Addressing Problems of Regulation in the Craft Beer Industry Andrew J. Miller
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CRAFTING A BETTER INDUSTRY: ADDRESSING PROBLEMS OF REGULATION IN THE CRAFT BEER INDUSTRY ANDREW J. MILLER* Beginning in the late 1970s, the story of craft beer has been one of impressive economic growth and success. In 1978, there were fewer than 100 breweries in the United States; today, there are more than 7,000. Yet, as the craft beer industry matures, growth in the industry has begun to slow, competition has increased, and consolidation has become more prevalent. Lurking in the background is pressure from Big Beer companies, who have greater resources and who are increasingly acquiring craft breweries to shore up their own positions within the market, and beer distributors, who are often aligned with or controlled by Big Beer companies to the detriment of craft brewers. In response to these unfavorable conditions, this Note pro- poses three changes to the legal landscape, all of which are designed with lobbying influences in mind: 1) expanded self-distribution laws or the cre- ation of state-run distribution centers that would operate alongside private distributors; 2) additional legislation in the form of a “retailer’s law,” which would correct power imbalances in the brewer-distributor relation- ship; and 3) further changes to federal excise taxation on beer. TABLE OF CONTENTS I. INTRODUCTION ...................................................................................... 1354 II. BACKGROUND ....................................................................................... 1357 A. Prohibition & the History of Three-Tiered Distribution .............. 1358 1. Pre-Prohibition ...................................................................... 1358 2. Prohibition ............................................................................. 1360 3. Post-Prohibition .................................................................... 1361 B. Beer Franchise Laws & Distributor Lobbying ............................. 1363 C. Taxes on Beer ................................................................................ 1365 1. Federal Excise Taxes ............................................................. 1366 2. State Excise Taxes & Tax Credits .......................................... 1367 * J.D. Candidate 2019, University of Illinois College of Law; B.A. 2015, University of Iowa. I would like to thank my parents, siblings, and girlfriend—all of whom are exceedingly accustomed to listening to me rant about things that I find interesting, such as this Note—for their unending support throughout my law school experience. I would also like to thank the members and staff of the University of Illinois Law Review for their work on this Note and support throughout the entire process. 1353 1354 UNIVERSITY OF ILLINOIS LAW REVIEW [Vol. 2019 III. ANALYSIS .............................................................................................. 1368 A. Three-Tiered Distribution Model Today ....................................... 1369 B. Current Franchise Laws ............................................................... 1371 C. Excise Tax Rationales ................................................................... 1373 D. Excise Taxation Abroad—The Progressive Beer Duty ................. 1374 IV. RECOMMENDATION ............................................................................... 1375 A. Changes to the Three-Tiered System ............................................ 1376 B. Circumventing Franchise Laws .................................................... 1378 C. Reducing Taxes on Craft and Other Small Breweries .................. 1381 V. CONCLUSION ......................................................................................... 1383 I. INTRODUCTION According to the Brewers Association, a not-for-profit trade association of American brewers, the craft beer industry contributed $76.2 billion to the U.S. economy in 2017.1 This reflects a relatively substantial increase from 2016, when the economic contribution totaled $67.8 billion—already a 21.7% increase from 2014 (the last time the biennial study was conducted).2 To generate this impres- sive income, the industry employed 500,000 full-time equivalent employees; more than 135,000 of these employees were employed directly by breweries and brewpubs.3 Between 2008 and 2016, the number of workers in breweries grew by 120%.4 While these numbers might suggest that the craft beer industry is currently experiencing a boom, sales have begun to stagnate in recent years.5 Stasis in the industry may be due to external factors, such as an increase in the consumption of wine and spirits,6 or internal factors, such as an oversaturation of the market.7 On the other hand, some industry