Craft Breweries Winning Small Victories Against Powerful Distributors

The craft brewing industry is booming. The Brewers Association in July reported that craft beer volume is up 16 percent over 2014. The craft beer market generated $19.6 billion in revenues in 2014, a 22 percent growth of sales over the previous year.

More and more people across the country are starting craft breweries. As of June 30, there were 3,739 breweries operating in the United States. That’s an increase of 700 breweries over the same period last year. There are another nearly 1,800 breweries being planned, according to the Brewers Association. At the moment, Indeed.com has 2,500 jobs listed in the craft brewing industry.

Yet despite its growth and popularity among beer drinkers, the craft brewing industry still faces battles in the marketplace — though those battles are not always fought within the free market. The 21st Amendment, which overturned Prohibition, gave the states wide latitude to legislate and regulate the production and sale of alcohol.

Among the biggest roadblocks new craft brewers encounter are the beer distributors, or wholesalers. They don’t brew beer or serve it. However, they function as a mandated middle-man between alcohol makers and retailers. As such, they wield outsized influence within a $135 billion industry.

Distilleries, wineries and breweries are generally required under state laws to hire separate distributors to get their products to customers. The distributors rely on arcane post-Prohibition regulations to guarantee their businesses and keep those rules in place by hiring scores of lobbyists and donating generously to state lawmakers. Alcohol distributors contributed approximately $15 million to state candidates in the 2014 elections, compared with $5.3 million from alcohol manufacturers and $2 million from retailers.

Distributors have used their clout to prevent craft brewers from selling directly to consumers on site. As it stands, most states allow craft breweries to sell directly to customers, but requirements vary — the quantities breweries may sell are usually quite limited — and most won’t let breweries cut out wholesalers entirely. Three states outright bar breweries from selling directly to the public: West Virginia, Hawaii and Mississippi.

Until just this year, Georgia was the fourth. Craft breweries had been fighting for a decade to have the rules changed and this year they scored a victory. Sort of.

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Source: Brewers Association

Breweries in Georgia are still not allowed to run like a retail store. Nor can they actually sell a six-pack of their beer directly to a customer.

Here is how it works: A customer will buy a ticket for a tour of the brewery. Depending upon the type of ticket he buys, he’ll be able to bring home a “souvenir” — generally up to 72 ounces (a six-pack) of beer to consume.

The bill originally included language that would have allowed for the direct sale of a limited amount of beer to customers, but the distributors pressured legislators to remove that provision.

While Georgia’s law is a step in the right direction, it is a far cry from implementing a truly free market. The post-Prohibition rules were enacted in part to prevent alcohol producers from owning and operating bars and saloons. Many of the beneficiaries were actually former bootleggers who used their political ties to stay in the business as state-licensed distributors.

The rules make little sense today, but their persistence only goes to show the strength and persistence of the distributors’ lobby. Georgia has a Republican-controlled House of Representatives, a Republican-controlled Senate and a Republican governor in Nathan Deal. It’s head scratching to see Republicans, who declare themselves to be champions of free enterprise, give in to the demands of special interests that seek to clamp down on that free enterprise.

Money talks however, and Gov. Deal has received nearly $17,000 from the Georgia Beer Wholesalers Association since 2010. Nevertheless, antiquated distribution rules have cost the state of Georgia revenues and jobs. Georgia, according to the Brewers Association, ranks 45th in the number of breweries per capita in the United States with a total of only 40 breweries. That is less than one brewery for every 100,000 Georgia residents. By contrast, Colorado — where the craft brewery business has flourished — has 235 breweries and ranks third in the nation with 6.1 breweries for every 100,000 residents.

Georgia receives no benefit by maintaining its current prohibition of direct alcohol sales. People are looking to other states to open breweries where they have that flexibility. The result is less money and tax revenue flowing into state coffers and fewer people working. Perhaps at some point lawmakers will see the advantages of eliminating the old distribution system.

That will require people to speak very loudly to Governor Deal and the Republican controlled legislature. As it stands, the wholesalers are still in the driver’s seat and will remain there for some time.

Jay Caruso is a contributor for Opportunity Lives. You can follow him on Twitter @JayCaruso.