It all started when Anheuser Busch LLC wanted to purchase Budweiser of Owensboro, an independent distributorship owned by the Hand family located in the city of Owensboro, KY. Opponents of the sale, comprised of competitors and their lobbyists, claimed that allowing the transfer of the distributorship license would violate the three-tiered system (Bluegrass Beacon: This Bud’s distributorship is for Anheuser-Busch, November 2014).
The three-tier system of alcohol distribution is the system for distributing alcoholic beverages set up in the United States after the repeal of Prohibition. The three tiers are producers, distributors, and retailers. The basic structure of the system is that producers can sell their products only to wholesale distributors who then sell to retailers, and only retailers may sell to consumers. Producers include brewers, wine makers, distillers and importers.
After Prohibition, the states began to seek methods to regulate and control the alcohol industry lest it return to the excesses and abuses that led to Prohibition years before. The states were also eager to devise a method to levy and collect taxes on alcohol producers. Both of these concerns led to the states individually creating environments in which single ownership of all three tiers (production, distribution and retail) was entirely or partly prohibited.
Anheuser-Busch won a court battle late last year which allowed the company to buy the Owensboro distributorship, like the one it has owned in Louisville since 1978. The court decision said that the concerns about the potential for monopolistic practices by Anheuser-Busch may be worthy of debate, but nothing in Kentucky law prevented malt beverage makers from being distributors (Kentucky beer distribution battle draws debate, January 2015).
House Bill 168
Opponents of the sale turned to the force of state government in Frankfort to stop the transaction as well as divest Anheuser-Busch of its Louisville operation. House Speaker Greg Stumbo (D-Prestonburg) sponsored House Bill 168 (HB 168) in order to close what some say is a loophole in Kentucky law that allows larger brewers to act as distributors, something that state Alcoholic Beverage Control department officials say no other alcohol producer can do.
The bill seeks to reinforce the post-Prohibition three-tier system for the alcohol industry that tries to keep producers, distributors and retailers separate as a check against any one player in the system having too much power. Abuses that helped lead to Prohibition (Kentucky beer distribution battle draws debate, January 2015).
It’s worthy to note that Lexington distributor Ann McBrayer is a big contributor to the Democrats political campaigns and no one has been a bigger beneficiary than Greg Stumbo (Bill could force Anheuser-Busch to surrender Louisville distributorship, January 2015).
The Opposition Weighs In
Representatives of the Kentuckians for Entrepreneurs & Growth industry group, which includes craft brewers, distributors and retailers in opposition to Anheuser-Busch's efforts and in support of Stumbo's bill argue that allowing brewers to act as distributors and solely distribute their products risks the jobs that independent distributors provide the state. They also say letting Anheuser-Busch have distributorships makes it tougher for craft brewers by reducing competition among distributors — since Anheuser-Busch distributes its products — and keeps some brands from having their beers sold in Kentucky (Kentucky beer distribution battle draws debate, January 2015).
Local NKY Distributor Chas. Seligman Distributing Co. Weighs In
Likewise, local distributors fear that a defeat of the current bill could lead to less competition in the marketplace and higher overall prices.
"House Bill 168 addresses the need to preserve the local jobs at risk with mega monopolistic brewers acquiring distributorships in Kentucky," Greg Thomas, director of sales and marketing for Chas. Seligman Distributing Co. in Northern Kentucky said in a statement (Kentucky beer distribution battle draws debate, January 2015).
"Those are exactly the effects that would probably happen to the beer market here if the three-tier distribution system is not strengthened," said Jennifer Doering, general manager of Walton-based Chas Seligman Distributing Co., one of the two largest distributors in Northern Kentucky (Beer fight: NKY beer drinkers have a stake in distribution fracas, February 2015).
Does the distributorship based in Walton, KY have an ulterior motive for supporting HB 168? Seligman sales executive Greg Thomas told Louisville TV reporter Joe Arnold that his company would be “interested” in purchasing Anheuser-Busch’s Louisville operation if the beer giant is forced to liquidate (Bluegrass Beacon: Free-market ‘Bizarros’ attack company’s property rights during beer-policy debate, March 2015). Are they using the force of state government to force Anheuser-Busch into selling them their Louisville distributorship?
Anheuser-Busch and Allies Strike Back
Anheuser-Busch, the American arm of Belgium-based Anheuser-Busch InBev, responds that employment at the Louisville distributorship grew from 20 to about 175 under its ownership and that craft brews are abundant in the area. AB officials argue that such a move would unfairly force it to sell off assets, including a well-established distributorship in Louisville. They argue that the system works fine now.