insiders believe that this data reflects the sta- bilization of a maturing industry, one that could not have maintained the same growth rates going forward.8 Lending further credence to this argument is the 1. Economic Impact, BREWERS ASS’N, https://www.brewersassociation.org/statistics/economic-impact- data/ (last visited May 11, 2019). This number reflects income from all levels of the three-tiered system of brew- eries, wholesalers, and retailers, as well as non-beer products sold at brewpubs and taprooms such as food and merchandise. Id. 2. Jim Vorel, Craft Beer Had a $67.8 Billion Economic Impact in 2016, PASTE MAG. (Sept. 26, 2017, 11:39 AM), https://www.pastemagazine.com/articles/2017/09/craft-beer-had-a-678-billion-economic-impact-in -20.html. 3. Economic Impact, supra note 1. 4. Derek Thompson, Craft Beer Is the Strangest, Happiest Economic Story in America, ATLANTIC (Jan. 19, 2018), https://www.theatlantic.com/business/archive/2018/01/craft-beer-industry/550850/. 5. See Craft Beer in America Goes Flat, ECONOMIST (July 8, 2017), https://www.economist.com/news/ business/21724864-slowing-beer-market-and-might-ab-inbev-has-small-brewers-worried-craft-beer-america. 6. Id. 7. See Brad Tuttle, Too Much of a Good Thing? Concerns About Craft-Beer Saturation, TIME (July 4, 2013), http://business.time.com/2013/07/04/too-much-of-a-good-thing-concerns-about-craft-beer-saturation/. 8. John Kell, How Craft Beer’s Popularity Is Hurting Craft Beer, FORTUNE (Mar. 28, 2017), http://for- tune.com/2017/03/28/craft-beer-sales-fall/. No. 4] CRAFTING A BETTER INDUSTRY 1355 fact that market consolidation has become abundant, a phenomenon that often occurs after market maturation.9 Consolidation is not necessarily negative; studies have shown that there can be both benefits and detriments from market consolidation.10 Market consolida- tion in the beer industry, and in general, increased during Ronald Reagan’s tenure as the Department of Justice (“DOJ”) relaxed enforcement of antitrust laws.11 The beer industry has seen a plethora of consolidation: over the last thirty years, forty-eight major breweries have consolidated to become two giant breweries today.12 Jim Koch, the founder of Samuel Adams, has pointed out that market con- solidation has not been benign in the beer industry.13 Discussing the merger of Molson Coors and SABMiller (then “MillerCoors”), and the merger of An- heuser-Busch and InBev (then “AB InBev”), Koch noted: The immediate result was a 6 percent increase in beer prices and the end of a decades-long decline in real beer prices. Drinkers began paying almost $2 billion a year more for their beer. At least 5,000 Americans lost their jobs, and cost cutting followed, saving the new owners an estimated $2 billion.14 Eight years later, the DOJ further approved the merger of SABMiller and AB InBev (on the condition that SABMiller sell off its stake in MillerCoors ),15 now the largest brewery in the world.16 The harmful effects of recent consolidation in the industry have been two- fold. First, brewery consolidation has indirectly led to consolidation in a related industry: wholesalers.17 Wholesalers, also known as distributors, are legally 9. For a timeline of craft beer company acquisitions, see The Definitive Timeline of Craft Beer Acquisi- tions, VINEPAIR, https://vinepair.com/craft-beer-sales/ (last visited May 13, 2019). See also Industry Lifecycle, INVESTOPEDIA, https://www.investopedia.com/terms/i/industrylifecycle.asp (last visited May 13, 2019). 10. Daniel Thomas, Are Big Mergers Bad for Consumers?, BBC NEWS (Oct. 30, 2015), http:// www.bbc.com/news/business-34666150. 11. Thompson, supra note 4. 12. Id. 13. Jim Koch, Is It Last Call for Craft Beer?, N.Y. TIMES (Apr. 7, 2017), https://www.nytimes.com/ 2017/04/07/opinion/is-it-last-call-for-craft-beer.html. 14. Id. 15. The 58% stake was sold back to Molson Coors for $12 billion. Lisa Brown, A-B InBev Finalizes $100B Billion Acquisition of SABMiller, Creating World’s Largest Beer Company, CHI. TRIB. (Oct. 11, 2016, 7:22 AM), http://www.chicagotribune.com/business/ct-megabrew-ab-inbev-sabmiller-merger-20161010-story.html. Be- cause MillerCoors is now owned by Molson Coors, operating as the company’s United States division, any non- historical references below are used interchangeably. 16. See Tara Nurin, DOJ Approves Largest Beer Merger in Global History, with Significant Conditions, FORBES (July 20, 2016, 3:34 PM), https://www.forbes.com/sites/taranurin/2016/07/20/doj-approves-largest- beer-merger-in-global-history/#49dc27e413df. For an ex ante discussion of the merger, see Andre Barlow, 1 Drink Too Many: Why Consumers Will Lose with Beer Merger, LAW360 (Nov. 12, 2015, 5:21 PM), https:// www.law360.com/articles/726137/1-drink-too-many-why-consumers-will-lose-with-beer-merger. 17. Koch, supra note 13 (“This brewer’s duopoly