Legislature Brews Up Interference in Free Market

By James Wigderson
Special Guest Perspective for MacIver Institute

I have an acquaintance, TJ Buczak, who is a pretty good plumber. Everyone should know a good plumber, right? But what makes this plumber even better than most is that he has put his knowledge of liquids and pipes into a very fun hobby, making his own beer.

Unlike a lot of home brewers, our plumber friend TJ is actually pretty good at making his own beer. I know this because I’ve sampled it. TJ is now at the stage of entering his different types of beer in competitions and, very soon, he will start selling the beer to other people. With any luck, our friend will someday join the sixty commercial craft brewers that make up 5% of the beer market in Wisconsin.

It’s the Wisconsin dream. Frederick Miller. Frederick Pabst. Gottlieb Heileman. Jake Leinenkugel. And now?

Making beer is something Wisconsinites are naturally good at. That’s not surprising considering how much we consume. Heck, legislating in Wisconsin is a two-drink minimum. We even have a baseball team named after the brewing industry in a stadium named for a brand of beer.

Unfortunately, the state legislature may make it harder for craft brewers. The Joint Finance Committee (JFC), in a move designed to stifle competition with MillerCoors from Anheuser-Busch, adopted as part of the state budget changes in the way beer can be distributed in Wisconsin. The biggest change in the law would prevent brewers from owning beer distributorships.

Wisconsin already has an arcane system of rules governing the way beer is sold in Wisconsin known as the three-tier system.  Manufacturers (tier 1) sell to wholesale distributors (tier 2) who sell to retailers (tier 3). Most of us then buy our beer from tier 3 rather than the manufacturers or even the wholesalers.

The excuse we’re given for the three-tier system is that it protects competition because the distributors have a vested interest in meeting the demands of the consumers in what types of beer it provides rather than the needs of the manufacturer to maximize market share. The distributors also claim that the system aids in the collection of taxes (something attractive to lawmakers) because of the accountable nature of the system, and the excise tax on beer is collected from wholesalers.

In 2009 industry analysts said Anheuser-Busch, the number one beer manufacturer in the world, hoped to someday self-distribute up to 50% of its products by consolidating and acquiring wholesalers. The goal was to increase the margin from sales by cutting out the middle-man.

The fear by distributors in Wisconsin is that direct competition from Anheuser-Busch could drive them out of business. They argue that if the distribution tier is dominated by Anheuser-Busch that the brewer would use that power to cut off access to smaller craft brews as well as their main competitor, MillerCoors.

You can see why MillerCoors opposes allowing Anheuser-Busch from owning distributors in Wisconsin, and you can see why the local distributors would fear the competition. But the craft brewers aren’t buying that this addition to the state budget is in their best interest.

Craft brewers would still be allowed to do their own distribution under the proposed law. However, they would not be able to purchase or start up a distributor company that could sell other brands of beer. This means that small craft brewers cannot band together to start their own distributorship, as some have proposed.

As the number of distributors continues to shrink in Wisconsin, craft brewers fear that they will have less and less sales support from the state’s current distributors. Rather than get squeezed out of the market by distributors focused on the bigger brewers, craft brewers may start their own distributorships to promote smaller brewers in Wisconsin.

The reason craft brewers are not given a break under the law is because of a federal court decision in Illinois that prevents states from simply discriminating against out-of-state brewers. In order to prevent Anheuser-Busch from buying a distributor, everyone has to be prevented from buying distributors.

By the way, Anheuser-Busch has a ways to go before they even come close to their goal for self-distribution. There are 530 Anheuser-Busch distributors across the country. Anheuser-Busch owns only twelve of them and invests in another four.

The law would also create set the minimum number of retail customers at 25 before a potential distributor could apply for a wholesale license. That is clearly an anti-competitive move to prevent new distributorships from starting up, a concern again for craft brewers. Instead of being able to sell their products to five or six stores to get their business going, they will face a much steeper number of customers requiring greater initial costs.

Imagine any other business trying to start out being told they have to have a minimum number of customers before they can actually open their doors. It’s as if both parties in the legislature think a business can only be started if it’s promoted by Groupon.

Craft brewers would also lose their ability to have retail licenses. Instead of being able to set up small tap rooms that would feature their product as well as the products of other craft brewers, the new law would prevent the craft brewer from setting up more than a location at the brewery to sell their product and one other location. It would also prevent craft breweries from selling their retail locations if they become successful entities.

The law also prevents wholesalers from investing in craft brewers, but it does not prevent wholesalers from investing in publicly traded breweries. Under the proposed change to the law, craft brewers would be effectively cut off from a source of capital from a group of investors that would know their products best.

Here is the problem with including public policy issues in the budget process rather than deal with them separately. While some would argue that limiting competition may protect jobs, others would argue that opening up the brewing industry to more competition will produce more jobs. Including the policy change as one small item in a much larger state budget prevents the needed public policy discussion needed before legislators consider voting on it.

It’s also a problem with trying to pick economic winners and losers as government policy, something Governor Scott Walker and his fellow Republicans campaigned against last year. Protectionism for one large brewer that still has extensive operations in Wisconsin despite moving its corporate headquarters to Chicago can have an adverse affect on those smaller breweries that just might be the next big job provider of the future.

Wisconsin’s craft brewers are just 5% of the state’s beer market right now. However, it’s an industry that’s growing. Nationally craft brewers grew 11% last year. Wisconsin is poised to take advantage of that trend but only if it encourages more competition and more opportunities for growth for the state’s craft brewers.

We should be less concerned about the Anheuser-Busch threat to MillerCoors and more concerned about the dreams of a plumber who may have found his true calling. That’s something we can all drink to.