Privatization could affect Pittsburgh consumers' beer choices

Smaller brewers wondering what's on tap with privatization

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The average Pennsylvanian consumes about 24 gallons of beer, wine and spirits each year. Plans to privatize wine and spirits sales will throw the state's 80-year-old system of regulating how consumers buy those products on its heels.

It also will affect the state's thriving brewing industry, which has a $3.2 billion impact on the state's economy, according to the Beer Institute, an industry lobby group. Some observers say the vitality of Pennsylvania brewers is linked to the current regulatory system -- in which brewers sell to wholesalers, who sell to 1,200 distributors, who sell beer by the case to consumers.

And it's a lot of beer. Beer accounts for about 21 gallons of the alcoholic beverages that Pennsylvanians consume annually, according to the industry group.

House Bill 790, approved by the Pennsylvania House last week, would allow distributors to sell six- and 12-packs of beer, as well as wine and spirits.

The proposal also could usher in more competition from grocery stores, more than 100 of which already sell beer under restaurant licenses. House Republicans who support the measure estimate that number will double or triple. In addition, grocers will be able to purchase licenses to sell wine under the House-approved measure.

However, some fear the rush to privatize could harm small brewers in Pennsylvania. They worry that better financed national brewers will use their marketing clout with large retailers to keep beers brewed by smaller brewers off store shelves.

The changes could work both ways for state brewers, who will have to adapt their distribution and marketing plans as the result of a regulatory overhaul many say is long overdue.

"We know there's got to be a change," said Bill Brock, president and CEO of Straub Brewery in St. Mary's, Elk County. "There will be winners and losers, and you want to make sure that those who have done the right things and made investments aren't the losers."

Mr. Brock believes the House measure would hurt small brewers because it would abruptly change a system dating to the end of Prohibition, a system that Straub and other in-state brewers have based their investment and distribution strategies on.

Privatization would mean competing against national brands under a set of rules national brewers are already comfortable with.

Other in-state brewers are trying to fathom the magnitude of the changes.

"The devil's in the details and we don't know all of that yet," said Linda Nyman, marketing director of Penn Brewery on the North Side.

She said allowing distributors to sell six-packs might encourage beer drinkers who are reluctant to purchase a case of craft beer to try a smaller quantity of something new. "With a six-pack scenario, you can dip your toe in the pond instead of jumping in," she said.

Allowing distributors to sell wine and spirits as well as beer could make them the one-stop shops consumers have been clamoring for. Under the proposal, beer distributors would get first crack at purchasing 1,200 wine and spirit licenses. After a year, any licenses that distributors did not purchase would be sold to the public.

If distributors took on wine and spirits without expanding their stores, there would be less room for stocking beer. That could prompt them to stock more high-volume national brands and less Pennsylvania-made beer.

"If they're going to crowd additional product on an existing footprint, then that would have an impact on beer," said Bill Covaleski, brewmaster and president of Victory Brewing in Downingtown, Chester County.

Brewers are also concerned that taking on new products might cause distributors to de-emphasize beer. "Is it going to be any more difficult [for them] to pay attention to your brand?" Mr. Brock asked.

A bigger concern is whether a proliferation of beer licenses at grocery and big box stores will reduce consumer choice, something the measure's supporters say won't happen.

Pennsylvania brewers worry they won't have the money to compete against national brewers for shelf space at the stores. They say the distributor system is one reason why Pennsylvania beers stand up so well among the state's beer drinkers compared to national brands. Anheuser-Busch InBev, which has a 46 percent share of the U.S. market, only has 28 percent of the Pennsylvania market, according to Beer Marketers Insights, a Suffern, N.Y., research firm.

Pennsylvania brewers produced 4.3 million barrels of beer in 2011, up 19 percent from the previous year, according to a survey of brewers and beer pubs conducted by the General Assembly's Legislative Budget and Finance Committee.

The panel reported in January that craft beer accounts for an estimated 20 percent of the state beer market vs. a 5 to 7 percent share of the U.S. market.

The House-approved measure "would most likely reduce the number of brands available to the consumer and make it more difficult for small regional breweries to compete," Yards Brewing president Tom Kehoe said in an emailed statement.

"The national brands have established relationships with the big box stores, have deeper products to pay potential slotting fees, and can apply greater leverage to maintain shelf space and exclude competitors," the Philadelphia brewer wrote.

Mark Dudash, an Upper St. Clair attorney who has revived the Duquesne beer brand, agrees.

"Let's face it. The big guys are always going to get the shelf space," he said. "The beer distributor network really gives you a shot as a small brewer. I'm really a fan of distributors."

Pennsylvania's brewers are only one interest group with a stake in how privatization plays out. Others include restaurant and tavern owners, distributors, and national retailers itching to offer in Pennsylvania what they sell in other states.

Then there's the 3,500 clerks at the state-operated wine and spirits stores. They could lose their jobs under the House measure, which calls for eventually closing all 600 state-operated stores.

And don't forget consumers. Privatization is supposed give them convenience and better selection at competitive prices.

"The experience is that privatization does not reduce price, but it's an open issue in my judgement," said Cris Hoel, a Pittsburgh attorney who represents Straub and other beverage industry clients.

Choice, selection and lower prices have become rallying cries for proponents of the House Bill 790. But the catchphrases give short shrift to the potential repercussions of remaking a regulatory system the industry and consumers have lived with since the demise of Prohibition. Some proponents of privatization want change in the worst way while some opponents are resisting it in the worst way, Mr. Hoel said.

"And that's the worst way to go about it," the attorney said. "This is a very complex situation that seems to be viewed by many as simple."

Lawmakers are being asked to balance not only the interests of beer, wine and spirits producers but resolve the conflicting interests of national organizations such as large brewers, wholesalers and chain retailers and the regional interests of in-state brewers, regional wholesalers, and small distributors.

One thing everyone agrees on is that something has to change.

The House measure now moves to the Senate, where some expect significant changes will be made. House Bill 790 "is going to be tinkered with in the Senate," Mr. Covaleski said.

Mr. Brock of Straub said all levels of the industry have to be involved in crafting the new law.

"I do know there are solutions out there. We just have to get to them," he said.

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Len Boselovic: or 412-263-1941.


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