Craft Beer Conundrum: Study Says Breweries Face Barriers

Seth Richardson Contributor
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Craft breweries are facing a far more difficult time than they need to, according to a new study from the Mercatus Center at George Mason University.

“‘Build a better mousetrap,’ the old saying goes, ‘and the world will beat a path to your door,’” the study says. “Brew a better beer, however, and regulators will tie your door shut with red tape.”

The study highlights particularly difficult barriers to entry in the state of Virginia, where it is nearly as hard to start a brewery as it is to start a small business in Venezuela and China.

Laws held over from Prohibition make it very difficult for smaller craft breweries to enter the market, while simultaneously giving larger breweries such as Anheuser-Busch and Coors a market advantage.

“Limiting the ability of producers to both sell and promote alcohol directly to consumers was the historical social justification for the current regulations, but now there are also incumbents and more established firms that gain financially from the maintenance of these regulations,” the report reads.

In Virginia, it can take up to 177 days just for the approval of a brewer’s license, label and recipe. Once the brewer actually starts, the study says he or she must pay $2,150 if brewing fewer than 10,000 barrels — and $4,300, if more.

And this is just the cost. A brewer may also lose a license for seemingly draconian reasons, such as if the state believes he or she is “physically unable to carry on the business,” is not a person of “good moral character and repute,” fails to demonstrate the “financial responsibility sufficient to meet the requirements of the business,” or cannot “speak, understand, read and write the English language in a reasonably satisfactory manner.”

Bear in mind all of these regulations are subjective to the state. If at any time they feel a brewer lacks moral character, the brewer may be forced to cease operations.

But the restrictions aren’t exclusive to Virginia. Take Florida, which recently passed a law stating any brewery making more than 2,000 kegs of beer a year must sell to distributors before selling back to craft breweries for their own tasting rooms. Or that until recently, it was only legal to sell beer in containers less than 32-ounces or more than 128-ounces, which excludes the 64-ounce growlers popular at many craft breweries.

It’s because of these regulations that Matthew Mitchell and Christopher Koopman, the authors of the Mercatus study, say the craft brewing industry is in what is called a “tragedy of the anticommons.” This arises when “multiple parties have the ability to exclude access to a resource through taxation, regulation, or other means,” leading to a stagnated market.

The authors provide a historical example to put the problem into context: During the Middle Ages, the Holy Roman Empire controlled the Rhine River, including trade along the region. When the Holy Roman Empire fell, separate barons took over and started charging separately, not taking into account the actions of the others. Eventually, trade along the Rhine slowed to a crawl and greatly hurt everyone, including the barons themselves.

Like these robber barons, several overlapping entities at the local, state, and federal level have the ability to exclude access to the craft brewing market through taxation and regulation,” the report says. “Further, the political interests motivating the actions of each regulator are distinct from one another, diminishing the likelihood that any one regulator will account for the actions of the others.”

Virginia officials, however, say they haven’t seen any economic stifling. In an email to The Daily Caller, Department of Alcoholic Beverage Control public relations specialist Carol Mawyer said the business is growing.

“We’ve seen a rise in the number of craft breweries across Virginia,” she said. “The Virginia Craft Brewers Guild’s website notes that since [a law permitting breweries the right to sell beer for on-premise consumption], the craft beer industry in Virginia has seen 75 percent growth in the number of breweries, supporting 8,123 full time employment jobs and granting the commonwealth an economic impact of $623 million.”

But this growth still occurs amid a lot of regulations. Mitchell and Koopman argue for a more libertarian approach to the craft brewery industry.

“Instead, policymakers should focus on more direct, effective, and less problematic solutions to reduce the tangle of regulatory burdens encountered by craft brewers,” the report says.

Such is the case with South Carolina, where Gov. Nikki Haley recently signed into law the “Stone Bill,” despite strong opposition from the “Big Beer” industry. Breweries can now sell food onsite with no consumption cap, obtain a retailers permit, and distribute to wholesalers all under one roof after a simple conversion of the current licenses, which the law made easier to do.

Craft brewery connoisseurs rejoiced at the relaxation of regulation. And according to Mitchell and Koopman, it makes sense for both consumers and producers: Give people access to both production and consumption and the money will flow.

Similar legislation targeted at craft breweries has made the round in states like New York, where craft breweries operate on a special “farm brewery” license, and Illinois, where craft breweries have special exemptions for operation.

Even Virginia passed targeted legislation. SB 596 was approved in April of 2014. It takes the aforementioned $2,150 licensing fee and lowers it to $350.

And the restrictions have not scared away larger microbreweries. California-based Stone Brewing Co., for which South Carolina’s Stone Bill is named, is looking at Richmond for its east coast hub, according to WTVR.

But there’s still a slight hiccup with the policy route, according to Mitchell and Koopman.

“These targeted privileges, however, create their own set of inequities an inefficiencies, encouraging resource wastage through rent-seeking and unproductive entrepreneurship,” the report says. “Moreover, they are policy solutions to a policy-created problem.”

Like in Illinois, where instate breweries were allowed the right to self-distribute. That is, until 2010 when Anheuser-Busch filed a lawsuit claiming unfair practices against out-of-state brewers. That action led to the creation of craft brew licenses allowing companies to brew 15,000 barrels and self-distribute 7,500 barrels.

Now, the Illinois Liquor Control Commission is proposing regulations that would limit brewpubs to 1,200 barrels of beer for offsite consumption. This has created quite the legal conundrum for both the state and small brewers hoping to expand.

Hence comes the problem, the report says: Legislation on top of legislation until the market is so crowded, it’s hard to navigate. Instead, Mitchell and Koopman say the only way to really even out the market for the craft brewery industry is the laissez-faire approach.

“Eliminating regulatory burdens for all firms would allow brewers to succeed or fail on the basis of their ability to provide the greatest value to consumers at the lowest cost to society.”