No Small Beer – The Power of Business Incumbency

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Beer flight at Kunstler

Let’s not be naïve: there’s no such thing as a “free market.” In the beer world, especially to craft brewers in Texas, however, the market seems particularly unfree. You probably shouldn’t look to the government so much as other businesses for the unfree market.

At the small end of the beer-making market, Brent Deckard of brewpub Kunstler Brewing – close to where I live in San Antonio – has hit weird restrictions in his first year of operations. I enjoy talking to new entrepreneurs like Deckard because they are full of fresh outrage about restrictions on their ability to make a living.

Kunstler is licensed as a brewpub, which means customers may drink beer brewed on premises. Customers may also purchase a limited amount of beer “to go,” for home consumption. That brewpub-style business has only been legal since 2013. Kunstler may not, however, sell any other brewer’s beer on premises. That’s illegal. They can, however, sell others’ wine or cider, which makes no particular sense, especially when compared to the beer restriction. Kunstler could legally contract to pay a fee to a beer distributor to sell other brewers’ beers on his premises, even though the beer remained at his brewpub the whole time.

Why should we care about this labyrinth of brewpub laws? Only that in a highly unfree market, consumers always get less choices, at higher prices. And entrepreneurs have fewer ways to serve the public.

Moving up to a somewhat higher scale of production, restrictions also seem to make little sense to Eugene Simor, President of Alamo Beer Company. He operates under a beer manufacturer’s license, which allows you to drink beer at his facility, located just east of downtown San Antonio. You can buy his product by the case in grocery stores. But do not dare purchase his beer directly from his facility to take away and consume at home. That’s illegal. Because, well, why exactly?

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The incumbents are the beer distributors

Technically, under Alamo’s manufacturer’s license, Simor’s brewery can’t do what Kunstler can do, which is to sell their own beer “to go.” And why is that? Well basically, distributors need to get paid. Only small brewpubs can sell their stuff “to go,” while larger brewers can’t, in order to protect distributors from the free market.

Says Simor,

“I am disgusted that our elected officials continue to side with the big money donating distributors at the expense of the hard working small brewery owners. Texas is the only state that does not allow a small brewery like mine to sell a case of beer directly to customers.”

Now, there are obviously solid reasons to regulate alcohol sales and distribution. Few people would advocate a libertarian “free-for-all” in the beer market, in which my 8 year-old could fill up her growler with an IPA for her birthday party, or my 12 year-old could manufacture some dangerous-to-consume concoction of water, grain, hops, and yeast. Especially if she brewed a Berliner-style sour. Gross! Anyway.

 

As Charles Vallhonrat, Executive Director of the Texas Craft Brewer’s Guild explained to me, post-Prohibition regulations in Texas (and most states for that matter) have strongly split up the three roles of making, distributing, and selling beer. Businesses that want to engage in more than one of the those three activities have traditionally been severely restricted, in part for safety reasons, and in part to protect one kind of business from pushing around the other kind in an uncompetitive manner. The growth of craft brewing over the last two decades has represented a challenge to this traditional system, as small-time makers of beer have sought to sell directly to their customers in a variety of ways, cutting out the distribution step.

As Vallhonrat tells it, craft beer makers are not looking to upturn the system, but rather to loosen restrictions. In Texas they got their wish in 2013, which allowed for brewpubs, although within a set of still-complicated rules, as brewers Deckard and Simor have found. Craft brewers view a 2017 law passed in Texas as pushback by distributors and large beer makers, who sought to limit the volume of direct-to-customer sales of brewers while preserving the status quo around distribution.

Rick Donley, President of The Beer Alliance of Texas, which represents distributors’ interests, disagrees with some of my characterization of the tensions between crafter brewers, distributors, and the 2017 law.

“Beer distributors absolutely regard the craft sector as important customers. Beer distributors look forward to continuing to partner with crafts as our customers, as they use our delivery and marketing systems to grow their brands,”

he wrote me. The Beer Alliance points out that the 3-tier system has served the market well, and that 2017 restrictions do not impact the overwhelming majority of craft brewers in Texas. The Beer Alliance, Donley continues, supported the 2013 openings for brewpubs.

Oddly, not everyone cares about beer, or the minutiae of beer laws, so let me try to make my view of this fight universally applicable to other businesses and industries.

alamo_beerThe central issue that a brewpub or beer manufacturer faces is not one of big government versus free markets. Because again, free markets don’t exist. I see the central tension as incumbent versus challenger.

This same issue – incumbent versus challenger – drove the Uber/Lyft versus taxi drivers’ fight that played out in cities worldwide over the past 4 years. It’s what a lot of telecom and media fights have been about since the 1980s. Since technology companies like Facebook, Amazon, Netflix, and Google miraculously transformed themselves from upstarts to incumbents over the last decade, the interesting upcoming fights with the regulatory state will hinge on to what extent they have captured the ability to shape laws that favor their businesses.

Upstarts – like craft beer makers – have to work a lot harder to make the case that the regulatory state should crack open a bit more to allow them to meet customer demand. That’s a hard fight.

On the other hand, many voters like variety in their beer, and they like to pay less for beer. So the long-term shape of the regulatory state remains in dispute.

 

A version of this post ran in the San Antonio Express News and Houston Chronicle.

 

See related posts:

Entrepreneur’s Journey – Opening a brewpub

 

 

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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