Wednesday, October 10, 2007

The Great Dane Dilemma Part III - Small Breweries

The first two parts of this series are covered here and here. In those posts, we summarized, in some detail, the particulars of Wisconsin Senate Bill 224.

SB 224 is a big deal. As consumers, we don't really think about the details of getting beer from Point A (the kettle) to Point B (our stomach). In many respects, we've never really had to worry about it; free market economies give freedom to the producers to pick their channels of distribution, with some limitations. For example, the current state of affairs says that breweries (defined, generally speaking, as any entity that produces fermented malt beverages for consumption by the general public) have to sell to distributors and distributors sell to retailers. The general rule is that breweries cannot sell straight to retailers, or even straight to consumers.

Obviously, there are exceptions to the general rule that allow small breweries some flexibility in a crowded three-tier distribution system. Breweries can sell bottles and cans at the brewery, so long as these bottles and cans are not consumed on the premises. This is a Class A license. Breweries can have tasting rooms, so that consumers visiting the brewery can sample the beers there. This is a Class B license. Breweries can prepare and serve food at the brewery if they have a Restaurant license. Colloquially, we usually call a brewery that has a Class B and is a restaurant a "brewpub." A brewery can have two Class B licenses; this limitation to the exception (because remember, the general rule is that no beer goes from brewer to consumer without first going through a distributor)was to prevent large brewers (i.e., Miller, Pabst, and Schlitz) from simply opening up a series of bars all around the state and keeping small brewers from having the same opportunities. A brewery can have up to 20 restaurant licenses (although still only two Class B licenses), and, if it is suffiently small (under 4,000 barrels per year), can supply up to four of the restaurant with its own beer ("tied houses").

This was an important development for the encouragement of small breweries in the state. Allowing small brewers to serve food at their breweries, and to serve their beer at their breweries would allow small-time brewers to gain entry into the market. Consumers could try the beer; then, if they liked it, could find the bottles and cans at their local retailer. Without this outlet, small brewers could only compete with the big brewers at the shelf, without any context or consumer knowledge.

In this environment, numerous small breweries came to thrive in Wisconsin. Among them, Capital, New Glarus, Lakefront, Lake Louie, Central Waters, South Shore, and Tyranena, among others. Nestled in the hills and low-lands along the stretch of I-94 from Madison to Milwaukee, Tyranena brews exceptional beers. Tyranena is perhaps best known for its hoppy beers, such as the Bitter Woman (an India Pale Ale - aka "IPA"), and the Bitter Woman From Hell (an Extra IPA), and the Hop Whore (an infrequently brewed Imperial IPA). But it also has a terrifically smooth and mild American brown ale called Rocky's Revenge, the light and sweet Three Blondes Honey Blonde, and an amazingly subtle and complex Oktoberfest beer.

Like most breweries, if you were to visit (and it is highly recommended that you do) you could take a tour of their facility and then try some of the beers in the tasting room. On the weekends in the summer you can sit on the patio and enjoy a band or two. You can also participate in their charity bike ride or their charity beer run.

The point here is that Tyranena has quite a few ways of getting people to their brewery and getting its name in front of consumers. Other breweries use other means to get their name in front of consumers. For example, Ale Asylum or Milwaukee Brewing Company, or Central Waters might have a restaurant at their brewing facility to attract potential buyers. And, this, says Tyranena's head brewer, Rob Larson, is part of the problem with SB 224.
"If they choose to become a brewery with a restaurant they must get a brewpub license and they are then limited to 10,000 barrels per year in production. Many breweries open as a brewpub to ensure a market for their beer. A practice that is becoming increasingly important as the wholesalers are consolidating and there are few options to entering markets."

Mr. Larson goes on to point out that any brewery starting under the rules proposed by SB 224 would have to qualify as a brewpub if it wanted the additional market benefits of having a restaurant. One of those rules that is part of the current bill is that the restaurant activity must account for at least 40% of sales. Something that is very difficult for a brewery that wishes to focus on distribution and use the restaurant as supplemental income or for market development. And because this new brewery could not be a brewpub, it would be prevented from opening multiple locations with restaurants. Yet, Mr. Larson goes on to point out, a brewpub can also distribute. So, you end up with the inequitable and unfair result that brewpubs can compete with breweries, but not vice versa.
"A brewery would not be able to operate a restaurant at their tasting room, but the tavern down the street that sells less than 40 percent food would be permitted to sell beer and food? These are simply artificial deliniations that limit the future growth opportunities of breweries."

Mr. Larson is blunt about the impact of SB 224: "This legislation limits potential avenues for growth for our brewery." He further suggests that Wisconsin breweries would also be at a competitive disadvantage in the national marketplace:
"It is difficult to know how business is going to advance before it even starts. Goose Island started as a brewpub. Great Lakes started as a brewpub. But in Wisconsin, under SB 224, a brewpub would have to give up its up to 5 locations to become a larger brewer. Do we really want to limit the potential of Wisconsin breweries and businesses? Put them at a competitive disadvantage to out of state breweries?"

"I think almost everyone in the Wisconsin Brewers Guild is in favor of allowing the Great Dane to have additional locations so long as it does not adversely affect the opportunities for other breweries and so long as we are all treated equitably," Mr. Larson says. The problem is crafting a solution that would allow The Great Dane to have additional locations. Mr. Larson makes two suggestions, both of which are simple, would allow The Great Dane to expand, and yet leave market flexibility for small breweries: lift the [tied house] cap from 4,000 barrels per year to 10,000 barrels per year; allow all breweries to have 5 Class B licenses.

"However," Mr. Larson notes, "to pass any legislation in this state that has to do with alcohol you need the [political] support of the the wholesalers." And both of his solutions would further erode the three-tier system. "The wholesalers are interested in protecting their tier in the three tier system which has come under attack with a couple of recent Supreme Court opinions. So the wholesalers are doing everything they possibly can to strengthen state statutes to their benefit, which does not necessarily coincide with the interests of small breweries." Specifically in reference to SB 224, Mr. Larson says that the original bill drafted by The Great Dane was two pages. It is interesting to note that now that the Wisconsin Beer Distributor's Association has officially endorsed SB 224, the bill has swelled to over 26 pages.

Clearly, Mr. Larson, and by extension his Tyranena Brewing Company, is not in favor of SB 224 as it is currently written. He sees it as specialty legislation largely written by a biased trade-group opportunistically taking advantage of an isolated situation to further its own agenda at the expense of Wisconsin's small brewers.

It basically comes down to the fact that the state statutes are screwed up and written for another time. But this patchwork approach to permit The Great Dane to open an additional location and strengthen the legal stranglehold of the wholesalers is not necessarily in the best interest of small brewers. If SB 224 had been in effect 10 years ago, The Corner Pub would likely not exist today, the Ale Asylum would likely not exist today, Rowlands Calumet would likely not exist today, Granite City would not be welcome in Wisconsin. The wonderful diversity of the Wisconsin brewing industry would not exist. Instead it would be a state mandated cookie cutter approach where there would be only places like Great Danes, Rock Bottoms, Millers and Leinies.

1 comment:

  1. Why don't the small brewer get together and craft legislation that allows them to sell small quantities of their product onsight? They could have a store, bar and or restaurant that was physically located on the brewery site. The distributors would probably be okay with it if they gave up the right to directly sell elsewhere. The brewpubs would be okay with it because it would restrict the small brewer from opening retail outlets in retail areas.

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