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Business Observer Monday, May 12, 2014 4 years ago

There's much more to the beer brawl than you read

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Learn the real story behind Tallahassee's fight about beer.
by: Matt Walsh Editor

When the government intervenes, someone always is gored. Always.

This is the un-fun part of being a legislator. Talk to Sen. Kelli Stargel, R-Lakeland. She'll tell you.

As chairman of the Senate Committee on Regulated Industries, Stargel found herself this past legislative session dunked head first into a vat of craft beer. She didn't come out smelling too great, but it's not for lack of a great effort.

Unlike a lot of wimpy legislators, Stargel at least had the courage to take on an issue that had “bar-room beer brawl” written all over it.

And what she encountered was a story that plays out every year in Tallahassee and Washington when someone tries to change the rules for a regulated industry.

It's always ugly. For good reason: Changing one word, tweaking a paragraph, addressing a previous glitch — all of these seemingly little actions always affects the livelihood of someone. This is the consequence of government. You put your income and your employees' livelihoods in the hands of legislators. E-Gawd.

So if you knew the whole context of the fight last week in Tallahassee over beer “growlers” and craft brewers, you might have a different point of view than the one you read about in the daily press.
In their version, beer distributors were swabbed as the evil, fat-cat capitalists, the “crony capitalists,” the big campaign donors who bribe their way to an undeserved, wealthy livelihood and don't want any little guys muscling in. See the two excerpts below from the Miami Herald and Tampa Bay Times. That was pretty standard.

As you know, the press loves, loves, loves a story of David taking on Goliath. So when Sen. Stargel decided to expand legislation dealing with “growlers” — allowing craft brewers to dispense beer in 64-ounce containers — to include other regulations that would curb some of the distribution of craft beer, the capital press corps went bananas. A common story line mocked Republican Stargel and other Republican senators — the so-called defenders and promoters of free enterprise, who were now trying to squelch entrepreneurs and free enterprise. What hypocrites!

As always, there are two sides to every story. In this instance, though, you could say there are four sides — all legitimate.

It's really complicated.

The story starts 80 years ago, at the end of Prohibition. Some say the story actually starts before Prohibition. In the industry, everyone knows it as “the three-tier system.”

When Congress repealed Prohibition, Congress and others involved in the booze business wanted a system to avoid re-creating the drunkenness and corruption of the Roaring '20s. So they legislated that all three steps of the adult-beverage business must have separate, unconnected ownership.

A brewer could only brew; a distributor could only distribute; and a retailer could only sell retail.

The idea was to avoid what's called the “tied house.” Before Prohibition, there were instances when brewers owned everything. And they created such arrangements as, say, financing bar owners' new bars, indenturing them to the brewer in not so pleasant ways and manipulating access to competitive products.

So ever since 1934, the industry has lived by and continues to live by the “three-tier system.” If you talk to some of the old hands in the beer business, they'll tell you the three tier system has worked just fine. Surely some of you Baby Boomers remember that before you were able to drink legally, there were dozens of brewers around the country. As time passed, like all industries, the brewers consolidated into just a few giants. Try finding a Falstaff, Rolling Rock or a Schlitz these days.

On the distribution side, beer distributors were independent family businesses, often with distribution ties to the brewers going back to post-Prohibition. Thanks to all of the booze crime during Prohibition, brewers and state governments were picky and cautious about who qualified to be licensed distributors and franchise holders.

John Saputo, proprietor of Sarasota-based Gold Coast Eagle Distributing, tells the story that when he first applied in his home state, government officials conducted a “proctoscopy” on his character beyond what anyone might imagine.

That's a way of illustrating another point about distributors. When you hear about the federal and state regulations with which they must comply, you would likely think it's not really a fun business. For one, federal and state regulators require them to account for every bottle, can, keg and drop of alcohol that comes through their doors. And those numbers better match up with what the brewers say they shipped. From these detailed records, the feds and state extract their hefty excise taxes.

In Florida, state beer excise taxes are approaching $300 million a year. The state wants that money.

As it turns out, excise taxes are one of the issues that has raised concerns among distributors and the monster brewers about the craft brewers. You'll hear all of the players talk about how there should be a “level playing field.” But the long-time distributors and brewers, who write checks and wire cash to the state and federal governments every week for millions of dollars want assurances everyone is paying his “fair share.” Distributors say there simply aren't enough state inspectors to keep tabs on all of the craft beer coming out of the taps in the small breweries. Who knows whether everyone is paying the right excise taxes.

