Craft brewers win small victory in Springfield, but the real winners are distributors

June 4, 2013

(Flickr/DR000)

Illinois' booming beer scene will operate a little bit differently after laws governing the industry were tweaked in Springfield this month. The General Assembly approved two measures that subtly change the power structure behind the brewing industry.

First, the craft brewer's license was revised to allow small breweries to make more beer. Second, brewers were prohibited from owning any interest in beer or liquor distributors.

To understand why these changes were made and how they’ll impact drinkers in Illinois, it helps to look at how breweries build their business. The cheapest, most basic way is to brew a small amount of beer and sell it directly to a bar or liquor store. That gets actual customers consuming your product and hopefully looking for it again in the future.

Unfortunately for the fledgling brewer, the three-tier system devised after Prohibition aims to keep beer producers from distributing their product themselves (it also aims to keep brewers from selling directly to the public).

“I have a great relationship with my distributor. When they’re here picking up my beer we’re friends, but then they go to Springfield and work against my interests.”
- Josh Deth, Revolution Brewing

Despite the intentions of the three-tier system, until 2010 Illinois law was written loosely enough that breweries could legally self-distribute though few actually did.

However, all that changed when Anheuser-Busch tried to buy out City Beverage distribution. The Illinois Liquor Control Commission blocked the purchase, so Anheuser-Busch filed a federal lawsuit claiming unfair treatment. They claimed allowing Illinois brewers to self-distribute meant they had to allow Anheuser-Busch, an out-of-state brewer to do the same. The ruling that followed prompted the Illinois legislature to revise the Liquor Control Act of 1934 to treat small brewers differently than giants like Anheuser-Busch.

That led to the craft brewer’s license, made law in 2011. It’s original form allowed holders to brew up to 15,000 barrels per year and self-distribute up to 7,500 barrels. For reference Goose Island sold 127,000 barrels of beer in 2010 before being purchased by Anheuser-Busch.

This brings us to a more pricey way new brewers build their business- by opening a brewpub. Brewpubs don’t fit neatly within the three-tier system since beer producers are retailing their beverages directly to drinkers. Still, they can be an incredible accelerator for new brewers and beer laws are often written with exceptions for brewpubs.

That’s the route Josh Deth took when he opened Revolution Brewing in Logan Square in 2010. The two-hour waits for tables proved Revolution could skip the self-distribution step. Soon Deth was working to open a production brewery in a building on Kedzie Avenue that could accommodate a 100,000 barrel brewing system. At the time Illinois law seemed to allow a brewpub owner to also operate a traditional brewery provided they’re in different locations.

However, before the Kedzie facility opened the craft brewer’s license was conceived. Though all the terms weren’t agreed upon yet, Deth was told it would become a requirement for brewers to also own brewpubs. So he signed up, hoping it would also allow him to make full use of his massive new facility on Kedzie.

When the final language limited craft brewers’ output to 15,000 barrels, Deth went ahead with his business plan undeterred. But he redoubled his lobbying efforts to raise the ceiling.

“The last thing we should be doing is putting caps on the growth of business in Illinois,” Deth said in a recent phone conversation.

This year he enlisted lobbyists and the Illinois Craft Brewers’ Guild to revisit the craft brewer’s license.

Their goal was to increase the limit to 200,000 barrels a year. But the bill that passed this week only raised the limit to 30,000.

Deth says the distributor lobby watered it down.

“I have a great relationship with my distributor,” he said. “When they’re here picking up my beer we’re friends, but then they go to Springfield and work against my interests.”

Alcohol distributors in Illinois mostly got what they wanted out of the General Assembly this year. Not only did they molify the craft brewers for the time being without threatening their bigger accounts, they also effectively undermined Anheuser-Busch’s efforts to gain a foothold in their tier of the three-tier system in Illinois.

When Anheuser-Busch attempted to buy City Beverage in 2010, they already owned 30 percent of the distributor.

That was allowed under the previous law, but no longer: HB2606 explicitly forbids anyone licensed to manufacture beer from owning any interest in a distributor. By contrast, Anheuser-Busch wholly owns distributors in nine other states.

Staff in Senate President Cullerton’s office explained that “keeping beer distributors independent and not locked into one brand allows for more variety of choices a distributor may sell which allows for more consumer choice at market.”

The Executive Director of Wine and Spirits Distributors of Illinois, Karin Lijana Matura, applauds the General Assembly for limiting “the reach and power of the Industry giants while at the same time responsibly allowing craft brewers and distillers to develop new brands.”

Despite the three-tier system’s roots in reform, the distribution tier has a rather spotty track record. As recently as 2010 Crain’s and the Better Government Association found widespread evidence of pay-to-play practices in Chicago’s beer distribution market. In that article Deb Carey of Wisconsin's New Glarus Brewing Company, one of the most respected craft breweries in the country, said they pulled out of the Chicago market because retailers and distributors expected them to participate in illegal business practices.

As for Josh Deth and Revolution Brewing, this year they may remain under the new 30,000 barrel limit, but next year they expect to exceed it. The Kedzie Avenue brewing facility could support 100,000 barrels once fully built out and as long as the demand is there, they plan to keep growing.

So how do they plan to keep it legal? Since they don’t self distribute and the Kedzie facility could be considered a brewpub, they may exist in a grey area. At least until the license is changed again.

Andrew Gill is a web producer for WBEZ. Follow him on Twitter or Google+.