I Was Going To Post About How Awesome Josef Is

But, instead, I should probably mention that yesterday the budget was passed. As part of the budget, an add-on bill was tacked on at the last minute by Gov. Doyle.

I'm sure you all see where this is going. Yes, you guessed correctly. That pork bill was SB 224. So, SB 224 is now law, with only the "minor" revision that eliminates the requirement that the restaurant be at least 40% of the brewpub income. The Great Dane can now brew at Hilldale. So, congrats. I suspect that you will see the first beers there by the end of the week.

In our prior posts about this topic, we've suggested that the Wisconsin Distributors have taken over the bill and turned it into something that may not be the best for brewers, but works very well for them to further cement the three-tier system. Comments in our last post suggest that the three-tier system is the greatest invention since sliced bread, being the sole force bringing all of the world's craft beer to our doorsteps.

I have a few comments about that.

First, we never said the three-tier system wasn't beneficial. It is a very useful system. The problem of this bill in particular, but the distributors in general, is that their political power further deprecates alternative methods of distribution. If the three-tier system is so awesome, why don't we have Stone, Alaskan, Brooklyn, Jolly Pumpkin, and other nationally distributed beers here? If the three-tier system is so awesome, why don't we have a greater diversity in our beer stores? If the three-tier system is so awesome why does the influence of Miller, Bud, Coors, et al determine what is available in our restaurants? Yeah. The restaurants count on the distributors to make recommendations (remember, even the CEO of Miller suggested that the biggest benefit of the distributors is that they know the local market so well). But the "recommendations" of the distributors are paid for by Miller, Bud, Coors, et al who provide incentives (either over the table, or under it) to ensure that their product gets recommended (seriously, there is no other reason that Miller Chill is still in stores).

If the three-tier system is so awesome why does it need specialized protectionist legislation?

Even despite all of that, our problem with this bill is not that it passed. Our problem is that it was passed in such an under-handed fashion. It was hardly debated. The revisions were not debated. It was appended at the last minute as a political favor on a budget that was under pressure to be passed. This small part of the budget wasn't going to prevent it from being passed. And, that, is our main problem with this bill. If after debate on its own merits, absent the influence and money of the distributors (or The Great Dane, or The Brewers Guild, or any other political action group for that matter), the senators and the assembly both passed this, it would signal a legitimate claim that reasoned discourse decided this was appropriate. But that's not what happened. Afraid that the bill couldn't pass on its own merit, the distributors took over the bill and shoved it down an unwitting public's throat.

As a result, small breweries will be severely limited in the options that they can undertake to grow their businesses. We have turned away novel distribution methods (e.g., Granite City) and we have hampered the regional competitiveness of one of the few vibrant portions of this state's economy. All because the distributors are afraid that if some brewery has a restaurant on their premises that this will somehow erode the three-tier system.

Well. Congratulations to The Great Dane. Seriously, they were just in this for themselves, and I can't say I blame them. They got, finally, what they wanted. This particular piece of legislation, though, is far from ideal. Yet, I can't help but wonder what solution would have arisen after reasoned debate.

========Edit==============
We're getting a lot of hits about this today, so I thought I'd invite all y'all to read up on everything we've done about SB 224 (The Great Dane Bill). If you click the tag at the end of this post that says "SB 224" you will see all of our posts on this subject. We've had a couple that lay out, in quite some detail, exactly what this bills does, and we also have interviews with Tyranena's Rob Larson and The Great Dane's Eliot Butler. Anyway. Thanks for reading! Keep coming back, we promise more about beer.

The Great Dane Dilemma Part IV - The Great Dane

This is the last of our four part series on legislation currently being considered that would enable The Great Dane to serve its own beer at its Hilldale location. This legislation is currently known as Senate Bill 224. For a detailed look at SB 224, you can read our summary here, and you can view the actual bill here. As we pointed out, this legislation is not without controversy. Many small brewers, including Tyranena Brewing Company, think that this legislation could seriously hurt their ability to compete both here in Wisconsin and on a regional and national level; you can read our interview with Tyranena's owner and head brewer, Rob Larson, here.

