Federalism’s Tension with the National Love of Craft Beer

Federalism allows the individual states to function as “laboratories of democracy.” Innovations in the law of one state can spill over into others; in some cases creating a national consensus. Since alcohol regulation was largely left to the states after Prohibition, each became such a “laboratory” with respect to alcohol laws.

While the general three-tier system has been in place throughout the country, each state has put its own stamp on it. And some of the laboratories have performed more experiments than others, whose lab equipment still bears the dust that settled shortly after the passage of the 21st Amendment . Some of those experiments have benefitted small brewers because the three-tier system generally “protects” distributors and retailers from big bad manufacturers.

In particular, a strict three-tier system prohibits brewers from selling (or in some cases, even offering samples of) beer from the brewing premises directly to the public. Brewers in those states must employ a distributor to get their beer to retailers if they hope to make any money. Many states, such as California, allow breweries (small and large) to self-distribute and to offer tasting (for profit) at the brewery. And lo, the world has not ended. But it has provided start-ups with an instant revenue stream from the ability to sell beer on-site before they’ve even managed to find local accounts or considered a strategy for expansion/distribution.

It has also provided the public with an excellent way to appreciate their local beer: they can look at the brewing equipment and chat with the brewers and proprietors as they enjoy the beer made on site. Then, they can take growlers of it home. Of course, not everyone gets to enjoy local beer this way. Consequently, not everyone gets to enjoy a great variety of local beer: restrictive beer laws mean fewer would-be entrepreneurs will think it is worthwhile to start up.

In tension with these variations across the states is the national culture of beer appreciation growing rapidly in the United States. Drinkers just joining the ranks are well aware of the best beers across the nation, thanks to rating sites, social media, and the general modern ease of knowing about things beyond one’s own state’s borders.

When such a person reads something like this: “If their strategic plan was based on them opening up a microbrewery then changing state law, then that was a poor strategic plan,” he or she may be confused, even angry. He or she may know about the lines to fill growlers at Hill Farmstead or the Alchemist’s Heady Topper kerfluffle. He or she may have seen the picture of the lady with a 2-month-old baby waiting all night for a shot at some Pliny the Younger. Such a person may want a phenomenon of that nature to occur in his or her back yard.

Georgia’s Senator Jack Murphy added, “The three-tier system has been in place for, what, 80 years now? And what it was designed to do and is designed to do is regulate an industry that needs regulating,” Murphy said. Such a person, upon hearing this, is apt to think, “Federalism Sucks!” (Perhaps not in those terms). An opportunity for civic engagement, I suppose. It does seem that more and more politicians recognize the opening of small breweries as an opportunity to tout job creation, particularly in [rural] places that have not seen a lot that. Consequently, a challenger to an old “three-tier” guy may have a lot of success talking about small business growth, new jobs, and the good small brewing businesses have done for local communities.

While it is good that states can establish their own policies, the online and inherently borderless nature of like-minded communities, such as craft beer nuts, puts federalism in tension with the national mood. One national mood of craft beer is: locally made, locally consumed, [very] locally enjoyed. Small breweries (where they can) have teamed with the food truck phenomenon to turn their industrial-zone warehouse sites into cool, brewpub-esque hangouts. And it is a shame that residents of some states can only be spectators [and tourists] to this aspect of beer appreciation.

CA ABC Issues Industry Advisory Regarding Brewery Sales of Others’ Beer

A California brewery (type 1 or 23 license) has wide latitude in sales of its own beer. It can sell the beer on premises, to wholesalers for distribution, and it can self-distribute to other licensees without limit. 

However, in a recently posted industry advisory, the ABC clarified that breweries are expressly prohibited from selling beer that is not “produced and bottled by, or produced and packaged for” them. 

There are exceptions to this seemingly clear-cut rule:

• Brewers may obtain an off-sale retail beer and license.
• Brewers may also obtain a beer and wine wholesaler license.
• Brewers who also have restaurants on or next to the brewing premises can sell others’ beer and wine.

In a recent paper I wrote for a law school seminar class, I argued that small brewers’ who have no interest in operating restaurants should nonetheless have the opportunity that their restaurant-running brethren have to offer guest taps of fellow local brewers to increase consumers’ overall knowledge of the beer styles and choices available to them in the geographic area, to to facilitate their ability to interact and collaborate with one another as that is a valued element of the industry.

 

Language Shows Changing Power Relationships in Beer Distribution

Many states have protections for distributors, including some that require a brewer to renew its distribution agreement with the distributor unless the brewer can show “good cause” for ending the relationship. This of course interferes with a brewer’s freedom to choose how its beer will be handled, marketed, and placed for retail sale. The interference, historically, was justified by the power differential between large manufacturers with national presence and the small, independent, family-owned distributors that operated within particular geographic areas.

The three-tier system is now faced with breweries who are the smallest fish in the pond, with distributors being large and powerful (in many cases), and many retailers, too, being quite muscle-y: BevMo, for example.

Language itself can reveal a lot about how power dynamics have changed. One sentence in particular spurred this post:

@CraftBrewingBusiness sent out this tweet:

Stone Distributing takes Mother Earth Brew Co. under its wing http://www.craftbrewingbusiness.com/?p=11460.

Stone is no giant in wholesaling and craft brewers sign with them because they too are craft brewers and have a reputation for working well with fellow, smaller breweries. But the statement reveals a lot about a small brewer’s decision for the first time to cast a wider net and use distribution channels to sell beer. The language also reveals a lot about perceptions of Stone’s distributing business: it conveys the perception that Stone has a benevolent (if gargoyle-y) wing in the first place.

There are other examples as well (also happening to show that positive perceptions of Stone are long-lived).

When The Bruery signed with Stone in 2008, Patrick Rue posted on his company’s blog:

“This last Tuesday I … signed a distribution agreement! I cannot express in words how excited and happy I am about this.”

Now, taken out of context, if that statement were made in a traditional setting, with powerful manufacturers and small, independent distributors, who would be making that statement? Landing a contract to distribute Coors, Miller, or Bud would mean the world to a small company (I’m sure it still does). Now, such agreements can mean the world to small brewers who want to take the next step in growing their business.

A common usage to report a distribution agreement between a small brewer and a distributor seems to be “signed with.” For example, “Santa Clara Valley Brewing, which has been serving up some of the South Bay Area’s best brews, has just signed with California Craft Distributors™ to bring its golden goodness to the Golden State” (link). This phrasing is commonly found in pro sports, to report an individual player signing with an (obviously larger) organization. California Craft Distributors describes itself as “a  boutique distribution company which focuses on hand selling craft beer statewide in California.” This example further highlights the importance of distributor choice for a small brewer–since the laws add protections for the distributor, using other craft brewers or smaller distributors who will focus their time and energy on understanding and promoting smaller brands is key.

It bears mentioning that in CA, small brewers can self-distribute. Thus, they can get away with on-site sales and self-distributing to the local area for a while before they have to make the decision to use a distributor for the next step of growth. Not all brewers have this privilege, or to the extent that CA small brewers have it. Brewers Association has begun collecting information on the various self-distribution rights (or lack thereof) here.