Drunk on power: Booze distributors ply statehouses to keep profits flowing

Introduction

Rhinegeist Brewery invested $250,000 in trucks and employees to bring its beers into Kentucky, just a few miles from its fledgling brewery in downtown Cincinnati.

Sales boomed in the “thirsty” Kentucky market, said brewery co-founder Bryant Goulding.

But in March, just three months after the deliveries began, the legislature there voted to make Rhinegeist’s distribution business illegal.

“We were crestfallen, heartbroken, disappointed, really frustrated by the political process,” Goulding said. “We felt like we really didn’t have genuine access or really didn’t get genuine consideration from a lot of the politicians.”

Rhinegeist had run into a little-known but powerful political force at play in nearly every state: alcohol distributors. They don’t brew the beer, and they don’t serve it. But as wholesalers who function as the legally mandated middlemen between alcohol makers and retailers, they have a wide-ranging influence on the booze Americans drink, marking up prices and controlling the growth of craft brewers and small wineries.

Alcohol distribution is a $135 billion industry in the U.S. that has made many rich, including Cindy McCain, head of her family’s beer distributing company and wife of Sen. John McCain, R-Ariz. To protect the post-Prohibition regulations that guarantee their business, wholesalers bankroll scores of lobbyists and give millions of dollars in contributions in election seasons. And because wholesalers are often local, family-run, American-owned businesses, they are popular with politicians.

“The beer wholesalers are a lot like the teachers unions,” said John Conlin, a Colorado management consultant who works with beverage companies. “The teachers unions have incredible clout, too, and the reason is there are teachers in every congressional district out there… And historically that was the same with beer wholesalers.”

But recently two economic forces have encroached on wholesalers’ power and territory, putting them on defense: big multinational brewer Anheuser-Busch InBev, which boasts $47 billion in annual revenue; and the burgeoning craft beer industry that wants more freedom to distribute its own beer, offer tastings in new places or sell to-go containers called growlers.

At least 22 states had bills in 2015 seeking to allow alcohol makers to circumvent distributors and sell their products directly to customers, according to the National Conference of State Legislatures.

They faced firm opposition this year because state alcohol wholesaler alliances had at least 315 registered lobbyists spread across every state and the District of Columbia, except Wyoming, according to a Center for Public Integrity analysis of state records.

And alcohol distributors are by far the most involved in state politics out of those in the booze business. They gave roughly $14.6 million to state candidates, parties and ballot issue groups in the 2014 elections, while alcohol manufacturers gave about $5.3 million and retailers gave roughly $2 million, according to data from the National Institute on Money in State Politics.

They are politically active on the federal level, too, but because alcohol is largely regulated at the state and local level, wholesalers aim most of their political firepower at statehouses. Their giving in 2014 state races was more than double the approximately $5.9 million that they gave for congressional contests.

“As local businesses representing Main Street America, beer distributors take pride in participating in the political process and support a wide range of candidates,” the National Beer Wholesalers Association’s spokeswoman Kathleen Joyce said in an email.

Using that political firepower, wholesalers defended their economic turf this year in several states, including Kentucky, Georgia and North Carolina, by advocating for the exclusive right to distribute alcohol. And now wholesalers are also trying to expand their turf by going after the legal recreational marijuana market proposed in Nevada.

Fighting a beer giant

This winter, 38 lobbyists roamed the halls of the Kentucky State Capitol, employed by one side or the other of the beer debate. The alcohol bill they were discussing, lawmakers joked, was the Lobbyist Full Employment Act of 2015.

“You couldn’t walk the halls without a lobbyist from one side or the other wanting to be in your ear,” said Sen. Jimmy Higdon, a Republican from Lebanon in central Kentucky.

Wholesalers were pushing a bill that prevented brewers from owning a license to distribute beer — a move to close a long-overlooked gap in Kentucky’s regulatory system and effectively force Anheuser-Busch InBev to auction off its two distributorships in Kentucky.

Rhinegeist, with its newly opened distribution business, was also hit.

“We were just kind of a gnat caught between these two Mack trucks colliding,” Goulding said.

Anheuser-Busch InBev owned a distributorship in Louisville for decades. In 2014, it bought another one in Owensboro, a move that set off alarm bells among wholesalers who worried the beer giant would corner the market as part of a reported campaign to buy more distributorships.

