The Montana Tavern Association’s recent attempts to stifle brewery tap rooms touched a serious nerve with craft beer fans. Comments on this blog and other social media sites ranged from a call-to-arms to the unprintable (which I delete). Yet, commenters raised one common question more than any other: Why would the MTA want to enact a bill that would harm the brewing industry?
To review, the MTA, working with a friendly legislator, sought to draft a bill which would limit on-premise sales at brewery “sample rooms” to no more than 10% of the brewery’s annual production. Montana’s Small breweries (defined as producing between 100 and 10,000 bbls annually) may sell 48 ounces per person, per day for on-premise consumption between the hours of 10 am and 8 pm. Several of Montana’s 36 breweries sell 100% of their annual production on-site through tap rooms and growler fills. Most sell at least 85% on-site.
The effect of the bill would be devastating to most of Montana’s breweries, a point the MTA anticipated and sought to counter by preparing numbers demonstrating how breweries could still be successful. No doubt some could, but it begs the question. When the breweries have been built and operated within the laws as they’ve read since 1999, why should they?
Because they are violating the “intent” and “spirit” of the law, claims the MTA. It’s a comical argument with no defensible position. The law says small breweries can sell 48 ounces per person per day between the hours of 10 am and 8 pm. The law neither limits the number of people who may request their 48 ounces nor limits the amount of fun they can have while enjoying them. At the legislative hearings in 1999 to consider the bill to allow breweries to sell pints (within the 48 ounce limit, etc.) there was NO opposition. In fact, the MTA supported the bill and thanked the brewers, distributors and tavern owners who came together in compromise.
So what happened? Brewery tap rooms became an attractive nuisance to the MTA. People like them. Really like them. They largely provide an atmosphere missing from most bars. The craft beer boom reached heights anticipated by no one and coincided with a new-found sense of place – call it the drink local equivalent of the eat local movement.
In short, they started competing with the tavern owners. The MTA says the competition isn’t “fair.”
Competition, you say? When Starbucks moved into downtown Missoula in 2006, the local news media ran the predictable story asking local coffee shops like Break Espresso and Liquid Planet what it would mean for their business. The same story ran recently when Einsteins Bagels announced it would open its first Montana location less than a block from Missoula’s bagel institution, Bagels on Broadway.
In each instance, the response was predictable. Answers ranged from “there’s plenty of room for everyone,” to “the more the merrier,” to “national brands raise the interest in the product,” to “we are proud/good at what we do and will see how things shake out.” What else are they going to say? Competition is a fact of life for every business. (Incidentally, Starbucks closed it’s downtown Missoula location three years later. It’s now a Jimmy John’s sandwich shop competing with downtown’s other lunch favorites.)
Things are different in Montana’s world of alcohol.
When prohibition ended in the 1930s, Montana chose to enact a quota system for liquor licenses. For the most part, there aren’t any licenses left in the places you’d most want to get one. Thus, these quota limits have created an artificial system that significantly increases the value of the licenses.
Want to open a bar in Missoula? You can’t run to the Department of Revenue and pay $400 for a license. You must purchase it from someone who already has one. Supply and demand at play. As demand increases, so does the price. Add more licenses, and the value of the existing ones decreases.
The quota system also provides a built-in limit on competition. With only so many licenses, there can only be so much competition.
The MTA’s bill to limit tap room sales to 10% of annual production is about competition. It’s about the MTA’s attempt to preserve value created by an artificial system. Never mind that many tavern owners paid from a few hundred to a few thousand for a license, not the hundreds of thousands the MTA would lead one to believe. For them, it is merely about prohibiting Starbucks from moving in down the street.
To the MTA’s way of thinking, the breweries are unfairly competing with the taverns because the breweries did not have to shell out hundreds of thousands of bucks for a license to sell alcohol. Apparently recognizing this argument doesn’t hold up for many of their members, the MTA has more recently created another “unfair advantage” argument. Not only did the breweries not have to buy a retail license, but they get to sell their beer without the markup added by the breweries and the middle men, the distributors. If it cost the brewery $60 to make a keg and the bar has to buy it for $120, that creates an un-level playing field.
While the numbers might represent some generalized average, the argument is far too simplistic. For one, it ignores the fact breweries are only allowed to sell alcohol for on-premise consumption between 10 am. and 8 pm., not the 8 am to 2 am for most retail licenses (not to mention the max of 48 ounces per person). How level is that playing field? Breweries are also only allowed to sell the beer they brew onsite and cannot serve wine, liquor or beer from another brewery. Mash tuns, fermenters, and bright tanks aren’t cheap, either.
At the 2011 legislative hearing to shift the tap room hours, a proposal by the brewers that was dead on arrival, tavern owners who opposed the bill made this oft-cited argument: if the breweries want to act like bars, they should buy a retail license like the rest of us.
Except they can’t. Montana law prohibits a brewery from also owning a retail license. That’s why you see breweries like Kettlehouse going through complicated gyrations to split the brewery off from its tap room to make it work. It’s a good model when it pencils out and in many places it has where license values are low.
One legislator has even been working on a bill to allow “stacking”of licenses so a brewery could own both a brewery license and a retail license. Yet, craft beer fans and tavern owners alike shouldn’t be too quick to embrace this model.
Let’s say there are 50 retail, on-premise licenses available in Missoula. (Totally making up that number for illustrative purposes.) If there are also five breweries in Missoula, there are 55 places (in theory) where you can purchase adult beverages for on-premise consumption. As the breweries purchase a retail license (either because “stacking” becomes legal, or the brewery goes the Kettlehouse route), the tap room is replaced by a retail business. Fifty five locations get reduced to 50 locations. Thus, each retail license purchased by a brewery results in one fewer bar, taproom, restaurant or similar place to purchase alcohol for on-premise consumption. That decreases choice and decreases competition among alcohol retailers. As a side effect, it increases the value of the licenses which remain.
This is not a positive situation for anyone but the 50 license holders.
“Let’s just get rid of the quota system, then,” is the common response to this mess. Unfortunately, it isn’t that simple.
Some people who own taverns did pay hundreds of thousands of dollars for the retail license. Some bought a license decades ago and are counting on the increased value to fund retirement. Banks have lent money using licenses as collateral. There is no guarantee that any given license will retain its value (just ask someone in Butte), but there is a lot invested in the system.
Like it or not, it is the system we have. These are the rules the tavern owners must play by if they want to get into the game. And just like the brewers, they’ve played by the rules of the system Montana created.
Which makes it ironic that the MTA wants to change the rules on the brewers and pull the rug out from under them. There is nothing but politics standing in the way of the Montana legislature adding thousands of licenses to the system, thus immediately dropping the value for everyone down to nothing more than the application fee. But is that fair?
I don’t think so. The quota system decreases competition, decreases choice, prevents a free market from operating, and creates turf wars, legislative battles and hard feelings. There’s nothing there to like if you’re an outsider looking in. Or just a craft beer fan looking to enjoy a pint. Yet these are our rules.
They suck, but we’re in it together. If we’re going to create a better system we’re going to need to do it together. And by “we” I mean the brewers, tavern owners, distributors and consumers alike. Eliminating the quota system is the preferred way to go, but we’re likely going to need to provide some form of compensation to those who have paid dearly to play by the rules. That’s the political and practical reality of the mess we’re in. It won’t be easy or fun, nor will it likely be fair to all, but does anyone think the current system can survive another fifty years?
In the mean time, we could all save a lot of heartache if we’d just call a truce, accept the rules as they stand, and start working together to find a new model.
For all our articles pertaining to the 2013 Montana Legislature, click here.
