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Beer Bust

How state laws leave Georgia microbrewers with a hangover

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On the last Saturday of September, the Brick Store Pub in Decatur hosted the first of several gatherings intended to honor Crawford Moran and the company he'd closed just weeks before -- Dogwood Brewing Co.

By the end of the evening, bartenders had drained the final kegs of Dogwood's last specialty beer, a rich lager called Octoberfest, leaving customers to ponder one of the unassailable laws of the beer business: A good beer does not guarantee a successful brewery.

In few places is that dictum more true than in Georgia. In a state with almost 9 million people, only three microbreweries currently produce and bottle their own beer. Compare that to Colorado, which has half our population and 25 microbreweries, or Oregon, whose 3.5 million residents are served by 29 microbreweries.

Industry experts float a lot of theories for the disparity, including the Southeast's unremarkable history of beermaking, hot weather that discourages darker brews, and fickle and unimaginative beer drinkers. But no single factor holds more sway over the fate of a Georgia microbrewery than state law.

"It's a disaster," Moran says. "I don't mean to sound over the top, but I truly believe this: We have men and women in uniform dying, sacrificing their lives in the Mideast and around the world in the name of freedom, but I don't have the freedom in my hometown of Atlanta to change the distributor of my beer. That doesn't make any sense to me. That's not freedom."

Indeed, in the beer and booze business, the notion of freedom -- as in a free market where competition rewards consumers -- is fiction. In Georgia, as in most states, brewers must sell their beer through a distributor and only through a distributor. A brewer isn't allowed to sell so much as a bottle from its brewery. And if the brewer is unhappy with the distributor, severing that relationship can be all but impossible. Thus, a brewery's fortunes can rise and fall on the quality of the distributor it chooses.

"Who is this system protecting?" Moran says. "It protects the big interests, and distributors donate a lot of money to state politicians. It's a racket is what it is."

The 36-year-old Moran traces his fascination with beer making to his 20s, when a love of beer led to the realization that he could actually make it himself. His first batch came after a friend coached him through the steps by phone. From there, it didn't take long. By his late 20s, he'd earned a master's in comparative literature from the University of North Carolina. But a weeklong course at the Siebel Institute in Chicago, one of the nation's two brewing schools, determined his destiny.

At 28, with $750,000 from local investors, he opened Dogwood Brewing. The local brewing scene was not so different than it is today - just a few breweries trying to find a toehold in a cautious market that favors Budweiser, Miller and Coors. But small brewers are inveterate optimists, and Moran's greatest pleasure was seeing the smile on a customer's face after taking a sip of his India Pale Ale for the first time.

Within a year, Moran's beers were taking home medals from competitions around the world. Weekly tastings at the brewery off Chattahoochee Avenue became pilgrimages. Fans would bring their own mugs. Not that Moran didn't have friends before, but the number multiplied when he opened a brewery. He remembers getting phone call after phone call one Super Bowl Sunday, everyone inviting him over to watch the game, and could he bring a few beers?

As a start-up brewer, Moran says, his most important decision -- more important than the design of his labels, the strain of yeast he used, or the varieties of beer he cooked up -- was choosing a distributor. In Georgia, as in most states, all alcohol must go through an intermediary -- a distributor -- on its way from the manufacturer to the store shelves. It's referred to as the "three-tier system," and it dates back decades.

The three-tier system draws hard and fast lines between those who make alcohol, those who wholesale it, and those who sell it to consumers. If you do one, you can't do either of the other two. The idea was to provide an orderly way to regulate a product that has traditionally attracted some unsavory characters.

Through the three-tier system, the government can track alcohol all the way from the distillery, brewery or winery right up to the grocery store shelf -- and can tax it every step of the way. Buy a six-pack at Green's, and the price includes not only sales tax, but taxes paid by the brewer and the distributor. The Georgia Beer Wholesalers Association estimates that $3.58 of every case of beer goes to pay federal, state or local taxes.

The other idea behind the system was to prevent monopolies, which occurred in pre-Prohibition days when a big brewer could crowd out the competition by buying up the local bars and stocking them solely with its product. But over time, the three-tier system has ensured a monopoly of another kind. If you own a bar and want to sell Budweiser on tap, you're forced to do business with the distributor in your area that sells that brand. Don't bother looking for the competition; in the three-tier system, competition -- at least between distributors selling the same brand -- doesn't exist.

