Surely Surly isn’t Squirrely

I won’t go on (too) long about this, but it caught my attention and it galls me that an averaged-sized microbrewery in Minnesota is being kept from selling beer at its own facility by a strict reading of arcane 3-tier system rules – rules that have been modernized in half of the states without cataclysm.

I’m not in the trenches on this one. It is just an all too familiar story. I’m not from Minnesota and I’ve never even had a Surly beer. I’ve read two articles on the subject, and the quotations that follow came entirely from this piece and this other piece.

These journalists seem like good writers not prone editorializing, which is why I am writing this. Because I am outraged. All I’m going to do is repeat bits from these two pieces and add my own two cents. This is my editorial opinion.

The Background

Surly Brewing currently makes beer in Minnesota. Surly hopes to open brewpub which is costing them $20 million. This venture will contribute to the State’s coffers and commerce through permits, licenses, excise taxes, employment and employment taxes, purchasing of materials, and profit (and more taxes) paid by those who sell Surly’s beer in their networks and locations. [Ed. Who isn’t getting a slice here? It’s the distributors who want their 20-plus percent for stale-storing perfectly good beer in a warehouse while they collect graft, gratuities, or “sales incentives” from the top bidders. They’re P-O’ed that some business might have the gall to make beer and not pay them to ruin it! After all, they are entitled by law to distribute all the alcohol.]

The Board of the Minnesota Licensed Beverage Association (MLBA) appears to be run by some faction of: 1) fools, 2) pantywaists afraid of legal action by the major breweries who fund the distributorships, or 3) chicken littles that imagine an incremental change in outmoded law will result in a total collapse of beverage retailing.

Minnesota Public Radio states that the MLBA “represents Minnesota liquor retailers and wholesalers.” [Ed. Hello? What about the producers – the brewers and the distillers? Some 3-tier system when the agency in charge represents two of the three factions in this age-old farce. Who put these guys in charge and how does a brewer get fair representation?]

The Characters

MLBA Executive Director of Smug: Frank Ball. (Source: minnesota.publicradio.org/)

MLBA Executive Director Frank Ball, who earlier this week reportedly stated “We’re not opposed to any [emphasis added] of this. We want them to build a brewery. Surly has a wonderful product.” (Subtext: but we aren’t saying anything about actually selling said product.) A day later his tune was less catchy “We’re not talking about tires, batteries or accessories. This is alcohol, and it’s highly regulated. There’s a reason this law has been on the books since 1933.” [Ed. Yeah, because do-nothing bureaucrats can’t get past the bathroom mirror to modernize laws that were instituted in the wake of a) the Great Depression, b) 13 years of Prohibition, and c) lobbying by gangster-owned distribution networks].

Omar just wants be able to sell his beer at his new brewpub, but a capricious law says he's too big. (Source: blogs.citypages.com/)

Then we have brewery owner Omar Ansari. Seems sort of like Minnesota’s answer to Sam Calagione or Greg Koch. He has big plans for a destination brewpub that would draw big dollars to whichever city he chooses. “We’re not looking for the three-tiered system to go away. All we’re asking is to sell glasses of our own beer at our own facility.”

While Ball fights back with “You’ve got to play fair and Surly is asking for an unfair advantage. It would be one thing if they were a smaller brewer. But when you make over 3,500 barrels, you’re a pro and there are rules to follow.”

Meanwhile, other brewers in Minnesota, those without such grandiose plans, sound like 3-tier poster boys. According to Ted Marti, the president of Schell Brewing, “Our retailers are our lifeblood; they’re the reason we exist.” [Ed. No. Your customers are the reason you exist. Remember them, the people that buy your beer?] And then you have Mark Stutrud, founder of Summit Brewing. “We cannot survive without the three-tiered system.” [Ed. As lopsided as the 3-tier system is, all Ansari is seeking to do is sell beer at his location. He is not seeking a dismantling of the system. And for the record, total dismemberment of the 3-tier would likely result in Bud Light bars on every street corner like so many Starbucks. Hey how’d that happen?]

Final Analysis

Levy states that the 3-tier “separates manufacturing, distribution and retailing in the beer business.” Not exactly true. It does not prevent a major beer manufacturer from owning a substantial piece of a distributor. Just look at all the beer delivery trucks that say “so and so distributors” on the cab door, while the entire box is paneled with A-B or Miller-Coors hype.

