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POLITICS: PennAve

Thank Prohibition for the craft beer boom

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Food and Drink,PennAve,Joseph Lawler,Economy,Regulation,Magazine,Prohibition

American craft brewing is flourishing, and Prohibition is partly to thank.

Led by brewpubs and microbreweries, the number of U.S. breweries has doubled since 2007 to roughly 3,000, according to the Brewers Association, with hundreds more under construction. There were as few as 93 breweries countrywide in the early 1980s.

Big brewers are still dominant — craft beer accounts for only 8 percent of total volume, and two companies, Anheuser-Busch InBev and MillerCoors, hold roughly three-quarters of the market. But craft brewing is steadily gaining.

Craft brewers chalk up their success to a sea change in Americans’ tastes.

Bill Butcher, founder of the Port City Brewing Company in Alexandria, likened the growing appreciation for craft beers to the change in wine preferences several decades ago. Then, says Butcher, who worked for Robert Mondavi winery before entering the brewing business, drinkers “stopped ordering just a generic glass of cheap white wine, they’d call it a ‘chablis,’ and people started ordering a chardonnay or a sauvignon blanc.” Similarly, Americans are now demanding hoppy IPAs and flavorful stouts, rather than just American-style lager.

Based on the growth of other artisanal products, beer boosters reckon that craft brewing still has massive room to grow.

Bart Watson, the economist for the Brewers Association, which represents craft breweries, thinks specialty coffee's nearly 40 percent share in terms of volume is “a good benchmark of what craft beer could get to."

Consumers may be driving the surge, but the craft beer industry wouldn't have been able to respond without changes to the regulation of alcohol. After all, during Prohibition, there were no legal breweries, despite the pent-up demand for beer.

America’s unique system of booze regulation was shaped by the 21st Amendment. In addition to repealing the 18th Amendment and undoing Prohibition, the amendment was intended to protect dry states’ rights to not be forced into interstate commerce of booze.

After the amendment's passage, the 50 states began implementing Beer Franchise laws intended to re-create the most beneficial aspects of Prohibition. In particular, they were meant to keep beer distribution a local business to maintain control of sales and limit drunkenness.

Those laws “created a dynamic where there was always the idea of having the distributor be independent of its suppliers,” explains National Beer Wholesalers Association President Craig Purser, creating a "break or check" on the power of large national brewers.

The result is the “three-tier system,” in which brewers must sell to distributors rather than to retailers, and distributors must sell to retailers like liquor stores or bars rather than directly to consumers.

That system helps craft brewers, says Jim Caruso, CEO of Flying Dog Brewery in Maryland, by keeping markets “relatively open” for small producers.

“If the laws were such that Budweiser could brew the beer, control all the distribution, and have Budweiser bars,” says Caruso, “they would just — on every street — open bars, and only have Budweiser products. I could go there every day or once a week, and they’d never take my beer.”

Without the three-tier system, Purser says, beer would be sold the way soda is, with supermarkets offering relatively few brand options and Coca-Cola and Pepsi sponsoring restaurants that serve only their drinks.

Since the late 1970s and early '80s, deregulation and changes to the three-tier system have boosted small brewers. In 1978, Congress legalized home brewing without a license. Through the mid-1990s, states made allowances for brewpubs to serve beer brewed on premises. More recently, states have begun allowing craft brewers to change distributors if they think their brand is not well represented to retailers.

States also have relaxed other laws. For example, Alabama recently legalized beers that have an alcohol content over 6 percent, a restriction that previously prohibited many stronger craft brews.

There are still high barriers. The libertarian Mercatus Center found that a Virginia entrepreneur would have to go through 12 application procedures to open a brewery, in addition to normal small business regulations.

Nevertheless, the booming industry and its soaring exports — 50 percent growth in 2013 — suggest more growth is on tap.

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