“There is no ethical or pragmatic reason manufacturers of alcohol should be forbidden to choose their distribution partners through legally binding contracts.”
Despite its many benefits, the passage of TX SB 639 in 2013 required growing craft beer manufacturers (e.g., breweries) in Texas who intended to distribute more than 125,000 barrels per year to give away their distribution rights without compensation, and it limited them to using one distributor at a time to get their products into the hands of their customers outside of their own tasting rooms and beer gardens (Clark, 2016). The wholesale companies could then sell and trade the breweries’ distribution rights among themselves. For a state viewed as having minimal regulations, one might raise an eyebrow at the apparent preferential treatment distributors received. This type of rule encourages competition-limiting regional distributors, who wield more bargaining power than both the breweries and retail outlets in the three-tier system, trading the breweries’ distribution rights like their own personal securities. In response, three breweries — Live Oak Brewery, Peticolas Brewing, and Revolver Brewing — took up the mantle to push back against this regulation in the midst of the Texas craft beer boom. And, sure enough, a district judge in Travis County ruled that the law was not commensurate with the Texas State Constitution, striking it down in August 2016. Astonishingly, the TABC is now seeking to appeal this decision (Auber, 2016).
To fully understand what this means for the future of craft beer in Texas, let’s think back to the free enterprise fundamentals that enabled growth in the industry. When two parties trade, they both benefit because each can specialize in doing what they do best. Ultimately, consumers then benefit because producers’ costs are lowered through efficiency. Responsible deregulation has opened doors and driven growth for small breweries to make a real push to establish their brand and product. Accordingly, the health of the industry hinges upon a similar climate of even-handed oversight with respect to breweries’ freedom to distribute.
There is no ethical or pragmatic reason manufacturers of alcohol should be forbidden to choose their distribution partners through legally binding contracts. In best open market practice, they should be able to renegotiate those terms with new distributors when established contracts are terminated through expiration, performance, or otherwise. Brewers would be enabled to protect their brands and steer their growth paths. They could then choose alternatives should their current providers fail to deliver acceptable performance. Distributors would be encouraged to supply the highest level of service possible and to compete with one another to a greater extent in order to maintain and build portfolios of contracts. As with all forms of healthy competition, the end result means higher quality of distribution services, increased earnings for the best performing breweries and distributors, and a reduction in costs to craft beer enthusiasts across Texas. Everyone benefits.
Any regulatory body’s prime objective is to monitor and maintain a level playing field in the marketplace. Competitors, big and small alike, are held to the rules of fair play and consumers are better protected. To do otherwise than these basic open market principles is to raise the question of picking winners and losers. If the growing craft beer market is to continue to keep pace with increasing consumer demand, successful expanding breweries like Live Oak, Revolver, and Peticolas must be permitted to profit from the value of their products through the latitude of making their own distribution decisions.
References
Auber, A. (2016, November 29). Texas brewers remain in fight over distribution rights with TABC appeal. Retrieved December 19, 2016, from http://spirits.blog.austin360.com/2016/11/29/texas-brewers-remain-in-fight-over-distribution-rights-with-tabc-appeal/
Clark, E. (2016, December 06). Austin craft brewery booming, but threatened by distributor rule. Retrieved December 19, 2016, from http://watchdog.org/283284/texas-craft-beer/