that we see.”

I’ve heard a bit about cider in the lead up to American Thanksgiving like this piece on NPR’s Science Friday that focuses on Albany’s Nine Pin Cider. Like the All About Beer column, however, there was nothing indicating that the market for hard cider is softening in the way that Boston Beer has admitted. While most stories last year were all about the boom in cider, The Motley Fool saw clouds on the horizon as early as in May of 2014. That concern continues:

Total U.S. cider sales were down 3.4 percent in the 13 weeks ended Nov. 7, and the rate of decline accelerated to about 7 percent over the past four weeks, according to Nielsen. Four and five years ago, the rate of growth was in the heady triple-digits. Even a year back, the pace of growth was nearly 50 percent. “It’s been getting a lot of attention, because of all the huge growth rates in the past three to five years,” said Danelle Kosmal, vice president of the beverage alcohol practice at Nielsen. “It’s obviously difficult to sustain those triple-digit growth rates.”

So is it a case as I tweeted earlier today just that, “basically, Sam Adams bought a pretendy farm to suggest their cider-like product isn’t industrial” or is it worse? Is the farm one form of “the new packaging and advertising expenses taken on in the second half of 2015” in an effort to retain sales in a shrinking cider market? We get no guidance from the All About Beer column other than the oblique observation that the “vast majority of the company’s main brands will be produced at the Boston Beer facility in Ohio, with the focus of the new location being experimentation and small-batch only recipes.” As Jeff found in June 2014, getting a straight answer about Angry Orchard can be difficult. But at least he asked the questions. If the market for cider continues to shrink, it’ll be interesting to see how long it takes for the farm to be re-purposed or even sold off.

A Few More Thoughts On Craft Brewery Buyouts

I quickly wrote this over at the beer blog’s Facebook page* and thought it was clever enough to repeat:

With respect, the main point is being missed. The disassembling of the US craft beer market is itself the bursting of the bubble. The “big macro v. tiny craft” paradigm failed a long time as the BA’s failed “crafty” campaign illustrated. Continuing to suggest that the path of craft is being validated ignores the greater underlying realities. Big craft bought into scale a long time ago. Craft as brand regardless of what’s in the bottle is market reality. The brewery isn’t being bought. A battle with craft is not being waged. Macro is buying brands and markets to use for other purposes. The rump BA will appear to be quaint soon. Then pointless.

Some interesting comments ensued. I suppose it is related to the posts about how craft will kill itself from a few years back but this is really another thing. Craft being killed off by macro simply eating it after paying billions for the opportunity. We are likely not at mid-meal yet but that’s what’s going on. What we haven’t heard about yet, when you think of it, is how those brewers wanting to be bought but not getting offers are doing. You know, just because they are not worth buying doesn’t make them any less the traitors to the cause… if you are into that whole “cause” thing. What I expect we do know, however, is the guys at Goose Island must be really pissed off unless they took a deferred part of their $39 million chump change payment in the form of percentage share of future brand growth as part of their deal. That stuff is brewed everywhere and sold everywhere now and someone is making buckets of cash.

*…which reminds me of a pet cat having a pet hampster.

The Best Christmas Present For Ontario Ever?

I hadn’t thought of an attack on Ontario’s beer retailing weirdness from the Federal level but that may be just what is lining up for 2014:

A spokesperson for the Competition Bureau confirmed Friday that it’s “currently examining the differences between the beer industries in Ontario and Quebec and exploring the effect that these differences have on competition in each province….” “The bureau chose to focus on the beer industry as there have been a number of conflicting reports as to why the price of beer varies between Ontario and Quebec,” Phil Norris, a spokesperson for the Competiton Bureau, said via email. Sources told Global News Beer Store officials and others have been interviewed by the bureau. Regulators were “collecting information from industry participants,” Norris said.

Collecting information? I suppose if the mandate is limited to assessing a nutty regulatory system’s effect on pricing one must make a study of the obvious. As Jordan has detailed, the pricing arguments may not be all they appear but for me that is not the point. I have no interest in limiting my choice when it comes to my shopping whether for beer, cheese, shoes or books or anything. I buy at least half my beer ever the course of the year in Quebec or the USA. I’ve gotten the occasional wee lectures from overly eager border guards telling me I should not buy in the States but, really, when you allow yourself to take consumer product advice with folk with sidearms where are we?

I am happy to pay full freight. I am happy to declare purchases at the border, support local and support actual well crafted just about anything. But, when it is all boiled down, what I am most happy with is the idea of reducing the intermediaries. I prefer two parties to a transaction, the maker and me. Add a third as retailer and I am not upset but getting into wholesaler, bonding firms, distributors, importers and clearance certificate issuing laboratories and you start seeing not only why a simple product like beer is over priced but over wrought. As in what hath this system wrought?

At the moment – as it has since 1927 in Ontario – it hath wrought market constriction to the point one cannot be sure of value or even preference. We get what we are given and are expected to line up and praise the short shelves of selected goods. No thanks. I’ll continue to take much of my money elsewhere until that changes. If that takes a prosecution of the provincially regulated monopoly by Federal officials, so be it.

Another Good Reason To Support The Little Guy

Keeping in mind that by “little guy” I actually mean small brewers and not larger brewers who need their smallness to be defined by a trade organization… but this news out of Newfoundland is just weird:

…the bosses at Labatt Breweries in St. John’s apparently thought it was a good idea to instruct their employees to train workers who would replace them in the event of a strike. The employees refused and walked out, and are currently on a wildcat strike. The mind reels, and then reels some more upon news that a judge ordered the workers to stop interfering in Labatt’s daily business because, he said, they would do the company irreparable harm. Apparently, in a globalized knowledge economy, being replaced on the job does not qualify as doing irreparable harm to a worker.

We have to also be mindful, of course, that being a good brewer does not automatically entitle you to be considered as a good employer. You will recall how in 2011, Rogue of Oregon was the subject of “a devastating article about how Rogue Brewery treats its workers” to quote Jeff. Like any good consumer, that was the last time I bought any of their beer but, to be honest, anti-union tactics is something of a norm. But asking local workers to train their own foreign import replacements? Notice that a Canadian bank has been accused of the same thing this week. Which has led to an apology from now sweaty browed president and CEO Gord Nixon as clients are voting with their feet and withdrawing their deposits.

We clearly have a problem with any law that allows this. And any community that condones it. Will Canadians walk on Labatt, too? I hope so. Most likely in Newfoundland where the policy hits home most closely and people have an aversion to being led. They are not called the masterless men for nothing. One would hope these things would matter more generally, too. I do appreciate when Ethan points out that, hey, it’s capitalism but one needs to recall that capitalism is about trade and, frankly, turns on the principle “buyer beware.” As in be wary. Be aware. Know who and what you are dealing with. And appreciate, as Nixon now knows, that it is the consumer who defines what is appropriate within the construct of capitalism, not the law or business.