Section 1. The eighteenth article of amendment to the Constitution of the United States is hereby repealed.
Section 2. The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.
Section 3. This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by conventions in the several States, as provided in the Constitution, within seven years from the date of the submission hereof to the States by the Congress.
When we left off in part 1, Prohibition was just getting started. With the 21st amendment, the 18th amendment was overturned in Section 1. Instead of leaving well enough alone, they then preceded to fuck things up with Section 2.
And that is where this episode takes place.
Part 2: An Interlude on the Three-Tier Laws
With the power to regulate liquor given to the states, all the states developed a form of the three-tier system. Due to the laziness of congress, DC didn’t, so they get to operate in a much more reasonable fashion. With 50 different versions, I can’t cover every state, but will give a general idea of how it works and some examples of some of the exceptions.
What are the three tiers? They are production, distribution, and retail. Production would be your breweries, distribution your beer distributors, and retail your stores, bars, and restaurants. The laws, in general, prevent anyone from owning a company in more than 1 tier. The primary reason is to prevent the problem of “tied houses”, although I showed at the end of Part 1 that there was no need for a government solution. Tied houses are retailers that are contractually obligated to only sell from a certain brewery or brewery group.
The production and retail layers are obvious, but how does the distribution layer work? Distributors have a state-enforced monopoly on distributing to retailers contracted brands. Let’s say I am a new brewery, I would reach a deal with a distributor to sell my beers (or certain brands of my beers) in a defined geographic region, say a county, or sometimes a tiny gerrymandered section of a city. Once that contract was signed, the distributor would have the sole rights to sell that brand in that territory for all eternity. It is next to impossible, or very expensive at least, to move that contract from one distributor to another. And you are still stuck working with a distributor. Don’t even think about trying to negotiate special terms or restrictions with the distributor, when it comes to any area that is important, that is defined by state law and any terms different are null and void.
As should be obvious, distribution is the place to make money in the beer world. A Bud distributorship is about as close as you can get to a license to print money. See the McCains, for example. Sure, you have to have sales staff, but it isn’t like it is that hard to sell Budweiser products. Distributors do provide a few benefits. Many will, where allowed by law, clean the beers lines for bars/restaurants. And for stores, they will provide shelf layouts and even “organize” the shelves. Guess whose products end up front and center? It isn’t the products from the small craft distributors.
There are a couple of problems caused by this distributions system. In the ’90s, Budweiser had a “share of mind” program in which they were encouraging distributor consolidation (eliminating those gerrymandered districts I mentioned earlier). They provided loans and etc. to the distributors expanding and buying out “competitors”. To get this benefit from A-B, you had to be focused on their products. If you sold Bud and had a nice craft portfolio, you were a target for getting bought out. It was part of their effort to kill off microbreweries.
A second problem was that sometimes a distributor would sign a contract and then make no effort to sell the product. They were “buying” the brand to keep it out of competitors hands. Finally, and related, is the difficulty in moving from one distributor to another. The distributor’s argument was that they had created the value in the area for the brand through their marketing efforts, so should be rewarded. Ask any brewer about this, see what they say. A decade back, Bell’s was unhappy with their Illinois distributor, they stopped distributing to the state to force a reasonable settlement as the distributor wouldn’t give them up for a price Bell’s would accept. But Bell’s was in a financial position different than most small breweries.
Enough about distributors, what are some exceptions to the three tier laws? The most obvious is brewpubs. They are both production and retail. Different states handle this differently. In some, you can choose to get the exception, but then you can’t be a distributing brewery, you can only sell on site. You must choose up front whether you will distribute or sell on-premise, but you can’t do both. Other states allow both.
Another exception in some states is self-distributorship. You can distribute your own product. Generally, there is a size limitation on this, like 10k barrels. Once you are producing above that limit, you have to go to the regular distribution network.
The strictness of the rules varies also. There was a brewery that opened in Chicago around 2000 that could not find a distributor, all the locals had got burned by the collapse of the 1990s microbrewery market and weren’t interested. They started their own distributorship. Everything went fine until they tried to renew their licenses the second year. The state of IL realized they had made a mistake in issuing both licenses to the same people. The two owners (who were brothers), “sold” the distributorship to their wives. This worked for IL, but wouldn’t fly in KY, because KY restricts not only a person’s ownership by their spouse’s also.
And that is enough about that. Whatever year I get around to part 3, it will be back on the history. I should get to the actual core of the series in part 4.