Craft Beer’s Silent Crisis – Who Controls What you Drink?

By |2018-10-18T13:28:38+00:00May 19th, 2015|

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.)

RCW 66.28.285

“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 

[Tap Trail emphasis.]

Bellingham’s Chad Kuehl, brewer/owner of Wander Brewing observed,

“Not that we know officially, but there seems to be more and more bars that have beer menus that are aligned to a single distributor. We try not to read between the lines too much. Our focus is on our brewery and not on other’s sales practices. We are not trying to grow as big and as fast as possible, so if we lose a line at an account then we simply move on and continue to sell our beer elsewhere. Simple as that!”

Washington’s Liquor Control Board is responsible for regulating any pay to play in alcohol issues. Last year, the LCB increased staffing by four additional officers to help with the issue. But, in McClung’s opinion, the issue doesn’t come up on their radar. Those being impacted by pay to play tactics are concerned that their complaints aren’t being heard, as has been complained about in the aforementioned Massachusetts case

These brewers have quietly complained that the practice is rampant in the Boston area, but until Wednesday no business had been charged over the practice in at least 15 years, state officials have acknowledged.

But coming up on the “radar”, requires complaints to be filed. According to the LCB, that isn’t happening. To get violators prosecuted industry members must come forward

We have no specific brewery charged with this type of activity recently. We have had instances of what could be termed neglect. The violation was minor where we emphasized training and education. Most of these types of violations are difficult to find without the help of the industry. Any complaint would have to come from them as the general public would not know this.

The issue is a touchy one for brewers. They rely on their distributors and retailers to get their beer to the masses, so complaining potentially jeopardizes their ability to sell. According to the LCB the most difficult issue with enforcement is

1. Proving allegations. A willingness to come forward and submit documentation will assist officers to investigate violations.

2. Lack of documentation. Agreements are often verbal.

3. People not wanting to report anything to the LCB for fear of jeopardizing retailer/supplier relationship resulting in loss of access to purchase/sell products.

4. Fear that identity of complainant will be disclosed.

Fittingly, two Washington State breweries refused to go on record for this article about the issue, for fear of creating issues with distributors, retailers and other breweries. I was told by one, that a bartender once reported that their account was removed when the owner of the establishment was given $100 to get the distributor’s on instead. He also told me of distributors purchasing full 10 x 10 coolers for new tap houses in return for reserving a percentage of their taps exclusively for their beers. An employee from a different brewery acted indifferent and said people “vote with their dollars.” If they don’t like what’s on tap, they can just go elsewhere, which forces the tap house to provide what people want.

McClung is the owner of Schooner Exact Brewing of Seattle and knows of a brewery who’s beer was refused at a tap house during a Seattle festival for fear of upsetting the festival’s sponsors and distributors. McClung says this issue takes the power away from the consumer

In pay to play, the retailer has loyalty to who has the money.

The Guild is working with the Liquor Control Board to educate their members, so they don’t accidentally violate the law. But the issue isn’t just with distributors. According to McClung,

Where the problem starts depends on who you ask. If you ask brewers, they say it’s the distributors. If you ask distributors, they’ll say it’s the breweries.

According to Aaron Matson, owner of Bellingham’s Copper Hog Gastropub, the issue has various levels of complexity. Not necessarily illegal, but a grey area that bring’s into question who and how beer is getting on tap,

Distributors are also more inclined to promote breweries with larger contracts. The larger breweries sign contracts with distributors that are worth more money. So the distributor is more likely to push their beer over a smaller brewery.

The LCB agreed that the issue of pay to play isn’t just with distributors, but rather with all industry players. The most negative impacts are felt on the smaller producers because they have less resources to keep their product on tap. According to the LCB, those most likely to abuse the system are

[l]arge suppliers, distributors and retailers who can afford to offer incentives or restrict access to products.

In 2013, Washington State craft beer had over $1 billion of economic impact and accounted for 13,000 jobs, ranking us 9th in the nation. We currently have 272 breweries in the state, 3,500 in the US and 2,000 more planned. But that success is at least partially reliant on the diversity of the industry. As we reported earlier, many economists believe craft beer will look very similar to Anheuser-Busch in 5 years – large regional craft breweries owning many smaller breweries. If those regional breweries buy up the smaller breweries and are also paying their way to get on taps, just how diverse of a craft beer culture and what type of success and longevity can we expect?

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About the Author:

Scott Pelton
I'm Co-Owner of Tap Trail and the Editor of the Tap Trail website. Let's have a pint! Email me at scott@taptrail.com.