The Great Beer Challenge

A guy walks into a bar.
“You guys got any craft beers?”
One bartender shrugs.
“How ’bout a Bud Light?”
Another bartender raises an eyebrow.
“We got Bass Ale.”
The guy walks out of the bar.

That’s not a punch line to a joke. That’s the sobering reality that too many beer drinkers face today.

For example, beer distributors are fighting to maintain restrictions on how beer gets from brewers to consumers. And many consumer advocates allege that distributors are encouraged by big beer companies to circumvent laws that are designed to limit what distributors can offer to retailers (think free beer and other perks) as an incentive to stock their business partners’ products. Big beer companies are creating packaging gimmicks and products—including their own craft-brew brands—to flood store shelves and bar taps with their own labels, so there is little or no space left for beer that is made by smaller competitors. Even some of the largest craft brewers take the same rival-killing approach to bolster their profits.At a time when there are 1,600 craft-beer manufacturers in the United States, your selection of beers at local pubs, supermarkets and liquor stores is likely to consist primarily of brands that are owned by Anheuser-Busch/InBev or MillerCoors, a few imports and a couple of brands that are made by larger craft brewers. The largest companies that make beer and many of the companies that distribute it have done everything that they can to squeeze out the brands that are made by the skyrocketing number of craft breweries across the country.

In short, the most powerful forces that are in the beer industry are trying to limit your access to new and unique brands. Anheuser-Busch/InBev and MillerCoors still account for nearly 80 percent of all sales, according to consumer-research group Mintel. But craft-brew beers increasingly are tapping into the market and now account for 5 percent of the $101 billion in annual U.S. beer sales. From 2005 to 2010, the number of adults who drink craft beer increased to 28.8 million from 18.8 million—a more than 50 percent increase—even as the number of total beer drinkers decreased slightly.

Although it’s good news that some distributors finally are adding a few craft-brew brands to their menus, smaller breweries typically still face an uphill battle in getting their beer to market. And that means that beer drinkers pay the price in terms of a limited selection.

TIER IN YOUR BEER. If beer-distribution laws were changed to allow craft brewers to sell their products on the Internet and to more widely sell their products directly to bars and retail stores, consumers would have much better access to different beers, experts tell Consumers Digest.

But many of the 3,300 companies that deliver beer to stores from brewers are determined to preserve the distribution system that’s been in place since the end of Prohibition. Distributors see any attempts to reform the so-called three-tier distribution system as a threat to their existence. National Beer Wholesalers Association (NBWA) President Craig Purser tells Consumers Digest that the three-tier distribution system helps consumers, because it allows more craft brewers to survive. NBWA’s argument is that an independent distribution system prevents the deep-pocketed major beer companies from creating their own distribution system, which would make it even harder for craft brewers to get their beer to consumers. Even some craft brewers, particularly the larger ones that have been able to break into the three-tier system, agree with this point.

The problem with that argument, of course, is that major brewers already control much of the beer distribution in this country. Major brewers make sure that distributors sell their products exclusively or, at the very least, dramatically limit the distribution of beer that’s made by smaller brewers. When craft-brewed beer started to gain in popularity in the mid-1990s, Anheuser-Busch demanded that distributors commit what it called “100 percent share of mind” to carry only Anheuser-Busch products. Although that’s no longer a formal policy, more than 60 percent of distributors that deliver Anheuser-Busch products do so exclusively. Most regions of the country have two beer distributors: One carries Anheuser-Busch/InBev products, and the other carries MillerCoors products and everything else. The result is that there’s precious little room on distributors’ trucks and the store shelves that they stock for craft beers.

We don’t believe that the three-tier system should be abolished, as some craft-beer advocates do. But it’s clear to us that the rules that govern beer distribution should be relaxed to allow for more self-distribution exceptions for small brewers. It’s great that 29 states allow craft brewers to sell at least some of their beer directly to stores. (See “State of Direct Sales.") But according to a database that’s maintained by Brewers Association (BA), which is the trade group for craft brewers, five other states restrict direct sales only to brewers that are from that state. And 16 states and the District of Columbia allow no direct sales from brewers to retailers at all.

“I live in Iowa, and if you look at the entire spectrum of beers, I only have access to 15 percent of it,” says Maureen Ogle, who is the author of “Ambitious Brew: The Story of American Beer.” “If beer-makers could deal directly with a retailer, there are lots and lots of alcohol specialty stores where they could ship a few cases without having to sign a contract with a distributor.”

