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New Texas Beer Legislation: What It Could Mean for You

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In case you didn't know, we here in Texas are so far behind the curve when it comes to alcohol laws, we might as well be your grandmother trying to work The America Online. Other states literally look to Texas as the textbook example of how not to do things. It's an embarrassment, really.

See also: - An Open Letter to the Texas Craft Beer Industry

States like California, Colorado and Michigan enjoy the benefits of ever expanding multi-billion dollar brewing industries, while Texas's beer production and revenue is near the bottom in every ranked category -- despite being second nationwide in beer consumption. For that, you can thank outdated laws and a crushing stranglehold by powerful beer distribution lobbies set on controlling the revenues and flow of beer in Texas.

The Texas beer community has been abuzz this week with news that several pieces of legislation regarding craft beer, brewpubs and distribution of beer were approved in committee at the Texas state legislature. Bills 515,516,517,518 and 639 have all left committee. Additionally, all five pieces of legislation are now tied together -- making it as it stands an all-or-nothing package deal.

The laws are at their base form something a large number of people have been pushing for for many years in Texas.

Here are the basics of the five bills:

SB 515:

  • Increases annual production limit of brewpubs from 5,000 barrels to 10,000 barrels
  • Allows all brewpubs to sell to wholesalers
  • Allows brewpubs who only sell alcoholic beverages made on-site to self-distribute up to 1,000 barrels per year from a single brewpub, and up to 2,500 barrels per year from all brewpubs owned by the same licensee

This would essentially allow brewpubs in Texas to begin to become the legitimate businesses and production facilities that they are in every other important beer state. This piece of legislation may be the most important of all, more on that later.

SB 516 & 517:

  • Creates a new Brewer Distributor permit, with a fee set at $250, which a production brewer under 125,000 barrels of annual production can obtain to self-distribute up to 40,000 barrels per year

This is a slight increase up from the current 75,000-barrel limit but caps distribution at 40,000 barrels. This would allow breweries using distribution houses to supplement that with self distribution and continue to allow draft only outfits like 512 Brewing in Austin to continue self distribution.

SB 518:

  • Allows production breweries who are under 225,000 barrels of annual production to sell up to 5,000 barrels per year to ultimate consumers for on-site consumption

This one is bigger than it sounds. This is the piece of paper that will turn tasting rooms into cafes and may one day lead to Texas' having it's very own version of Dark Lord Day. If this passes, you won't be hunting Divine Reserve in the wild anymore, you'll be lining up at the front door to Saint Arnold for a chance to drink the beer at the brewery.

SB 639:

  • Codifies the 2010 TABC Marketing Practices Bulletin against the practice of "Reach-Back Pricing", which is the practice where a manufacturer will adjust his price to a wholesaler based specifically on the price a wholesaler sells to a retailer. The new language goes on to specifically state that a manufacturer is still free to adjust prices as necessary, however it cannot be based on the wholesaler's price to the retailer
  • Outlaws a manufacturer from accepting payment specifically in exchange for an agreement setting forth territorial rights
  • Sets forth language that specifically permits a manufacturer and a wholesaler to enter in contractual agreements that govern ordinary business, including but not limited to, allowances, rebates, refunds, services, capacity, advertising funds, promotional funds, or sports marketing funds
  • States the code does not prohibit a wholesaler from selling territorial rights of a manufacturer to another wholesaler

This is the little bill that has some Texas breweries in an uproar.

What this bill does is to essentially make it illegal for a brewery to sell its distribution rights to a distributor. Many smaller breweries are upset because this essentially keeps them from selling a property they rightfully own. Additionally, while a brewery cannot sell their distribution rights, distributors would be free to sell those rights between each other.

While the idea of a third party being able to sell a commodity which the law let them attain for free seems outrageous, it's not the worst implication in this bill. A major ramification here is that it eliminates almost all incentive for a brewery to build and market itself via self-distribution at all. Unless modified, it may very well spell the end of self-distribution for small start-up breweries as we know it. Additionally, it completely cuts off a possible revenue stream for young growing breweries looking to expand as they shift to a larger third party distributor.

As bad as that all sounds, however, the truth of the matter is that the practice of a brewery receiving cash for distribution rights to their product has never been out-and-out legal in Texas. In the past, the TABC has stated it was illegal for such a transaction to take place. Additionally, many breweries in Texas who are already with distribution houses never received payments for the rights to distribute. Essentially, you have breweries upset over money that they may have never seen in the first place.

Regardless, it is a fairly backwards and lopsided piece of legislature that clearly favors distributors in the way it is currently worded. Most brewers whom I spoke with regarding the legislature believe that despite its ridiculous implications, this ruling was a foregone conclusion due to TABC's request for clarification on the legality of the practice.

In an effort to better understand what these laws may mean to you the consumer, I spoke with brewers, bar owners and other industry insiders to get their feedback on the current state of the legislation and their view on the implications for Texas beer going forward.

You can see the reaction to the legislation from Scott Metzgar of San Antonio brewpub Freetail here. Austin brewery Jester King chimed in as well

One of the biggest implications for Hay Merchant owner Kevin Floyd is the newfound viability of the brewpub model.

"This is where the innovation is going to come from" says Floyd. "States with strong beer cultures and even stronger beer revenue all have very strong brewpubs at the heart." Till now, Texas has struggled to support brewpubs because the model has been handcuffed by our current laws. The ability to sell their product outside their brick and mortar locations will allow for larger branding and far greater reach to consumers.

The small brewpub model may also lead to a decline in new, freestanding brewery startups. Brewpubs now hold a better distribution option for smaller brewers, making them the more financially stable option in most cases.

Another possibility for the future will be a change in the way breweries run their tasting rooms. Cafes and lunch counters will now be an option because of the newfound ability to sell beer for on-site consumption. We have already seen Saint Arnold launch a kitchen in hopes of running a lunch service in the near future.

Perhaps the biggest implication in all of this is the possibility for a greater number of Texas breweries to see a rise to national prominence, says Ron Extract of Jester King. With new rights and new options, brewers may have the chance and motivation to seek customers in new markets. Unfortunately, another factor could simply be that the laws laid down in SB 639 may prompt brewers to seek more lucrative distribution deals outside of Texas.

Yes, we could, in fact, one day see a Texas brewer selling a majority of its beer to another state. While this scenario is unlikely (few Texas breweries even have a portfolio that is prepared for that sort of leap in the near future), it serves as additional proof of how asinine our beer laws truly are.

While I may have issues with the bill and its unfair format, overall it's still a great leap forward that will result in a huge boost to the Texas brewing scene. Not everyone in Texas agrees with us, however. Check back later today for more.

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