On Maryland’s Changing Beer Laws

(Brendan speaking:) Let me start by saying that if any of you caught my brief interview on Fox 5 DC last night, you may have been confused by my response regarding Montgomery County having “the best beer laws in the country when it comes to self-distribution.” When I went back and watched the interview, I was confused, too. Not to make excuses, but I was a bit surprised to find myself suddenly on camera during a live news feed and in my frantic effort to mentally orient myself, I scrambled two separate thoughts into one statement. I meant to say that I believe Montgomery County is the best place in the country to be opening a brewery and that self-distribution laws under the Class 7 state license are what enticed us to come here in the first place.

I did not mean to say that Maryland (nor Montgomery County) has the best beer laws–though that may soon change…

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Yesterday, Maryland State Comptroller Peter Franchot had his “Reform On Tap” task force unveil their recommended legislative changes for Maryland’s beer laws. This was a critical step in the path to bringing fairness to the craft beer market. To catch you up on how we got here, consider this laymen’s summary of recent significant events:

The Maryland State Assembly (the people who make Maryland’s laws) voted through House Bill 1283 which was full of bad rules that really hurt most of Maryland’s breweries. The passing of this terrible law turned into a national news story that severely damaged the nation’s perception of Maryland as a business-friendly state. This is no shock considering that a state’s treatment of its breweries has come to be viewed as a symbol of its business-friendliness in general. Therefore, this bill was quickly recognized as an embarrassment for the entire state and it threatened to hurt the growth rate of Maryland businesses irrespective of industry.

To get to the bottom of what the heck has been going on, the guy in charge of Maryland’s money (Comptroller Peter Franchot) put together a group (the “Reform On Tap Task Force”) to study the size of the impact of Maryland’s breweries on the state’s economy and also to understand how the state’s existing beer laws affect its breweries’ abilities to grow and, in turn, generate revenue for the state.

The Reform On Tap Task Force released its findings two weeks ago. To summarize, they found that Maryland’s craft beer laws are exceptionally restrictive for no discernible purpose. (In truth, it is well understood that these bizarre laws came from big money special interest groups and lobbyists who pushed through legislation to protect their own rears regardless of what’s good for the state and its people.)

After allowing two weeks to digest the findings, the Task Force announced yesterday a full suite of recommended legislative changes that they’re going to introduce to the State Assembly, including:

Reform On Tap 2018 Proposed Law Changes

While each of these issues is important for creating a fair and competition-driven market, two in particular stand head and shoulders above the rest: elimination of self-distribution limits and franchise laws for brewers brewing less than 300,000 BBL/year.

Self-distribution is the right for a brewery to sell and deliver its own beer to its own customers. Those customers include retail establishments like bars, restaurants, and bottle shops, and they also include end consumers like you. Currently, there are three brewery license classes and each has its own self-distribution volume limit. Once a brewery has reached its limit, it has to sell its beer to a distributor regardless of whether or not it wants to simply because the law requires it. This is not a market-based decision. It is a legal requirement.

This is bad because it forces breweries to relinquish control of their own product and brand. To help you understand how this works, let’s use an example where you are the owner of a business that makes peanut butter:

In this example, you walk into Safeway and discuss the sale of peanut butter with the store’s stock manager. They agree to buy 5 cases to sell at their store. Since you have the right to self-distribute, you simply call up your truck driver and have him slap 5 cases on the back of the truck to deliver it today. Meanwhile, you get to keep all of the profit made from the sale and you are sure that the peanut butter delivered is of the highest quality when it arrives.

Now imagine you do not have the right to self-distribute. Instead, you are required by law to use a distributor. You make the sale and you call the distributor to schedule the delivery. The distributor lets you know that although the customer needs it today, it will be delivered on a regularly scheduled day sometime in the future because they have so many other deliveries to make and so many other manufacturers to keep happy… unless, of course, you’re wiling to pay an expediting fee to get your own product on the shelf today when the customer needs it.

Eventually, the peanut butter is delivered and the sale is completed. And even though the distributor takes a cut of the sale price, you couldn’t charge the customer more for peanut butter than the competition because the acceptable price of a case of peanut butter is set by the market. So you just take the loss on the distributor’s cut.

Finally, you receive an angry phone call from the customer: the peanut butter was spoiled. The distributor was not following best practices when it came to storage and transport of your product. Now the customer is upset and no longer trusts your brand. In fact, they want their money back and make it clear that they won’t be buying your peanut butter again. You’re angry yourself because this is relatively commonplace and you’ve mentioned your dissatisfaction to your distributor several times with no significant improvement.

Perhaps at this point you’d be looking to terminate your relationship with your distributor. Ah, but you can’t… you see, franchise laws dictate the terms by which a manufacturer/distributor relationship can be terminated and by law, you are required to give the distributor 6 months to rectify their mistake upon notice of intent to terminate even though this has been a constant and repeating issue. And if, after those 6 months, you can legally prove in court that the distributor was delinquent on delivering service of an acceptable quality, you still have to pay dramatic fees to finally break the agreement.

Not to mention that during the 6-month dispute, the bad will generated caused the distributor to decide to stop stocking your product in large volumes so your customers are experiencing even longer delivery times. In fact, your customers may not even want to deal with the hassle of waiting for your peanut butter and risking quality issues when there are a million other brands on the market whose peanut butter shows up on time and with sufficient quality.

And there’s not a damn thing you, the peanut butter manufacturer, can do about the delivery timeline nor the state your peanut butter arrives in because the law requires that you use this distributor and the law requires that you stay with them for at least 6 months even if they continue damaging your brand.

These examples may sound extreme but they happen to real breweries. This is a huge reason why small breweries fail. Take a moment to sincerely ask yourself how many small businesses you know that could survive a bad relationship with a sub-par distributor they’re legally required to use during a minimum of a 6-month quarrel, culminating in a huge contract termination check being written to the distributor for terminating a relationship that was bad in the first place.

It’s obscene.

That’s why these changes are nothing short of essential for allowing Maryland’s craft breweries to compete in a fair and balanced environment. Currently, the cards are stacked in such dramatic fashion against local breweries that in 2016, Maryland’s economic impact per capita generated by breweries was 47th in the nation ahead of only:

  1. Mississippi
  2. Alabama
  3. South Carolina
  4. Oklahoma

These are not states that we should be comparing ourselves to because together, they represent some of the most restrictive and craft beer-negative legislative environments in the nation. (This is to say nothing of the wonderful craft beer fans who inhabit those states! I mourn for their parched throats needlessly being deprived of the vast array of local options they should have access to.)

Still, as common sense as these changes are, the fight is going to be gnarly. The special interest groups who helped form these backwards laws are well-funded and very experienced in the state’s legislative process. We need this conversation to be had and had often. We need the truth of how unfairly things operate to spread like wildfire so that you, the Maryland beer drinking public, can see an explosion in the growth of local craft beer and reap the benefits; both economic and cultural.

Lastly, please call your state representative and tell them you support the Reform On Tap 2018 initiative and let them know you feel particularly strongly about the elimination of self-distribution limits and franchise laws for small, local brewers.

Cheers,

The True Respite Team

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