Craft Breweries In North Carolina Face Stout Political Opposition To Expansion Efforts

05/12/2015 02:30 pm ET | Updated May 12, 2015

North Carolina’s craft beer advocates achieved a significant victory in 2005 when the “Pop the Cap” coalition convinced state legislators to raise the limit on alcohol content for beer and other malt beverages sold in the state from six to 15 percent.

The battle inspired some strange bedfellows. Independent wholesale beer and wine distributors opposed raising the limit, fearing that stronger beers would interfere with their sales of fortified wine, while conservative religious groups were concerned about loosened morality. On the other side were libertarians who saw the limit as an unnecessary restriction on personal enterprise, liberal beer enthusiasts who wanted to drink higher-quality brews, and entrepreneurs who predicted that lifting the cap would be a step towards making North Carolina the beer capital of the South.

Since that fight, the number of craft breweries based in the state has risen dramatically. When Pop the Cap began its campaign in 2003, there were 25 breweries in North Carolina; now, there are 130. National craft brewing powerhouses like California’s Sierra Nevada and Colorado’s New Belgium have built facilities in or near the beer-packed city of Asheville, while others, like Oregon’s Deschutes, are contemplating similar moves.

But North Carolina’s craft breweries are now once again facing off against wholesalers over another obstacle to their continued growth: the so-called three-tier system, a legacy of Prohibition. Under the system, breweries can only distribute up to a certain number of barrels of beer each year on their own before they must turn over their products to wholesalers, who then distribute the beer to retailers. North Carolina's self-distribution cap of 25,000 barrels a year, which was instituted in 2003 and was originally meant to prevent monopolies and overconsumption, has become a major source of frustration for smaller brewers.

The fight over self-distribution limits is a partial result of craft breweries' growing share of the total beer market. While the craft beer industry is growing at a healthy clip, production by major companies like Anheuser-Busch InBev and MillerCoors is down. Wholesalers fear that raising the self-distribution cap could be a step toward eliminating the three-tier system in North Carolina, which could lead those large companies to withdraw their business and sell to retailers directly. In the process, the wholesalers point out, smaller breweries could also get crowded out.

Fearing a loss of future business, wholesalers have developed a number of arguments against increasing the self-distribution cap. They have suggested that raising the barrel limit would threaten jobs and that state excise taxes are collected more efficiently under the current system.

"We feel the current level is exceedingly generous and more permissive than any other state in the Southern U.S.," Tim Kent, executive director of the North Carolina Beer and Wine Wholesalers Association, told The Associated Press.

But craft brewers say that having more freedom than breweries in Georgia and Alabama isn't enough, pointing out that thirteen states have no self-distribution cap, while another dozen or so have caps set higher than North Carolina's.

“To me that’s like being the best of the worst -- when you look at craft brewing around the country, it’s no surprise that the Southern states tend to be much more restrictive toward craft breweries,” said Margo Metzger, executive director of the the North Carolina Craft Brewers Guild. “What we’re doing is looking at Colorado, New York, California -- states where craft beer is thriving so much more than it is here.”

Metzger said North Carolina craft breweries should have the opportunity “to become the next national brand.”

“We feel like we’d have a much better shot if the small brewers were allowed to grow based on business sense and not based on a forced relationship,” she added.

In an email to The Huffington Post, Kent offered more detail about why his association opposes increasing the self-distribution limit.

"Unlike North Carolina, California, Colorado and Oregon law allows multi-national mega-breweries (e.g. Anheuser-Busch InBev) to self-distribute their own products," he said. "'Branch-owned' distribution discourages product variety and it reduces consumer choice in the marketplace. Branch-owned distribution also eliminates jobs by locally-owned independent distributors. History has proven that those jobs are not replaced but eliminated."

Thanks to lobbying and large-scale political spending on behalf of the wholesalers, who have given hundreds of thousands of dollars to lawmakers from both parties, legislation that would deliver the brewers' wishes has repeatedly been squashed. Several bills that would have adjusted the cap upwards have been introduced -- by Republicans, who control both chambers of the General Assembly -- but they haven't even received consideration in committee.

Now, craft brewers must decide on a way forward. Should they emulate the wholesalers by committing funds to play in elections, or should they continue with their grassroots strategy, though it hasn’t yet yielded results?

“We’re at this weird inflection point where we have to decide whether we’re going to play the game or not, whether we’re going to lobby and exert our political capital and create a PAC,” Sean Wilson, the owner of Durham’s Fullsteam Brewery and one of the first Pop the Cap campaigners, told HuffPost. “I think we’re stronger by being the grassroots, by defying the rules, by not playing the game because if we try, we don’t have the resources. [The distributors] are wealthy because of government protection. So can we win the money game? Probably not. But we can absolutely win the PR game.”

Though Fullsteam isn’t close to hitting the self-distribution cap, Wilson said his quarrel with the wholesalers is as much about philosophical opposition to unnecessary government regulations as it is about the practical implications of the limit.

“We really rely on wholesalers -- they’re not all of the same ilk, so I don’t mean to throw them under the bus -- but their association will manufacture fear in an attempt to keep the status quo,” he said, adding, “I’m less likely to work with a wholesaler because they’ve created fear and anxiety where it didn’t need to exist.”

As a handful of North Carolina breweries, like NoDa in Charlotte, approach the cap, they are grappling with whether to limit production to avoid turning their beer over to distributors. The brewery, which makes the 2014 World Beer Cup Gold Award winner “Hop, Drop ‘n Roll,” currently produces about 15,000 barrels a year. However, it is opening a new facility that could push it past the limit.

“We would rather produce 24,999 barrels and control our distribution, control our brand and the way our brand is handled with restaurants and grocery stores than to produce more and lose the ability to have any control or any say at all,” NoDa owner Todd Ford told HuffPost. “We’re new to this game, so this will take some time. The wholesalers have had a presence for many years, they’ve been successful with raising money and relationships. We need to do the same and we plan on doing that.”

Leah Wong Ashburn, the president of Highland Brewing, one of the state's largest craft breweries, said she agreed fellow brewers should be able to self-distribute more than 25,000 barrels a year, even though her brewery signed on with a distributor before it hit that mark.

"We made the decision to go with the distributors long before we had to. We didn't want to be in the distribution business -- it's complicated, it's expensive, and there are folks who can do it better," she said, adding that she thought distributors were mistaking the drive to raise the limit for an attempt to abolish the independent distributor system altogether.

The brewers’ distribution push has picked up some fans along the way. Alex Johnson, the North Carolina director of Generation Opportunity, a youth-oriented group linked to the billionaire conservative industrialist brothers Charles and David Koch, wrote an op-ed about the brewery issue last year, in which he argued that the state government shouldn’t suppress entrepreneurship.

“It’s embarrassing for Republicans to run on free-market principles and then, once they get elected, to turn their back on the free-market system and use government to destroy business,” Johnson told HuffPost. “These are archaic laws from the Prohibition era --- maybe the problem is we have legislators from the Prohibition era.”

Republican state Rep. Chuck McGrady, who sponsored one of the defeated bills this session that would have modified the self-distribution limit, said it was disappointing to see his fellow GOP legislators opposed to reforming the state's "arcane laws."

“Philosophically we’re about competition and small business and that’s what the craft brewers are about,” said McGrady, who was instrumental in bringing Sierra Nevada to North Carolina. “It's not like we’re trying to take the cap off, we’re just trying to have an incremental change because the world of brewing is very different now from what it was like even a decade ago.”

This story has been updated to include comment from Kent.

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