The "Extortion Fee" on Texas Craft Beer
Currently, it’s a three-tier system in Texas: microbreweries brew beer, sell it to a distributor, and then they sell it to a retailer. They have to go through a distributor to reach the end consumer unless they have a tap room, but that doesn’t remove the glass ceiling above their heads. The craft beer scene is, surprisingly, regulated with a very heavy hand.
Texas bill HB 3287, which was enacted at the end of May, tightens distributors' grasp on the market and removes the support that craft breweries received in 2013.
Under the new law, if a brewery produces more than 225,000 barrels of beer per year, it cannot operate a tasting room. Breweries that currently do so are grandfathered in but have to pay distributors for the beer sold in the tap room. Breweries are also only allowed to have up to three tap rooms across multiple locations, and are capped at selling no more than 40,000 kegs of beer that they can self-distribute across all locations, and no more than 5,000 barrels aggregate across tap room locations.
Upon exceeding 5,000 barrels of beer sold in the tap room, the brewing company has to sell the excess to its distributor at wholesale with 30-day terms and then buy it back at retail, with payment due at the time of purchase. The beer and the barrels never even leave the brewery. It’s all an accounting transaction that leave the distributors in credits on an account. They can then turn around and use the difference between the two to purchase kegs from the brewery at a sub-wholesale rate, increasing their big-business profit margin and decreasing it for the small business.
“When they opened up and changed it to where you can sell beer in the tap room, the distributors started losing money,” said Seth Morgan, owner of Denton County Brewing Company, and HB 3287 will essentially limit what breweries can continue to sell in the taproom. “The way that TABC is written, the breweries sell it to them [the distributors] wholesale and they buy it on credit, but when bars buy from distributors at retail they have to pay same day. After their cost of what they pay, and what we pay, they will just see credits on their account and production breweries will never see money.”
Breweries that don’t have a tap room aren’t in the clear: the glass ceiling extends to the production side of the business. The same rule applies to amounts over 40,000 kegs.
Texas is currently the only state that does not allow breweries to sell beer for off-premise consumption, and over the past four years, Governor Abbott has received the most big-label beer distributor cash, totaling $1.4 million according to figures from Texas for Public Justice.
The bill that sits on Abbott’s desk will go into effect June 18, with or without his signature.
“First of all, we can’t compete,” said Morgan. "We don’t make money like that and these are huge businesses. The distribution folks are saying that tap room sales are starting to really pick up and take a lot of their sales.”
Lobbyists for the large distributor companies have the time and money to throw behind the legislation and at their state representatives. Craft breweries are small businesses run by passionate entrepreneurs, and running one's own company makes it difficult to allot time to make it to the meetings and hearings in Austin.
“If all this passes, and it looks like it will, it will give them a foothold into taking profit out of the tap rooms, and is allowing them to get their foot in the door. The way that it stands right now, if a brewery brews a beer and sells the beer in the tap room, it makes the most profit, but if we have to sell it to them at wholesale and buy it back retail we would have to cut jobs, we have to save costs somewhere,” says Morgan. “When you talk to craft brewery owners, they tell you that it doesn’t benefit us long term, what does this lead to in the future, it shows how lobbyists affect the nature of business.”
The number of small breweries that were brought into the conversation? Zero. The distributors are telling the brewery owners, ”We’re going to help you, but we’re not going to ask you if you actually need help, and we’re not going to create a conversation to find out where the real issues are,” said Morgan. “If you really cared about us, why wouldn’t you bring us all together to find a win-win situation instead of using this money to come to a situation that does not benefit us at all? We have to buy back our own products.”
Governor Greg Abbott tops the list of political candidates that have received funds from distributors. He is followed by Lieutenant Governor Dan Patrick, who sits close to $700,000, and House Speaker Joe Straus, who has made half a million. With those kinds of dollars being tossed around in support of the bigger businesses, it’s no wonder the smaller craft breweries feel like they can’t keep up. HB 3287 is a cap on the ability of these Texas brewery owners to fulfill their dreams and pursue their passions.
Header Image by Christopher Rodgers