Microbreweries Distribution Limits

Dec. 15, 2014

Transcript:

Ted Simons: The growing popularity of microbreweries is prompting the producers of craft beer to seek a change in state laws to allow for higher Production limits. But not everyone thinks this is a good idea. Tonight we hear both sides of the issue. Andy Ingram is the co-founder of Four Peaks Brewery in Tempe and is in favor of higher limits, and Don Isaacson represents the wholesale association, which is not in favor of the higher limits, at least not the limits that we originally talked about. Thank you very much for being here.

Andy Ingram: Thanks for having us.

Ted Simons: Define capacity beer by Arizona law.

Andy Ingram: The micro-brewer's license allows us to do three things. We can produce 40,000 barrels of beer and self-distribute a small amount, and we can own restaurants. That's really the crux, the difference. Not really an argument. The problem is, that the law says, once you get to 40,000 barrels, you will have to -- you will be given a producer's license, which is great. You can make unlimited amounts of beer, but you can no longer self-distribute and you can no longer own retail or restaurants. So, that's the kinds of pickle we're in. We're going to go over 40,000 barrels this year. We just want to clarify and amend the law to, actually, get the legislature to commit and say, you can carry your retail with you, once you are a producer. And you give up self-distribution.

Ted Simons: Why is the current situation a good thing, or at least why would you want to keep it as opposed to making changes?

Don Isaacson: We support making changes. Last year the legislature modified the law for small wineries and small distilleries in a manner that we think makes a lot of sense. In our proposal, is will be to mirror what was done last year. What that is significantly expanding the exposure that small entities like wineries, breweries, and distilleries have, give them a lot more exposure to develop a following, but at some point, when they graduate from that, that they then graduated into the world of producer, and they lose those rights, most states have that, and it's, basically, an incubator type of model where we have 80 craft distilleries and breweries in Arizona, that the system must be working. It's good. It's good for everybody. We want those to get big. But, they have to be protected, which means that they have to have rights that larger entities don't.

Ted Simons: The idea that -- of an incubator system, I will get you up and going, and once you are, go on your way, it sounds like you are ready to go on your way. Why change the rules?

Andy Ingram: Well, it's our situation for us. Like I said, if we go over 40,000 barrel limit, I have to close two restaurants and put 200 people out of work. I don't think that that's the message that the legislature wants to send to the entrepreneurs, to come to Arizona and you can be sort of successful. We don't think that those bureaucratic barriers would be that.

Ted Simons: Why is that situation -- what's, what does that do? I understand the incubation aspect of it all, but once they get past 40,000, or 50 or whatever the case may be, why must they lose retail?

Don Isaacson: Ted, there is an underlying principle that gets complicated, and I will try to get to it quick. It's called the three tier system. Prohibition was a mess before prohibition was a mess, coming out of prohibition, most of the states adopted a three tier system, they divided the liquor industry into three parts. Producer, wholesaler, retailer. And with the notion that you can be in one place, but you cannot be in more than one place. The exception is for places like Andy's, where you can be a producer, a wholesaler, and a retailer all at once. But, part of that notion is, it is an incubator, when you get to a certain limit, then you have to drop those. For example, you don't see Budweiser bars. Why? As a producer they cannot own bars. You don't see Jack Daniels' bars. Why? As a producer, they cannot have bars. And what Andy is talking about, is Four Peaks Brewery graduating, if you will, into a producer status, and still keeping their restaurants. We think that restaurants and retail are very appropriate for the small guy, but applauding Four Peaks and San Tan, they are very successful, not the small guy any more.

Ted Simons: Not the small guy any more.

Andy Ingram: I beg to differ. We're still the small guy. I think Budweiser spills more day than we make in a year. And founded a great job of describing the future system, but if you read our language, in what we're proposing, is we feel we really strengthen the system, not only are we graduating to be a producer, we're allowing those producers to take their restaurants with them, I mean, there is a lot of these guys' dreams to own restaurants, not just brew pubs but to make great food and have community gathering places. Ask them to sort of get rid of those because they are successful, and didn't really make sense. What we're sacrificing, what we're giving up is that ability to self-distribute. So, in our mind, we don't see any difference between having three retail outlets or 30. We're still going to have to go through the distributer to get to that.

Ted Simons: Would you think it would be all right for Budweiser or Jack Daniels?

Randy Cerveny: We really don't have a problem with that at all. If we are being honest about our bill, which is the jobs bill, a Congress bill, which will hopefully bring more jobs, why would we exclude somebody like that.

Ted Simons: Is the three tiered system antiquated? You mentioned prohibition. That's a long time ago. Time to change?

