Today the results of the most recent update of the Texas Craft Brewing Industry Economic Impact Study has gone live. Below is a copy of the story, and a link to additional materials.
I’d like to thank all my colleagues in the Texas Craft Brewers Guild for helping me with this study, and a special thank you to Joanne Marino of Skematik and Steve Brand of Wasabi Creative for all their help in helping with the release and publication of the study.
Texas cannot afford to keep it’s small businesses operating at a disadvantage to out-of-state concerns. 52,000 jobs and $5 billion of additional annual economic activity are at stake. I encourage you to contact your representatives, tell them the story of Texas Craft Beer, and point them towards this study.
TX Craft Beer Impact $608 Million, Could Be Billions
The Texas craft beer industry is having measurable positive economic impact on local and regional economies throughout the state to the tune of $608 million, according to the Economic Impact of the Texas Craft Brewing Industry study released today by the Texas Craft Brewers Guild. Texas craft brewers are also creating jobs, accounting for 51.2 percent of all the state’s brewery jobs, a remarkable figure given only 0.7% of the beer consumed in the state comes from Texas craft brewers.
The study, authored by University of Texas-San Antonio Economics Professor Scott Metzger, founder and CEO of San Antonio-based Freetail Brewing Co., also models how the economic impact of the Texas craft beer industry could reach $5.6 billion annually in just eight years.
“$5.6 billion sounds astounding, but given what’s happening across the country with craft beer, it’s not. It’s actually conservative,” Metzger says, calling the 2011 figure “the tip of the iceberg.”
“Given consumer demand and planned increases in capacity, a tremendous opportunity exists for ongoing and future growth — provided legislation may be passed allowing Texas’ craft brewers the same access to market enjoyed by brewers in other states and by the Texas wine industry,” Metzger says.
“In other states, brewers can sell their packaged goods directly to consumers through tasting rooms. In other states, brewpubs can sell their beer off premises, at festivals, for instance, and as packaged goods in retail stores, not just at their brewpub location,” explains Metzger.
“These sales opportunities other brewers benefit and grow from are lost for Texas craft brewers — and they add up.”
I get occasional questions via email and comments here in regards to if Craft Brewers will once again be active in the 2013 Texas Legislative Session. The answer is absolutely, and I believe we are more focused, driven and organized than ever.
If you hadn’t heard, Senate Business and Commerce Committee chairman, Senator John Carona, (Rep-D16-Dallas County) asked fellow committee member, Senator Leticia Van de Putte (Dem-D26-Bexar County), to form a working group of industry stakeholders to evaluate the Texas Alcoholic Beverage Code. Production, wholesale and retail tier members from distilled spirits, malt beverage and wine have been actively engaged with one another since.
On the malt beverage side, I am encouraged by an unprecedented level of openness and communication between the different tiers. For the first time since I’ve been involved, stakeholders have willingly come together and been open about their goals and concerns and, more importantly, we all acknowledge that it’s okay for us to disagree on certain points. In fact, recognize where we disagree is the first step in coming to a middle ground we can all agree on.
Some of the best news is the sense of all around agreement is that craft beer is here to stay and that it is an important part of wholesaler’s growth plans. Not only is craft beer driving all of the growth in the craft beer segment, but the success of craft beer is what drives the big breweries to continually develop new products – and those new products are the only growing portion of big beer’s portfolio. Craft beer is a win, win for everyone.
I know there hasn’t been a ton of activity on this blog, but look for things to be picking up as we advance closer to the session and then my goal is to have daily posts once the session starts.
We are Texas, and our Star shines bright.
As of December 31, 2011, Texas was home to 71 licensed small craft breweries (which, for the purposes of my analysis, include breweries less than 75,000 barrels of annual production, up from 47 just a year earlier. That number includes 34 brewpubs (up from 28 at year end 2010) and 37 production breweries (almost double from the 19 licensed production breweries at the end of 2010). in 2011, Texas small craft brewers produced 130 thousand barrels of beer, compared to 93 thousand just the previous year.
The growth of our industry has been amazing and has not gone unnoticed, yet I submit to you the following proclamation: we are underachieving.