"Anheuser-Busch opposes this legislation because it represents unnecessary government intervention in the free market and places restrictions on competition in the distribution tier," said Damon Williams, director of sales and marketing for Anheuser-Busch in Louisville. "Even more troubling is the negative impact this bill would have on the outside investment that Kentucky needs to grow its economy and create jobs (Beer fight: NKY beer drinkers have a stake in distribution fracas, February 2015)."
Anheuser-Busch officials said their brands make up 92 percent of the products they distribute, with competitors' brands accounting for the other 8 percent. That's compared to 98 percent of Anheuser-Busch products distributed by the Owensboro company before it was bought (Ky. Brewers battle over beer distribution, February 2015).
Kentucky has 26 active independent brewers, according to the Kentucky Department of Alcoholic Beverage Control. But interest in craft brewing has increased significantly since 2011. Before that, state officials received just eight applications for a brewing license. Since then, the state has received 24 applications.
State law does not allow these independent microbreweries, like Lexington's Country Boy Brewing, to own a distributor (Ky. Brewers battle over beer distribution, February 2015).
The lines drawn in the legislative battle are similar to the ones in last year's lawsuit. Greater Louisville Inc., which is the Louisville Chamber of Commerce, supported Anheuser-Busch in the court fight and is communicating with Jefferson County legislators in opposition to the Stumbo bill.
Normally a Stumbo ally, the Teamsters Local 783 that represents about 100 of Anheuser-Busch's Louisville distribution employees, is opposing the bill, calling it anti-union.
"We believe our workers at (Anheuser-Busch) are paid better and receive better benefits than similar workers at the non-union distribution shops elsewhere in Kentucky," local President John Stovall said in a statement. "If (Anheuser-Busch) is run out of the state and other distributors are allowed to buy their property, then there is no guarantee these jobs will remain as they are, particularly the ones that our part of our Teamsters union (Kentucky beer distribution battle draws debate, January 2015)."
Caught in the Middle
Somewhere in between is Cincinnati brewer Bob Bonder, who is an owner of Rhinegeist Brewery, which he says, can distribute its own beer under Ohio law. Bonder also started Riverghost Distributing company in Erlanger, Ky., with the purpose of giving craft brews — including his own — greater access to Kentucky markets, but he says the Stumbo bill likely would put his distributorship out of business. He'd like to see something that blocks Anheuser-Busch but not businesses like his.
"Rhinegeist is one of the fastest growing breweries in the nation and one of the fastest growing small businesses in Cincinnati," Bonder said. "We hope that Riverghost Distributing will see a similar growth path in Kentucky, but that will only be possible if this legislation is modified or does not pass at all."
Ideally, he said he'd like to see an exemption for smaller brewers, possibly below 10 million barrels a year to "prevent monopolistic behavior from the juggernauts of the industry while encouraging entrepreneurship, job creation and craft beer growth."
If Stumbo's bill passes as is, Bonder said his company's almost $250,000 investment in the distributing business would be lost — along with about $30 million in revenue over the next five years and about 50 jobs that were expected.
Without a company like Riverghost, Bonder craft breweries looking to enter the Kentucky market are forced to choose between distributors that mostly sell either Anheuser-Busch or Miller Coors products or distributors sell a multitude of brands.
"If Riverghost Distributing closes, many of these brands (it is catering to) would send that volume to another state rather than going with a larger distributor in Kentucky," Bonder said (Kentucky beer distribution battle draws debate, January 2015).
HB 168 Passes
A House committee reluctantly approved HB 168 that would require Anheuser-Busch to sell its two distributors and ban it and other brewers from owning any in the future. Many of the members voting for the bill said they could likely vote against it once it reaches the House floor. The committee approved the bill by a vote of 14-4, but seven members said they voted for the bill only to ensure it would get a hearing on the House floor. They urged the two sides to come up with a compromise, such as allowing Anheuser-Busch to keep its current distributors but not allow them to buy any more. Anheuser-Busch could not agree to that because it would limit their future growth. Democratic House Speaker Greg Stumbo, who sponsored the bill, said grandfathering Anheuser-Busch would most likely lead to the court overturning the law because it did not treat all brewers equally (Ky. Brewers battle over beer distribution, February 2015).
HB 168, which prohibits brewers from owning/operating a distributorship, passed the House in another close vote. The Senate debate and 23-13 vote showed the strange bedfellows HB 168 created, with some Republicans voting against property rights of businesses and some Democrats defending those rights (‘We just got screwed’ by KY beer bill, March 2015).
Northern Kentucky Senators Schickel, Chris McDaniel (R-Taylor Mill), and Wil Schroder (R-Wilder) supported the measure.
In the House the bill received aye votes from Reps. Joe Fischer (R-Ft. Thomas), Tom Kerr (R-Taylor Mill), Sal Santoro (R-Florence), Arnold Simpson (D-Covington), Diane St. Onge (R-Lakeside Park), and Addia Wuchner (R-Florence). Reps. Dennis Keene (D-Wilder) and Adam Koenig (R-Erlanger) opposed the bill (Beer Bill Passes Kentucky Senate: “Anheuser-Busch Wants a Monopoly, March 2015).
