- North Carolina state law forces brewers to hand over 100% of their distribution rights to a 3rd party once they produce more than 25,000 barrels
- This cap hurts a growing industry by artificially favoring the large brewing companies
- Government has no right to tell businesses how to sell and distribute their products
Can you name an industry that is forced to hand over all sale rights if too many people enjoy its product? That is, punished because it’s too creative, innovative and successful? In North Carolina, it is the local craft brewing industry being punished with a state law handcuffing its very growth.
Craft Freedom events held across the state of North Carolina last week turned out opposition to North Carolina’s archaic distribution cap law. The law places a 25,000-barrel cap on self-distribution. Once a brewery produces 25,000 barrels of beer it is forced to hand over 100% of all distribution rights to a third-party distributor.
This cap is anti-competitive from its roots, as it stymies growth for all North Carolina brewers, violates the rights of brewers and beer drinkers, and undermines the freedom of association.
Just what is the distribution cap? Since Prohibition ended in 1933, the federal government left states to largely regulate alcohol on their own with some exceptions. Nearly all states adopted a three-tier distribution system, supported in part by large breweries in the name of tax revenue and safety. This three-tier system forces the producers of beer to use a middleman – or wholesaler/distributor – to deliver their product to a retailer instead of direct sales from brewer to retailer. The pretext was that without it people would drink way too much, small brewers couldn’t reach market and it would be impossible to collect taxes.
The real effect of the system was a huge decline in the number of breweries in the United States, from 766 in 1935 to 89 total in 1978. It was not until the government legalized home brewing in 1978, along with many states adopting brewpub exceptions and increasing or eliminating distribution caps to the three-tier system, that we began to see the surge in micro-brewing. Now the nation boasts 4,000-plus breweries.
As you can imagine, the middlemen must get paid, and in addition federal and state governments collect taxes on both ends of the transaction. Laws requiring third-party distributors impose greater costs on brewers. This money ultimately comes out of beer drinkers’ pockets, while hampering craft brewers from growing and selling more product to people who want it.
Additionally, the law hinders small brewers’ marketing and ability to stand out. A distributor will also carry between 50-150 products from other companies. It is hard enough to build brand loyalty for one product, let alone 100. Getting the word out about your company, your unique story, and why someone should buy your product in the first place may be the toughest part of a business, even on top of the onerous laws and regulations small businesses have to navigate through. If a growing craft beer is forced to be just one of a hundred brands the third-party wholesaler distributes, there is little chance its story will be told. Adding more hurdles to an already competitive market is no way to start and grow a company.
Then there is the question whether a distributor will favor a small, growing company over a giant competitor? Recent news suggests InBev (Budweiser) is financially incentivizing distributors to carry over 98 percent InBev product, then buying up larger craft brewers so local distributors can achieve the 98 percent-plus mark by still offering some type of microbrew but still paying InBev. With limited shelf and tap space available, small brewers are at a disadvantage when they are forced to use a middleman being incentivized by Budweiser. Think they’ll get a fair shot at prime shelf space?
That’s why craft, micro-brewers and customers so strongly oppose North Carolina’s 25,000-barrel distribution cap: They are forced to use a monopolistic system controlled and supported by the state government and large crony corporations. These small businesses have unique products and systems of distribution, they have created unique brand loyalty, and they are growing exponentially due to their success (which was not guaranteed). Their success is in part due to their ability to self-distribute, but once they become somewhat successful, brewers are faced with an arbitrary government-forced cap.
These laws can even hurt small, growing brewers well before the 25,000-barrel cap. Brewers may be forced to make costly growth decisions, opting for lower-capacity equipment instead of growing with the expectation of higher volume.
The owner of Brooklyn Brewery, Steve Hindy, in a 2004 interview with Beverage Industry Magazine stated he did not think he could have competed against the large giants in the Brooklyn market without self-distribution. It is not surprising that large well-known craft brewers originated in states like Colorado, California or Washington that have either no distribution cap or one much higher.
It is the success afforded under self-distribution that promotes growth of the company and the economy in the region. Self-distribution allows brewers to share their story, create brand loyalty, ensure product quality, hear directly from their customers, and be a part of the community wherever that may be.
The law even hurts the state as a whole. North Carolina brewers in general, like Fly Trap in Wilmington, agree that a rising tide lifts all boats, with thriving North Carolina brewers attracting more tourists and name recognition to local cities.
Small breweries create a product and atmosphere that customers enjoy tremendously and therefore pay for gladly, they create value where before there was none, and they utilize innovative and new ways to create a product that 30 years ago we thought could only come in regular and light. It is as a result of all this that we see economic growth and productive jobs in the end.
Government caps on self-distribution of beer harms productivity, creativity, and job growth across the state. Government at any level has no right to interfere with how a small business can sell its product at market, and tend to only create unintended consequences far worse than the original so-called problem. Let the brewers choose their path, not be forced by politicians to conform to a government-sponsored monopoly.
Article written by: Greg Pulscher
Good article, but it fails to address the STRONG lobby and the significant dollars that flow from the distributors to the state legislature members. This lobbying effort is the biggest hurdle to the craft brewers’ efforts to raise or eliminate the cap. It is about the “money”.