As with any commodity in any industry, the more beer a distributor sells, the more money he makes. So distributors don't just distribute. They work with the brewer to promote the brand. They give out merchandise, like mugs or caps. They build up the brand.

In the 1960s, distributors began lobbying state legislatures for more protection. They were worried that the work they'd done to promote a brand would be all for nothing if the supplier -- the brewery, winery or distillery -- took its business to another distributor. Soon, franchise laws were enacted in dozens of states. Georgia ended up with one of the toughest franchise laws. It allows an alcohol supplier to switch distributors only in extreme cases. Even then, the state must give the OK.

"The franchise laws are justified by the distributors in terms of the allegedly great market power of the alcohol suppliers, such as the brewers," says Glen Whitman, a California economist who wrote Strange Brew, a book critical of franchise laws. In fact, Whitman says, it's now distributors who have become all-powerful through mergers and huge economies of scale. Alcohol sales in metro Atlanta are dominated by a handful of distributors. This past July, Smyrna-based United Distributors, which employs 1,000 people in nine states, bought out Better Brands, creating what is thought to be Georgia's biggest distributor.

"It's really a form of corporate welfare," Whitman says. "It's protecting an industry from competition. What people think of as corporate welfare is handouts. But that's almost never what it is. It's almost always some form of protectionism."

Distributors protect their turf with heavy involvement in the political process, including thousands of dollars each year in campaign contributions to both Democrats and Republicans.

Carl Von Epps, a Democratic state representative from LaGrange, is chairman of the Regulated Industries Committee, which decides the fate of legislation that would affect the three-tier system or the franchise laws. In a three-year period that ended last January, he reported approximately $91,000 in campaign contributions. Of that amount, at least $40,000 came from distributors or their lobby.

Distributors also fork over thousands every year to the Georgia Wholesalers for Better Government, a lobby that in turn donates to the campaigns of lawmakers across the state. In the 2002 election cycle, according to disclosures filed with the Georgia Secretary of State's office, the lobby gave $125,000 to candidates or their parties.

Distributors don't just woo legislators; they also know how to coax regulators to become lobbyists for their cause. Chet Bryant spent 27 years with the federal Bureau of Alcohol, Tobacco and Firearms, and most recently was director of the state Department of Revenue's Alcohol and Tax division, the office responsible for regulating the three-tier system. Bryant is now executive director of the Georgia Beer Wholesalers Association.

In 2001, when he still worked as a regulator for the state, Bryant was one of many officials who testified before a special state House committee reviewing the three-tier system. The committee was prompted by a lawsuit filed earlier that year by convenience and grocery stores. Georgia Department of Revenue rules said that if a store wanted to carry a certain type of beer, it had only one choice: to buy the beer from the distributor in that territory who sold that brand. And the stores were claiming those rules improperly favored wholesalers.

The committee heard from all three tiers of the system. Testifying for wholesalers, veteran lobbyist Bryan Fiveash said that "our industry ... fosters vigorous inter-brand competition and provides accountability at all levels. It is our opinion that the system is not only not broken, it is working well."

Another endorsement came from Bryant. In his report to the committee, Bryant and then-Commissioner T. Jerry Jackson called the system a "time-tested framework that has proven to be an effective regulatory scheme."

Representing brewers were officials from Anheuser-Busch and Miller. Both companies operate huge breweries in Georgia, employing hundreds. The Anheuser-Busch official likened the three-tier system to a "reliable family car. It might need a tune-up and maybe even a new set of tires, but neither the industry, nor the state, needs to incur the expense of designing and building a brand new vehicle."

A majority of the committee members, including Epps, agreed. Their conclusion was "to refrain from any significant legislative changes at this point."

The committee didn't hear from any of Georgia's three microbreweries -- Dogwood, Sweetwater or Atlanta Brewing; they were never invited to testify.

"We never even heard about it," says Freddy Bensch, co-owner of Sweetwater Brewing Co.

When Moran was looking for a distributor back in 1996, there were about six choices. He finally settled on Empire Distributors Inc. Founded in 1940 by Max Kahn, Empire is a family business. Kahn's son, Roger, is the former CEO and chairman (and a past unsuccessful congressional candidate). His grandsons, Michael and David, now run the company. With operations throughout the Southeast, Empire last year saw revenues of $300 million.

Empire's bread and butter is wine and spirits. But Moran liked Empire's pitch -- that it wanted to build up a beer portfolio with specialty brews like Dogwood. He figured he'd get individual attention and ride the crest of a growing wave of beer sales at Empire.

