Pay to Play

Since the repeal of Prohibition, federal and state guidelines governing the alcohol industry have been very strict. The most stringent surround ‘Tied-House’ laws. In a nutshell before Prohibition breweries in all states would offer up fully functioning taverns/bars/etc. to willing tavern keepers. The catch was that once they received the fully functional bar but all they were allowed to sell was the beer from the brewery that owned it. That was anti-competitive, particularly when you add in the aggressive price fixing, and additional inducements to lure patrons away from other bars (and hence other brewery’s offerings). The general consensus was that this needed to be banned once Prohibition was lifted in the spirit of fair competition and limiting the corruption involved in the alcohol industry. It clearly gave undue advantage to the big breweries with the exceedingly deep pockets like Budweiser, et al to literally control the beer market.

Ownership in bars and taverns is not the only game in town however when it comes to inducements to leverage the market in favor of a particular brewery as there are myriad methods. In Massachusetts AB-InBev was investigated for giving away over $1 million in enticements to retail establishments in the form of coolers and draught lines for prime shelf placement and committed draft lines. Although the MA Alcohol Control Board determined there was insufficient evidence to charge them, which was not the outcome in California where they did face consequences for their actions. AB-InBev was forced to pay a $400,000 fine for violation of pay-to-play laws when their reps furnished refrigeration systems, televisions, and draught lines for 34 retailers. AB stated that they were just ‘leasing’ the equipment and it wasn’t an inducement to prioritize sales of their beers. They promised re-training of all sales representatives to avoid such confusion in the future. Hmm….confusion is it?

AB-InBev also got into trouble in Washington State in 2016 when they engaged in Tied-House violations when they paid for concert venues in which AB products were exclusively sold. It does not stop there however, in 2016 AB-InBev agreed to pay $6 million to the US Securities and Exchange Commission for anti-trust violations involving- you guessed it, pay-to-play practices, this time in India. The issue here is that a $400,000 or $1.6 million fine is a drop in the bucket for the mega-monopoly that is AB-InBev and it is not a deterrent against these pervasive pay-to-play practices.

Other high profile breweries engaged in these illicit practices and were also fined. This month (May, 2018) Warsteiner Importers Agency, Inc. agreed to pay $900,000 for Tied-House, Commercial Bribery and Exclusive Outlet violations that placed, or potentially placed the retailer’s independence at risk. Warsteiner paid for draught lines, and sponsored events where Warsteiner beers were exclusively carried.2

This is not however strictly a macro-brewery violation. Recently Craft Beer Guild LLC, a wholesaler who distributes more than 200 craft brands throughout Massachusetts and the Northeast paid bars $120,000 over a two year period (2013-2014) for tap handle placement. The Guild admitted to paying kickbacks up to $2000 per tap handle and up to $20,000 for committed lines. They were already forced to pay the TTB (Alcohol Tobacco Tax and Trade Bureau) $750,000 in fines for another, separate violation.

Southern Glazer’s, a Miami based wine and spirits distributor demonstrated that pay-to-play was not in any way restricted to the brewing industry. They were fined $3.5 million by the New York State Liquor Authority last year for schemes involving cash, gifts, and credit card swipes (large expenses paid through Southern Glazer’s expense account), among a host of other preferential placement schemes.

This problem is also not limited to manufacturers and wholesalers. There are many stories of bar owners with their hands out for that flat screen television, or a new draught system and they are more than happy to prioritize tap lines in kind. For others it isn’t the flat screen or direct cash, but instead they receive a reduction in the total beer bill in exchange for tap placement- and in many states this is legal. It is something called an accumulation credit. The translation is: if a bar buys a certain number of kegs of a certain brand, they distributor will credit them back the cost of a fair percentage of those kegs.1

What is perhaps more shocking is that not everyone sees this as a problem. A recent article in FoodDrink International argued in favor of the erosion of Tied-House statutes enabling for example manufacturers of alcoholic beverages in some states to hold ownership of retail licenses to operate retail outlets on production premises. I would argue this is more of a carve-out specifically for taprooms which serves as a brand building necessity for small breweries to gain an audience. A more intriguing analysis of the ‘evils’ of the Tied-House laws comes from the Midwest- Wisconsin to be precise. The Tied-House law is so restrictive that a restaurateur Justin Aprahamian had to open his craft brewery in Illinois because the laws in Wisconsin prevented him from holding any ownership in both a retail establishment and a production facility. Logic dictates that a brewer would like to sell his hand crafted beer in his own restaurant but Wisconsin law firmly stands against such an act as an unacceptable integration of the three-tier-system.

