Another perspective on the brewers’ economic report

A modern brewery

A lot of breathless attention has been trained on a study released earlier this week by the craft brewers about their own success – and how much their business could benefit Texas if we would just throw out the three-tier system and let them distribute their own beers and sell from their own breweries.

Everybody in the industry who are not affiliated with foreign owned mega-brewers are pulling for the success of craft brewers in Texas.  Texas is the proud home of Shiner, St. Arnold’s and Celis, some of the best craft success stories in the country.

My concern regarding the report published by the craft brewers is the premise that the craft brewers will benefit from deregulation of the three-tier system.  In fact, a lot of the coverage takes the study at face value and declines to address what assumptions are being made by this study, what the realities might be, what the motives are and what the Other Side of the Story is.

The study, by the Texas Craft Brewers Guild, claims tens of billions in revenue to the state by 2020 and is based on the idea that craft brewers will go from having .7 percent of the market share to 6.4% of the market share. (Editor’s note: The market share has been corrected from an earlier assertion here that was inaccurate. Apologies and thanks to Metzger for pointing it out.) 

The adjunct econ professor who did the number crunching, Scott Metzger, is owner of San Antonio-based Freetail Brewing Co. and used member-provided data.

Here are my thoughts:

Industry sources remember last year when Metzger testified before the Texas Legislature that the brew pub bill – which would have thrown out that three-tier system, basically – would have generated “$57 million dollars of new tax revenue per year” for the state. Out of brewery sales. That’s more than ALL THE CURRENT BEER EXCISE TAXES COMBINED. That’s a big assumption, and potentially overly optimistic.

The study (focused on small brewers) aims, clearly, to set the stage for a hefty argument before the Lege when it convenes next January. The brewers have been champing at the bit to do their own thing, without the distribution and retailing tiers, and argue that the three-tier system is holding them down. At the same time, the number of craft breweries operating in Texas has more than doubled in the past five years – from 35 to 78 – with another 61 ramping up their efforts to open their doors.

The craft brewery industry is actually thriving under the current three-tier system and very likely would not be viable without it. I appreciate craft brews and the people who make their living from them as much as any beer drinker and small-business supporter. I want to see them flourish. I enjoy a good tasting beer that doesn’t need horses in its ad campaigns or cater to low budgets and low standards. But there’s a big problem here that the craft brewers aren’t seeing, or aren’t believing, when it comes to this distribution issue.

Moving toward deregulation could destroy the incredible success of the craft brewers in Texas, where an independent distribution system gives them a unique access to the market that occurs nowhere else in the world. Anheuser-Busch and Miller/Coors are now owned by foreign conglomerates that believe they can export monopolies they have in other markets to the U.S. They will try to use the craft brewers as fronts to deregulate the system, and then force the craft brewers out of the market after they take control of the distribution tier (which they will). This is what they do all over the world.

Are there some things the state can do to help craft breweries get off the ground?  Absolutely.  Does allowing breweries to be all three tiers of the system without any limits at all help craft brewers?  Probably not.

 

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5 Responses to “Another perspective on the brewers’ economic report”

  1. Karen,

    First off, thank you for covering this issue as it is one that continues to grow in the public and legislative consciousness.

    There are a number of factual inaccuracies in your story that I feel compelled to correct.

    1) The notion that we have suggested that the 3-tier system be “thrown out”. The Texas Craft Brewers Guild is a vocal supporter of the 3-tier system, so much so that protecting the integrity and viability of the 3-tier system is one of our publicly stated goals. The following web address takes you to the official position statement of the guild regarding the alcoholic beverage code.

    http://www.texascraftbrewersguild.org/download/TX_Craft_Beer_Economic_Impact_2012_Positions.pdf

    In no instance have we suggested that the 3-tier system be dismantled. Without it, access to market for small producers would be drastically reduced. The potential growth of the craft beer industry in Texas actually highlights the importance of an independent 3-tier system, which the guild supports.

    What the guild seeks is parity with other segments of the alcohol industry and the out-of-state breweries we compete with. On what governmental interest should the state of Texas put its own businesses at a disadvantage versus out-of-state businesses?

    Luckily, we have found common ground with a number of distribution-tier members who understand our position and see craft as the future growth engine for their own businesses. These proud Texas businessman share our passion for supporting Texas businesses first.

    2) Your statement that the study is based on the assumption that Texas Craft Beer grows from 0.7% to 50% market share is flat out incorrect. The study makes it quite clear that the resulting market share from the scenario that results in a total economic impact of $5.6 billion would only be 6.4%.

