For beer lovers in Pennsylvania, good news may be on the horizon. Laws on the books since the end of Prohibition that make it more difficult and expensive for brewers to get their product into consumers’ hands could go the way of the Edsel if legislation introduced in August by State Rep. Mike Tobash, R-Pottsville, moves forward.
House Bill 1666, now in the House Liquor Control Committee, would end a longstanding system that locks brewers into lifetime contracts — sometimes longer — with their distributors. It finally would give brewers the flexibility to choose distributors, which would increase competition, allow new distributors to enter the market and probably lead to lower prices and greater consumer choice for all.
The current beer distribution system in Pennsylvania and much of the nation maintains legal separation between the companies that make, ship and sell alcohol. Brewers, who make up the first tier, may sell their products only to distributors, also known as wholesalers, who then sell and ship the beer to the second tier — bars, restaurants and stores.
Most states also have franchise protection laws, which essentially grant wholesalers a monopoly in their designated areas. And these monopolies mean no incentives exist to improve performance, efficiency or prices.
These measures, also holdovers from Prohibition, are meant to protect wholesalers — which at the time of repeal consisted of a large number of small local operations — from big breweries that supplied all of the nation’s beer at the time. These behemoth brewers could threaten to walk away from contracts in order to bully wholesalers into unfair contracts.
But today, the roles are reversed. We’ve gone from fewer than 100 breweries in 1980 to more than 2,500 today — and more than 90 percent of those breweries produce fewer than 15,000 barrels a year. Meanwhile, the number of wholesalers has declined from more than 4,000 in 1988 to fewer than 2,000 today, according to the Beer Institute.
Yet franchise laws still bind brewers to wholesaler contracts regardless of a wholesaler’s performance. It is expensive — sometimes even impossible — for brewers, especially small ones, to get out of contracts with their wholesalers unless the wholesaler agrees. And if distributors decide to sell contracts to other wholesalers, brewers have no say over who may buy the contract, which can be sold or passed down through a family business for generations.
Additionally, existing brewers are locked in, so it’s exceedingly difficult for new brewers to enter the market. As a result, fewer and fewer beer distributors handle ever-increasing numbers of brands, which makes it likely each of those brands will get less attention from its wholesaler over time. Franchise laws make it virtually impossible for brewers in this situation to take their brands to different wholesalers who might offer better service or rates.
Under Rep. Tobash’s bill, brewers and wholesalers would have to renegotiate their contracts every five years, so brewers would be able to opt out of their wholesaler contracts for any reason so long as their brand makes up less than 20 percent of the wholesalers’ total sales volume. Brewers that do make up greater than 20 percent of total volume will have to show “good cause” before terminating their contract, but Rep. Tobash’s bill clarifies and broadens what constitutes “good cause” under Pennsylvania law.
Predictably, wholesalers oppose the changes, claiming the legislation could result in job losses for some beer wholesalers. Of course, it also could result in more jobs available from new and expanding wholesalers as well as breweries that are able to expand because of the new law.
The Tobash bill isn’t perfect. It keeps franchise laws in place. It imposes a new limit on the amount of beer that Pennsylvania-based breweries are allowed to self-distribute — 75,000 barrels a year. But it would allow out-of-state brewers to self-distribute the same amount — something they are currently barred from doing. If the House Liquor Control Committee approves the bill it will go up for a vote on the House floor.
According to Dave Casinelli, president of Yuengling brewery in Pottsville, the cap is a tradeoff brewers are willing to accept. And although the mandatory renegotiation of contracts represents interference in the market, it does give brewers more power than they have now to create equitable arrangements with their distributors. With all those caveats in mind, on balance, the bill would help create a more flexible system and result in lower prices and greater variety for consumers.
Ultimately, the ideal policy to improve Pennsylvania’s beer market would be an outright repeal of franchise protection laws. But until then, Rep. Tobash’s proposal seems worthy of consideration.
Michelle Minton is a fellow in consumer policy studies at the Competitive Enterprise Institute, a free-market policy organization based in Washington, D.C. (cei.org).