Challenging the Bluster Over Brewery Taprooms

The American beer drinker enjoys visiting brewery tasting rooms, where they find good times, make new friends, are a part of the community and develop a relationship with small brewery owners. The success of taprooms at independent craft breweries in the United States is seen as competition by beer wholesalers and retailers who don’t get a piece of those sales during those occasions.

A recent online article by Pamela S. Erickson titled, “When Suppliers Morph into Retailers,” is a case in point. Ms. Erickson was the Director of the Oregon Liquor Control Commission from 1996 until 2003. Ms. Erickson’s web site includes several expert reports indicating that she regularly acts as a paid advocate on behalf of alcohol beverage wholesaler associations, control states, and others with a direct economic interest in alcohol beverage control policies that protect their respective business models.

The article is laced with inaccurate suggestions that taprooms and brewpubs are “new” and that significant lapses are occurring in regulation of breweries with taprooms. The article overstates the existence and the role of one business model, the three-tier system of distribution. That position is understandable because the system works well for the largest brewers and their wholesalers. But Ms. Erickson clearly supports one regulated business model over another with little or no factual basis or public policy rationale.

Below are a few chestnuts from the article, followed by some fact checking:

Sometimes, training on good serving practices was not included as a [licensing] requirement.

Brewers are responsible for sales that occur in their taprooms, and must have the same insurance and adhere to the same prohibitions on service to underage or intoxicated persons. While several states do not have mandatory server training requirements for any retailers, many brewers voluntarily train their employees, whether or not it is mandated, because they are concerned about compliance, the safety of their customers and their neighbors, and understand excellent customer service.

Sometimes there is no increase in the license fee nor did the premise have to pay to acquire a license.

No states have “free licenses.” In many states, brewery licenses include retail privileges, but brewers pay for their licenses and renewals just like every other industry member.

Bar owners in Alaska “have to pay many thousands of dollars for their licenses.

The annual fee to apply for or transfer an on-premise retail license in Alaska is $100. Alaska and several other states do enforce quota systems that force aspiring restauranteurs to buy a retail license from an existing restaurant. That policy is an example of government restrictions that “seemed like a good idea at the time” they were enacted. Today, those policies act as a barrier to entry for new small businesses while protecting the interests of established business and the largest retailers that can pay to purchase an existing license.

We rely on licensed, independent wholesalers to prevent the kind of market domination which created major social problems before Prohibition.

Anheuser-Busch InBev is by far the largest brewer and simultaneously the largest wholesaler in the U.S. with vertically integrated distribution operations in nine states, including New York and California. Nothing is independent about that arrangement. The files of the U.S. Justice Department are filled to bursting with information about the domineering behavior of the world’s largest brewer toward its “independent wholesalers,” but that behavior is deemed to be legitimate competition. The reality is that Anheuser-Busch InBev self-distributes more than 130 million cases of beer annually and substantially constricts full-service distribution options in some of the largest metro areas in the nation.

Within the wholesale tier several other beer, wine, and spirits wholesalers are among the largest privately held businesses in the United States. Each one of the top six beer wholesalers in the United States distributes more beer than the combined volume of every taproom in the United States.

The beer industry has been dominated by large brewers and large wholesalers for decades. Over the last five years, the “big have grown bigger” with the worldwide consolidation of Anheuser-Busch InBev and SABMiller, as well as steady wholesaler consolidation across the country. The “independent, local wholesaler’s” name may be on a license, but its management is increasingly in a distant city or state with sophisticated multistate logistics designed to move the largest beer brands. Nothing is inherently wrong with this model. It simply does not work for many truly local and independent craft brewers. Nor is it fair that a licensed brewer cannot sell its own beer to consumers without arbitrary regulations and penalties, such as requirements that brewers must pay a local beer wholesaler a fee based on the beer sold on-site at the brewery.

Our tied house laws don’t permit manufacturers to be in the retail business.

Oregon’s tied house law was amended to create exceptions for wholesalers and manufacturers to engage in retail sales in the mid-1990s while Ms. Erickson was the Director of the Liquor Control Commission. Brewers did not quietly “morph” into taprooms and brewpubs. ORS Sec. 471.396. They were clearly authorized by state laws to operate, often over the objections and extraordinary political opposition from wholesalers and other competitors.

Since repeal of Prohibition, the federal tied house law has authorized brewers to hold a 100 percent ownership interest in a retailer. The decision made sense. Congress wanted to discourage absentee ownership of retailers and prevent use of hidden ownership interests and bribes intended to pressure retailers to engage in unscrupulous practices.

Taprooms at breweries are inherently local and heavily regulated at all levels of government. They must be authorized to operate by the federal government and their home state. Most breweries usually hold several state and local business licenses, environmental permits, and other authorizations. Breweries have an open and obvious physical presence and are directly accountable to state and local regulators and law enforcement personnel.

The middle tier prevent[s] domination by large companies.

Most beer wholesalers operate in markets where they only have one or two competitors. That means that 95-100 percent of the beer sold in most communities in the U.S. passes through two or three wholesalers. It also means that many wholesalers represent 100 or more breweries. Which player is dominant in those relationships?

Beer is following the evolution of the wine and spirits distribution system, and truly “morphing” from a network of hundreds of small and independent companies to a small group of multistate or national players. The creation of Southern Glazer’s in 2016 created a national distribution and import business valued by Forbes at $16.5 billion that sells 150 million cases of wine and spirits and millions of cases of beer annually. A second merger between Republic National and Breakthru Beverage will create another dominant spirits, beer, and wine wholesaler from two of the 100 most valuable privately held companies.

Most state tied house laws are riddled with exceptions that benefit the largest brewers and wholesalers. For example, California has dozens of exceptions that allow large brewers to dominate beer sales at stadiums, arenas, race tracks, concert venues, and other large facilities that sell major beer brands to thousands of patrons every time the doors open. Wholesalers also benefit from those sales, as they deliver and receive a markup for the beer sold at major venues. Oregon, like most other states, has an extensive list of exceptions benefiting family members of wholesalers and grandfathering established businesses.

In closing, small brewery businesses have a right to exist if they are well-operated, make quality beer, and develop a customer base. This taproom model is growing because there is little other real option for these businesses to succeed and because beer drinkers are demanding the unique on-premise experience they provide.