On the retail side, bar owners, convenience stores, restaurants and grocers have done just fine under the three-tier system. They all must have a license to sell alcohol, and they are allowed to purchase it only from a distributor.

If you think about it, altogether the three-tier system has been operating efficiently, with each player adding value along the way.

The manufacturer can focus on making the product and shipping bulk quantities to wholesale distributors. It doesn't need to worry about making sales and relationships with the millions upon millions of retailers who sell their products direct to consumers.

That's the job of the distributors. They make heavy investments in people, trucks, forklifts, warehouses, gasoline and printing equipment to make the beer accessible to consumers and help promote it for all three segments.

When you talk to the small craft brewers, most of them recognize the importance of distributors. The startup breweries can't possibly afford to invest in the trucks and everything else to move their beer.
Likewise, with retailers. They rely on the distributors to get the product to their shelves.

Loophole opens the door
But as with all industries, changes disrupt the marketplace. Joseph Schumpeter called this “creative destruction.”

This can be especially destructive in regulated industries. Inevitably someone tries to gain an advantage by way of a law.

In that vein, to no surprise, Florida lawmakers and regulators have made exceptions to three-tier system over the years — not to pay off political favors, but for good intentions. The box above details some of the most important exceptions — essentially allowing the craft brewers to exist.

The most notable exception is the one known as the Busch Gardens exception. Decades ago, Anheuser-Busch operated one of its breweries on the site of Busch Gardens in Tampa. Anheuser-Busch owned both. Because of the three-tier system restrictions, it was prohibited from selling its product on the same property as its brewery. The company sought an exception. And the Legislature complied.
Lawmakers created a loophole that allowed a manufacturer to sell beer on premises as long as the brewery's property included “such other structures which promote the brewery and the tourist industry of the state.” Another criterion was attached as well: “Such property may be divided by no more than one public street or highway.”

Over the past few years, the Busch Gardens exception has become the rule. State regulators have permitted the opening of dozens of craft breweries under this loophole — even though many of them operate in small industrial buildings of their cities, hardly a destination for tourists.

As Sen. Stargel became more familiar with the state's beverage law, she concluded that with so many of the breweries permitted under the Busch Gardens rule, they were vulnerable to being put out of business at the whim of a regulator or new governor.

“If I were operating a business on a loophole, I'd be nervous,” she told us.

So Stargel decided to take on the task and challenge of eliminating the Busch Gardens loophole from the state statutes and giving the craft breweries legal standing to operate.

Apparently, this caught the craft brewers by surprise. When the legislative session began, the only change they wanted was the ability to serve beer in 64-ounce growlers, heretofore unlawful in Florida (even though they're legal just about everywhere else).

The next thing the Florida Brewers Guild — the association for craft brewers — knew, the “growler” legislation morphed into a roaring controversy.

As soon as Stargel decided to address the Busch Gardens exception, distributors began raising other concerns about exceptions and legislation that were having the effect of making what was a level playing field a bumpy playing field.

One of the controversies that really irked the craft brewers was a part of Stargel's Senate 1714 that apparently would have required a small brewer that operated two breweries to engage a distributor to take kegs from one of the brewers breweries to another of his breweries. The brewer would have to buy his beer back from the distributor.

It sounds wacky, and it is. But this was the complex minefield that blew up in the last weeks of the Legislature.

Stargel's intent was to clean and clarify Florida's beer laws and maintain a marketplace that would be as fair to everyone as possible. But as we noted at the outset, the second a legislator begins to change words in a statute or proposed legislation, the unintended consequences are like shaking a can of beer and popping the top.

Crafting the perfect brew
In the end, Stargel's bill failed. The craft brewers still don't get to use growlers. And virtually all of the craft brewers are operating under a flimsy loophole in state statutes.

Stargel feels she came close to crafting that perfect brew — legislation under which all sides could operate, grow and thrive. But she's not sure she'll want to or be given the task of taking it on next year.
Meanwhile, Mike Halker, owner of Due South Brewing Co. in Boynton Beach and president of the Florida Brewers Guild, sounded a little shell-shocked in the aftermath of the legislative session. In business as a brewer for two years this week, Halker witnessed lawmaking first hand for the first time.