But as the years went by, Moran says, the promises fell by the wayside. Empire's enthusiasm for selling beer waned. It eliminated its beer manager position, Moran says. He'd walk into a grocery store and see four varieties of Sweetwater beer, four kinds of Atlanta Brewing beer, and only one of his own. He'd argue with the warehouse to send back empty kegs, and end up driving down and picking them up himself. He'd complain to Empire and they'd shrug their shoulders, he says. "Crawford," he says they told him, "we're not a beer distributor. We sell wine and liquor."

One premise of the three-tier system is that with distributors selling beer to retailers, brewers will be free to concentrate on making good beer. Except the system doesn't work that way. No matter how small you are, brewers know they have to sell their beer at least as aggressively as the distributor does.

"Brewers can't just hand their product over and say to the distributor, 'Go sell it and make me rich,'" says Daniel Bradford, president of the North Carolina-based Brewers' Association of America. "It doesn't work like that. More and more, you're finding that the small brewers, like the big ones, are providing market support. You've got to come in with the plan. You've got to know where it is you want to go. You've got to know how to get there. It's a two-way street. If you provide support, they're going to work with you. But if you're going to be passive, they'll be passive."

Moran insists he was anything but passive, employing his own salesperson to open new accounts. More than once, he says, the rep would go into a new bar or restaurant and find that Empire salespeople had been there, but had never breathed a word about Dogwood.

Eventually, Moran began asking Empire to release his brand. "I said, 'You've got to release my brand or you'll drive me out of business.' That was a few months ago, and here we are."

It´s mid-afternoon on a weekday, and Freddy Bensch is exercising his prerogative as co-owner of Sweetwater Brewing Co. He is dressed in cargo shorts, T-shirt and Birkenstocks, leaning against his pickup outside his brewery, chatting on his cell phone, and sipping from a pint glass.

Bensch was born 33 years ago in California, but his education came in Colorado, where he worked in breweries while attending college. The fact that he has made his passion his occupation hasn't diminished his enthusiasm for beer-making. Quite the contrary. On a tour of the brewery's new facility in Midtown, Bensch flips a spigot on a massive 100-barrel fermenting tank, and fresh beer fills up a glass.

"This is a little piece of heaven," says a guest.

"Man," Bensch says, "this is a great big piece of heaven."

Last year, Sweetwater brewed 14,500 barrels, and this year is on track to brew 18,000. Atlanta Brewing is far back, brewing about 4,000 barrels. And before it closed, Dogwood was also at a 4,000-barrel pace.

Last spring, after seven years on Fulton Industrial Boulevard, Sweetwater sold its facility to an upstart called Zuma, which is brewing a beer aimed at the Latino market. Sweetwater moved to an old dry cleaners in an industrial area off Monroe Drive. Bensch and his colleagues outfitted the cavernous space with tanks shipped on semis from a brewery in California. Tinkering with any element during the brew process -- much less moving an entire brewery and installing new equipment -- can alter the final product in subtle and not-so-subtle ways, so Sweetwater put a moratorium on new sales while the company calibrated the machinery and re-captured its winning formula.

Today, although Bensch insists he can taste the difference from batch to batch, Sweetwater's consistency -- especially in its flagship brew, 420 -- wins plaudits from the competition.

"I don't think they've ever put out a bad bottle of beer," says Greg Kelly, founder of Atlanta Brewing, which produces Red Brick Ale and Laughing Skull, among others, from its brewery in Midtown.

Consistent quality and taste is an imperative in the beer business, where consumers are confronted with dozens of choices at the grocery store. Sell a six-pack that foams over when your customer cracks it open, and you may have lost that customer for good. Dogwood had just such a problem several years ago, and even went so far as to pull product from retailers' shelves.

But a product's quality won't mean much if it's not wrapped in a sunny package. Sweetwater's label has its fish and its motto, "Don't Float the Mainstream." Dogwood's label, on the other hand, wasn't eye-catching, says Pete Marte, who co-founded Thunderhead Distributing and is now Southeast marketing manager for Flying Dog, a Colorado microbrewery. "Crawford's packaging was not as good as it could have been," Marte says.

What's more, the unwritten rules of beer sales in Georgia are stacked against small brewers, Marte says. He learned the hard way with Thunderhead.

"Let's say I want to go into a bar, as a distributor, and get a draft line for one of my brands. That draft came at a cost to the bar owner. And the bar owner has a loyalty to the people who gave the system to him. So I've got to buy his loyalty away from him by giving him free product."

