The Electric Commentary

Wednesday, November 02, 2005

Beer Wars

Wisconsin is debating the passage of a law requiring beer manufacturers who manufacture over 100,000 barrels of beer per year to maintain an extra warehouse in-state, whether or not they actually keep any beer in them. It would also grant exclusive (read: monopoly) territories to beer distributors.

So what's going on here?

Back in May, in what have been dubbed the "wine wars" cases, the US Supreme Court ruled that laws in Michigan and New York that allowed in-state wineries to ship their products directly to consumers, but that required out of state wineries to go through a distributor, were unconstitutional under the "dormant commerce clause." In short, a state may not discriminate economically against those in other states. The legal question involved had the commerce clause in opposition to the 21st amendment, which repealed prohibition and granted regulatory power over alcohol to the states. The Supremes correctly ruled that there was no intention to give the states a power that trumps the commerce clause.

At this point, you may be wondering why anyone is required to use a distributor for anything. Good question. It all goes back to prohibition.

Right after prohibition, the government decided that it didn't want big breweries to dominate taverns. In a sense, they were trying to create fair competition. In other countries, when you visit a tavern it is not uncommon to find the selection limited. This is because beer companies tend to run their own taverns and it would be stupid to sell other people's beers at your tavern. To prevent this scenario in the US, the government created a system called the "three-tiered system" based on "tied house" law. Essentially, it requires all beer companies (and liquor companies, and wine companies) to sell only to distributors, who then sell to retailers. They created a class of very protected, and very wealthy middlemen. How wealthy? In 1997 Anheuser-Busch attempted to end the distribution contract of the family of Roger Maris (yes, that Roger Maris). They sued, and eventually settled for..."at least $120 million."

So the beer distributors lobby is pretty powerful, and over time they've developed government enforced exclusive territories, monopolies, and an almost complete protection from termination. Breweries have an uneasy relationship with their distributors because they want to reduce the number of distributors that they need, and they want to sell for as much as possible, but if they become too antagonistic the distributor can sabotage their distribution. It's a tough business.

Many people consider this model to be outdated, and rightly so. The regulations involved are extremely tedious, and complying with them is an enormous waste of time and money, conferring no benefit of any kind. Because the regulation takes place on a state to state basis (there are a few Federal regs, but due to the 21st Amendment regulation of alcohol is different from state to state, although they all use some form of the three-tiered system), there is no uniformity, and big brewers have to become experts on the law in every state in which they do business.

In Wisconsin, in-state breweries can ship directly to consumers, but out of state breweries must go through a separate warehouse. These facts are analogous to the wine war cases, as Wisconsin is clearly discriminating in favor of the in-state breweries, and if the current law is challenged it is likely to be struck down.

Wisconsin's proposed solution is not to simply eliminate the middleman, but instead to insert a new middleman into the business of the in-state breweries. The bill would have a lower limit of 100,000 barrels, so that most microbreweries would not be affected (for instance, the New Glarus brewery which makes the delightful summer beer "Spotted Cow" will brew about 40,000 barrels next year), however, the microbrewing segment of the beer market is growing, and many small breweries are concerned that this bill will inhibit their growth.

The nation's specialty beer segment boasted 7% sales volume growth during the first half of 2005. Overall industry sales, dominated by Miller Brewing Co., Anheuser-Busch Inc. and Coors Brewing Co., posted a 1% decline during the same period. Milwaukee-based Miller supports the bill, saying it helps strengthen the current distribution system.

New Glarus generally uses distributors, Carey said. But it has occasionally done direct shipping, she said.

Under the bill, New Glarus could eventually be forced to spend money on unneeded warehouse space, Carey said. That would siphon capital away from buying new equipment and expanding the brewery, she said. Also, higher operating costs from adding warehouse space would be passed on to consumers, she said.

Much smaller brewers that do direct shipping also worry the bill could eventually hurt them.

"That certainly is anti-small business," said Tom Porter, owner of Lake Louie Brewing Co., in the Iowa County community of Arena. "That's putting a ceiling over my potential."

Lake Louie, founded in 2000, will sell around 1,500 barrels in 2005, Porter said. But the company has been doubling production in recent years, and has a waiting list of retailers wanting to stock its Coon Rock Cream Ale and other brands, he said.

Also, the bill's provision requiring exclusive territories for wholesalers could cause problems for small brewers, said Russ Klisch, president of Milwaukee's Lakefront Brewery.