There is yet one more aspect to delve into and perhaps it is more significant in many ways when applied to craft alcoholic beverage producers- advertising. There are numerous federal and state restrictions linked to alcohol advertising. Beers cannot be advertised in a way that confuses brands, promises health benefits, disparages another brand, targets children, or makes promises it cannot deliver. These seem like pretty common sense rules. Many states go a step further- like Missouri where alcoholic beverages cannot be advertised for a discounted price outside of the retail premises, cannot be advertised below the retailer’s actual cost, and requires manufacturers to exclude retail pricing in all advertisements while including multiple unrelated retailers in the ad. Most states are like California and prohibit manufacturers from giving rebates or kickbacks to retailers, or paying a retailer for advertising. Again this all seems to be under the guise of common sense.

As a comparative tool let us briefly delve into Maryland history and take a gander at Queen City Brewing Company. Post-Prohibition, Queen City and Cumberland were THE major breweries and employers in Cumberland. Their brews were a staple of bars and package stores across western Maryland, into southwestern Pennsylvania, and West Virginia. The brewery salespeople and the retail establishments knew each other well. By the 1950s every package store in the region was suddenly flush with massive advertising displays of Budweiser. To top it off the displays were prominently placed where Queen City and Cumberland products once sat. There were plenty of giveaways along with the six packs of Budweiser that were far cheaper. As a regional brewery with limited tchotchkes, and a far smaller advertising budget- there was no wat to compete. It didn’t matter that the six packs of bud were in 10 ounce or 12 ounce cans instead of pints, consumers were enjoying the bells and whistles- as were the bars that began to carry more macro brewed beer than regional beer. When was the last time you drank an Old German or an Old Export? Chances are you either weren’t alive when it was still on the market, or you were too young to drink it. Although the Queen City and Cumberland merged, they still could not survive the macro brewery advertising and closed down in the 1970’s. This is a reminder that many of the laws that are so bothersome today were put in place to protect regional breweries and level the playing field- advertising was just one facet of that.

There is no question that advertising has changed over the past few decades particularly with the advent of social media. Should we adapt to this- yes. Does that mean we throw out the rule book completely and start over? Not necessarily. There is absolutely no doubt that pay-to-play is happening in almost every state of the union whether it is dedicated tap lines, prime retail shelf space, sponsorship of certain events, or outright bribery as already outlined. Granted it is also not something happening only at the macro level. Must craft breweries- or their distributors pay-to-play to garner shelf space and sales? Ideally no- particularly when we think about the role of social media when it comes to advertising craft beer.

Ponder this for a moment, the whittling away of the Tied-House and pay-to play prohibitions may serve smaller craft alcohol manufacturers in the interim, but it is setting up a terrible precedent for the future that monopolistic breweries and wholesalers will take advantage of, and I wager that they already are. I will quote Craft Beer Professor Daniel Croxall,

“Without these laws, the market would turn into a free-for-all for those with the deepest pockets. Of course international monoliths would take every advantage to squeeze out pesky independent brewers who keep taking market share—dare I say even pay bribes to retailers? And as I have pointed out before, many state three-tier systems and accompanying Tied-House regulations are under attack through sophisticated lobbying efforts, legal challenges, and even through circumventing the laws in questionable/illegal ways. Are there problems with the three-tier system? You bet. Do the benefits outweigh the problems? That depends on if you favor consumer choice, an even playing field, and good old independently brewed beer in all its glorious iterations.”

So where do we go from here? Each state is witnessing a battle brewing against restrictive Prohibition-era legislation that inherently favors monopolistic breweries over local craft. Some laws -like the franchise law imposed upon small breweries deserve to be challenged and overturned. This will help with the levelling of the playing field and engender a greater ability for craft breweries to compete in the market. State by state many of these statutes and regulations can be revised, removed, or renegotiated to give craft brewers a fighting chance, while leaving certain protections in place for all three tiers. Other laws however, deserve a much greater level of scrutiny and attention to the long term implications and should be examined without opening a Pandora ’s Box that would certainly incite a bloodbath with the removal of Tied-House laws en masse thus spelling an end to our independent craft brewers.
Beer for Thought
Cheers!

TTB Craft beer advertising guidelines: https://www.ecfr.gov/cgi-bin/text-idx?SID=29140e6cab911aaf20a26fd46e304766&mc=true&node=pt27.1.7&rgn=div5#sp27.1.7.f

Author: brewedinmaryland

Historian, author, craft beer lover. View all posts by brewedinmaryland