31 Texas counties are home to a small craft brewery, but that’s out of 254. Not good enough.
That 130 thousand barrels produced by Texas small craft brewers? That represents a paltry 1.2% of the craft beer industry and a pathetic 0.06% market share in the overall US beer market. Not good enough.
Those 71 small breweries? We still rank 46th in breweries per capita in the US. Not. Good. Enough.
Since I only speak on behalf of myself and my brewery, I won’t call the following list a set of goals. Instead, let’s call them a challenge.
By 2015, I challenge Texas to the following:
- Be home to 160 actively licensed small craft breweries.
- Produce 250,000 barrels of beer from small craft breweries.
- Have a small craft brewery in 40 Texas counties (this one is admittedly harder, since breweries tend to open in more populated areas, for obvious reasons).
These three challenges are achievable, but it will take the effort of numerous parties. To be successful, I’m challenging the following groups to do their part.
- Texas Small Craft Brewers: your challenge is obvious.
- Texas beer distributors: you are our ally in the growth of the industry, and our growth cannot happen without you. Commit to carrying and featuring Texas brands.
- Texas beer retailers: you are the front line. Abandon the old school way of retailing beers and the intimidating walls of industrial light lager. Give brewers a fair and equitable display with no unfair preference to brands who kick you illegal incentives. Provide consumers easy, clear access to the brands they want.
- Texas Legislators: you are challenged with the task of establishing fair, competitive industry reforms that allow Texas small craft brewers to grow their brands. That means allowing production breweries to establish tasting rooms and sell directly to consumers on premise and allowing brewpubs to sell into the wholesale tier. There is almost $1 billion in economic impact at stake for helping Texas meet the 2015 Challenge (based on my annual Economic Impact Study – latest version to be published in March/April).
- Texas beer consumers: you have the best job in achieving the challenge. Continue drinking and supporting Texas small craft brewers.
Together, we can do this. Share the message of the 2015 Challenge with friends, colleagues, industry members, and anyone you know who cares about Texas Craft Beer.
Drink Beer, Save Texas.
One item lost in the shuffle following the Authentic Beverage v. TABC ruling is a telling statement from Senator John Carona, Chairman of the Senate Business and Commerce Committee, which hears alcohol-related bills.
“A Federal Court has ruled that Texas’ laws regarding the advertising and labeling of beer are flawed. In the case of Authentic Beverages Co. vs. TABC, the Judge awarded a summary judgment that certain laws directing the labeling and advertisement of beer are unconstitutional. While the three-tier system of manufacturer, distributor, and retailer has served Texas well since the end of Prohibition, it is an open question how well the Texas Alcoholic Beverage Code reflects today’s reality of Internet sales and the growth of the craft brewing industry. The Court’s ruling suggests this is a topic that may be taken up by the 83rd Legislature.”
Credit Lee Nichols’ I Love Beer Blog for the quote.
Senator Carona’s quote demonstrates that our legislators have becoming increasingly aware of the changing marketplace, and recognize that an 80 year old code may not be the best to regulate it. 2013 is looking better and better for Craft Beer to finally have a fair hearing for statutory reform.
Drink Beer, Save Texas!
And now for the lighter side. As I alluded to previously, Judge Sparks’ judgement is full of all kinds of funny lines. If this whole judging thing ever gets old to him, he’s got a career in comedy.
Judge Sparks wastes no time getting into the humor (and a little jab), and offers this in his background on the case:
The practice of law is often dry, and it is the rare case that presents an issue of genuine interest to the public. This is just such a case, however. Dealing as it does with constitutional challenges to the Texas Alcoholic Beverage Code, it is anything but “dry”and this Court wouldnever be so foolish as to question the sincerity of Texans’ interest in beer.
Given this obvious public interest, it is both surprising, and unfortunate for proponents of the Alcoholic Beverage Code, that the State of Texas does not appear to have taken as much of an interest in this case as it might have.
Judge Sparks did limit comedy to his commentary, and titled one section of his Judgement as:
2. Beers and Liquors and Wines, Oh My!
On the defense’s argument that The Texas Alcoholic Beverage Code is constitution because it is the Texas Alcohol Beverage Code:
In a remarkable (though logically dubious) demonstration of circular reasoninga tactic it repeats throughout its briefing, and which it echoed in open court TABC attempts to defend the constitutional legitimacy of the Code through an appeal to the statutory authority of the Code itself.
On the idea that the state should have the authority to define words however the legislature sees fit (and in what can only be seen as a tip of the hat to Freetail Brewing Co… right?):
Second, TABC’s argument, combined with artful legislative drafting, could be used to justify any restriction on commercial speech. For instance, Texas would likely face no (legal) obstacle if it wished to pass a law defining the word “milk” to mean “a nocturnal flying mammal that eatsinsects and employs echolocation.” Under TABC’s logic, Texas would then be authorized not only to prohibit use of the word “milk” by producers of a certain liquid dairy product, but also to require Austin promoters to advertise the famous annual “Milk Festival” on the Congress Avenue bridge. Regardless of one’s feelings about milk or bats, this result is inconsistent with the guarantees of the First Amendment.
This one isn’t so humorous as it is an insight into the larger issue that I have dealt with extensively: the restrictions of brewpubs to sell their beer to distributors or retailers for resale based on 3-tier arguments. Judge Sparks questions whether or not the concerns purported by the WBDT as reasons for not letting brewpubs sell their beer to distributors and retailers is a valid one.
Although unquestionablytrue whenthe Code was first written, andthe evils oforganized crime’s involvement in the alcoholic beverage industry were both immediate and substantial, it is less clear that vertical integration of the alcoholic beverage industry still poses a grave threat to Texas’s interests. In any case, in light of wineries’ exemption from these regulations, this purported interest is suspect.
In response to the defendant’s argument that the “Beer” and “Ale” distinctions are important for consumers to know how strong a product is in terms of alcohol, the Court reponds (my favorite part highlighted by me):
Although a typical member of the public may not be able, off the cuff, to state the average alcohol content of popular Texas malt beverages, the Court is confident that same person could, if presented with the alcohol content of a variety of malt beverages, come to a reasonably quick and accurate conclusion regarding their average range. Having determined the average range, this person could then make an intelligent choice whether to deviate from that range, in which direction, and by how much. The Court simply does not share TABC’s apparently low estimation of Texans, and remains steadfast in its belief that they are capable of basic math.
On why TABC’s lawyers presented what appears to be a less-than-full effort:
Regrettably, TABC has almost wholly failed to submit such evidence, and has often failed even to respond to Authentic’s arguments. Whether this failure reflects a tactical error, laziness, an implicit concession that the Code cannot withstand constitutional scrutiny, an erroneous assumption that TABC is entitled to special treatment, or a mere oversight, the Court cannot say. However, under the circumstances here, the Court is obligated to grant summary judgment in favor of Authentic on its First Amendment challenges.
On why just because TABC doesn’t know why it enforces stuff, it doesn’t make it unconstitutional:
However, as noted above, the state need not come forward with any record evidence whatsoever in defense of the Code. Further, just because particular individuals within the Texas governmenteven those of high rank within the administrative agency that enforces the law may not be able to articulate a reason for the Code’s disparate treatment, that does not mean no reason exists. Indeed, although it may well be desirable, there is no constitutional requirement that a personwho enforces of a law must also know the legislative purpose behind it.
Again, on defendant’s level of effort in defense:
The Court is shocked and dismayed at the Texas Attorney General’s halfhearted conduct in this case. The very purpose of having the Attorney General’s Office defend suits like this, is so the State of Texas can vigorously defend its duly enacted legislative mandates. Here, however, when TABC responded to Authentic’s challenges at all, it responded with little in the way of argument, and even less in the way of relevant evidence. The State of Texas is lucky the burden of proof was on Authentic for many of its claims, or else the Alcoholic Beverage Code might have fared even worse than it has.
Final note: I don’t feel the Attorney General let the TABC down as much as Judge Sparks thinks they did. Judge Sparks thinks the AG left arguments on the table, but I would contend THERE WERE NO ARGUMENTS TO PUT ON THE TABLE!
Been a fun day. Cheers everyone.
