(Lansing, MI) – Michigan’s small brewers are mobilizing support for recommendations released by the Department of Licensing and Regulatory Affairs (LARA) Friday, June 29 for updating the state’s liquor regulatory rules and regulations. These recommendations are the latest in a series of reports issued by the Office of Regulatory Reinvention (ORR).
The Liquor Control Advisory Rules Committee that developed the recommendations was comprised of individuals representing all segments of business, government, and society that are impacted by liquor laws including representatives of law enforcement, economic development, public health and safety, large and small suppliers, distributors, and retailers.
Brewpub owner Matt Greff, who serves on the Government Affairs Committee of the Michigan Brewers’ Guild (MBG) was tapped to represent the interests of Michigan’s craft brewers. According to Greff, the recommendations regarding Michigan breweries can pretty much be categorized into three key areas of interest to Michigan’s small breweries:
- Regulatory parity with Michigan wineries
- Franchise Law Exemption for very small breweries
- Creation of a single brewery license
Regulatory Parity With Michigan Wineries
In a statement delivered during the ORR’s Friday press conference, Greff explained that “LCC rules and laws relating to Michigan’s small wineries provided a fantastic blueprint for our recommendations [regarding small breweries].” These provisions are already in place for small wineries and have proven effective in promoting the growth of the industry and increasing consumer choice while at the same time preserving a free and independent distribution tier and protecting the public health and safety.
Over the years inconsistencies have developed in the liquor code when changes made in one part of the rules or code regarding one license type were not carried over to other places in the rules or code for similar license-types. The proposed changes would clean up the discrepancies in the code making it fair, consistent, and predictable.
The two major parity changes are as follows:
- Direct Sales to Special Licensees – The current code allows the holder of a special license (like a non-profit fundraiser) to purchase directly from small wineries, micro-distillers, wholesalers, and retailers who hold a carry-out license. Microbrewers are currently the only suppliers from whom they are not permitted to purchase directly.
- Direct Sales to Retailers – The current code permits Michigan wineries to sell their products directly to retailers but does not provide small breweries with the same opportunity. Self-distribution encourages economic development by allowing new small breweries to be more financially viable while they build volume. It also allows them to build equity in their brand before entering into contract negotiations with wholesalers. The top 9 brewing states in the US (measured by the number of breweries per capita) permit small brewer self-distribution.
Craft beer lovers in Michigan may be surprised to know that one of the state’s fastest-growing brands almost didn’t make it to market.
“When we started Short’s it was hard to find a distributor willing to carry our brand,” says Scott Newman-Bale, Partner/CFO at Short’s Brewing Company. “Since we were a small relatively unknown brewery, most local distributors were not interested in what we had to say or offer. In the end we took the unusual step in signing with a state-wide distributor. However, if we had been able to self-distribute like Michigan wineries, we may have entered the market at a higher profit margin, simultaneously building our brand equity and our company to such a place that initial contract negotiations could have been quite different.”
Franchise Law Exemption For Very Small Breweries
Franchise laws were enacted to protect distributors from the undue influence and bargaining power of their largest suppliers. They essentially give the distributor ownership of the supplier’s brand as soon as a distribution contract is signed. This locks the supplier into a lifetime contract and gives the distributor the ability to sell or transfer the brand to another distributor without the supplier’s consent. While there are technically remedies in place, they are out of the financial reach of very small suppliers who cannot afford to purchase the rights to their own brand back from the supplier or fight for them in court.
The MBG agrees with the Brewers Association (the national trade group established to promote and protect small and independent American brewers) that “applying those laws to relations between small brewers and wholesalers is unfair and against free market principles.” Where franchise laws exist, the BA believes that any brewer contributing less than 20% of a wholesaler’s volume should be exempted from those laws and be free to establish a mutually beneficial contract with that wholesaler.
The ORR recommendations regarding the franchise law were much more modest than the BA recommendations, setting the limit for exemption from the Franchise Law to a mere 3% of the distributor’s book of business. This would give small start-up brewers the ability to establish enforceable contracts with distributors that both parties agree are fair and equitable. And it would give them the ability to discontinue or re-negotiate the terms of their contracts as their business grows, their needs evolve, and they create greater brand equity.
“Many wholesalers believe the current franchise laws give them the ability to determine a small suppliers home,” says Brett VanderKamp, President at New Holland Brewing Company. “Once a brewery signs a contract with a wholesaler, that wholesaler owns their brand’s distribution rights for the given territory and is free to sell or trade those rights to other wholesalers. The supplier/brewer is supposed to have an opportunity to approve or reject the transfer, however those actions are often met with opposition and legal threats.
“We once had a situation where a wholesaler we had chosen to do business with was negotiating the sale of our brand to a wholesaler that we didn’t think would do a good job representing us in the market. We offered to match the sale-price, intending to redirect the sale to a wholesaler of our choosing. Not only was the offer refused, but we were threatened and eventually pushed to a different wholesaler, against our will. Franchise laws were put in place to provide stability for small distributors who invested in brands and risked being cancelled by large suppliers. Present day, it is allowing large wholesalers to unfairly control small suppliers.”
Creation of a Single Brewers License
Michigan’s current licensing structure for small brewers divides them into brewpubs and microbreweries. Brewpubs are permitted to purchase and serve beer, wine, and spirits through the state’s distribution system but are prohibited from distributing their own beer. Microbreweries are permitted to distribute their beer but are prohibited from purchasing and serving beer, wine, and spirits through the state’s distribution system.
This licensing distinction is unnecessarily complicated and restrictive. Many other states have a single small brewer license which allows the licensee to produce and distribute their own beer as well as to purchase alcohol through the normal distribution channels in the state.
Arcadia Brewing Company Founder and CEO Tim Suprise explains how this unnecessary restriction made it much more difficult for Arcadia to get into the black after opening their Battle Creek location in 1996.
“We established Arcadia Brewing Company as a microbrewery and restaurant and very quickly realized that our inability to offer a full bar put us at a major competitive disadvantage with other area restaurants. Any entrepreneur will tell you that the key to success is the ability to revisit and update your business model in response to market forces. By unnecessarily and artificially limiting the types of goods and services small breweries can offer, the state is imposing barriers to economic success at a time when it should be doing everything it can to support business and job growth. We were one of the lucky small breweries who survived our start-up years, but having a more level playing field with other local restaurants, and with small brewers from neighboring states certainly would’ve accelerated our growth throughout economically depressed periods.”
The Battle Ahead
“Even though these recommendations are fair, have been proven effective in other states and other sectors of the Michigan market, and will have a very positive impact on economic development and job creation in the state, we know that this is going to be an uphill battle” Greff asserts. “The wholesalers are going to fight any changes that improve the position of small breweries – and let’s face it, they have a lot more money than we do.
“Privately they will admit that they would rather have the breweries sell directly to small non-profit events because they are a hassle for them and they don’t make any money, but as an organization, they have been unwilling to support even that simple change.
“But even though we don’t have the support of the wholesalers, we do have the support of Michigan’s wineries, small brewers, and tens of thousands of Michigan craft beer lovers in the state. And for the first time, we also have the support of the administration. So we are crossing our fingers that we will also be able to gain the support of a business-oriented legislature.”
The role of the Michigan Brewers Guild Government Affairs Committee (GAC) is to monitor and assure a healthy brewing industry within the state by developing and articulating to the industry a consensus from within our membership as it relates to regulatory, legislative and governmental affairs. By working together to protect its mutual interests in the governmental and legislative arena, it strengthens relationships with each other in other arenas. For more information on legislation related to brewing and the Michigan beer industry, please contact [email protected].