In response to recent lawsuits (both unsuccessful and pending) in states that seek to scale back the three-tier distribution system, beer distributors have rallied behind new federal legislation that is called the Comprehensive Alcohol Regulatory Effectiveness (CARE) Act. This act would affirm state control of liquor laws and reinforce the three-tier distribution system. Not only would the legislation curtail lawsuits, but it also would strike down other federal regulations, such as uniformity of labeling, which craft brewers say would allow states to further discriminate against out-of-state brands and make it even more difficult for smaller breweries to compete. (See “Strange Brew.") Hearings on the bill, which has 152 co-sponsors in the House of Representatives, were held in September 2010. The bill could be put to a vote this year.

Of course, distributors oppose another potential retail option for beer sales that could benefit consumers—the Internet. At a time when 36 states allow direct sales of wine on the Internet, most states still prohibit direct online sales of beer. That means that most small brewers aren’t able to sell their beer beyond a small region. So, for instance, if you live in Colorado and want to buy a craft beer that is made in Florida, you have to hop on a plane or gas up for a long road trip.

Assuming that the proper age-verification safeguards could be employed to reduce the likelihood that minors could buy beer online, we believe that allowing small brewers to sell at least limited quantities of their product online would be a positive development for consumers. In some cases, shipping costs for beer could cost almost as much as the beer itself, but Internet sales could increase the options for beer drinking from dozens of brands to hundreds in a short time, Ogle and other beer-industry observers say.

CRAFT PROJECT. If there’s hope for consumers in the current distribution system, it’s that some beer distributors have begun to add craft-brewed beers to their product lists in the past 3 years.

But for now, even the distributors who’ve added craft brands still rely heavily on brands that are made or owned by major brewers. Brands that are from major brewers still account for as much as 95 percent of sales by distributors who have added craft beers. That means that many craft brewers still are scraping for store space, and consumers more often than not must take a scavenger-hunt approach to finding the craft beers that they want—even if that means driving to another state to buy it.

The truth is that even as craft-brew sales increase, it might be only the largest craft brewers that benefit the most, which means that your choices will be only slightly less limited. According to Beer Business Daily, the top four to six craft brands (which vary by region) account for 60 percent to 90 percent of the craft-beer market (numbers and percentages vary depending on the area), which is a percentage that only will grow.

“You are going to see a few [craft] brands become larger, like Sierra Nevada and New Belgium, but there is going to be only so much room to expand,” says John Cochran, who is co-founder of Terrapin Beer in Athens, Ga. His craft beers are distributed by a Coors distributor.

And BA will be partly responsible for this growth pattern, because it appears to be quite comfortable with letting the larger craft brewers dominate the market even if it’s at the expense of smaller craft brewers. In January, BA changed its limit on the amount of beer that a brewer could produce annually and still be considered “craft” to 6 million barrels from 2 million barrels. Some in the industry call this change the “Sam Adams provision,” because it affects only one brewer—Sam Adams’ maker Boston Beer, which recently crossed that 2-million-barrel threshold. (The next-largest company, Sierra Nevada, sells only 800,000 barrels.) Although some craft-beer advocates groused about the change—arguing that a “big” craft brewer is an oxymoron—others celebrated the milestone as a recognition of the popularity of craft beer. The important thing for consumers to note is what Boston Beer has done to stay on top.

Believe it or not, in a speech to NBWA in September 2009, Boston Beer founder Jim Koch said craft brewers should embrace the three-tier distribution system, because it’s good for the craft-beer industry. And Koch hasn’t been shy about pushing aside smaller craft brewers. In an interview with Beer Business Daily last August, Koch admitted to lobbying distributors to drop other craft beers in favor of stocking more Sam Adams beer. He told the publication that it was a “heck of a lot easier and a lot more profitable to double your Sam Adams volume than to take on 50” brands from other craft brewers. Koch and other Boston Beer officials refused interview requests for this story.

Although Boston Beer’s tactics might make good business sense for Boston Beer and its distributors, it runs against the ethos of craft beer, which started (largely through Sam Adams’ example) by embracing the variety of more full-flavored beers as an antidote to the bland sameness of domestic lager.

