Monday, March 5, 2012

Kettlehouse, the 10,000 bbl Limit, and a Blueprint for Legislative Success

Today, Growler Fills welcomes guest writer Eric Cioe* for his take on the 10,000 barrel limitation recently highlighted by Kettlehouse Brewing Co.'s decision to pull out of three Montana markets.

BY ERIC CIOE - Kettlehouse Brewing has unfortunately been forced to make a tough decision: either pull out of some of their markets, or shut down their two tap rooms in Missoula.  The decision isn’t forced by capacity demands.  In fact Kettlehouse has recently expanded their production brewery on Missoula’s Northside, more than doubling capacity with two new 90 barrel fermenters.  The issue is a legislative one, an issue that at least one other state has just dealt with quickly and justly, providing a blueprint for Montana legislators to support a popular and growing local business.

The rub is caused by the definition of ‘small brewery’ in statute 16-3-213:
(2) (a) For the purposes of this section, a "small brewery" is a brewery that has an annual nationwide production of not less than 100 barrels or more than 10,000 barrels.

(b) A small brewery may, at one location for each brewery license, provide samples of beer that were brewed and fermented on the premises in a sample room located on the licensed premises. The samples may be provided with or without charge between the hours of 10 a.m. and 8 p.m. No more than 48 ounces of malt beverage may be sold or given to each individual customer during a business day.
What these parts mean put together is that breweries that produce more than 10,000 barrels a year are no longer considered a “small brewery” and can no longer sell pints of their beer on premises.

Big Sky Brewing is so far the only brewery in Montana that exceeds that limit.  Because of this, they have to give away their beer rather than sell it in their taproom, and in quantities less than 48 oz.  One gets the feeling that this is not an issue for Big Sky, who have successfully built a regional brewery that distributes to almost half of the states in the country.  Their goals and circumstances are unique among Montana breweries.

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Kettlehouse is a different animal entirely.  Their Myrtle Street taproom is an obvious hangout for the university and downtown communities, more relaxed and kid-friendly than nearby bars.

Even more obviously community oriented is the Northside taproom. There, Kettlehouse hosts Community UNite each Wednesday where $.50 of every pint poured goes towards varying organizations within Missoula.  These events are booked through the end of 2012 already.  Important community groups like the Big Sky Documentary Film Festival, the Caras Park Fund, and the Missoula Senior Center are all being represented in the first few months of 2012.  Every Wednesday there are bikes chained up outside and street parking full for a hundred yards in both directions.

With both of their taprooms, Kettlehouse supports the Missoula that has supported them through the years.

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So when faced with the choice of brewing beyond the 10,000 barrel limit for selling beer in their taprooms in Missoula, or reigning in production by pulling out of markets where their beers are popular, Kettlehouse has chosen to side with Missoula.  No doubt Cold Smoke fans in Kalispell, Helena, and Great Falls are disappointed with the choice, but Tim O’Leary recognizes the importance that his taprooms have in Missoula and is unwilling to give them up, even at the cost of potential profits.

But he should not have been faced with this choice to begin with.  While arguments can be made for most of the other provisions that govern breweries, such as the 48 oz law and the 8 pm last call, one can scarcely see a point in the 10,000 barrel limitation for beer sales in taprooms.

Who are the beneficiaries of such a law?

Not the bar owners in Missoula.  Because of the other regulations on the Kettlehouse, there is hardly competition between local bars and local breweries as is.  

Not the bar owners in Kalispell, Helena, and Great Falls.  They will no longer be able to supply their customers with the Cold Smoke that they enjoy.

Not local small brewers.  Missoula newcomer Draught Works is already pouring beer as fast as they can brew it and, like both Kettlehouse locations, are busy almost every night of the week.

Not the state.  The more beer Kettlehouse sells, the more tax dollars that go to Helena.

Not the local economy.  Kettlehouse employs brewers and bartenders at two locations in a town with a distinct job shortage.  Their growth would mean more jobs in Missoula.

Not the local communities.  Both taprooms are friendly, safe places where locals can grab a pint after work without being in bar environment.

Those who will benefit most of all from the Kettlehouse not being in three large Montana markets are large out of state brewers like Sierra Nevada and Deschutes, who will doubtless fill major parts of the void left by Kettlehouse’s departure.  And as much as I enjoy the beer from those breweries, I can’t help but feel they are doing fine without help from the Montana legislature.  

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Fortunately we are not in uncharted waters.  In 2010 and 2011 I watched a similar regulatory hitch encountered and eventually overcome while living in the Midwest.

The Three Floyds Brewery in Munster, Indiana realized in 2010 they were on course to surpass the 20,000 barrel limit that the state government had imposed in the early 1990s.  After reaching that limit breweries would no longer be able to operate a taproom, among other things.  Three Floyds teamed up with Sun King and Upland, two other breweries in the state who were approaching 20,000 barrels per year to lobby for raising the limit.

Recognizing the economic benefit to the community and the state as a whole that these three successful business provided, the Indiana legislature quickly voted to raise the limit to 30,000 barrels per year in May of 2011. With Three Floyds recently growing at a rate of almost 5,000 barrels annually, this law will no doubt be challenged again in the next few years.  But when pressed on the issue, the Indiana legislature was able to take quick action to prevent successful businesses in their state from being forced to make tough decisions regarding their production.

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Unfortunately for Montana, Kettlehouse has already had to make a tough decision to comply with state law. Kalispell, Helena, and Great Falls residents are already beginning to see fewer Kettlehouse cases at their beer stores and fewer Kettlehouse kegs at their bars.

