by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
This year has seen much talk already of reforming and modernizing North Carolina’s alcohol policy. An earlier research brief talked about the importance not just of making the long overdue big change of moving to a license system, but of modernizing here and there, making practical fixes in individual areas of law.
Companion bills before the General Assembly would address one area in need of a practical fix. It is the state’s notorious distribution cap on breweries, which ends up promoting the wholesale distribution oligarchy at the expense of growing breweries. It’s been an issue for several years, leading to a lawsuit last year.
Under current law, breweries cannot produce more than 25,000 barrels of beer per year without having to contract with a distributor. In practice, it forces growing breweries to choose between staying artificially small or turning over all distribution to a third-party wholesaler that could have divided loyalties to bigger brands.
As my colleague Jon Guze explained:
While there are a small number of exceptions for small brewers and vintners, larger producers are not allowed to sell directly to retailers at all. Instead, they must deal with a limited number of licensed wholesale distributors who enjoy a profitable oligopoly on this trade. In addition to enriching the distributors at the expense of retailers and consumers, this expensive, three-tier system of producer/distributor/retailer protects the big producers by giving small producers a powerful incentive to stay small. …
Speaking recently at a conference at Johnson and Wales University, [Olde Mecklenburg Brewery’s director of sales] Ryan Self emphasized another reason why the brewing company is reluctant to exceed the 25,000 barrel-per-year threshold: turning its marketing over to the distribution cartel would mean firing 11 of its people.
Here is how North Carolina compares with other states in terms of allowing breweries to self-distribute. It’s one of the 36 states that allow breweries to self-distribute, which is good. But it’s one of the more restrictive states in that cohort — 24 states give breweries more freedom to self-distribute than North Carolina. Eight of those states have distribution limits higher than 25,000 barrels, ranging from 30,000 to 3000,000 barrels, and 16 don’t have distribution limits.
So North Carolina currently ranks 25th out of the 36 states that allow breweries at least some ability to self-distribute.
Senate Bill 246 wouldn’t go as far as those 16 states without distribution limits. It would, however, move North Carolina breweries into a relatively freer environment.
If passed into law, no longer would a brewery be required to contract with a third-party wholesaler if it wanted to produce over 25,000 barrels. Breweries could self-distribute up to 50,000 barrels, and if they wanted to brew more to sell to consumers, wholesalers, and exporters, they could produce up to 100,000 barrels. Breweries producing over 100,000 barrels would still be required to contract with a third-party wholesaler.
Such a change would give North Carolina breweries more room to grow and expand and still maintain control over their product as they wish. It would be an overall boon to the state’s craft breweries, but it would still maintain the three-tier system.
If it passed, how would North Carolina rank among the 36 states that allow breweries to self-distribute? The state would move up in the rankings to 20th.
The problem with ranking, of course, is that there’s a 16-way tie for first place. The instance a state placed any limit on breweries’ ability to self-distribute, the best ranking you could hope for is 17th.
That spot is currently held by Wisconsin. Its distribution cap for brewers is 300,000 barrels.