When the major shareholder in the distribution company and the majority of product moved by that distributor are the same mega-brewery, it takes very little effort to: a) slow-pedal the small guy who is obliged by law to contract with a distributor, of which there is often only one! and b) fail to represent their beer fairly in the market because the squeaky palm gets the grease and by other nasty tricks like removing product from retailer shelves and stealing tap positions.

A small brewery signing an obligatory contract is like a promising musician signed on with a major record label. In other words, sorry to hear that. In this day and age of diversified sales and marketing strategies, social media, and mail order beer sales, it is simply outrageous that wholesalers use their bully pulpit, puppet liquor boards, and fat wallets stuffed by the smaller brewers’ competitors to continue to throttle the commerce of small brewers by referencing corrupt rules that weren’t fair when there were only 75 breweries after Prohibition was repealed and are even more outrageous now that there are over 1800 breweries.

I venture to guess that the reason Ansari is seeking a change in the rules is the absurdity of the following scenario. Under current rules, since the brewery is producing over 3,500 barrels of beer annually (more like 10,000), they exceed Minnesota’s brewpub definition. If they wanted to sell beer at their new location they would have to contract with a distributor and pay them 20, 30, 40% for the privilege to move a keg of beer from the brewery to the taps in front. Distributors/wholesalers argue that they are entitled to cut by law. It is bad enough that when they actually move craft beer from point A to B they don’t add that kind of value worth their fees, charging this bribe for doing nothing but a paper chase is un-freakin-believable.

As the old timers say, “For crying out loud!” I am getting surly. Well, I would if I could. Until then, I’m just plain pissed.

TPJ

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10 Comments (+add yours?)

  1. David Moritz
    Feb 24, 2011 @ 22:02:23

    Looks like Minnesota needs some help from the Craft Brewers Association to get the law changed. If it was me, I would build the Brewpub just across the border in another state.

    PA also has stupid liquor laws ans most people on the southern border just go into Maryland to buy beer or wine.

    Arizona list past year just got rid of the last “Blue” law that restricted the sale of alcohol until after 10:00 AM on Sundays. All of these stupid laws need to be repealed!

    Reply

    • palatejack
      Feb 24, 2011 @ 22:35:32

      I’ve observed the Craft Brewers Association walks tenderly on these issues. They won’t come out fully against 3-tier.

      As for the other state idea, Director Ball as much as said ‘if you don’t like it, go elsewhere.’

      Reply

  2. tim
    Feb 24, 2011 @ 22:03:49

    i’m opting for item (1): fools

    Reply

  3. Chris
    Feb 25, 2011 @ 01:39:19

    Why not just form a subsidiary? Or independent LLC’s? Is there something stopping them? Seems to me this has happened before – was there a work around?

    More and more I’m seeing (maybe just because my eyes are open now) states shoot themselves in the economic foot because of ideology or backroom politics. At the end of the day, neither of these serve the State. Ideology sounds nice – but it puts no food on the table. Backroom politics only serve those asking for the deal – not those that provide it.

    Reply

    • palatejack
      Feb 25, 2011 @ 09:42:22

      Good points all around. Creating other entities has problems. For instance, brewery ownership is explicitly detailed to the Feds and you can’t have the same principal owner. If you create a new company with a different name you lose goodwill associated with your brand. Moving to a nearby state with favorable laws is one approach, but you penalize your local customer base.

      California rules forced Gordon-Biersch to split years ago. They were left with a bottling brewery in San Jose, while a restaurant group in Tennessee took over the brewpubs. As a side story, there was also an earlier $11 million investment from a famiglia in Las Vegas that resulted in a management takeover. The restaurant group owns the Rock Bottoms, the G-B Brewpubs, the Old Chicago taverns, and a bunch of other brands, some 200 units altogether. I’m glad we didn’t let G-B sell beer at their brewery, they might have become too big. LOL.

      And as far as the distributor networks and their cozy relations with state agencies, they have been consolidating, buying up smaller outfits. In the end there are fewer craft beer choices because these guys look at cases moved more than margin per case. Argghh.