Tim O’Leary has committed himself to raising the 10,000 barrel limit through legislative action.  Doubtless the beer communities of Kalispell, Helena, and Great Falls support his efforts.  And Bayern Brewing, who is likely the next brewery to reach 10,000 barrels in Montana, also stands behind him.  But beyond that, any Montanan who cares about the growth of its local business, especially those who support the community they are part of as much as Kettlehouse does, should support him to get the limit raised or even eliminated.

Of course there will be complications involved.  Any alcohol-related decision made in Montana must contend with the biggest lobby in the state, the Montana Tavern Association, who have not proven flexible with previous challenges to brewery regulations.  But because the main beneficiaries of the limit seem to be out of state brewers who stand to gain sales while Kettlehouse loses them, the Montana legislature and any other interested parties should work quickly so that the natural growth of this successful business is not inhibited any more than it already has been.
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* Eric Cioe lives in Missoula, MT, having arrived not long ago from the great beer havens around Lake Michigan. He's a fan of big stouts, cask-conditioned ales, fresh local brews and - as I can attest - sharing brews with friends.  You can find more from Eric over at Montana Beer Finder.

7 comments:

  1. This is a State economic disaster, for sure. Breweries should be allowed to grow and prosper without such antiquated laws. However, Kettlehouse has more options than just pulling out of markets. Couldn't they have pulled just draft or cans from Kalispell, Great Falls, and Helena? Or couldn't they have purchased a license and continued their Missoula taprooms? This is about the dollars generated in the taprooms and nothing else. By today's definition is Kettlehouse a package brewery or two brewpubs? The laws need to be changed so that all breweries can grow and grow together in a community fostering the spirit of craft beer.

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  2. We're certainly supporters of changing the laws to help our craft beer industry prosper. A brewery owner cannot also own a beer/wine or all-beverage license, though there are certainly ways to structure your holdings and also structure the real estate to have the look and feel of a brewery and brewpub/bar. Tamarack's Lakeside location is one of the best examples. However, there are no unallocated licenses in Missoula. Thus, Kettlehouse would have to pay current fair market value for a beer/wine license or all-beverage license - assuming someone is willing to sell theirs. Flathead Lake Brewing Co. of Missoula paid $25k for their beer/wine license last year. Tamarack paid $715k last year for its all-beverage license for its new Missoula location.

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  3. On a personal level, I'm against a brewery having to pay more than they already are to be a successful business. I think the allocation system of licenses is in need of overhaul. Of course there would have to be some agreement worked out with the members of the Tavern Association, perhaps a 20 year phase out or something. But right now the state of things seems to be "well, we got dealt a bad hand, so now we're going to make everyone else suffer because of it."

    But this argument isn't one that needs to be made for current purposes. There is a simple legislative fix that could be tacked onto any other bill that simply changes the upper limit for "small brewery" from 10,000 to 20,000. I can't think of a reasonable objection that the MTA might make to that simple change.

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  4. From a technical perspective, we can't tack on riders to bills in Montana. Thus, unlike Congress, we can't add a bunch of small, but controversial (or even non-controversial) changes onto bills which are sure to pass.

    I, too, can't think of a reasonable objection to raising the barrel limit, but that's coming from a logical base of thinking. Fortunately, there have been some recent examples of cooperation which provide some encouragement.

    The license quota system which gives rise to the inflated prices is here to stay for the foreseeable future. Though most licenses have traded at a level which doesn't create too big of a problem for dropping the system, far too many have reached values which guarantee one hell of a turf war.

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  5. I have heard from a local brewer that the pulling out of Kettlehouse in those areas are now allowing other local breweries to up their production to fill that gap. So, based on what he knows from other brewers from other breweries, it won't necessarily be out-of-state breweries filling that gap, but other local breweries. I believe he told me that some of them are already planning on purchasing more brewing equipment so they can increase their production. Just something else to think about...

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  6. Who are the beneficiaries of such a law?
    How about the local brewers in Helena, Kalispell and Great Falls? I recently read in the Missoulian (March 9, 2012) that back in 1995 O’Leary helped draft the very laws that he now wishes to change because those laws were advantageous to small brewers.
    Now that Kettlehouse is on the verge of becoming a “big” brewery, it seems that O’Leary finds it convenient to change those laws. Every upstart brewery knows how hard it is to get local taps and distribution opportunities. If all of the taps in Helena, Great Falls and Kalispell are taken by “out of town” brewers (Kettle, Big Sky, Bayern), it makes distribution very difficult or impossible for the local breweries.
    Yes, Kettlehouse is a fine brewery with a fine product. I like it. O’Leary has been very successful. Why not have three more successful breweries in Kalispell, Helena and Great Falls? Why stack the deck so that there’s only room for “the big three” successful breweries in western Montana? I would not want to see the big three become the only three. America has already experienced “Big Beer” and we found it intolerable.
    I’m not saying that the laws should not be changed. Maybe they should. But let’s not forget why the laws were there in the first place. If the laws are to be changed, let them change for the right reasons and in the right way.

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  7. Thats right, Todd. The smaller brewers will fill the gap left by Kettlehouse. Thats how free markets operate. I believe what this boils down to is that "tasting rooms" do not have to purchase a liquor license, which are very expensive in Montana. Hence the 48 oz rule and unique hours of operation. Acquire a liquor license like the rest of the bars in the area and overcome these challenges.

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