If a wholesaler with exclusive rights went bankrupt, the brewer might face delays getting those rights assigned to a different wholesaler, Klisch said. That could choke off the brewer's access to the market, which would restrict the number of brands available to consumers.


All of this to protect the business of a middleman? And for what? In the Wine Wars cases (which you can read all about at the Volokh Conspiracy as part of Todd Zywicki's multi-part series, which is extremely long, but quite interesting. Here's part 3. You should be able to find the rest from there.) the middlemen claimed that the current distribution system helps to curb irresponsible and underage drinking, the thought being that many teenagers are apparently ordering wine online and having it shipped in from out-of-state wineries so that they can get hammered. The court was unresponsive to this line of reasoning.

And what do we hear from the beer distributors?

Beer wholesalers say the system helps ensure that alcohol is marketed responsibly.

Right.

And it is not just distributors that exert their pressure. Neo-prohibitionists are also well aware of the price increases inherent in the three-tiered system, and put their weight behind these protectionist efforts.

The current system of beer distribution is horribly outdated, and extremely anti-competitive, but it is also firmly entrenched, and very powerful politically. Hopefully this matter eventually makes it into the legal system, where it can finally be put out of its misery. The commerce clause exists to stop this kind of discrimination, and anti-trust law exists to stop the kinds of monopolistic activities that these middlemen thrive on.

8 Comments:

  • Roger Maris's family has that kind of money? I remember reading something in '98 about how Major League Baseball was making money off the home run chase but not giving anything to the Maris family. It seemed like a pretty feeble argument at the time, but now that I know this it seems really absurd.

    By Blogger MDS, at 11:39 AM  

  • "the New Glarus brewery which makes the delightful summer beer "Spotted Cow" will brew about 40,000 barrels next year"

    Even you like Spotted Cow? Am I the only person that thinks that stuff sucks?

    By Blogger DannyNoonan, at 12:38 PM  

  • Yes, you are. Do you like any sweeter, wheatey beer at all?

    By Blogger PaulNoonan, at 1:04 PM  

  • Actually the Maris family got the distributorship as a gift from whichever Busch was in charge at the time. They may have been broke before that, but I don't know. AB tried to pull it recently because allegedly they were doing a horrible job. I guess they were legally entitled to keep doing a crummy job though. I mean we can't sacrifice inept mandatory middlemen to the petty interests of producers or consumers can we?

    I'll support Dan, Spotted Cow does suck, except the name. Name trumps taste for many I fear. And I do like wheat beers, although I'm not even sure spotted cow is one. The house Hefe Weizen at Piece is good. Leine's Honey Weiss is also better than Spotted cow.

    By Anonymous Scott, at 2:23 PM  

  • I don't like any wheat beer at all. I think part of the reason is that in college I sold plasma (88 times in one year! I was on the wall of fame at the plasma center) and plasma looks just like wheat beer. But the major reason is that it tastes bad. I will drink an occasional Honey Weiss but it's rare. Call me old fashioned but I like my beer beer-flavored, not honey-flavored. I think Scott is right about the name. People drink that shit like crazy around here and the only thing at all good about it is the name.

    By Blogger DannyNoonan, at 2:36 PM  

  • http://www.newglarusbrewing.com/beers/spottedcow.html

    Cask conditioned ale has been the popular choice among brews since long before prohibition. We continue this pioneer spirit with our Wisconsin farmhouse ale. Brewed with flaked barley and the finest Wisconsin malts. We even give a nod to our farmers with a little hint of corn.

    Naturally cloudy we allow the yeast to remain in the bottle to enhance fullness of flavors, which can not be duplicated otherwise.

    Expect this Ale to be fun, fruity and satisfying. You know you’re in Wisconsin when you see the Spotted Cow.

    By Blogger PaulNoonan, at 2:41 PM  

  • I notice from the New Glarus link that unlike about half of the other beers they have Spotted Cow has never won any awards. For the record, I didn't claim affection for Honey Weiss, just that Spotted Cow was worse.

    As for the original thread, I guess maybe without distributors beer makers would edge each other out. Schlitz used to own a lot of bars in Chicago. Of course, the choice that many bars offer isn't much of a choice anyway. Here we basically can choose from Bud, Miller, Schafly & sometimes Fat Tire or 1554.

    By Anonymous Scott, at 4:25 PM  

  • Spotted Cow is a corn beer = it sucks. Love their other stuff.
    Michael Horne
    www.milwaukeeworld.com

    By Blogger Michael Horne, at 3:57 PM  

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