Published in Food/Agribusiness

Editor's Notebook: Bills to eliminate economies of scale for some craft brewers

BY Sunday, December 09, 2018 05:18pm

A slate of lame duck legislation has the potential to stifle growth for Michigan’s $2 billion craft beer industry. 

Among a host of tweaks and clarifications, the 15 bipartisan-backed bills would require breweries that operate satellite taprooms to brew at least 50 percent of their beer on site at the secondary location, or install a 3-barrel brewhouse, if they want to transfer beer between their main brewery and the other premises. The requirements would add upwards of $100,000 to the cost of a secondary taproom compared to what’s currently allowed under the law. 

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Backers say the new requirements would codify the spirit of the existing microbrewery licensure laws, which they say were created so companies would be making beer at each of their locations. They’re fine with allowing the transfers from location to location, which had been legal under the existing law, so long as companies still produce beer at each of their taprooms. Even the Michigan Brewers Guild signed on to the changes. 

RELATED: Bills would uncork changes for Michigan’s craft beverage industry

The issue arose as a handful of breweries including Jolly Pumpkin Artisan Ales and The Mitten Brewing Co. LLC opened satellite taprooms with minimal brewing systems but leveraged economies of scale by ramping up production and creating jobs at their central brewing operations to support their network of locations. 

Current law includes no requirements that the satellite locations must make the beer on site, nor does it specify the breweries need to install any certain size of brewing equipment. Operating legally under the letter of the law, these companies built their growth-oriented business models around economies of scale on the production side, which enabled them to grow into new communities, invest in new taprooms and add dozens of new jobs. 

The legislative changes would eliminate the economies of scale of centralized brewing and skew the economics for many craft brewers to open secondary taprooms. 

If signed into law, the new bills would immediately add at least $100,000 to the cost of opening a satellite location just in brewing equipment alone if a brewer wanted to be able to transfer in beer. What’s more, the proposed law doesn’t even require the company to use the equipment; it just needs to be “installed and functional” and “capable of producing and fermenting” beer. 

This all raises the question: Who’s really benefiting from the changes? 

Not the government, since the changes will have no fiscal impact on the state, according to an analysis by the Senate Fiscal Agency. Not breweries, who are facing higher development costs to open secondary locations and expand. Not smaller, more remote communities around the state, who are unlikely to see breweries open secondary taprooms within their borders because of those higher up-front costs. Not consumers, who are likely to see higher beer costs if the secondary locations still do come to fruition. 

Industry insiders and legal experts say beer distributors, one of the groups that helped draft the legislation, are hoping that if it’s more difficult and expensive for brewers to open secondary locations, they’ll be pushing more of their beer through the distribution tier, which means more money in the wholesalers’ pockets. 

It seems most brewers opted to go along with the changes, even if it meant alienating some of their colleagues, because they wanted to find ways to effect compromises with the politically powerful lobbies advocating for the bills. After all, brewers need to carefully pick their public battles with the people in charge of helping move their beer and sell their brands in the market. 

As well, if breweries do invest in secondary locations, the distributors also still have the potential to benefit, especially given the 50-percent production requirement, which could leave producers with the capacity to make more beer than they could serve over their bars, particularly if they’ve already invested in a centralized brewery. 

According to Spencer Nevins, the president of the Michigan Beer & Wine Wholesalers Association, a brewer has choices to make in that situation. 

“I don’t have to necessarily sell it. I just have to produce it. I might sell it into the three-tier system, which our members, of course, would love,” he said of a brewer’s thought process. “I might sell it in my tasting room. I might transfer some of it to another tasting room and some of it I might just decide, ‘This isn’t quite good enough and I might dump it down the drain.’”

To quote the start of the old adage, if it walks like a duck and talks like a duck…


MiBiz food and agriculture news coverage is supported by Dan Vos Construction. For more information, visit danvosconstruction.com

Read 4606 times Last modified on Monday, 18 March 2019 16:24
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