Friday, October 12, 2007

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.

1 comment:

  1. "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."

    How stupid. I have no sympathy. Don't they have lawyers?

    You drop this kind of coin on an expansion and THEN you see if it's legal?

    Give me a break.


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