Don Isaacson: Ted, I think that the three tier system has served the country well, and the state well. You have got to put yourself back, what other product in our nation's history has been banned at the U.S. constitutional level, and then reinvigorated 13 years later and thrown into the states for regulation? I like what Andy's group put on their website about the three-tier system, and I want to go through it quickly. Arizona's three-tier system of regulating alcohol production and sales is time tested, and it benefits consumers by generating tremendous choice in alcohol products. We agree. Craft Brewers benefit because as they grow, they can partner with independent distributors like us, who invest in new brands to market and sell to retailers across the U.S. We agree, repealing the three-tier system would not solve the problem. It would probably make it worse for craft breweries and consumers. Finally, separation and independence between the three tiers is very beneficial because it ensures against marketplace domination by a few huge players and fosters fairness and good dealing. What the three-tier system and the Arizona model does is incubate small entities, small distilleries, small wineries, small breweries. It allows them to have rights that the big guys don't have. It nurtures competition. It fosters development of the product. When you have 80 microbreweries in the state, the system must be working well.

Andy Ingram: I completely agree on the system. There would not be a craft brewing system without it. The access to market that it provides is a craft brewer is something that they cannot do organically, and to relax those standards for the incubation period, we think, is great. But, moving forward, there is so many blurred lines. A wholesaler can come in and own a wholesaler so you are eliminating two of the tiers right there. What we're asking for is to not be punished for our success. Let us graduate. To the producer status. Bring our restaurants, which is really the culture, how we get our word out and tell the story. It is for the restaurants and the people that work there, and it does not seem right to close those or put those people out of work just because we're the big guy when we're really not.

Ted Simons: Does it seem fair to you?

Don Isaacson: Our proposal will not put any person out of a job or close any restaurant. What it will do, and unfortunately, we are still refining it and getting it signed off, but I will avow to you what it will do will allow entities like Andy's, continued room for expansion to a point. At some point, you are big enough to not need the special rules, the special privileges that the incubator industries have. The idea of restaurants and all the abilities that these small entities have is, basically, to develop a following before you have shelf space, so it gives you exposure. At some point, you don't need it any more. And at some point, it's unfair to other people in the sector.

Ted Simons: I was going to ask that question. There is an argument that this is unfair to other beer companies. Is that a valid argument?

Randy Cerveny: Four Peaks is being unfair to Miller and Coors. That's an interesting argument. But, that's one that's hard to wrap my head around. No, it's not unfair. Like I said, again, we're asking to take what we built with us when we become producers. We're going to adhere to the three-tiered system rule and have to go through the distributors to get to those outlets.

Ted Simons: And other side, people will say, what's happening now, unfairly limits free enterprise. Valid?

Don Isaacson: Invalid. The three-tier system has served the state well. If it weren't for the exceptions that exist today, that we have supported over time, Andy's existence, Four Peaks would not exist so we support that. But, the rules that are in play to promote small wineries, small distilleries and breweries, those are to give privileges, such as restaurants and extra retail rights that Budweiser does not have, that Guinness does not have, and all the other plethora of beers do not have. And --

Andy Ingram: Yes, they do, they can have throws and come into Arizona now, and with the producer's license, and own restaurants. And we're all for that. As the craft brewer's guild, all 11 distributors, they agree with us on that. But to answer your question, we think that it is valid that it's not pro commerce. It's not pro free market. What other industry says ok, you can grow to this point and congratulations but now you have to decide, stop growing or lay people off.

Ted Simons: I want to leave with one point for each of you. For you, first. There will be those who argue, you knew the system when you started the brewery. The system was in place. It is in place. You knew the 40,000 was there. You fit the 40,000. Why change?

Andy Ingram: That's a great point. Just because the law is there does not mean it's a good law. We see it as a bureaucratic hurdle, something that we should not have to contend with. If you look in 2006, to be in the top 50 craft Brewers in the country you had to make 14,000 barrels, that would mean you are No. 50, go to 2013, to be in the top 50, you have to make 57,000 barrels of beer. The media growth -- caught everybody by surprise. When don helped us move up to 40,000 barrels, no one thought that was going to happen. Several years later, here we are.

Ted Simons: And very quickly, the argument on your side against the position would be that your group is afraid of competition.

Don Isaacson: We don't compete with restaurants, as Four Peaks. What we want to do is preserve the integrity of a regulatory system, and preserve the special rights and privileges for the true microbrewery, all applauding to Four Peaks. They are no longer a microbrewery. They are a macrobrewery, as is San Tan. They are not a storefront Prescott Brewing Company. And we think those little breweries deserve the special rights. At some point, maybe not 40,000 barrels, maybe some other figure. You graduate and you lose those rights.

Ted Simons: Ok. We have to stop it right there. Great discussion. Good to have you both here. Thanks for joining us. We appreciate it.