“I know far more about it than I want to,” he said.

But he also sounds like a voice of reason. Halker believes in the three-tier system. “We all need it,” he said. “But it needs modifying.”

To that end, Halker said he and some of his colleagues will be working between now and the next legislative session to bring brewers, distributors and retailers together with the hope of crafting that perfect brew.

In the bigger picture, this wasn't really a battle of David and Goliath, although portrayed that way. You could say it was a lesson in the art of lawmaking: Get as much agreement before you propose. And a lesson in the consequences of government intervention. Inevitably, someone is always gored.

One side of the story
The following excerpts from the Miami Herald and Tampa Bay Times give you a sense of the daily press' slants on the craft-beer legislation. The Miami Herald story was a news story; the Tampa Bay Times piece was an opinion column.

Miami Herald
Writer: Michael Van Sickler

TALLAHASSEE -- Florida's Republican lawmakers frequently talk about creating a business-friendly climate. But this week, the Senate Rules Committee voted 9-4 for a bill that would heavily restrict a burgeoning industry in Florida: craft breweries.

What started as an effort by Florida microbreweries to sell beer to consumers in popular half-gallon “growler'' containers has morphed into a measure some say could put them out of business by strictly limiting retail operations.

SB 1714 is heavily backed by the Florida Beer Wholesalers Association, which has controlled beer distribution in the state for decades. The group has at least doubled its contributions to the re-election campaigns of senators who have voted on the measure, which was approved Monday by the powerful Rules Committee.

Call it a sobering civics lesson in the power of campaign cash.

“It's classic crony capitalism,” said Joey Redner, the founder of Tampa's Cigar City Brewing, after the Rules Committee vote.

Tampa Bay Times
Writer: John Romano

OK, it's about how legislators are willing to contradict themselves, ignore their constituents and push the agendas of their campaign donors.

(Ding, ding, ding!)

A bill approved by a Senate committee on Tuesday will essentially force small breweries to sell their bottled or canned beer to a distributor before buying it back from the same distributor and finally selling it to you from their own brewery.

Get it?

The distributor won't make or market the beer. The distributor won't pick up, deliver or even see the beer. Heck, the beer won't even leave the refrigerator at the brewery.

And, still, the distributor will make a profit.

Ain't Florida grand?

The sneaky part of the plan is that it has a whiff of legitimacy along with the usual stench of political favors.

EXCEPTIONS TO THE SYSTEM
The following paragraphs spell out some of the exceptions to Florida's “three-tier system” for craft brewers in the Florida Statutes, Section 561.221:

(2) The division is authorized to issue vendor's licenses to a manufacturer of malt beverages, even if such manufacturer is also licensed as a distributor, for the sale of alcoholic beverages on property consisting of a single complex, which property shall include a brewery and such other structures which promote the brewery and the tourist industry of the state. However, such property may be divided by no more than one public street or highway.

(3) (a) Notwithstanding other provisions of the Beverage Law, any vendor licensed in this state may be licensed as a manufacturer of malt beverages upon a finding by the division that:
1. The vendor will be engaged in brewing malt beverages at a single location and in an amount which will not exceed 10,000 kegs per year. For purposes of this subsection, the term “keg” means 15.5 gallons.

2. The malt beverages so brewed will be sold to consumers for consumption on the vendor's licensed premises or on contiguous licensed premises owned by the vendor.

(b) Any vendor which is also licensed as a manufacturer of malt beverages pursuant to this subsection shall be responsible for applicable reports pursuant to ss. 561.50 and 561.55 with respect to the amount of beverage manufactured each month and shall pay applicable excise taxes thereon to the division by the 10th day of each month for the previous month.

(c) It shall be unlawful for any licensed distributor of malt beverages or any officer, agent, or other representative thereof to discourage or prohibit any vendor licensed as a manufacturer under this subsection from offering malt beverages brewed for consumption on the licensed premises of the vendor.

(d) It shall be unlawful for any manufacturer of malt beverages or any officer, agent, or other representative thereof to take any action to discourage or prohibit any distributor of the manufacturer's product from distributing such product to a licensed vendor which is also licensed as a manufacturer of malt beverages pursuant to this subsection.

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