    You are confusing that fact with my statement that I would like to see Texas Craft Beer be 50% of the *craft beer* market, which isn’t an assumption in the study, but rather something I’d like to personally see happen.

    3) Your notion that $57 million dollars of new tax revenue could be created is unrealistic because it is more than all the beer excises taxes currently collected combined. The reality is that the State of Texas collects a lot more than just excise taxes, and in fact Excise Taxes are one of the smallest totals of all the taxes brewers pay. In 2011, Texas Small Brewers paid or generated $16 million in taxes to the state of Texas. $13.4 million of that total were local and state sales taxes.

    —-

    I would be more than happy to have an open discussion with you on these issues, but I think it is important that it be done on a level playing fields so far as the facts are concerned.

    Here is a link to the Economic Impact Study: http://www.texascraftbrewersguild.org/download/TX_Craft_Beer_Economic_Impact_2011_STUDY.pdf

    I encourage you to read in its entirety. I’m sending this entire response to your email as well, and look forward to a productive discussion on the matter.

    Scott Metzger
    Freetail Brewing Co.
    Texas Craft Brewers Guild Board Member

    • Karen Brooks says:

      Hey, Scott –

      Thanks for the comment.

      1) Your group would like to see small craft brewers manufacture, distribute and sell beer. That pretty much takes out the three-tier system, as I understand it. And my point is that if you try to do that – even if it’s just for yourselves, which is fine and yes, an idea that has support in the distributing world – you open the door to AB to ask for the same thing. You saw that last session. Many in the industry pushed to let craft breweries be treated as a special class, immune from some of the current constraints of the three-tier system. The distributors weren’t giving you pushback on much of that. But the effort died when AB insisted on getting the same treatment, as giving them the same treatment would in fact dismantle the system. For more people than just the craft brewers. So even though you may not have said specifically, “throw out the system,” what your advocating would do exactly that.

      2) You’re right, I misspoke and have clarified that info up top.

      3) I’m not understanding your point on this one. Could you clarify?

      Davis:
      Thanks for asking. I am in a dialogue with Scott. But this blog is clear that it takes a position on issues, and it’s within my rights to post a study and comment on it without permission. The study itself presents the craft brewers’ own side of the story. I did correct the inaccuracy and apologize for that. Otherwise, this is simply stating another perspective. Plenty of editorializing out there. That’s nothing new.

      • 1) There seems to be the occasional mis-portrayal (by folks on both sides of the discussion) of 3-tier in Texas as a binary system that inherently must be either exactly the way it is now, or completely non-existent. The suggestion that 3-tier in Texas is a matter of black and white is one I strongly disagree with, and there is plenty of evidence across the US of viable 3-tier systems that allow exemptions for certain participants (Texas being one of them already in a number of instances, and it hasn’t led to the downfall of 3-tier).

        Luckily, we’ve been in direct dialogue with a number of stakeholders, including wholesale tier members, who are, in fact, able to see the million shades of gray that exist between the black and white world purported by others. Not coincidently, these also happen to be some of the most successful distributors in the state. It’s their willingness to come to the table and work together on common ground that is moving the beer industry forward in this state.

        2) Thank you for making the correction.

        3) You state that the idea that craft beer expansion could create $57 million of new annual tax revenue is “overly optimistic” because it exceeds the total of all other excise tax revenue combined. This comparison is akin to saying total sales of a craft brewery couldn’t get to $10 million because it exceeds the total of all craft beer t-shirts combined.

        Excise tax is only one of many taxes that are either paid directly or generated by brewery activity, and it isn’t even near the largest one. Craft Breweries paid or generated over $16MM in local and state taxes in 2011, so the $57 million figure (which was based on the 2009 Economic Impact Study – the potential tax revenues have only gotten larger since then) isn’t nearly as “overly optimistic” as seem to think. That figure includes all taxes, not just excise taxes.

      • I also wanted to provide this link to a post I wrote on my blog in November 2011, coincidently by the same name as a post here on your blog: The Case for Three-Tier

        http://blog.freetailbrewing.com/2011/11/10/the-case-for-three-tier/

        From my perspective, it appears we fundamentally agree on the importance of an independent wholesale tier. Where we appear to disagree is on the point of whether one can exist while also giving craft brewers greater access to market.

  2. Davis says:

    Ms. Brooks

    I think you may benefit from a re-read of the study. You may have misunderstood some of the numbers, particularly the .7 to .50%

    That is referring to the CRAFT market in Texas, not the total market

    Did you contact the author of the study before publishing your interpretation?

    I enjoy well researched journalism.

    Thanks

    Davis Tucker

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