How Some States Blunt Growth for Craft Brewers

Armada Brewing shown here with new equipment is one of several craft brewers that want limitations by Connecticut state laws changed.
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Cities across the U.S. support craft brewers for economic development, but in certain states, laws limit their growth potential.

Despite the craft brewing industry’s astronomical growth in the last decade, small and independent brewers in many states face roadblocks and red tape distributing their product.

The Atlantic revealed that between 2008 and 2016 the number of U.S. brewery establishments expanded by a factor of six, and employment grew by 120 percent, doubling the workforce a 200-year-old industry is less than a decade.

This success is attributed to the craft brewers, according to a 2017 report by the Brewers Association, a nonprofit trade association dedicated to small and independent brewers. Of the 6,000-plus breweries operating in the United States last year, 98 percent were small and independent.

With all that success, one would think craft brewers have it easy. That’s not the case in some states where post Prohibition-era regulations place distribution and sales restrictions on brewers and curtail industry growth. But cities often look to craft breweries for economic development. Massachusetts Governor Charlie Baker noted as much in February when he visited Castle Island Brewing in Norwood to address the Massachusetts Brewers Guild, according to BrewersAssociation.org (BA):

Downtowns used to want a Starbucks to help with (economic development); now they all want a brewery.’ I am paraphrasing, but the sentiment is the same. Small and independent breweries are economic drivers, and legislators across the country are taking notice,” wrote Katie Marisic, federal affairs manager for the BA.

Three-Tier System and Self-Distribution

Brewers in some states say what’s holding them back is a three-tier distribution system that was enacted after Congress ended Prohibition with the 21st Amendment.

The system – which legally separates manufacturers, distributors and retail establishments – was intended to abolish monopolized tied houses, “retail establishments tied to a particular brewer or distiller and supplied exclusively by that producer,” according to Understanding the Three-Tier System: Its Impacts on U.S. Craft Beer and You, a Craftbeer.com resource.

These pre-Prohibition saloons were said to have attracted criminal elements – drunkenness, gambling, prostitution and violence, according to the article – and were coerced to tie themselves to select brands of alcohol by organized criminals who controlled the distribution networks.

In some states, small brewers can self-distribute their product until they reach a certain number of barrels, an amount that varies by state. Once they reach that number (25,000 barrels in North Carolina, for example) they are required to work with a wholesale distribution company.

Beer Franchise Laws

Further frustrating these entrepreneurs are beer franchise laws, passed in the 1970s and 1980s, when the newly emerged national breweries dwarfed beer distributors, which at the time were mostly small mom and pop operations, according to Craftbeer.com.

“These laws provide special and often un-waivable legal protections to beer distributors to protect the arbitrary termination of their right to distribute a brand,” wrote author Marc Sorini. “But beer distributors have continued to grow and consolidate, with most mainline (i.e., distributors of one or more major national brands) distributors today dwarfing the vast majority and, in some cases, even the very largest craft brewers.”

Craft Brewers Fighting Back

Small brewers in Connecticut recently poured into the state capital to support HB 5036, a bill intended to lift the limit on the amount of beer craft brewers in the state can sell brewery visitors.

According to Ctnewsjunkie.com, a customer can purchase nine liters of beer per transaction from a brewery, which John Kraszewski, owner and founder of Armada Brewing of East Haven, said translates into “about 21, 16-ounce cans.”

Imagine being a bread baker and then just being able to sell one loaf of bread,” Kraszewski said.

In North Carolina, small brewers joined forces through the North Carolina Craft Brewers Guild, a local trade group, and Craft Freedom, a group put together to challenge North Carolina’s beer distribution laws, according to WRAL. These craft brewers would like to raise the cap on the amount of beer they can distribute without working with a wholesaler. Under current law, once a brewery sells 25,000 barrels of beer per year it can no longer deliver its own product.

“I don’t want to be told what to do with my business,” said Kristie Nystedt, co-owner of Raleigh Brewing.

No Southern Comfort

Things are not much better for independent brewers further south, according to MarketWatch.com.

Author Jason Notte researched the “legal idiosyncrasies” small brewers face in Georgia, Texas and Mississippi and concluded, “Stifling small brewers by denying them self-distribution, brewery sales, pub sales and even something as relatively trivial as growler sales doesn’t protect distributors or defend big brands. It just makes beer drinkers and legislators in states where small brewers have had the right to all of the above for decades wonder what’s wrong with your state.”

Notte lives in Oregon, where breweries have been allowed to sell beer directly to the public since SB 813 passed on July 13, 1985, according to Brewpublic.com.

A System That Stifles Industry

In an essay published by George Mason University’s Marcatus Center, Jacob Burgdorf called the three-tier system an economic “vertical restraint” as it restricts how firms up and down the supply chain interact. He wrote beer-franchise laws are a vertical restraint, too, as they regulate contracts between brewers and wholesalers.

“States that allow self-distribution and do not enact beer franchise laws consistently have more breweries, creating more choices for consumers,” the essay concluded.

Read about how the city of Boulder, Colorado, is looking to a craft brewer for more than economic development:

Beer Waste Could Reduce City of Boulder Nitrogen Discharges

Patrick Sullivan, a Connecticut-based craft-beer aficionado and home brewer, contributed to the above report.

 

About the author

Larry Claflin, Jr.

Larry Claflin, Jr.

Columnist Larry Claflin, Jr., is a freelance writer based in New England and co-founder and former executive director of the non-profit Salem Jazz and Soul Festival. He is fascinated with the mechanics of city government and cultural development in cities.