According to Anat Baron, who is a former beverage-industry executive and the director of the 2008 documentary “Beer Wars,” which details problems with the major brewers’ hold on the three-tier distribution system, some believe that brands such as Sam Adams and MillerCoors-owned Blue Moon are craft brands that will lead consumers to purchase smaller craft brands. “But I don’t think that’s true,” Baron says. “If I were making ‘Beer Wars 2,’ it would not be big [brewers] versus small [brewers], it would be bigger small brewers versus smaller small brewers. That’s where the battle is happening.”

PLAYING GAMES. The truth is that distributors and brewers play plenty of games to keep small brewers’ beers out of sight. This runs counter to federal laws that are designed to level the playing field. For instance, it’s illegal for distributors and brewers to pay bars and other retailers money or to use other incentives, such as free beer, to get their products into the market. But the largest brewers and distributors find ways to circumvent those rules.  

A November 2010 story in Crain’s Chicago Business detailed an allegedly rampant pay-to-play system in Chicago bars, in which small brewers who couldn’t afford to pay bribes—as much as $10,000 per tap for 6 months—were shut out of the market. At least one brewer, Wisconsin-based New Glarus Brewing, pulled out of the Chicago market rather than pay the fees.

“They constantly have their hands out, and you can get space if you pay,” Deb Carey, who is the founder and president of New Glarus, tells Consumers Digest. She says retail stores would offer prime placement if the brewer or distributor paid for ads, and she says bars would require brewers or distributors to pay for bands that play in the bar or pay for new tap lines if they wanted their beer to be featured on a tap.  

Although the Crain’s article painted the practice as unique to Chicago, virtually everyone with whom we spoke called the practice of giving incentives to bars widespread nationwide. Only Carey and one other brewer with whom we spoke, Greg Koch of Stone Brewing, categorically denied that their breweries engage in the practice. (Other brewers whom we interviewed declined to comment on the issue.) Koch says many bar owners have asked him to give the bar a free case of beer for every four or five cases that the bar buys. “If you decline, you get a string of expletives on the way out the door,” says Koch, who is not related to Boston Beer’s Jim Koch.

The distribution games go beyond bars, however. As “Beer Wars” revealed, many supermarkets designate a distributor of one of the major brands of beer to oversee which products are sold on the limited space that is on their shelves and in their coolers. That’s right, a representative from a distributor (which often works on behalf of Anheuser-Busch/InBev or MillerCoors) actually decides what goes on supermarket shelves and how it should be arranged. Unsurprisingly, those beer representatives recommend primarily their own products.

Even if a supermarket has a huge beer section, major brewers still can flood shelves with enough selections to crowd out brands from craft brewers. That’s because Anheuser-Busch/InBev and MillerCoors have purchased many specialty brands and even created some of their own in the past 10 years. For instance, Anheuser-Busch/InBev has nine varieties of Budweiser, including labels, such as Budweiser Golden Wheat, that mimic the names (if not the taste) of craft brands. MillerCoors now owns niche brands Leinenkugel and Henry Weinhard Special Reserve, which used to be independent regional beers. )

We aren’t surprised that Anheuser-Busch/InBev responded to our interview request with a statement that didn’t address any of the issues that we raised, or that MillerCoors failed to respond to our multiple requests for an interview. In fact, it seems that both brewers are more interested in contributing to consumers’ confusion than clearing it up. Each year, these brewers introduce marketing gimmicks as a way to draw attention to their most popular products.

For instance, 2 years ago, Coors Light started selling its beer in “cold-activated” cans that change colors when the temperature of the beer supposedly is cold enough to drink. And as of last year, Miller Lite now is sold in so-called vortex bottles that have twisted glass on the inside of the neck that makes the beer spin out when it’s poured. Although MillerCoors says the vortex bottle is designed to enhance the beer’s flavor, we found no independent experts who say that such a bottle design would make any beer taste better.

Seriously? Swirling beer? That kind of bottling novelty is enough to make your head spin too. It’s another indication that big beer companies and many distributors will do whatever it takes to distract you from getting access to all of the beers that you want. And it adds a whole new meaning to the phrase, “Think Before You Drink.”

Michael Blanding has written stories about the food and beverage industry for Consumers Digest. He also is author of the book “The Coke Machine: The Dirty Truth Behind the World’s Favorite Soft Drink” (Avery/Penguin, 2010).