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New Law Signals Big Beer Changes in Montgomery County

Those who failed to closely read the listing for Republic’s First Annual 4th of July Freedom Fest in Takoma Park may have missed a particularly interesting tidbit beyond the fun sounding event. The press release notes that the barbecue/beer/freedom festival will celebrate the “passage of [a] new law enabling microbreweries to self-distribute in Montgomery County.” Montgomery County is notable not just in the area but nationwide for its stringent alcohol distribution laws, but a new state law that goes into effect July 1 should go a long way toward making some craft breweries’ (and also some wineries’) lives easier.

Maryland House Bill 132 was signed into law by Governor Martin O’Malley on May 15. Far from a maze of legalese, the three page piece of legislation is more or less to the point. Starting July 1, holders of certain licenses and permits (both in- and out-of-state) will be legally allowed to “sell or deliver its own beer to a county liquor dispensary, a restaurant, or any other retail dealer in Montgomery County,” and conversely, these entities will be legally allowed to buy that beer. This is what is known as “self-distribution,” where a brewer skips the middle man and sells directly to retailers. This scenario is not unheard of; DC’s Alcoholic Beverage Regulation Administration (ABRA) allows breweries within the District’s borders to self-distribute, and brewers like 3 Stars Brewing Company and Right Proper Brewing Company both do so.

To put into perspective why this a big deal, here is a short crash course on how alcohol distribution works in Montgomery County. Recall that the three tier system has producers (read: breweries), distributors, and retailers. Breweries sell their beers to distributors. Distributors then turn around and sell these beers to bars, restaurants, and bottle shops/liquor stores, who then sell to consumers.

Montgomery County is what is known as a “full control jurisdiction,” and, “is the only jurisdiction in the United States that controls the distribution of the big three—beer, wine, and liquor—and it’s been handling this puritanical duty since late 1933, when the county decided the best way to limit the supply of fire water to its residents was to put the government in charge” (to read more, check out Tim Carman’s great 2007 article). In Montgomery County, the distribution tier is not quite the same as elsewhere. Instead of distributors selling directly to retail establishments, they prepare a brewer’s portfolio for sale to Montgomery County’s Department of Liquor Control (DLC) and coordinate the logistics of getting beer to the DLC. The DLC operates a countywide warehouse from which bars and restaurants place orders. The county then delivers the product to the retail establishments.

The complete set of merits and demerits of the “full control jurisdiction” is a topic for another post, but trust that complaints are common from brewers, distributors, and retailers (again, Tim Carman’s 2007 post has more). Here are just a few of the reasons for this: beer deliveries from the DLC are less frequent; the DLC’s mark-up for handling the product (in addition to the state’s excise tax on alcohol) makes products more expensive; and special order beers that are not regularly stocked by the DLC both take longer to process through the system and can get lost between the two different distributors’ warehouses they need to go through. This last is a serious problem because the DLC warehouse essentially becomes a fourth tier in the system. This additional step opens up more opportunities for unfortunate things to happen to beer, e.g., fresh IPAs going stale, which is especially possible since, according to Robison, the DLC does not store beer in refrigerators.  (To read the county’s defense of being a “control jurisdiction” you can read this, um, somewhat biased FAQ.)

Tim Liu, beer director for Scion Restaurant’s two locations (Dupont Circle and Silver Spring) and Crios Modern Mexican (Dupont Circle) has experienced life under both distribution schemes and the problems described above. “The biggest difference for me was the delivery schedule. In DC, you place an order and receive the product the following day. Compare that to [Montgomery County], where it can take 1-3 weeks for delivery. Only the largest, high volume brands are available for same week delivery.” On product selection, he adds, “When it comes to availability, Montgomery County has most of the same major breweries. The difference is in the specialty beers, most of which never see Montgomery County,” but if they do they “are significantly more expensive.”