As seen in the post immediately preceding this one, Judge Sparks has sided with the plaintiffs, Authentic Beverage, on the 1st Ammendment claims of their lawsuit filed in Federal Court.
To summarize, the ruling has the following effects:
- TABC cannot prohibit you from telling customers or advertising where they can buy your products
- TABC cannot require you to label your products by their definition of “beer” and “ale”
- TABC cannot prohibit you from advertising the strength of your products by prohibiting words like “strong”, “prewar strength”, “full strength”, etc
If you read my blog post on thoughts from the motions hearing in this case, you might remember I raised some questions about point #1, specifically in respect to the potential for brewers or distributors to advertise on behalf of retailers in order to provide a benefit to the retailer. I maintain that it is not far fetched for a Big Distributor or Big Brewer rep to say “hey, carry our beers and we’ll include you in our ad” as an inducement to gain tap space.
In spite of Judge Sparks’ ruling, such behavior remains illegal – but its enforcement may prove difficult. I agree with the general sentiment that brewers should be able to tell you where you can find their products, but I maintain a real danger exists that this may open the door to less than scrupulous activity. If you’re a normal reader of this blog, you know my feelings on ethical behavior and its primacy in the marketplace. I hope this does not open a can of worms that results in the eradication of small, local brands from tap walls and bottle shops as larger brands “buy out” the space with inclusion in ads. I think it is a lot to ask of any enforcement agency to be able to effectively track down, prosecute, and prove guilty violators of this behavior – as we’ve seen it is already difficult for them to enforce the laws restricting other illegal inducements (see the No Label tap targeting case).
The biggest win on these points is for the Texas beer consumer, as it should open to the doors to more brands coming into Texas. This may, in fact, make Texas a more competitive market place and put more strain on start-ups fighting for space in bars, restaurants and other retailers. However, you will not find me arguing against the lifting of restrictions of competition. I don’t believe in laws that reduce competition for wholesale or retail tiers, and I certainly don’t believe in anti-competitive laws so far as they concern the production tier. Quite simply: let the best beer win.
It was not a total victory for the plaintiffs, brewers, and Texas beer consumers, however, as Judge Sparks sided with the state on the claim that the restrictions on permissible activities of breweries and brewpubs. Authentic’s lawyers argued the restriction of breweries from selling to consumers and brewpubs from selling to resellers (wholesalers or retailers) was a violation of the 14th Amendment Equal Protection Clause and the Commerce Clause.
In essence, Judge Sparks did not go so far as to say that the state’s restrictions on breweries and brewpubs were constitutional, just that the plaintiffs did not satisfy the burden of proving they are unconstitutional. As critical as Judge Sparks was of the defense in their arguments in the 1st Amendment issues, he was just as critical of the plaintiffs in their arguments on these claims. To quote Judge Sparks:
Because Authentic has failed to present sufficient evidence in support of its Equal Protection claims, it is clearly not entitled to judgment as a matter of law. It further appears TABC is entitled to such judgment, by reason of its cross-motion, and because of Authentic’s failure to meet its evidentiary burden. Accordingly, the Court grants summary judgment in favor of TABC on Authentic’s Equal Protection claims.
While the illogical restrictions on the activities of breweries and brewpubs in Texas may have withstood legal challenge this time, Judge Sparks has provided a lot of kindling for the fire when the next legislative session rolls around. My fellow Texas Beer Freedom members and I have already begun discussing strategy for the next Legislative Session, and we have the continued support of San Antonio Representative Mike Villarreal, who is steadfast in his commitment to fair, logical beer laws. In 2013 I think you will find Texas Craft Brewers more united than ever before and our chances of reforming the law and finding an equitable solution are better than ever.
I’d like to give some thanks and credit. First, to Jim Houchins and Rachel Fisher of Authentic Beverage and Pete Kennedy of Graves Dougherty Hearon & Moody for taking on this case. They are deserving of all the endearing credit that I hope you all bestow upon them. They took this lawsuit up not because a brewer asked them to, but because they believed in the cause. Additional thanks to Jester King Craft Brewery and Zax for volunteering to be co-plaintiffs in the suit so that it could have standing.
