Brewers of Pennsylvania

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PA Laws Vex Small Brewers

Thursday, June 20, 2013

By Bill Covaleski

Let’s say you’re a Pennsylvanian who attends a local beer festival and discovers a great, Pennsylvania-brewed beer that you haven’t tried before. You attempt to locate a store in your area where you can buy that great beer, but you can’t. Why? Because the wholesaler for that territory controls the distribution of that great beer and has decided it won’t be sold in your neighborhood.

Wholesalers are part of a government-mandated three-tier system. Essentially, brewers can sell their products only to wholesale distributors, who sell to retailers, who then sell to consumers. Brewers must therefore rely on wholesalers to sell their beer.

While the debate over privatizing Pennsylvania’s state wine and liquor stores continues, a separate set of laws related to the state’s brewing industry remains in place. They threaten the growth and success of small Pennsylvania brewers, as well as small brewers from other states.

These archaic laws, which are exempt from antitrust statutes, mandate that a single wholesaler has exclusive distribution rights to brewers’ products in a given territory. That’s true regardless of how well or poorly the wholesaler services a brewer. It is, in effect, a state-mandated monopoly.

Pennsylvania brewers believe there is a fair and commonsense solution. We believe that when a brewer’s product accounts for less than 20 percent of a wholesaler’s volume, the brewer should be free to seek the best possible distributor. The brewer should have the power to compensate the existing wholesaler fairly for its work and then move on to a new wholesaler that can help it build the business. In cases where an agreement on fair market value can’t be reached, binding arbitration could ensure a timely resolution.

Franchise laws that bind brewers to wholesalers made sense when they were adopted decades ago. Small wholesalers that generally carried beer from only one large brewer needed protection from that brewer. The fear was that a brewer could pull its product from a wholesaler and put it out of business.

Today the tables have turned. Pennsylvania wholesalers have consolidated, and the few that remain have grown large and powerful. Many now carry the products of hundreds of breweries. Small brewers have little or no leverage because wholesalers depend on much larger brewers for the bulk of their revenue. Any effort to cancel a contract with a wholesaler is expensive, often taking years of litigation while the company retains exclusive rights to sell the brewer’s beer.

Like any other business in Pennsylvania, brewers deserve the right to determine where their products are marketed and sold within the commonwealth. If the Hershey Co.’s wholesalers controlled candy distribution the same way beer wholesalers control beer distribution, it would violate antitrust laws.

Pennsylvania’s brewing industry, which includes more than 100 small breweries, has a direct annual economic impact of $1.1 billion and employs 60,000. These facts alone argue for a reexamination and update of the commonwealth’s laws.

The Brewers of Pennsylvania support a fair, three-tier beer distribution system. But it’s time to overhaul the laws related to small brewers and distribution. Only then can Pennsylvania’s small breweries make necessary capital investments and create even more jobs.

The growth of craft beers has been a welcome phenomenon for beer drinkers throughout Pennsylvania. It has occurred despite an uneven playing field that favors giant brewers and powerful distributors.

The current antiquated system threatens the growth and success of small brewers. Pennsylvania needs to reform it to address their challenges and needs.

[Bill Covaleski is president of Brewers of Pennsylvania and a cofounder and co-brewmaster of Victory Brewing Co. in Downingtown.]