The new law coming online allows for some breweries to bypass the DLC warehouse process and self-distribute to the bars, restaurants, and liquor stores that will ultimately sell beer to consumers. Self-distribution in this case will help to correct each of the grievances above. For example, if a brewery wanted to make sure that certain rarities were only received by certain venues (because the brewer and the beer director have a good working relationship, for example), a brewery could now self-distribute these beers directly into the hands of specific retailers. Further, because of an approximate two week lag between a beer's arrival at the DLC and its delivery to a venue, needed kegs could get to a retailer much quicker if need be (say for an event). An even bigger advantage is that by avoiding the DLC mark-up, these self-distributed kegs could (keyword: could) also be offered at a substantial discount to the retailer. Of course, whether that discount would be passed on to consumers remains to be seen. Worth noting is that the change is not “all-or-nothing;” brewers can self-distribute the beers they choose to when they choose to and distribute the rest of their product via the normal tiered system.

The keyword in the paragraph above is "some," as the new law only applies to breweries with a certain class of license or permit (specifically Class 7 microbrewery or wholesaler’s licenses in-state and nonresident brewery permit owners out-of-state). In Maryland, Class 7 microbreweries are those that produce 22,500 BBLs of beer or less annually (for reference, DCBrau's 2013 barrelage was over 12,000 and Port City's was 9,000). Class 7 breweries are permitted to self-distribute up to 3,000 BBLs of beer per year in Maryland. Some of the larger craft breweries in Maryland (e.g., Flying Dog, Heavy Seas) are Class 5 licensees and are not permitted to self-distribute under the new law.

Still, for those breweries eligible to take advantage of the law change, this is good news. “I think it is a boon to both small brewers and MoCo consumers,” says Volker Stewart, co-owner of The Brewer’s Art in Baltimore, “It is a huge step in loosening MoCo, which had one of the more challenging sets of rules for small brewers.”

Bill Butcher, founder of Alexandria’s Port City Brewing Company, which is eligible to self-distribute under H.B. 132, echoed these sentiments. “We see this as a positive development. This will make it easier for our customers, the bars, restaurants and retail stores that carry our beer, to get our products in stock and available for sale,” says Butcher. “It won’t replace the county’s distribution system, but it will reduce the friction that we see between our accounts and the DLC. We are not a large producer, and our small quantity items can get lost in the system. This will allow us to get our beers to our customers more quickly and efficiently.”

Republic’s Brett Robison says that brewers are “the big winners” while “prudent retailers” have gained a “significant victory” and “consumers” a “mild” one “with some unintended consequences.” He foresees “an inevitable surge in the local craft beer scene and a progressive disengagement in regional craft and big beer” by the public because of having access to “more options at a lower price and fresher beer.” His fellow beer director, Tim Liu, adds, “If what I've heard is correct, I think it is a huge advantage for young, local breweries. One of the obstacles for a young brewery is choosing the right distributor for their brand. I think it gives the brewery much more control, without forcing them to commit to a specific distributor.”

The impetus for this bill came from the coming-this-summer Denizens Brewing Company in Silver Spring. Brett Robison tells DCBeer, “Emily Bruno and Jeffrey Ramirez did a bunch of research and case compiling which Julie Verratti then presented to MD ABC / Montgomery County DLC.” Bruno, Jeffrey, and Verratti are all owners of Denizens. “Julie went before several different rounds of politicos and put the state of affairs into a frightening matter of fact sense for legislators,” continues Robison. Verratti says that when she and her partners were looking for a place to start a brewpub, recent legislative wins attracted them to Montgomery County: “We chose Montgomery County because the state had just recently (as of July 1, 2013) passed laws allowing class 5 breweries to sell pints without food in MoCo and allowed for self distribution in almost all counties in the state other than MoCo,” she explains. “The county had also recently created a Nighttime Economy Task Force to look at potential law or policy changes to create a better climate for social industries, including alcohol. We took this as a sign that the county was open to new ideas and ripe for change, so we jumped on the opportunity.”

Once MoCo was identified as moving progressively on alcohol regulations (mindbogglingly to anyone who has followed it over the years), the Denizens team met with Montgomery County councilman Hans Riemer. From there they testified in front of the aforementioned Nighttime Economy Task Force and submitted legislation to Maryland’s Montgomery County delegation in Annapolis. Their argument was one that emphasized the economic and jobs boost that more lenient regulations would have, and even the county DLC bought into the idea. “We worked directly with Kathie Durbin at the DLC and Delegate Sam Arora to craft the legislative language. This led to county and state officials from every level and office not only supporting, but directly advocating for allowing breweries to self-distribute,” says Verratti. Was changing the regulations in one of the staunchest and most stringent counties in America difficult? Surprisingly not, Verratti tells us: “From an economic development and job creation perspective changing this law was a no brainer.” (For those readers voting on the basis of beer support, other legislators who were helpful, according to Verratti were Delegate Tom Hucker, currently running for council in MoCo, and state senator Jamie Raskin.)

