In the comment thread to yesterday’s post, Surly Brewer Todd Haug offered some clarification about Surly’s intentions saying, “We are asking to sell pints of our beer. No back door sales, no full liquor, no packaged beer sales.” This more specific explanation is extremely helpful. Specificity is important, especially when dealing with legislation where every word counts and what is not said is often as important as what is said. Earlier statements by Surly (here and here) that were picked-up and repeated by the media said, “We can’t be licensed as a brewpub because we brew too much beer so Minnesota law currently says we can’t sell beer in the new brewery.” These statements suggested, to me at least, a much bigger goal that would have necessitated either a redefinition of “brewpub” in the statutes or a significant expansion of what is allowable as a large brewery. Either way it would have been a tricky legislative debate.

The less ambitious aim means that the law could conceivably be changed with a simple, narrowly worded statement allowing breweries to sell their own draft beer for on-site consumption at a restaurant or beer garden attached to the place of manufacture; something akin to the subsection that now allows growler sales at small breweries, except that it provides for on-sale instead of off. It would not require a change to the existing brewpub license. Because it would not require a retail license, it gets around the statute forbidding manufacturers from having an ownership stake in any entity holding such a license. Depending on how it is worded, it could still be interpreted to allow limited on-sale by other breweries in tasting rooms. It’s still a tricky legislative debate, but perhaps not quite as tricky.

My thanks to Todd for the clarification.

The Opposition

Todd’s clarification is also helpful in examining the arguments against Surly’s plan.

The only organization that has thus far made public statements in opposition to the plan is the Minnesota Licensed Beverage Association (MLBA). The MLBA is a business association representing the retail tier of the three-tier system; bars, restaurants, and package stores. Their website states that since 1952 they’ve “been helping licensed beverage retailers in Minnesota with educational programs and government affairs services designed to promote and protect their business.” The organization offers retailers a range of services including discounted alcohol liability insurance, alcohol server training, business development counseling, as well as tracking, information, and lobbying on legislative issues.

The MLBA was quick to oppose Surly’s plan. In a statement made to Tom Scheck of MPR News the day after Surly’s announcement, organization representative Frank Ball said:

It’s pretty simple within the parameters of the three-tier structure we have in Minnesota. The manufactures make the product, the wholesalers distribute the product and we, the retailers, sell the product to the consumer. It’s even more simple if you say it the way my retailers say it: “you make it, we’ll sell it”…you make it ‘and’ sell it, we won’t buy from you”.

The reason for the three-tier structure was to keep the integrity of the distribution of a controlled, highly regulated, commodity. Alcohol — like prescription drugs or firearms — is no ordinary commodity. In fact, alcoholic beverages are the only commercial products specifically named in the United States Constitution. Because our society recognizes the importance of controlling alcohol use and access, alcohol has always been treated differently under the law than most other products.

The manufacturers (breweries, vineyards and distilleries) supply distributors. Under the laws which created the three-tier system, each level of the system is independent of the others, ensuring accountability to the public as well as the benefits of healthy competition. By preventing tied houses (i.e. Retailers that sell the products of only one supplier), the three-tier system limits the number of retail outlets and therefore promotes moderate consumption, hence our position with the Surly matter. We want the Surly product to sell in our stores, we don’t want the manufacturer of a great beer to sell to the public, we’ll do that enthusiastically as possible.

While it is true that the current law is rooted in the manufacturer/retailer separation mandated by the three-tier system, Ball’s opening argument amounts to “this is how it is.” In a more recent statement he reiterated that argument even more explicitly saying, “This is Minnesota. These are the rules.” Simply stating that something is one way or another doesn’t amount to a convincing argument for why it should remain that way. He claims no specific benefit from maintaining the status quo, nor does he cite any possible harm that would come from changing it. He also fails to account for exceptions to the system that already exist, such as the farm winery license that allows wineries to sell product at the manufacturing facility for on or off-sale, something that goes further than what Surly is proposing.

At the end of his opening statement Ball resorts to blackmail saying, “you make it ‘and’ sell it, we won’t buy from you.” This seems to me a difficult claim to substantiate. While I admit that my intelligence is hardly comprehensive, the retailers that I have heard from all support Surly’s plan and would happily continue to sell the brewery’s products. Aside from this, blackmail is never pretty. It’s thuggish. It is not an effective way to win friends and influence people.