Wineries, breweries and distilleries are generally required by state laws to hire separate distributors to get their drinks to customers, with exceptions that vary by state. States made these rules after Prohibition: some acting to avoid returning to the days of saloons controlled by major alcohol producers that pushed drunkenness; some to decentralize the industry and its political power; and others motivated by former bootleggers with political ties who wanted to stay in business as state-mandated wholesalers.

Today, distributors are in a power position. They can stifle the growth of craft breweries or small wineries by refusing to distribute their products. Or they can foster them by helping them reach customers they couldn’t efficiently reach on their own. Having separate distributors can also push up the price of alcohol.

Some public health advocates credit the layers of regulation that come from this middleman-style system for helping prevent cheap or dangerous libations from creeping into the market in a country where alcohol is already the third leading lifestyle-related cause of death.

Yet Daniel Okrent, author of “Last Call: The Rise and Fall of Prohibition,” called the public health arguments sanctimonious and said there’s no evidence that wholesalers protect public health. “They are essentially protecting what is in effect a quasi-monopoly business,” he said. “They are very powerful political lobbies with a great deal of money.”

In Kentucky, wholesalers turned to the legislature to bar Anheuser-Busch InBev from having a piece of their market, just as wholesalers have successfully done in eight other states since 2010, according to the National Conference of State Legislatures.

Two Kentucky distributorships in particular, Chas. Seligman Distributing Company and Kentucky Eagle Inc., led the charge against Anheuser-Busch. Their executives and employees have given at least $213,000 to state and local elections since 2000, according to a Center for Public Integrity analysis of state records. Kentucky Eagle’s owner Ann Bakhaus gave more than $124,000 of that, including $13,300 last year. She said she had her business in mind when she did so.

“Our business is highly regulated,” she said. “There’s a whole lot of parts and pieces to it, and so I’m always trying to watch out for our business and for our state, too.”

During the 2014 elections alone, the Kentucky Beer Wholesalers Association gave more than $14,000 to Kentucky lawmakers. Comparatively, Anheuser-Busch has given little — just one $500 donation in 2008, according to the National Institute on Money in State Politics. Neither alcohol group responded to multiple requests for comment.

Both sides lobbied hard. And both sides took to the airwaves. Wholesalers spent $151,000 on Facebook, newspaper, TV and radio ads, state records show. Anheuser-Busch, while outspent in political contributions, tried to make up for it with nearly $330,000 in advertising.

“Greedy special interests are trying to run Anheuser-Busch out of the state, seeking for them to close a business they’ve owned for nearly 40 years,” said a TV ad from the beer company.

In the end, though, it wasn’t even close. The wholesalers’ bill passed the Senate 23-13 and the House 67-31. The world’s largest brewer and Rhinegeist lost. Anheuser-Busch InBev said Tuesday it plans to shed its Kentucky distributorships. Rhinegeist has already dismantled its distribution business there.

Rep. Adam Koenig, a Republican from Erlanger, fears the law will have a broader chilling effect.

“After seeing Rhinegeist basically have the rug pulled out from under them, and a company that’s been operating legally with no complaints for 30 years be forced to divest, it makes you think twice about opening a business in Kentucky,” he said.

Limiting the craft brewers

This spring, North Carolina state Rep. Chuck McGrady, a Republican from Hendersonville, sent his colleagues a draft of a bill he planned to introduce. The bill would have helped local craft breweries by allowing them to distribute more of their own beer. Not long after, two of the co-sponsors called and asked him to remove their names.

“Those legislators told me the beer and wine wholesalers in their area had already called and they were big contributors to the campaign,” McGrady said. “They still supported the bill, but they didn’t want to be on it. It was really rather striking.”

Craft brewing had taken off in North Carolina, as it has in the rest of the country. The number of craft breweries in the U.S. more than doubled from 2008 to 2014, reaching 3,418, according to the Brewers Association, a national craft brewers group based in Boulder, Colo. And they’re getting more organized — the U.S. now has local craft brewers associations in every state.

In North Carolina this year, craft brewers saw an opportunity to improve state laws to allow them to grow. Currently, brewers in North Carolina can distribute 25,000 barrels of their own beer. If they want to grow larger, they must hire a distributor for all of their beer, a move some breweries are loath to make.

McGrady’s bill would have given brewers slightly more wiggle room by not counting beer sold at taverns (usually only a few thousand barrels) toward the 25,000-barrel limit.