Now that they can self-distribute, we should expect to see craft breweries with the appropriate licenses going bar-to-bar like IPA milkmen (and milkwomen) daily selling $1 DIPAs, right? Not so fast. Remember that there would be a lot of overhead and infrastructure required to cut both traditional distributors and the DLC entirely out of the process. Taking, filling, delivering, and accounting for orders are just some of the tasks that a brewery would be required to take on themselves through self-distribution. This means that in most cases more personnel would need to be hired and fuel and vehicle costs incurred, among others. Multiple breweries we spoke with said they just didn’t have the infrastructure to make that work and would continue, for the most part, to use the extant process.

Port City’s Bill Butcher notes, “I can only speak for ourselves, but obviously if we start our own limited self-distribution, this puts us in the role of a wholesaler. This role carries its own overhead and business challenges. It will not affect our prices. We see it as a convenient option for our customers to get our products more efficiently.”

The Brewer’s Art’s Volker Stewart says of the price question, “Without having a concrete plan just yet, I can say without hesitation that kegs coming directly from us will be substantially cheaper for the retailer than they were paying the DLC.” Don’t expect this to completely reform the cost structure of beers in MoCo, however. Cheaper prices on whichever kegs (and it sounds like it will be a very small percentage of the overall volume in the county) are self-distributed won’t turn the tide completely. Even Robison, who is optimistic about the legislation, writes that, “Kegs will be cheaper and order will be significantly easier (assuming many breweries adopt self-distribution.)”

From the retailer’s side, Scion’s Tim Liu says, “I don't see any reason for breweries to charge less than [they] do in other markets. But if they did, we would probably pass along those savings. Our pricing is strictly based on the cost of goods, not the scarcity, demand, or any other factors.”

And what of the benefits for the firebrands behind this legislative change? Why rock the boat when you haven’t sold your first pint yet? Julie Verratti from Denizens points out that

Being able to self-distribute will allow us to get our product in the door at many more bars and restaurants than prior to the law change. As other breweries know, this is so important when you are just starting out. If we had to sell our beer to the DLC ahead of time we wouldn't have as much control over quality, quantity, or even timeliness in delivery. When you add all of those factors up it is nearly impossible for a start-up brewery to sell in the system. We want our beer to be accessible to anyone and having more channels to sell it only makes that easier.This change has solidified for us that we made the right choice when we chose Montgomery County, MD over DC.

Even brewers who are not affected by this change see it as a benefit. “We view wins for any individual or type of brewery as a win for the overall industry,” says Flying Dog’s Chief Marketing Officer Ben Savage. “While we're all growing strong, craft is still a marginal percentage of the overall beer market, so what is good for a small segment of craft is most often good for all craft breweries… We support most initiatives that further the availability and exposure of craft beer in the State of Maryland.” Aside from the sentiment of camaraderie, Savage also points out that Flying Dog isn’t a good candidate for self-distribution anyway: “...at our size, self-distribution (and all of the logistics that come with it) is not an option for us nor something we plan on pursuing.”

From a craft beer angle, the consensus from the craft beer community is that the passage of H.B. 132 is both an unexpected and positive development. With a new brewpub coming in, political representatives who seem responsive to the realities in the market and eager to attract more of the buzz of the craft beer segment, retailers who want their beer menus to someday rival those we enjoy in the District, and consumers seeking out ever more delicious suds, the Montgomery County craft beer market, long thought to be stodgy and pseudo-prohibitionist, all of a sudden looks adaptable and progressive (at least compared to its former self). As Julie Verratti concludes, “We only see good things on the horizon for the DMV beer scene coming out of this new legislation.” Surprisingly, we agree.

The author is grateful to Chris Van Orden, Jacob Berg, Brett Robison, and John Fleury for their assistance in the writing of this article.

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