That free product could be a keg at no charge. Or a discount on the first few. It doesn't matter; what matters is that the distributor's brand is now on tap, and his competitor's brand isn't. Like payola, it's illegal. But since both parties benefit -- the bar owner pays less for product, while the distributor scores another account -- neither is likely to rat on the other.

As a small distributor, Marte says, he couldn't play by those rules. "I didn't have a big enough brand to give away product," he says. And neither, he speculates, did Empire when it came to selling Dogwood. "Even as big as Empire is and as powerful they are, they were not competing on this level," Marte says. "They didn't go on the field to play to win in the beer business, and Crawford was a victim of that."

But as Marte also says, "Any business failure can be attributed to a number of things." How much any one factor -- the packaging, the payola, the competition -- figured in the demise of Dogwood is hard to say. Even Moran says Empire wasn't responsible for all his problems. But he is convinced that if he had a different distributor, he'd still be open today.

Gary Wolfe has another opinion. As regional sales manager at Empire, Wolfe chooses his words carefully when discussing Dogwood Brewing. "We're very proud to represent the brand," he says. "It was an important part of our beer portfolio." Indeed, the only other beer Empire distributes in Georgia is Sam Adams.

Wolfe says the realities of the marketplace crept in. Big brewers, looking to elbow their way into the craft beer market, were introducing their own specialty brands. And he says that better-positioned craft brewers, armed with huge marketing budgets, have the money to advertise "aggressively" through print and radio. "Other brands have suffered if they haven't been able to participate at those types of levels."

Wolfe says Empire never rejected Moran's request to release his brand and gave him the sales figues he'd need to shop for another distributor. "We told him we would work with him in that transition."

Moran calls Wolfe's assertation false, but does say that sales were up 20 percent at Dogwood compared to a year earlier. What's more, the new beer law in Georgia left Dogwood well positioned to take advantage of the higher-alcohol beers that could now be produced. Instead of being limited to beers with 6 percent alcohol, brewers could make beers with alcohol content up to 14 percent. "It played into what our brand was about," Moran says.

Moran says the jump in sales wasn't enough to offset his debts. Only a new distributor, he believed, could be his salvation.

Moran had one more option. He could have petitioned the state to allow him to hitch up to a new distributor. While it's done rarely, the state can release a supplier from a contract if it rules that the distributor is failing financially, breaking the law or not promoting the brand effectively. From what Moran says, this last clause seems custom-made for his type of complaint. But he didn't file the petition.

Asked why, he lists several reasons. First, he worried that any problems he had with Empire would only be exacerbated if he made his complaints formal. Second, he was holding out hope for a last-minute infusion of cash that would tide him over -- cash that never came. Third, without that cash, he doubts he could have survived the months-long process that appealing to the state would have involved.

In the end, he says, it would have been too late. "I honestly don't think that would have saved us."

Brian Buckowski´s day job is brewer at Five Seasons brewpub on Roswell Road, but his dream is to one day open his own brewery. He and John Cochran are co-owners of Terrapin Beer Co., out of Athens. For six years, they've been talking patiently with investors, perfecting their recipes and devising a business model.

Two-and-a-half years ago, they brewed some of their first beer on a large scale. It was at Dogwood Brewery. Six months later, the beer -- a rye pale ale -- won a gold medal at the Great American Beer Festival in Denver.

"We were like, 'OK, the product has legs,'" Buckowski recalls. From there, they scouted out contract brewers along the East Coast that make beer to exact specifications for other clients. Fans of jam bands, the partners hired Richard Biffle, who's illustrated Grateful Dead art, to draw the label of a turtle wearing Jerry Garcia glasses.

"You have to be in tune with your market," Buckowski says. "In the case of Dogwood, I don't know who their market was. I don't know what their marketing strategy was, because I wasn't there. With Sweetwater, I know. It's like us. We go after music people, people who like Widespread Panic, outdoors, sports, kayaking. It's a package deal."

With Dogwood out of the picture, leaving a brewery available, it's natural to wonder if Terrapin may have found a home. Buckowski won't comment. But the death of Dogwood provides a strong cautionary example.

Moran, meanwhile, has been cleaning out his brewery.

"It's like when you clean out the attic. Everything's a memory. I feel like Jimmy Stewart in It's a Wonderful Life. People have been coming up to me telling me how much the beer's meant to them. They say my friends will get me through this. I say, yeah, my friends and a whole lotta beer."

steve.fennessy@creativeloafing.com

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