In late 2005, co-owner and President of The Great Dane, Mr. Eliot Butler, was introduced to the idea of putting a Great Dane Pub at Hilldale. Mr. Butler, knowing that the current legal environment was against him, nonetheless believed The Great Dane would be successful there whether it could be an active brewery or not. The location would reach its greatest potential as a brewpub, but could still be successful without it. So, he and his business partners agreed to the location. But this story actually begins a few years before that.

In 1994, The Great Dane Pub and Brewing Company set up at the Fess Hotel Building in downtown Madison. It was the first operating brewery in Madison since the Fauerbach Brewery closed its doors in 1966. By 1999, The Great Dane was on its way to becoming the Madison institution that it is today. Around that time, a small brewpub up in the Fox River Valley, appropriately called Fox River Brewing Company, was trying to get the laws changed so that it could have more than two locations. Mr. Butler remembers, "I spoke at the Senate committee hearing that Fox River Brewing instigated that led to the exemption for 'small brewers' (under 4000 barrels cumulative) allowing them to have six retail locations as opposed to two. I begged the senators to set the limit at 10,000 [barrels] and failed due to the wholesalers' power." These committee hearings led to revisions that resulted in a minor exception to the general rule that "tied houses" were prohibited. Namely, that a brewery can have two Class B licenses, but can distribute to up to four more locations if its total brewing capacity is less than 4000 barrels per year.

Clearly, Mr. Butler had his eyes on expanding The Great Dane. In fact, in 2002 The Great Dane opened its second location in Fitchburg. Around this time, Mr. Butler took another shot at convincing the legislature to change the laws. In Mr. Butler's words, "I chose the wrong lobbyist ... those efforts cost me lots of money and went nowhere."

So, in 2005, when Mr. Butler had a decision to make about Hilldale, he chose the same lobbyists that had been successful for the Wisconsin Brewer's Guild.

"I just believed that the current law is so unreasonable and unfair that we would eventually succeed. ... After meeting with [the lobbyist] I was hopeful that the law would be altered in the Spring of 2007. I knew I was taking a big risk, not just with the success of the new store, but with the entire Great Dane brand and concept. Perhaps it was my belief in the excellence of our restaurant operations that provided the courage to move ahead."

Of course, it is now Fall of 2007 and the law has not been changed.

The Wisconsin Beer Distributors Association is a formidable opponent. As has been noted before, no law regarding alcohol passes in this state without the approval of the distributors. The idea that the cap of 4,000 barrels per year would have to be raised would have to have the approval of the distributors. And, thus, the political process of getting that cap raised began. "I was not so naive to think the wholesalers would give us these 'concessions' without getting something in return. Or that they would agree to lift all limits, as I and every other craft brewer would love to see happen."

Modern politics is a game of compromise. Whether it should be or not is another debate best left for another day. But, the fact is, very few legislators are going to go about changing the alcohol laws without first asking the distributors what they think, at least not for the request of a single brewpub. In a perfect world, The Great Dane could propose a law that simply changed the barrel cap from 4,000 barrels to 10,000 barrels - a simple proposal suggested by Tyranena's head brewer in our last post and proposed to the State Senate by Mr. Butler back in 1999. A proposal that was rejected by the distributors.

Bear with me please, but let's analyze this suggestion for a moment.