And finally, in what I think is an overdue thank you, thank you to all the other brewers in Texas who were involved in this effort behind the scenes. There is more than meets the eye in this case, and a lot more Texas breweries were involved than you know about, providing feedback and assistance to Authentic and Mr. Kennedy when asked. They did so without the expectation or desire for credit or applause from the crowd, but rather they did so because of a belief in the cause. You won’t find their names on press releases or blog postings nor will you ever get their names from me even though I know them. The community of Texas Craft Brewers is a tight knit group – perhaps too tight at times and I know newcomers to the scene may at times find themselves “outsiders” to the club – and that tight knitting is what provides the support system for efforts like this one, or HB 660, HB 602, HB 2436, the Texas Craft Brewers Festival, and countless other to be possible. A tip of my hat to all my fellow brewers. I often jokingly brag to folks how I have the coolest job in the world, and a big part of that is because I have the coolest peers in the world.
PS: In a few hours I’ll post “Judge Sparks’ Greatest Hits”. His judgement is a demonstration of some extraordinary wit, and some comments are just too good not to share.
I’m going to post a quick summary, and follow up later with interesting tidbits from Judge Sparks’ ruling. But in the interest of getting information out there quickly, the Judge has ruled Sec. 108.01(a)(4) of the Texas Alcoholic Beverage Code unconstitutional as a violation of the First Amendment. . Additionally, he has ruled Texas Administrative Code Title 16, Sec 45.77, 45.79(f), 45.90, & 45.110(c)(3) unconstitutional as a violation of the First Amendment.
What does this mean in layman’s terms? 3 things:
- TABC cannot prohibit you from telling customers or advertising where they can buy your products
- TABC cannot require you to label your products by their definition of “beer” and “ale”
- TABC cannot prohibit you from advertising the strength of your products by prohibiting words like “strong”, “prewar strength”, “full strength”, etc
Like I said, be back later with more details. You can play the home game and read the full judgment here.
It was a Who’s Who of the Texas Beer Industry at the Federal Courthouse in Austin today, enough so to give me flashbacks of our failed efforts to affect change in Texas beer laws in the last legislative session (a high-level recap: we brewers want 1) the ability to sell our products to consumers and to distributors 2) the ability to call our products what they really are and 3) the ability to tell people where to find our beers). In the crowd were representatives from The Beer Alliance, who sided with us in our efforts to gain the right to sell brewpub beer to distributors, many TABC staffers, representatives from a handful of distributors and importers, a staff of a key Texas Congressional Committee, and our old friend Keith Strama from The Wholesale Beer Distributors of Texas. From all appearances, I was the only member of the craft brewing industry present and perhaps from the brewing tier altogether (I didn’t recognize anyone from the big breweries, but there could have been someone there I don’t know).
For those unaware, Authentic Beverage, joined by co-plaintiffs Jester King Craft Brewery, LLC and Zax, LLC, filed suit against the TABC and its commissioners (in their official capacity) over a number of issues. You can read what Jester King had to say about the suit and the actual filings by the plaintiffs and the defendants.
For those unaware and who don’t want to go through the rigor of reading the entire suit, I’ll summarize the main points that were argued this morning.
- Brewers’ first amendment rights are violated by the state’s prohibition on breweries from “advertising” where their products can be found, whereas an “advertisement” has been defined as any communication be it traditional advertising, a list on the company’s website, or even word-of-mouth.
- Brewers’ first amendment rights are violated by the state’s prohibition on breweries from listing the alcohol content of their products in any “advertisement”, whereas an “advertisement” has been defined as any communication be it traditional advertising, a list on the company’s website, or even word-of-mouth. A brewer can, but is not required to, list alcohol content of products on a label, but cannot do so in advertising.
- Brewers’ first amendment rights are violated by the state’s definition of “beer” as a malt beverage containing 4% or less alcohol by weight and “ale” as a malt beverage containing over 4% alcohol by weight. In industry parlance, the terms “beer” and “ale” have nothing to do with alcohol content (and in fact an ale is a beer while a beer is not necessarily an ale, by industry terminology). The suit contends the state compels producers of beer to make false statements to consumers in order to adhere to its definitions of “beer” and “ale” (since if a producer makes a lager that is over 4% ABW, they are required to call it an ale even though it is not, and if they make an ale under 4% ABW they are not able to call it an ale although it really is).
