Texas Craft Brewers and the Big Beer Industrial Complex

The beer industry in Texas today is still regulated by a “three-tier system” devised in the 1930s. A system that requires each of the industry’s tiers— brewing, distributing and selling— to operate financially independent of the others.

Think of it in terms of The Simpsons.

Following Prohibition, state lawmakers wanted to thwart the likes of Mr. Burns from acquiring Duff beer and Moe’s Tavern, then brewing and distributing Duff exclusively to Moe’s franchises across the Texas.

Monopolization concerns required ultra-wealthy Mr. Burns to choose only one of the tiers. He chose distribution. Wholesale distribution to be exact.

Almost a century later, three-tier has seen only a few modifications.

In 1994, the Texas Legislature legalized craft brewpubs. And in 2013, brewpubs were allowed to distribute, and small breweries were allowed to offer on-site sales direct to consumers.

The law changes resulted in a huge boom for craft brewing as well as the Texas economy, according to Brock Wagner, founder of Saint Arnold Brewing Company, in a recent interview with me on Other Side of Texas radio. [Note: Hear the full interview below.]

“There are about 250 craft breweries in the state today. Ten years ago, there were about 20. So, you can see when the law changes, it really helps the entire state,” said Wagner, who launched Saint Arnold, the state’s oldest craft brew, in 1994.

But when the law changed again last year, the affect was much more bust than boom for craft brewers.

The 85th Legislature passed House Bill 3287, restricting certain operations brewers can have on their premises. It also requires breweries producing 225,000 or more barrels per year to sell beer produced on premises to distributors, and then buy it back from distributors in order to sell on premises. Breweries owned by brewing giants are, however, exempted by the law.

Saint Arnold Brewery & Beer Hall, located in downtown Houston.

In other words, grow only so big— or else.

Wagner calls HB 3287 “a step backwards.” Other craft brewers go further, call it “an extortion tax.”

“The distributor doesn’t actually want to pick the beer up from us, bring it to their warehouse, then ship it back to us so that we can serve it,” Wagner said. “They’ll just give us an invoice for what we take out of the cold box, and move to our bar and sell. Just to get their bump tax.”

What’s more, Wagner says the bill reduced the value of the state’s craft breweries by some 50 percent because “it makes us unappealing for any other brewery in the country, or the world, to want to invest in our breweries, because their investment could actually cause us to have to shut down our taprooms. Our taprooms are our number-one marketing tool.”

So how did such a bill pass out of the Legislature, and do so with a governor’s veto?

Because of money in the second tier of distribution, which is now much more politically powerful than brewing or retail.

Wholesale beer distributors “are one of the largest contributors of political donations to the politicians in the state of Texas. Their donations are in the millions of dollars every single election cycle,” Wagner said. “They pretty much blanket the entire Legislature.”

Saint Arnold, the state’s largest craft brewer, produces 68,000 barrels annually. Wagner says Anheuser-Busch, InBev does around 100 million.

“It’s kind of ‘money talks.’ They’re a very lucrative businesses, and that’s how it works,” he said. “As long as money becomes the driving force in politics, as long as that’s the case, it’s gonna be hard, and the end result may not be what’s actually best for the state of Texas.”

Rick Donley, president of the Beer Alliance of Texas, which represent big beer interests, recently argued to Texas Tribune and KXAN-TV that making further modifications for craft beer could, effectively, upheave three-tier.

“The fear is you make that carve-out and somebody else wants a carve out, and somebody else wants a carve-out, and then all of a sudden the whole three-tier regulatory system has holes big enough you could drive a beer truck through,” Donley said.

But distributors make another argument that makes lawmakers jittery. Without laws like HB 3287 distribution jobs in their districts.

“Am I allowed to say ‘bullshit’ on here?” Wagner quipped.

“That’s the biggest bunch of malarkey that I’ve ever heard… every time the laws evolve in a positive way for craft breweries, the amount of craft beer that these distributors sell goes up,” he said. “And they make more money selling our craft beer than they do the big, mass produced brands.”

An economist by training and a supporter of a modernized three-tier, Wagner then laid down an economic critique and forecast: “(Wholesale distributors) view the economy in the market for beer as a zero-sum game, and I can tell you, every time you look at something like a zero-sum game, and that’s the way you start behaving, what actually happens is, the pie shrinks.

“What we’re trying to do is get these laws to evolve, which will actually grow the pie, and everybody will benefit from it.”

Craft brews will be on the minds of more and more Texans as we head toward the 86th Legislature in January. And for good reason. The current distributor driven three-tier system is producing anti-market results the system was devised to prevent.

But for Mr. Burns the results are– as you would expect– excellent.

 

Jay Leeson can be heard on the Other Side of Texas weekdays from 5-6pm on AM 580 Lubbock. Email him at jay@othersideoftexas.com or on Twitter @jayleeson.

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