The following information is based on tax filings in 2006. The Wisconsin beer tax for producers less than 50,000 barrels is $1 per barrel; we will assume that breweries this low on the production scale are not exporting out of Wisconsin in any significant amount (exported barrels are not taxed at all). In 2006, 52 breweries in Wisconsin brewed less than 5,000 barrels (paid less than $5000 in beer taxes). All but 10 of them brewed less than 1,000 barrels. Which means that 10 breweries in the state brewed between 1,000 and 5,000 barrels of beer last year. We know that 1 of those 10 is The Great Dane. Which leaves 9 breweries that brew more than 1,000 barrels and less than 5,000 barrels. There were only 3 breweries in the 5,000 to 10,000 barrel range. What does this mean? Well, this means that raising the cap from 4,000 to 10,000 barrels would affect, at most, 13 breweries (even if we assume that all 10 of them are between 3,500 and 5,000 barrels), one of whom is The Great Dane. Such a cap increase would allow those 13 breweries to distribute to up to 6 locations, instead of 2. How many of them would take advantage? Half of them? Clearly, not all of them; because some of them could have 2 (or even 6) now, but they don't. (If you're interested in where these numbers came from, please see Rep. Terese Berceau's website; somewhat interestingly, it comes from her proposal to raise the beer tax in Wisconsin).

The reality is that the Wisconsin Beer Distributors are putting up a fight that really only affects, at most, half a dozen breweries. Nonetheless, it is a significant move, as any of those 42 that are less than 1,000 barrels could find a market and take off; not to mention those starting up in the future. And, the fact remains that the distributors are opposed to any further erosion of the three-tier system in any form.

So the battle rages on, and the current proposal, SB 224, represents the compromise that the distributors are willing to make to allow 10,000 barrels per year at 6 locations. It basically requires a brewer to make a choice when it starts: brewery or brewpub. If brewery, it must fit fully in the three-tier system; If brewpub, it must stay below 10,000 barrels.

As Mr. Butler notes, "new start-up brewing companies are going to need to have more developed business plans and financing and exit strategies than before." In other words, the owners will need to understand the law and have these options fully mapped out in a defined business plan. The business plan will have to include what strategies will be once these limits are reached and what types of funding will have to exist to stay above or below these limits. Brewing companies that choose the distribution route will have to be creative in how their beer is marketed; opening an on-premises (or off-premises for that matter) restaurant will not be an option. If a brewing company chooses to become a brewpub it must be willing to abandon (spin-off?) its restaurants once it needs to surpass the 10,000 barrel limit. Of course, as Mr. Butler notes, the other option is to simply expand out-of-state once the brewery reaches its in-state limits.

It is useful to be reminded that SB 224 has not yet passed. It is not yet law. It can, and likely will, change from the form it is currently in. Nonetheless, it is a legitimate compromise. It would allow The Great Dane, and other brewpubs in the state, its additional locations and a reasonable path for growth, even if that growth is capped at 10,000 barrels. Current breweries would be grandfathered to the current laws (allowing restaurant permits and up to 2 Class B licenses). Of course, the breweries can still have a Class B license, just not a Class B license and restaurant license; so, breweries could still have a tasting room. On the other hand, starting as a brewpub, even one that's income is less than 40% from sales of food, is an attractive option for entering the market, both locally and regionally. Preventing this income stabilizing and marketing opportunity would handicap small brewers vis-a-vis the region in competing against beers from other states. Moreover, preventing such additional income streams could reduce some of the risks that in-state brewers might be willing to take. Without the safety of non-beer related income, a brewery might be less willing to take a risk that would impact its only source of income, even despite the opportunity for reward for taking that risk.

As of this writing, the Wisconsin Brewers Guild has yet to officially endorse SB 224; in fact, they "officially" oppose it. The Wisconsin Distributor's Association endorses it. Strangely, the Wisconsin Independent Businesses endorses it. The Wisconsin Restaurant Association and the Tavern League are undecided or have reservations. Miller Brewing Company "officially" is undecided, but its CEO has recently made statements strongly supporting the three-tier system ("The three-tier system is the best business model for the beer industry").

For his part, Mr. Butler has this to say:

I do truly believe that the benefits of the bill outweigh the loss of 'total freedom' for future brewers in Wisconsin.

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.