- Brewers’ have their 14th amendment rights violated by virtue of the states make brewers chose between being a brewpub (which can only sell its products directly to the consumer on its premise) and a production brewery (which can only sell its products to distributors for resale) while not applying the same restrictions to wineries, which are allowed to do both.
There was another argument made as to the number of permits a foreign brewery is forced to obtain, but I won’t go into that as it constituted the least amount of time and has the least direct impact to Texas brewers.
On the 1st Amendment Issues, Judge Sparks was especially harsh on the TABC’s counsel (note, the state’s Attorney General Office acted as counsel, not TABC lawyers), which failed to provide a rational basis for the law. It is important to note that the courts have found the government can restrict free speech where they have a governmental interest to do so, but the defense failed to provide a rational basis. One exchange went like this:
Defense: I can’t site you to any specific evidence [of a rational basis]…
Judge Sparks: Because there isn’t any!
In the end, the State seemed to center their defense around the circular argument that (I”m paraphrasing) “The rational basis for the law is that they are the laws.” As you might imagine, this didn’t impress Judge Sparks very much, who at one point rhetorically asked the defense “you are aware that the legislature can pass unconstitutional laws, right?”
The defense did cite the 21st amendment, which ended prohibition and gave the states to regulate alcohol in their state, as a defense, but that led to the most comical moment of the morning for me, as Judge Sparks asked: “So can the state just define wine as beer? Can they define malt liquor as orange juice? […] These are false statements.”
In the end, it appears that at least on the issue of item #3 above, the plaintiffs will prevail, ending the absurd labeling silliness that gets Texas ridiculed nationwide by people who know the actual beer nomenclature of beer, ale and everything else under the sun.
On the issue of advertising where to find one’s beers, the court did raise a valid concern. If we let breweries advertise where to find their beers, what would stop the big breweries (or any brewery) advertising on behalf of their preferred clients and putting undue influence on the market? Or what is to stop a big brewery from offering ads to retailers as incentives for carrying their beers over other brands? This is an area that (in my opinion) needs some mechanism to regulate what constitutes “providing information to consumers” and what constitutes anti-competitive behavior. I think that will be the biggest hurdle to overcome, because clearly there is a governmental interest in competitive markets.
On the 14th amendment claim, my sense (and this is just my opinion) is that the court may agree that our laws are nonsensical, but that doesn’t make them unconstitutional. Unfortunately, states do indeed retain the right to make stupid laws and we citizens sadly have no constitutional protection against stupidity – it has to be coupled with a real constitutional violation. The question: are breweries and wineries similar enough to where an equal protection claim can be made? To me, the answer is yes – but I have a certain (biased) viewpoint based on the similarity of the production processes. At the same time, I can admit that wine is in fact different than beer – and that is the issue of whether or not equal protection applies. It will be interesting to see what the court says.
Some notes on what I feel are take-aways from today’s hearing:
- The state was unable to provide an evidentiary defense or rational basis for the laws being challenged in the 14th amendment portion of the suit. That doesn’t, in an of itself, make the laws unconstitutional, but it does provide some interesting fodder in the next legislative session. It will certainly be interesting to stand in front of the congress and remind them that the state can’t think of any reason for these laws to exist. Judge Sparks had another interesting comment when TABC was pressed to explain the rationale behind the laws they enforce and couldn’t. “So you guys just blindly enforce the laws they send you?” asked the judge.
- The tides continue to change in our state. The “old guard” is on their heels and they are fighting change with their last tooth and nail. I’m not talking about the TABC here, I’m talking about the WBDT.