He next makes a historical argument that alcohol has always been treated differently. There is some truth in this statement. Alcoholic beverages have been a tightly regulated commodity going all the way back to colonial times. However, they have not always been regulated in the same way. The three-tier system wasn’t put into place until 1933. Saying that regulation has always existed isn’t a sound argument for any particular form of regulation.

In the third paragraph he makes the statement that, “Under the laws which created the three-tier system, each level of the system is independent of the others, ensuring accountability to the public as well as the benefits of healthy competition.” While this may be true of the intention of the underlying laws, many would argue that the reality of their implementation does exactly the opposite (see Arguments against the three-tier system in yesterdays post). They contend that large breweries are able to game the system to their own anti-competitive advantage and that distributors have become the ultimate decision makers on what gets to market, giving them the ability to make or break a small producer.

He further states that the three-tier system “promotes moderate consumption.” There is little evidence to support this claim. During prohibition, the time of greatest regulation of alcohol in the nation’s history, alcohol use actually rose. The Schaffer Library of Drug Policy states on their website, “National alcohol prohibition began in 1920. Apparent alcohol use fell from 1914 to 1922. It rose thereafter. By 1925, arrests for public drunkenness and similar alcohol-related offenses were already above the pre-prohibition records. Consumption by women and children increased dramatically.”

The Proponents

I already discussed many of Surly’s arguments in favor of the brewery plan in part one. I won’t discuss them again here. However there is one argument being made by supporters that needs to be examined; the “they do it in other states” argument.

I can already hear my mother saying, “If they were jumping off cliffs in Colorado (or Oregon, Wisconsin, etc.) would you jump off a cliff?” The fact that something can be done elsewhere is not by itself a compelling argument that it should be done here. As stated in part two, every state has the ability under the federal law to regulate how the three-tier system is implemented. Some states have an even more restrictive approach than Minnesota, such as those in which the state monopolizes both the distribution and retail tiers. The case could just as easily be made that Minnesota should adopt one of these more restrictive models. If the “other state” argument is to be used, concrete reasons must be given, be they economic, cultural, or otherwise, as to why another model is better for Minnesota than the one we currently have.

Conclusion

I think that some people might have taken my last two posts to be an attack on Surly or the brewery proposal. I assure you that this is not the case. I called this “calm reflection” because that’s what is. It is my attempt to think through situation and make sense of it without the hype and hyperbole that was coming from all sides. Some of my conclusions have been challenged. Great! I love a good debate. I’m willing to listen and be convinced. Where I was convinced I have made the effort to correct previous statements.

In the end, I am fully behind Surly’s cause. I find the idea exciting. I applaud their success. I think the facility will be good for craft beer not just in the state, but in the whole upper-Midwest region. I wish them luck and will do what I can to support them.

In any event, it’s going to be an interesting fight. I look forward to watching it play out.

Read Part One
Read Part Two

As has been reported, the only thing preventing Surly from moving ahead with their brewery plan are the Minnesota statutes regarding licensure for liquor manufacturers, wholesalers, and retailers. The real significance of this story lies in the proposals to change those laws. Reading the articles and the attached comment threads reveals a good bit of misinformation and misunderstanding about what the laws actually say and where they originate, so let’s take a look at that.

The Three Tier System

What is it and why do we have it?

The laws in question stem from the state’s interpretation of the three-tier system of alcohol manufacture, distribution, and sale. The three-tier system is a set of federal statutes put in place after prohibition that are intended to separate the manufacturers of alcoholic beverages from those that sell them to consumers. The statutes basically require that manufacturers and importers sell to wholesalers, who in turn sell to retailers. The system was devised to correct coercive and anti-competitive practices that existed prior to prohibition.

In those days, breweries owned saloons, which of course sold only their products. They also entered into exclusivity agreements with saloon owners, often through coercion or bribery with loans and equipment, creating so-called “tied houses.” The brewery that held the most saloons could essentially prevent competing breweries from entering certain markets, creating an anti-competitive situation. Breweries also exerted a good deal of pressure on tied-house owners to increase sales, leading to public drunkenness and ultimately aiding the cause of the prohibitionists.

Arguments in favor of the three-tier system

Proponents of the system say that it simplifies revenue collection, provides retailers with easier access to a greater range of products, and creates a more level playing field for small brewers to enter markets.

Distributors maintain centralized warehouses through which product is moved. They are better able to track the comings and goings of those products for payment of taxes and can efficiently generate a paper-trail for reporting of those taxes. This centralization also means that retailers can go to a single location to access several breweries’ products rather than having to manage contacts and transactions with a multitude of different producers. It also saves brewers the difficult task of selling to many individual retailers.