But North Carolina Beer & Wine Wholesalers Association Executive Director Tim Kent said his members didn’t want to cede any ground and opposed McGrady’s bill and a similar one.

“North Carolina already has by far the most progressive beer laws of any state from Virginia to Texas,” he said. “You’ve got a small group of brewers who are trying to deregulate the industry…at the expense of public health.”

Alcohol wholesalers in North Carolina have given more than $740,000 to state lawmakers since 1996, according to data from the National Institute on Money in State Politics. They had seven registered lobbyists working this spring. On the other side, the craft brewers together had four registered lobbyists but had given comparatively little to political candidates.

“We’re putting a lot of money into growing our business and making sure we’re getting new equipment and hiring people and stuff like that,” said Erik Lars Myers, the president of North Carolina Craft Brewers Guild and the founder of Mystery Brewing Company in Hillsborough. “That means that we don’t have a lot of extra money to spend on lobbying. They have a significant financial advantage over us.”

Both bills stalled when a committee co-chairman, Rep. James Boles, wouldn’t let them be heard, brewers said.

Boles, a Republican from Moore County, received more than $17,000 from alcohol wholesalers for his unopposed 2014 re-election, including $5,000 from the North Carolina Beer & Wine Wholesalers Association PAC. Aside from the money he gave his own campaign, the association is Boles’ second most generous donor over the course of his six-year career in the statehouse, according to the National Institute on Money in State Politics. He did not respond to requests for comment.

The bills’ failures mean that at least four craft breweries in the state won’t expand, hire more people or make more of their specialized local beer, Myers said.

“There’s going to be a lot of people who want beer who won’t be able to get it,” he said.

Settling for compromise

A similar story played out in Georgia this spring, when brewers put forward a bill that would have allowed breweries to sell a limited amount of beer directly to customers who visited. What they wound up with instead was the ability to offer free beer to patrons who pay for a tour.

“We don’t sell you beer, but we take your money and you leave with beer,” said Nick Purdy, president of Wild Heaven Craft Beers just outside of Atlanta. “It’s a bit of a theater of the absurd.”

Georgia Craft Brewers Guild Executive Director Nancy Palmer said it was the guild’s first time going up against the longstanding relationships the wholesalers have built, in some cases over generations.

“The wholesalers are astute politicians,” she said. “If I were in their position, I would be doing exactly what they do. The depth and breadth of their influence is certainly formidable.”

Alcohol distributors in Georgia have given nearly $1.2 million in contributions to state lawmakers since 1992, according to data from the National Institute on Money in State Politics. They also invite lawmakers to an annual, paid conference at a seaside resort. The state distributor association did not return requests for comment.

The man credited with reworking the bill to allow only paid tours and free beer, Sen. Rick Jeffares, has received $6,900 from wholesalers since 2010, including $4,750 out of the $81,000 he raised for his unopposed re-election bid in 2014. The Republican from McDonough, south of Atlanta, did not respond to requests for comment.

Still, for the brewers it wasn’t a total loss. Palmer said they were pleased to get at least the compromise that allows them to sell tours.

Finding new territory

Wholesalers are now flexing political muscle not just to protect their current businesses, but to enter a new market: marijuana distribution.

Alcohol salesmen often see pot as a competitor vying for consumers’ dollars. And liquor industry advocates have bristled at pot activists’ assertions that marijuana is safer than alcohol.

But wholesalers in Nevada gave a combined $87,500 to a 2016 ballot measure campaign to legalize recreational marijuana there — about 13 percent of the amount raised through December, according to the most recent report available. The ballot initiative, if passed, would mandate that for the first 18 months of legal weed, only licensed alcohol distributors could distribute the drug, giving the alcohol wholesalers a head start in the pot distribution business.

Backers of the initiative consulted with alcohol distributors when they wrote the measure to avoid a fight. The 18-month window allows experienced distributors to help get the industry off the ground, according to campaign spokesman Joe Brezny.

“Experience matters,” he said.

For those without political connections, access to new markets is proving more difficult. Back in Cincinnati, Rhinegeist Brewery gave up finding new turf on its own. Instead, it’s re-entering Kentucky through a wholesaler. It’s a move co-founder Goulding thinks will work out well for sales, but he’s still disappointed.

“It seems really strange that government can come and, something that was legal a few months ago, just take it away,” he said.