- A great job, and I mean this in all sincerity, by both sides in today’s hearing. I think the plaintiff’s counsel did a good job explaining their case (and I’m not talking about the rational case of whether the laws are dumb – but the case of whether they are constitutional), and I want to impress upon you that they 14th amendment claim is an uphill battle. Whereas the burden of proof in the 1st amendment claim lies on the defense to provide a rational basis or governmental interest, the burden in the equal protection case relies solely on the plaintiff. Attorney’s Pete Kennedy and Jim Houchins did a great job. On the flip side, Beau Eccles from the AG’s office did a good job of defending the state. The fact of the matter is that THERE IS NO RATIONAL BASIS for these laws, but the AG is required to defend them anyway. They can’t just “roll over” because they personally think they are stupid. Their job is to defend the laws the Legislature writes. I found Mr. Eccles to be a well-reasoned, open-minded and rational person who did his best to defend the state. Despite the fact that I disagree with the position he was defending today, I’m glad to have someone like him defending our state when other issues might arise.
Certainly this isn’t over. We’ll see what’s next!
No, you read the title of this post correctly, The Case For Three-Tier. Disclaimer for those who are pregnant, may soon become pregnant, or suffer from a heart condition: you are about to read me make a case for the three-tier system and not in a “devil’s advocate” sort of way, but in a real “we actually need this” way.
There is a growing sentiment among consumers, and even a growing trend among statutory changes (like this one Tuesday in Washington state), against the 3-tier system. The behind-the-scenes warfare, as detailed here, between the members of the various tiers has only intensified as the clamoring for reform has grown. Most of you are probably aware that I led a charge for statutory reform in Texas earlier this year that would have allowed brewpubs like mine sell to distributors, which is currently prohibited.
So I come here today to once again remind us all of the importance of a truly independent distribution tier. The simple fact of the matter is that craft beer needs the middle tier for its continued existence. The distribution game is a difficult one, and in most cases requires scale in order to be profitable. Because of the scale required, it often takes big resources and big companies to be an effective distributor – something most craft breweries cannot be. If not for the requirement for an independent middle tier, there is little question the world’s mega brewers would vertically integrate distribution networks, and eventually crowd out craft brands. Niche distributorships may emerge, but their geographic reach would be limited (and many geographic areas would probably end up underserved or completely unserved).
Craft beer needs distributors. But our beer laws also need reform. These are not concepts in conflict with one another. As the fight for fairer beer laws in Texas continues, I’m proud to say that I’m in the process of meeting with distributors across the state to find common-ground solutions so that we can move forward. What I’ve found is that the distributors are not as unreasonable as we are led to believe, and they increasingly want craft beer in their portfolios. Now they want a way for us to work together without opening things up completely and allowing the world’s mega-brewers to re-establish the vertically integrated monopolies that flourished pre-prohibition.
The craft movement has a strong foothold and is here to stay. Let’ s not undermine the progress made thus far by calling for the complete abolition of 3-tier, let’s instead focus on making the right improvements to the system that doesn’t kill the craft movement in the process.
The Value of Business Integrity: A Call for Enhanced Ethics, Respectfulness and Law Abiding Behavior
So, it’s been awhile – and even before the last update, posts had been sporadic at best. Don’t stop me if you’ve heard this one before – but I’m going to make a real effort to update at least once a week. Some updates will attempt to be poignant and tackle serious issues, other might be about the daily in-and-out of running a small brewery and teaching economics while finding time for soccer and mountain biking. In any event, content will be more frequent if not necessarily more meaningful.
Today I want to discuss something that’s been bugging me for a while, a certain lack of business integrity by not only by big business (the rumored targeting of start-up No Label Brewing taps by mega-distributor Silver Eagle for example), but by fellow craft brewers and non-beer industry small businesses in my community. (Note, I’ve always adhered by the long-standing prison code of “Snitches Get Stitches”, so I’m not here to rat anyone out. If you’re reading this and any of the things I’m describing sound like you, then they may very be you. It’s up to you to correct your behavior.)
