Craft beer diversity exists because of the symbiotic work of three major players: Brewers, distributors and tap houses. All three provide the variety that has given rise to our current craft beer renaissance. It is also a system highly susceptible to abuse.
There are signs of wear in craft beer’s lustrous and shiny coat – everything from trademark issues to a foretold pricing war that some see as inevitable. Another issue is raising it’s head, but has been present for decades. “Pay to play” is an industry term for distributors, brewers and/or retailers paying sums of money or the trading of goods to get beer on tap in place of a competing beer. As of 1933, the end of Prohibition, this practice became illegal. To some, pay to play makes the playing field unlevel and gives the advantage to those with resources to get on tap. With very limited tap space and thousands of different beers in our rotation culture, pay to play is how some breweries are keeping their beer on tap among stiff competition.
As reported by the Boston Globe, Massachusetts is currently prosecuting a distribution company for pay to play and unfair business tactics.
“The alleged wrongdoing in this case is serious,” said state Treasurer Deborah Goldberg, who oversees the ABCC, said in a statement. “As the commission examines this matter, we’ll continue the work to ensure license holders across the state are acting in a proper manner.”
In Britain there are pubs called “tied houses”. Tied houses are tap houses that must sell at least some of their taps to designated local distributors or brewers. Following Prohibition, tied-houses became illegal in the US for fear of creating monopolies where only the producers with the most money got on tap. The federal government made it illegal for alcohol producers to pay for shelf space, in order to keep large companies from dominating the market. As a solution, most states came up with a three-tier system to keep monopolies from developing. But in 2012 Washington voted to privatize liquor sales, becoming the only state in the US without a three-tiered system.
Craft beer makes up only 2.5% of the market in the UK and 11% in the US. Is it possible the deregulation of distribution in the UK, that allows tied houses, has assisted in curtailing the spread of craft beer there? While there are many reasons craft beer has exploded in the US, according to various studies, the checks and balances of the three tiered system has been a major factor in this success. From the Harvard Business Review
What we found surprised us. The great effervescence in America’s beer industry is largely the product of a market structure designed to ensure moral balances, one that relies on independent middlemen to limit the reach and power of the giants.
In most consumer goods markets in America today, two or three giants dominate — think toothpaste, eyeglasses, and soft drinks. New entrants—be it Tom’s toothpaste or Vitamin Water — can find it very hard to keep their independence for long. In large part, this is because most distribution systems — and even most shelving decisions inside the retailers — are managed by the giants.
In the beer market, by contrast, new entrants still find more than 3,000 small distributors that have both an interest in promoting new and better products and the means to do so. In this one instance at least, a market designed to yield a particular set of moral outcomes has also proved to be extremely effective at promoting innovation and variety.
Not that America’s craft brewers and drinkers should rest content. Our research also revealed that both big beer and big retail have in recent years unleashed a series of attacks on the independence of this middle tier of wholesalers and distributors. Anheuser-Busch, which controls well more than 50 percent of the market, especially has pushed hard for more direct control over distribution. Which means that, absent government action, this fragile marketplace that delivers us so much might soon vanish.
Even though tied houses are illegal in the US, there is evidence to suggest there is abuse in Washington.
I reached out the to Liquor Control Board’s Communications Director, Brian Smith, with some questions. He put me in touch with their enforcement division. In Washington State, pay to play is defined as “undue influence” in the three-tier system (three tier is still the defacto system in the state.)
“Undue influence” means one retailer or industry member directly or indirectly influencing the purchasing, marketing, or sales decisions of another retailer or industry member by any agreement written or unwritten or any other business practices or arrangements.
WAC 314-12-140 Prohibited Practices
No industry member or employee thereof shall sell to any retail licensee or solicit from any such licensee any order for any liquor tied in with, or contingent upon, the retailer’s purchase of some other beverage, alcoholic or otherwise, or any other merchandise, property or service.
In my interview with the President of the Washington Brewers Guild, Heather McClung suggested the issue of pay to play is starting to elbow out smaller breweries from tap houses and create more issues within the craft beer community.
10 years ago illegal tactics were much more prevalent. But two major distributors in Seattle worked together to resolve their issues. Since then we’ve seen occasional abuse, but things get worked out. In the last one to two years though, we’ve seen a ramping up of illegal tactics. When a Midwest distributor moved to Washington State they were astonished at how dirty we were