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Research & Commentary: Are Regulations Slowing Growth of the Craft Brewing Industry?

August 13, 2015

The Brewers Association reports production at craft breweries – facilities making no more than six million barrels annually – increased by roughly 18 percent last year over the previous year, generating $19.6 billion in sales.

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The Brewers Association reports production at craft breweries – facilities making no more than six million barrels annually – increased by roughly 18 percent last year over the previous year, generating $19.6 billion in sales. In 2010, craft breweries collectively produced about 10 million barrels; by 2014 production had skyrocketed to 22 million barrels. As a whole, liquor production grew by only 0.5 percent between 2013 and 2014, meaning craft brewing was a primary driver of growth for the industry. 

That impressive growth has occurred despite myriad local, state, and national laws creating barriers to new entry and expansion. According to a 2014 study by the Mercatus Center, brewing entrepreneurs must hurdle more than a dozen regulatory barriers on average before a new facility can open. Those regulatory steps take on average 100 days and cost in the thousands of dollars for a single license

The study noted craft breweries also face the standard business regulatory hurdles, including zoning ordinances, incorporation rules, and tax compliance costs. The Mercatus Center researchers write, “starting a microbrewery in the state of Virginia requires as many procedures as starting a small business in China or Venezuela, countries notorious for their excessive barriers to entry.” 

Many of these regulations are decades-old and ill-suited for modern markets. First, most states have established a three-tier distribution system where suppliers, wholesalers, and retailers must remain separate. These laws grant the distributors exclusive territories and wholesalers brand exclusivity while limiting interaction between the groups. This three-tier system was designed to prevent large breweries from controlling beer production, distribution, and retail sales. Some states even limit how much product the brewers are allowed to produce, severely restricting their ability to grow. 

The second major regulatory hurdle is licensing. A new brewer must receive a Brewer’s Notice from the Alcohol and Tobacco Tax and Trade Bureau, which requires background checks, on-site examinations, and legal analysis. Then the brewer must obtain a license from the regulator of alcoholic beverages in the state where he/she plans to operate and sell product. The stringency of this step varies from state to state, but Mercatus notes some states refuse these licenses over concerns about “moral character,” language skills, or “public safety.”

 Brewers must also gain approval for their labels from state and national government agencies. In some instances the brewer may also need approval for the brewing formula as well. 

Although some of these requirements have a legitimate public safety purpose, jumping through all the hoops is often unnecessarily time-consuming and expensive. Many of the restrictions serve to protect from competition the larger brewers who have the resources to manage the bureaucracy more effectively than craft brewers can. 

According to the Boston Globe, several states have begun efforts to help smaller craft brewers overcome the burden of regulation. In Arizona and Wyoming, legislators have increased their caps on production for microbreweries. Illinois and California have expanded the ability of brewers to sell their product: California will allow sales at farmers’ markets, and Illinois gave brewers more options for selling directly to consumers. Texas breweries can now sell on site, and Florida brewers can refill the 64 ounce containers known as growlers. 

Legislators should lower regulatory burdens on brewers, as on all businesses. Market competition will reward the brewers who create and market a product consumers want to buy. 

The following documents examine craft brewing and the associated regulations in greater detail.

Bottling Up Innovation in Craft Brewing: A Review of the Current Challenges and Barriers
http://heartland.org/policy-documents/bottling-innovation-craft-brewing-review-current-barriers-and-challenges
Matthew Mitchell and Christopher Koopman of the Mercatus Center examine the current set of state regulations hindering the growing craft beer industry. The study concludes, “Eliminating regulatory burdens for all firms would allow brewers to succeed or fail on the basis of their ability to provide the greatest value to consumers at the lowest cost to society.” 

Craft Beer Boom Prompts States to Ease Laws in Bid for Revenue
http://www.bloomberg.com/politics/articles/2015-07-10/craft-beer-boom-prompts-states-to-ease-laws-in-bid-for-revenue
Freeman Klopott of Bloomberg examines the growing craft beer industry and describes how states are reducing regulations on these businesses in an effort to improve their economies and increase tax revenue.

Ten Principles for Improved Business Climates
http://heartland.org/policy-documents/ten-principles-improved-business-climates
The business climate of a nation, state, or city is the combined effect on businesses of public policies, natural endowments, and other assets that affect business startups and profitability. A good business climate encourages existing businesses to grow, people to start new businesses, and national and international businesses to invest. A poor business climate does the opposite. 

Trouble Brewing for Craft Beer
http://www.usnews.com/opinion/economic-intelligence/2014/06/03/craft-brewing-industry-stifled-by-regulation
Matthew Mitchell and Christopher Koopman explain craft brewers face a unique set of challenges that undermine consumer welfare and privilege some in the industry at the expense of competition and innovation. 

Halting Beer’s March to Monopoly
http://heartland.org/policy-documents/halting-beers-march-monopoly
In states and regions that mandate a “three-tier” distribution system, smaller craft brewers are vulnerable to market exclusion by distributors who are forced to deal exclusively with macro-manufacturers such as InBev. This white paper from the American Antitrust Institute documents the harm done by such a system. 

Avoid a Beer Monopoly by Setting the Market Free
http://heartland.org/policy-documents/avoid-beer-monopoly-setting-market-free
Michelle Minton of the Competitive Enterprise Institute details the harm caused by the imposition of “three-tier” distribution on the alcohol industry. “More freedom, not less, will make it easier for small brewers to start up and stay in business, resulting in better beer choices for consumers,” Minton writes. 

Microbrew Laws Rewritten as Demand for Craft Beer Grows
https://www.bostonglobe.com/business/2015/04/01/states-rewrite-microbrew-laws-demand-for-craft-beer-grows/1RRaspPQ7vg3FXD9B7cJiO/story.html
Ryan van Velzer of the Associated Press examines how states are changing their regulatory systems to address the rapid growth of the craft beer industry.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.  

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Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR