Michelle Minton is a fellow at the Competitive Enterprise Institute, a free-market think tank in Washington, D.C.
This week marks the sixth year bars, brewers, distributors and other beer enthusiasts will come together to celebrate the beer community in our nation’s capital. One of the educational events, which was held last night, was a “drinking seminar” on How Government Affects Your Beer. From taxes, which make up about half the cost of a beer, to the one man in the Treasury Department who approves every beer label, to the laws that dictate how brewers can sell their beer, rules and regulations have a huge impact on the cost, availability, and variety of beer in the market—something that should be of interest to any maker or lover of craft beer.
While there’s no doubt that we are living in the “golden age” for craft beer in America (soon we’ll have around 3,000 brewers, the most since the end of Prohibition in 1933), but there are still anti-competitive laws and regulatory schemes, like the strict mandatory three-tier distribution system and state franchise laws. Many consumers aren’t aware of these obstacles, but they hugely impact what beer we can buy, how much we pay for beer, and will affect how the craft beer “boom” will continue to develop.
Journalists love speculating on why, eight decades after prohibition, craft beer blossomed into one of the strongest and most dynamic sectors in the alcohol market. Recently, a Washington Examiner article asked us to thank Prohibition, and the restrictive laws that followed, for the craft beer boom that began in the 1980s and 90s. However, there are a few other significant factors that really contributed to the rise of craft beer, particularly the legalization of home-brewing and better access to capital in recent decades, to name a few.
After Prohibition ended, Americans could sell, produce, import, and transport alcoholic beverages, but home-brewing was still illegal until 1978 when then President Jimmy Carter signed legislation to legalize brewing in the home for personal or family use. In that year, the number of breweries was at its lowest point after the repeal of Prohibition. But in the 1980s, after states began to legalize brewpubs, the number of brewers began to rise. This development, along with easy access to capital in the 1990s and 2000s, aided efforts of modern craft breweries to change the laws in their home states so that they could brew more, self-distribute, and start the microbrew revolution.
It’s a great time to be a beer drinker. The only time the United States had more breweries in operation was in 1873, before Prohibition, the three-tiered system, or franchise laws. Even though the number of breweries is growing, far less noticed is the declining number of wholesalers. While the number of breweries rose from about 250 to more than 2,500 between 1990 and 2013, the number of wholesalers declined from about 3,250 to fewer than 1,500 during that same time period, according to Beer Institute data.
This shrinking “route-to-market” system could mean trouble for future micro brewers because of a Prohibition-era remnant called the mandatory three-tiered distribution system. This distribution system requires brewers to sell their beer to wholesalers and prohibits from selling directly to consumers with a few exceptions. Enacted for political expediency at the time of Prohibition’s repeal, the three-tiered system was intended to address aggressive marketing by brewers that some believed led to excessive levels of alcohol consumption.
Another hindrance for craft brewers are franchise laws, enacted among the states in the 1970s and 80s due to fears of brewers’ market power. With less than 50 brewers in the nation at the time—most of them large—there was a fear the big brewers could hold wholesalers hostage by threatening to walk away unless distributors bowed to the brewers’ demands. Since then, however, the landscape has completely shifted.
Although the number of wholesalers nationwide has declined, those remaining are larger and more powerful than almost all of the breweries in the nation. Yet, the laws remain, giving the wholesalers “virtual carte blanche to decide how the beer is sold and placed in stores and bars,” according to Brooklyn Brewery founder Steve Hindy.
In almost every other industry, a manufacturer unhappy with a distributor’s performance or price can terminate a contract in search of a better fit. This is not the case for beer manufacturers. Brewers wishing to switch from one distributor to another must go through long and costly legal battles. Hindy, for example, paid $300,000 to get out of a contract with a New York wholesaler. Yuengling COO Dave Casinelli’s experience was similar. In a phone interview, he noted that in his 24 years with the company, he couldn’t recall any attempt to switch wholesalers that didn’t end up with some legal ramifications.
Most state franchise laws not only make leaving a wholesaler hard, but they also create regional monopolies, known as “exclusive territories,” where a brewer is prohibited from selling through more than one distributor within a given area. This undermines incentives for wholesalers to compete by improving performance, increasing efficiency, or lowering prices. After all, distributors have little or no fear that a brewer will leave—because most of them can’t. As for consumers, they end up paying more because of this lack of competition.
Franchise laws, along with the mandatory three-tiered system might also explain distributors’ decreasing numbers. With established beer brands firmly locked into exclusive contracts, new wholesalers cannot add those brands to their portfolios. And startup brewers would be compelled to sign contracts with the well-established wholesalers that could meet their needs as they grow – since switching may be a difficult and expensive process. Efficient distribution is essential for any craft brewer hoping to expand; this is why it’s imperative we address the cause for the dwindling numbers of distributors and look for ways to open up distribution channels for brewers—even if that means the brewers must self-distribute.
DC Beer Week’s seminar on Wednesday gave a chance for consumers, brewers, and lawmakers to talk about these and other issues facing the craft beer industry. While it truly is a great time to be a beer lover in America, if we want to keep the "boom" going we need to keep doing what started the “boom” in the first place—freeing craft brewers and all of the tiers from archaic and anti-competitive, Prohibition-era regulations.