The Aftermath of the Bill’s Passage
The bill will force the owners of Erlanger-based Riverghost LLC to either sell or close their distributorship. That company was created in December 2014 by the founders of Rhinegeist Brewing of Over-the-Rhine as a way to distribute its beer in Northern Kentucky, with the hopes of distributing other craft beers and wines in the area as well (‘We just got screwed’ by KY beer bill, March 2015).
Now the company will have to not only have divest itself of Riverghost, but also sign on with one of two distributors who serve Northern Kentucky to distribute Rhinegeist in the region after investing upwards of $300,000 in the new company. (‘We just got screwed’ by KY beer bill, March 2015).
"We just got screwed ... this is why I hate government," said Rhinegeist co-founder and president Bob Bonder, who was in Frankfort lobbying against the bill. "The entire debate today was about Anheuser-Busch and we didn't get mentioned at all. That's because it's too difficult for them to address our situation.
"I mean what kind of state votes to take away someone's business just three months after they started it (‘We just got screwed’ by KY beer bill, March 2015)?"
Anheuser-Busch released a statement saying that in contrast to previous reports, that it supported the amendment.
"This has been an appalling exercise and nothing short of a full-scale attack on a good corporate citizen who has followed every rule and invested heavily in the Commonwealth of Kentucky for decades," Anheuser-Busch of Louisville's director of sales and marketing Damon Williams said in a statement late Wednesday. "This legislation violates our rights under the U.S. and Kentucky constitutions, discriminates against our company by providing economic protections for in-state special interests, and represents nothing short of a taking of our property (‘We just got screwed’ by KY beer bill, March 2015)."
Governer Beshear Unsympathetic to Riverghost LLC
In response to an interview by the Enquirer, Beshear stated HB 168 would put the liquor industry on same level playing field as the beer industry, and make all rules the same and preserve the three-tier system. Not only that, but it will preserve employment in the state ... a large number jobs in distributorships around the state could go away if we continued to allow one of the two big players in country buy up all the distributorships.
(As for Rhinegeist and Riverghost), Obviously that's unfortunate example of unintended consequence of legislation that happens from time to time. But there will definitely be lawsuits and perhaps that if they win they can keep what they already have in place (Beshear declares bridge bill dead, March 2015).
The Magic of the Free Market
Ostensibly the justification our legislators used to pass HB 168 was to facilitate free market competition and protect small craft beer makers from a monopolistic, leviathan like Anheuser-Busch.
“HB 186 is about the three-tier system in regards to alcohol distribution in the state of Kentucky,” said Sen. John Schickel (R-Union). “A three-tier system specifically prevents interlocking ownership between the tiers. The three-tier system prevents monopolies, but to be effective, the tiers must be independent of one another.”
He said 37 other states have endorsed the three-tier system and none of those governments has given into Anheuser-Busch’s request to deregulate the beer business.
“Anheuser-Busch wants a monopoly, not a free market,” Schickel said (Beer Bill Passes Kentucky Senate: “Anheuser-Busch Wants a Monopoly, March 2015).
However, it would make more sense for them to support eliminating the obsolete three tier system altogether. It drives up their costs by requiring them to use separate distributors to get their products to the retailer even if it’s a restaurant next door. Wouldn’t allowing a small brewery to deliver directly to a retailer offer a much more viable competitive advantage to craft beer makers than denying Anheuser-Busch a license to deliver its own Budweiser? Opponents of the Owensboro transaction fail to acknowledge that the craft-beer industry in Louisiville—where Anheuser-Busch has operated for decades as a distributor—is “red hot,” according to Mayor Greg Fischer (Bluegrass Beacon: This Bud’s distributorship is for Anheuser-Busch, November 2014).
Schickel contends that the alcohol beverage industry has always been highly regulated as though what has always been done is the right way. Unfortunately innovation and progress have always been stymied by attitudes like, “we’ve always done it this way.” He further cites that we wisely established the three-tier system in Kentucky because the alcohol industry was taken over by organized crime during Prohibition. The reason the organized crime element infiltrated the alcohol beverage industry was because of regulation such as Prohibition, not in spite of it (Beer Bill Passes Kentucky Senate: “Anheuser-Busch Wants a Monopoly”).
The established businesses always try to use government to handcuff competition (Crony Capitalism Stifles Competition, May 2012). Now the three-tiered system serves crony capitalism instead of organized crime although it’s sometimes hard to tell the difference. The state of Kentucky would be better served by repealing the obsolete system and let free market competition determine the winners and losers instead of our state government. We should let crony capitalism go the way of Prohibition instead.