      Reply

  4. Lash
    Feb 25, 2011 @ 09:37:44

    It will be hard for Surley (I have consumed ((and enjoyed)) most of their beers) to beat the system anywhere in the Midwest unless they want to build an entirely separate brewery at the desired pub. Surrounding States have laws just as strict or even stricter than Minnesota. Parenthetically, and in discredit of my prior sentence, Nebraska’s craft beer threshold is 10,000 barrels.

    I don’ think that the Minnesota State Agency is the problem; the problem is the archaic state laws. The Agency can only enforce what the Legislature gives them. All of the distributor driven laws need to be changed.

    It is ironic that the laws were originally aimed at protecting consumers from being force fed a low quality monopoly product from the Gallo Brothers and the Busch family. Prior to 3 tiered distributor protection both families quickly and mercilessly engaged in exclusive vertical cradle to grave ownership with the sole purpose of eliminating their competition.

    It is an interesting lesson in governance to see how quickly the Gallo family learned to twist a system that they opposed into their own little fiefdom. The truck advertising is a prime example (good thought TPJ). As consumers in a 3 tiered system we should all be able to instantly know the name of our distributor, but nobody really does, and if they do they associate them with the large industrial size beer that they serve. i.e. D and D are the “Bud” guys or State are the “Coors” guys. That consumer disconnect is the best evidence that the system designed to protect consumer choice has failed.

    I find it interesting that Schell and Summit are coming to the defense of the distributors. I don’t think that they fully understand that an old school German population has kept them in demand for many years, and it probably the consumer that has demanded shelf product placement more than the efforts of their contracted distributors. Shame on them!!! I have always had a soft spot for Schells in my gullet, but I might rethink that next time I see one of their sampler packs on sale. I think that they are underestimating the intelligence of their own customer base which I do not appreciate.

    Reply

    • palatejack
      Feb 25, 2011 @ 09:51:54

      “It is ironic that the laws were originally aimed at protecting consumers from being force fed a low quality monopoly product from the Gallo Brothers and the Busch family.”

      Great examples Lash, thanks for pointing those out.

      As for Schell and Summit, they are acting like they are afraid of how their distributor would act knowing they came to the aid of another modestly-sized brewery. Distributors have languished in entitlement and built a war chest for defending it. Who will take them on, a little brewer, a corner market, an ambivalent populace? The Legislature is the only way and even then you so often end up with too much compromise.

      Reply

  5. Lash
    Feb 25, 2011 @ 11:00:38

    “Distributors have languished in entitlement and built a war chest for defending it. Who will take them on, a little brewer, a corner market, an ambivalent populace? The Legislature is the only way and even then you so often end up with too much compromise.”

    So true. A very eloquent and accurate analysis of the situation. The large brewers in Nebraska don’t even have an advocacy presence. They don’t really need it. The wealthy distributors are more than willing to fight their fights. The distributors know that they have a sweet deal. I assume that businessmen don’t pay millions of dollars for a small distribution company that distributes meat to one city in Nebraska. But those same businessmen would gladly throw millions at a monopoly beer distributorship that only.
    Who takes on the system? Good question. One of the owners of a well stocked liquor storein lIncoln was complaining to me that he was tired of customers continually coming in and asking for Stone and Dogfish head beers. As an apathetic consumer apparently seeking his approval, I laughed and said that I had pretty much worked my way through both lines, and would continue to buy Odell. I was wrong!! It will take consumer demand to break down the system. Every consumer that goes in and asks for Stone Ruination or some obscure Oregon Pinot Noir is really the hero in this difficult to understand system.
    Another step that an educated consumer could take is to research which distributorships are actually supportive of consumer wine and beer choice, and encourage their friends that consume the mass production swill to buy their mass production jug wine or beer from the brand exclusively sold by that distributorship. For instance, if it is the Miller distributorship that actually distributes the micros, then we should tell our Bud friends to switch to Miller. Or vice versa. The problem then becomes how to communicate to the distributor the reason for their new found business success. ARGH
    As Midwesterners, we certainly seem to favor compromise rather than conflict. People seem to assume that the answer is somewhere in the middle on all issues that they don’t understand. Unfortunately, middle ground on this issue does not accomplish a whole lot.

    Reply

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