Across the United States, a new movement has arisen with more people buying local. One of the champions of this movement is craft beer. While craft beer is certainly not as large as Budweiser or MillerCoors, craft beer is starting to change the way people think of beer. Even with its growing popularity, craft beer still makes a very small portion of the total beer profits. The top four beer brands alone, Bud Light, Coors Light, Miller Lite, and Budweiser, make up 38 percent of the beer sold in the United States, making three out of four beers sold one of the these brands. In contrast, all craft beer combined makes up only 18 percent of the U.S. beer market.
In order for craft beer to have a bigger presence in the beer market they must break down a few barriers. One of these barriers is the restriction placed on all breweries, big and small, on how much they can distribute before selling to retailers through a distributor. Distributors have often fought any dilution of the restrictions because of their stake in the beer industry. Originally, requiring sales through distributors allowed the government to make sure taxes were collected and regulate big beer from exploiting the public. Distributors also get a great deal of money from brewers for their services.
For example, Georgia had a law that prevented any brewery to either sell their beer at their location or to personally distribute to retailers. In February, the Georgia senate passed Senate Bill 85 that allows patrons to buy a case a day onsite and to buy pints of beer at the brewery. The bill ends the complicated tour-system that allowed breweries to only give beer to patrons who bought a tour of the brewery. Recently, North Carolina has proposed a similar bill that will relax the distribution restrictions placed on its breweries.
[I]n North Carolina, breweries can distribute up to 25,000 barrels per year.
As the law currently stands in North Carolina, breweries can distribute up to 25,000 barrels per year. To put this in perspective, one barrel equals 2 kegs or 330 bottles. Thus, the current cap is 50,000 kegs or 8.25 million bottles per year before a distributor is required.
Generally, North Carolina’s craft beer industry is not one of the biggest in the country. That prize goes to California and Pennsylvania. However, North Carolina’s craft beer industry ranks sixteenth in overall economic impact, at about $1.2 Billion. North Carolina has 204 breweries, with most around the Triangle and Asheville areas. Now, North Carolina craft breweries are looking to expand their market and availability.
House Bill 500 would give craft breweries the means to expand their horizons. Sponsored by Chuck McGrady (R-Henderson), Jon Hardister (R-Guilford), William Brawley (R-Mecklenburg), and Pricey Harrison (D-Guilford) the bill increases the distribution cap from 25,000 to 200,000 barrels per year. Additionally, small breweries will have greater leeway with distribution agreements. Under N.C. Gen. Stat. § 18B-1305 small breweries must show good cause before termination of such agreements. Amendments from HB 500 will allow a small brewery to simply give notice of termination to the distributor without a showing of good cause. A small brewery is defined in HB 500 as a brewery that produces less than 200,000 barrels per year.
All craft breweries in North Carolina would fall into the small brewery category. Currently, only three breweries approach the new limit, Old Mecklenburg Brewing, NoDa in Charlotte, and Red Oak Brewing Company in Guilford County. The other 201 breweries are averaging about 7,000 barrels per year. Meanwhile, big beer companies like Canadian owned MolsonCoors and Belgian owned Anheuser-Busch Inbev, the number one and two breweries worldwide, produce between 17 and 18 million barrels per year. These two companies alone have billions of dollars in assets and own their own fleets of distribution trucks. While HB 500 may be trying to help small breweries expand their market it also gives greater leverage to big beer to increase their presence in North Carolina’s beer market.
The 28 distributors in North Carolina are all family owned…
In statements made to WRAL, Tim Kent, executive director of the North Carolina Beer and Wine Wholesalers, worries that the breweries wanting HB 500 do not understand what they are asking for. Rather than a free and larger market for North Carolina breweries HB 500 will increase the amount of disputes between distributors and breweries. These disputes are mediated by the Alcoholic Beverage Control Commission and are required under HB 500 if the brewer and the distributor cannot come to an agreement twelve months after the notice of termination. With breweries able to terminate agreements without cause, distributors and breweries may be stuck arguing while wasting time and money. Mr. Kent says that the 28 distributors in North Carolina are all family owned and simply want what is best for the public health and welfare. Democracy North Carolina, however, claims that these family owned distributors, as members of the North Carolina Beer and Wine Wholesalers, have given political campaigns over the past four years $1.5 million.
Further, HB 500 may not be constitutional if Granhold v. Heald, a 2005 Supreme Court decision, applies. Michigan had an increase in small wineries but a decrease in wholesalers, not unlike North Carolina’s current situation. Wholesalers had less incentive to buy products from small wineries, who would not be able to fully stock their warehouses, and more incentive to buy products from large wineries, who would be able to stock the warehouses and ensure distribution of their product. To make sure that small wineries could still get their product to the public, the state constructed a distribution scheme that gave in-state wineries a license to distribute directly to retailers while denying the same benefit to out-of-state wineries. This scheme made in-state wines cheaper than out-of-state wines, which harmed out-of-state wineries. The Court found that if a state law gives special treatment to in-state companies and burdens out-of-state companies it violates the Commerce Clause.
HB 500 does not differentiate between in-state and out-of-state breweries…
The argument can be made that by allowing in-state small breweries to bypass distributors out-of-state breweries will be harmed. However, HB 500 does not differentiate between in-state and out-of-state breweries that do not have to use distributors. It would appear to apply to any breweries that distribute in North Carolina and fall below the 200,000-barrel threshold. Unlike Granhold, no license is granted to designating a brewery as small brewery. HB500 may clear the constitutional hurdle.
With April being declared North Carolina Beer Month and the proposal of HB 500, craft breweries in the state hold high hopes for the future of their product. John Marrino of Old Mecklenburg Brewery, one of larger craft breweries in the state, told WRAL that distributors do not add much to the equation for small brewers. He feels that big distributors have less incentive to promote small breweries who may only contribute to a very small portion of their profit. By allowing small breweries to do their own distributing they are better able to get their brand out to retailers without having to rely on distributors, who may have hundreds of other beers to sell to retailers and may not give small breweries the same attention.
In the end, both sides have similar arguments. They both want to create jobs, promote free markets, and help North Carolina’s economy. Unfortunately, breweries and distributors just disagree on whose course of action does the better job of achieving those goals, and a pint at the local brewery is not likely to settle the dispute.