Pay-to-play is a fairly common practice in the beer business, independent of how illegal and unethical it is. Stories like this one out of Chicago are just telling us what we already know: where the incentive exists, businesses will try their hardest to circumvent fair trade in order to gain the upper-hand. When products don’t have incremental intrinsic value to offer the consumers, they can hang onto, or gain, market share in a number of ways (this list not intended to be comprehensive):
- Increase the real value the product provides consumers (make your product better)
- Increase the perceived value it offers consumers even if it offers no more real value (in economics, we call this advertising)
- Become the more attractive option for consumers from a price perspective (make your product more affordable)
The first three options on this list are all okay, because they all require a two-way match of wants, preferences and needs for a consumer to choose one product over another. Like it or not, some people make purchasing decisions based on who has the best ads. Fair enough, but an ad in and of itself does not take a competing product off the shelf and limit consumer choice. The same with making a product better or less expensive. Sales of that product will still depend on how much consumers value that product relative to all other options.
It’s fairly self-evident why “cheating” in business is bad for consumers (not to mention our nation’s continuously bleak economic picture). We generally have little problem calling out big, faceless, corporations when they “cheat” – but it seems like we lose our ferocious intolerance for cheating when someone we have an emotional attachment to is doing it. We have no problem blasting Silver Eagle and the brands they carry (who we only alledged might be the brands replacing the targeted No Label handles) – but there is nary a whisper when it’s a beloved craft brewer openly and proudly engaging and promoting blatantly illegal activity. We may not like the Texas Alcohol Beverage Code, but until it changes we are still bound to follow it. Those who ignore the law, even if out of a sense of rebelliousness, are no better than a big distributor illegally targeting a small brewers taps.
Beyond the obvious ethical hypocrisy, I wonder about the potential backlash from this kind of activity in a legislative session. We all remember The Wholesale Beer Distributors of Texas Keith Strama’s bumbling, incoherent diatribe in front of the Licensing and Administrative Procedures Committee (chronicled here) where he stammered on how allowing brewpubs to distribute would somehow lead to babies drinking barley wine on street corners in dry counties. It may not be too hard to picture him standing before the LAP Committee again rambling on about how we can’t even obey the existing laws and we want the state to give us more freedom? It would be like handing the car keys to a teenager who you just grounded for getting excessive speeding tickets. (This would be the argument used against us, not one I actually believe in). It is imperative, for the success of any future legislative efforts (which there will be for years to come, even after breweries and brewpubs are allowed the freedom we seek – there are many other issues to tackle) that we be model citizens.
So here I present you with a proposed Code of Small Business Ethics. Please comment to add to, disagree with, or give a tip o’ the hat.
- Be a Law Abiding Corporate Citizen. Regardless of your opinion of the law, you chose to open and operate a business under the jurisdiction of said laws and they must be obeyed.
- Commit to Product Excellence. Let the sales of your product be dictated by the real value of your product, not by increasing your relative value by putting down your competitors. Your competitors making a better product should drive you to make a better product, not drive you to find ways to tell consumers a competitors’ products are garbage.
- Make Honesty a Core Value. Be open, honest and transparent about your business, even your shortcomings. As a small business, your customers have an emotional connection with you. They knew you weren’t perfect long before you admitted it to yourself. Be truthful when you fail and never be ashamed to say sorry.
- Be Direct and Discreet With Those You Disagree With. The growth of social media has made for entertaining battles when two figures (either business or personal) clash, but when you have beef with a competitor or partner, take your beef directly to them – not to twitter.
- Give Credit Where It Is Due. Give props to the people who made things happen. If someone gives you credit that you don’t deserve, be the first to stand up and distribute it where it truly belongs – don’t let others do it for you.
- Always be Customer Focused. This is obvious and cliché, but seemingly oft forgotten. Never forget, that without your customers, your business has no reason to exist.
- Commit to Fairness Throughout the Supply Chain. Treat your suppliers, creditors, employees and downstream customers with the same respect and fairness you would expect from them. Your supplier has bills to pay too, and squeezing every drop of margin out of him threatens his viability and your ability to benefit from him in the future.
- Be Passion-driven, not Profit-driven. Let your business decisions be driven by what you believe, not by what would be most profitable in the short-run. Your passion will best support you in the long-run. The craft beer industry is a great example of small businesses driven by passion, not by capturing economies of scale and seeking the greatest profit. As a result, it’s the only segment of the beer industry that is growing.
What should we add to the Small Business Code of Ethics? Chime in!
Next Post: I’ll have La Muerta details on my next post, which I’ll aim to have out this weekend at the latest. Cheers.