Requiring manufacturers to go through distributors theoretically prevents larger breweries from flooding markets with underpriced goods or bribing/coercing retailer to carry only their products. Because wholesalers make money from many producers, they have an incentive to promote the large and the small brands, thus creating a level playing field.

Arguments against the three-tier system

Critics argue that the three-tier system has simply shifted the corruption and coercion. They say that large manufacturers now incentivize distributors to drop competing brand, in essence creating tied-house relationships with wholesalers rather than retailers. Distributors then offer perks to retailers, such as installing draft lines at bars that agree to carry their products. Although such practices are for the most part illegal, critics say they are often overlooked. In this way, both small producers and small distributors can be denied access to markets. According to critics the same anti-competitive situation still exists that existed before prohibition.

The Laws in Minnesota

States interpret the statutes

While federal law mandates the manufacturer/ distributor/ retailer model, it gives the states a great deal of leeway in how to interpret and implement it. The model varies significantly in structure and strictness from state to state. In some cases, state government takes on the role of wholesaler and/or retailer, operating state liquor stores or buying from manufacturers and selling to retailers. Some states allow breweries to self-distribute product, some do not. Some allow manufacturers to participate in retail sales at the brewery, others prohibit this practice. I have read instances where state officials come to inspect a brewpub’s tax determination tanks, buy the beer in the tank from the brewery, and then immediately sell it back to them.

What does Minnesota law say?

Here’s where we get technical.

Minnesota statute allows four types of brewer’s licenses:

1.       Brewers who manufacture less than 2000 barrels in a year

2.       Brewers who manufacture between 2000 and 3500 barrels in a year

3.       Brewers who manufacture over 3500 barrels in a year

4.       Brewers who also hold one or more retail on-sale licenses and who manufacture fewer than 3,500 barrels of malt liquor in a year, at any one licensed premises, the entire production of which is solely for consumption on tap on any licensed premises owned by the brewer, or for off-sale in growlers as permitted in another section of the statute.

Brewers in the first and second category may not hold a retail “off-sale” license, but are permitted to sell beer from the brewery for off-premise consumption in 64-ounce growlers or 750 ml bottles. Brewers in the category three may not hold a retail license or sell beer for off-premise consumption from the brewery. None of these three license categories allow the sale of beer for on-premise consumption. In other words, breweries cannot sell beer directly to consumers in their tasting rooms, nor can they sell beer directly to consumers in an attached restaurant. No brewery in any of these three categories is allowed to have any ownership stake in any business holding a retail license. Brewers with these licenses are allowed to self-distribute their product if they obtain a separate wholesalers license and produce no more than 25,000 barrels of beer annually. Surly along with a number of the state’s other small breweries self-distribute their beer to retailers.

Category four is the so-called “brewpub” license. It allows a brewery to hold a retail license for on-premise consumption at a restaurant located in the place of manufacture. Brewpubs are allowed to sell growlers and 750 ml bottles for off-premise consumption, but are prohibited from distributing their product to the off-sale retail market. They can also sell their product at other separately-licensed locations for on-site consumption if those locations are owned by the same entity. For instance, Town Hall is able to sell its beer at the Town Hall Tap because both are owned by the same entity. Town Hall would not be allowed sell its beer across the street at Preston’s.

Confused yet?

So what does this all mean?

In order to move forward with the brewery project, Surly needs to change the law to allow breweries that manufacture over 3500 barrels annually to also hold a retail license for on-site consumption at a restaurant located in the place of manufacture. In other words, they need the rules that apply to brewpubs to also apply to large breweries. As I understand it, however, beyond raising the barrel limit for brewpubs, they would also need to change the brewpub license to allow for distribution into the retail market. Otherwise the change in classification would allow Surly to sell beer in their proposed restaurant, but would prohibit them from selling beer in stores. The change to the law requires more than has been suggested in the current discussion.

This change to the law has broader implications than just allowing Surly to build its brewery. If successful, the change would presumably allow brewpubs like Town Hall and Fitger’s to package and sell their beer in bars and liquor stores, something they have long wanted to do. It could also be interpreted to allow breweries to sell beer in their tasting rooms, essentially operating them as bars, as they do in Colorado.

A lot of competing interests have already begun building their cases both for and against the change. I’ll address that tomorrow.

Read part one.
Read part three