adventures in craft beer and real food

Sunday, December 02, 2007

The truth, the whole truth, and nothing but the truth

The Wisconsin State Journal really missed the mark in a December 1 editorial.

Here's the backstory: Wisconsin had a prohibition era law that prevented any business from producing beer at more than two locations or more than 4000 barrels of beer per year. To be fair, this law made sense at the time as it helped prevent the formation of tied houses. Tied houses are inherently anti-competitive, so we should be glad to be rid of them. However, the Great Dane hit a regulatory brick wall in 2005 when they were forbidden from producing beer at their Hilldale location. Instead, the Great Dane-Hilldale had to serve beer from other breweries.

This all changed with Senate Bill 224 (pdf, 101.3 kb) which lifted some of these restrictions by raising the caps to six locations and 10,000 barels/year. In a political sleight of hand, SB 224 was merged with the 2007 Wisconsin Act 20 (aka the state budget, pdf, 4.3 Mb - see section 125.295) and signed into law. Euge! Common sense! Paradise regained, right?

Well, yes. Sort-of. I mean, it's great that the Great Dane can sell more of their delicious beer. But Senate Bill 224 was more than a common sense correction of a 1933 legal relic. Eheu!

To understand why SB 224 has been called the "screw the small brewer bill" in the Tyranena Brewery newsletter, you have to understand a few things about beer distribution in Wisconsin. In order to prevent unfair consolidation in the beer market, the law has historically required a three-tier distribution system that divides up the beer market between the brewer, wholesaler, and retailer. SB 224 short-circuits this system by creating a new classification called a brewpub that exists next to the three-tier system, and clearly spells out limitations of a brewery and a brewpub.

In the past, any brewery could hold a so-called Class B license that allows on-site consumption. Also, breweries could hold a restaurant permit. Now, with SB 224, breweries cannot have restaurants. To serve food, the brewing facility must qualify as a brewpub. To quote the Legislative Reference Bureau's summary of SB 224, "This bill prohibits a person issued a brewers' permit after the bill's effective date from holding a restaurant permit, thereby requiring a person who intends to begin manufacturing beer and operating a restaurant after this date to obtain a brewpub permit." For this to happen, the facility must produce less than 10,000 barrels of beer/year (per SB 224 page 9 line 19), must "manufacture" all beer served on premises (per SB 244 page 9 line 21), and sale of alcoholic beverages must account for less than 60% of all gross sales (page 9 line 23), must offer to sell beer other than that "manufactured" by the brewpub group (page 10 line 3), and have no more than six brewpub permits (page 11 line 10).

Now... by restricting food service exclusively to brewpubs, the law does great and I fear tangible harm to our state's brewing traditions. Many breweries also maintain on-premise restaurants such as the Ale Asylum, Lake Front Brewery, Central Waters, Milwaukee Ale House among others. Instead of holding a brewers' permit, they will have to hold a brewpub permit with all of the restrictions listed above. For one thing, to continue serving food total production will be capped at ten thousand barrels annually. For another, food sales would have to account for at least 40% of gross sales -- which is clearly impossible for many of these establishments. The end result is that food service will sadly have to cease in many instances.

Which eliminates competition for brewpubs by forcing competitors to register as breweries instead of brewpubs. Is this what the Great Dane wanted all along? If so, this seems selfish and short-sighted. It's not like there was anything even approximating market saturation as anyone who's ever tried to get a table at the Great Dane-Downtown at 8 PM on a Saturday night can tell you.

Furthermore, the restrictions on food service and food-alcohol sales percentages limit business in unnecessary ways that unfairly hurt small and start-up brewing operations. Traditionally, brewers have used food sales to provide a second source of income that dampens the impact of market fluctuation in beer sales. If a start-up brewery can't maintain at least 40% of all gross sales in food service, it would have to forgo food service all together.. After all, people usually start brewpubs (as opposed to restaurants) because they are skilled at making beer.

Why restrict the ability of the entrepreneur to start and operate a business like this? It doesn't make any sense. For that matter, why restrict brewpubs to 10,000 barrels of production? Shouldn't a brewer simply be allowed to produce the amount of beer that the market demands? Why cap it at all?

Even if you agree with SB 224, you will no doubt be less enthusiastic about the manner in which it was passed. SB 224 was slipped into the state budget at the last minute. Recall: Wisconsin was the very last state in the union to pass a state budget for the current fiscal year. As a result, the Wisconsin State Journal among many other papers were raising a clamor to get a budget passed. Because of this strong public pressure, attaching SB 224 to the state budget essentially assured its passage -- all without the benefit of floor debate or serious consideration by the full legislature.

All manner of scandalous connections have been well detailed by Michael Horn and need not be repeated in their entirety. Suffice it to say that extensive lobbying by the Great Dane Pub and Brewery Co, Wisconsin Beer Distributors Association, and the Wisconsin Independent Business Inc. overcame lobbying by the Wisconsin Brewer's Guild. Indeed, the total lobbying dollars spent are staggering. The Great Dane spent $13,500 hawking this bill. The Wisconsin Beer Distributors Association spent $16,335.20. With all this money trading hands, I can't help but to think that this isn't how our government was meant to work.

The Great Dane has some smart people working for them. They built a third brewpub knowing that they would be unable to sell their own beer there. Then they were free to appeal directly to the public essentially saying, "Look, we built a nice new brewpub and we can't sell our own beer there! Poor us!" Had the Great Dane simply had a business plan on hold for the Hilldale location pending changes in the law, I imagine the public reaction would have been less direct and more deliberate.

The Great Dane supported the bill because it's going to allow them to make a lot more money. The Wisconsin Beer Distributors Association presumably supported the bill because it further protects the three-tier distribution of beer and because SB 224 requires brewpubs to sell beer purchased from wholesalers. On the other side you have the Wisconsin Brewer's Guild which is made up of small Wisconsin breweries. And these breweries said "no" to SB 224. This is telling.

Finally, the production caps for brewpubs were set to ten thousand barrels per year being produced at no more than six locations. I wonder what the Great Dane will say when they reach 10,000 barrels a year or six retail locations? Many of the same arguments that went into raising the limits are equally valid should that happen. What would be the reaction if the Great Dane built a seventh location? Why couldn't the Great Dane-Location Seven sell its own beer? And that's what really disturbs me about the Wisconsin State Journal lavishing such praise upon SB 224: it just reserves the original problem for Great Dane-gate round two.

Wisconsin deserves beer regulations that make sense. The changes brought about by SB 224 don't solve the fundamental regulatory issue it tried to solve; it merely kicks the pebble a little bit down the way. And in so doing, it creates a multitude of new problems requiring urgent legislative attention.

To quote Wolfgang Pauli, "That's not right. It's not even wrong."

1 comment:

Will & Kate said...

This really is terrible. I hate the government sometimes. I'd feel ever sadder except that I'm moving from Wisconsin soon. And I'm much more sad over the fact that Iowa doesn't have nearly the same small beer culture that Wisconsin does. (know of any????)