On Tuesday, Rep. Bill Brawley, Rep. Chuck McGrady, Rep. John Hardister, and Rep. Pricey Harrison, along with the support of the North Carolina Craft Brewers Guild and Craft Freedom, filed House Bill 500 with the North Carolina General Assembly.
A 12-point document with the short title, "ABC Omnibus Legislation," House Bill 500 is the equivalent of a software update for North Carolina's alcoholic beverage regulatory framework. Within it, there are simple bug fixes, such as a retail business designation for on-premise retail sales of unfortified wine and brewer sampling for sensory analysis. There are small feature additions like the authorization of crowler sales and an allowance for noncontiguous brewery storage locations. More importantly, there are a couple of underlying algorithm rewrites, ostensibly aimed at increasing competition and encouraging innovation within North Carolina's wholesale distribution tier.
Make no mistake, should House Bill 500 be installed, the North Carolina craft beer industry is looking at a complete paradigm shift. Here's why.
The Self-Distribution Cap
Section 11 of House Bill 500 does two major things.
First, as expected, it portends to raise the production cap on self-distribution from 25,000 barrels per year to 200,000 barrels per year. We've waxed poetic re: North Carolina's self-distribution cap (and the accompanying innovative opportunity) on this blog repeatedly. But for some perspective on how much beer 200,000 barrels really is, check this out.
That's about as fresh as craft beer statistics get.
Second, Section 11 of House Bill 500 makes five crucial exemptions from a brewery's production calculation for purposes of the self-distribution limit. The relevant language reads, "[s]ales of malt beverages pursuant to subdivisions (3), (5), (6a), (7) and (8a) of this section shall not count towards to sales quantity limitation set forth in this subdivision." (Emphasis added). Those enumerated subdivisions respectively refer to a brewery's right to:
- Sell beer to independent distributors;
- Sell beer to employees and/or guests of employees;
- Sell beer brewed pursuant to a contract brewing arrangement;
- Sell beer in its taproom; and
- Sell beer at its affiliated retail locations.
Put another way, a successful House Bill 500 would allow breweries to leave out production quantities associated with any one or more of the categories above when calculating annual output under the new cap. Taken together, North Carolina's self-distribution threshold would operate as a function of business strategy and brewery operations, rather than idly sit as a hard number. And that's but one piece of the proposed overhaul.
Termination of Distribution Agreements
As we've written before, its important to note beer distribution relationships currently favor independent distributors under North Carolina law. By default, a distributor is granted territorial exclusivity and the option to control a brewery's product and brand as long as it wants. In fact, in the absence of what the law defines as "good cause," the only way a small brewery can claw back the rights to its product and brand from a distributor is to pay "fair market value." How that valuation is made and agreed upon is another conversation entirely.
An understanding of this dynamic is what makes the decision to distribute a critical one early in a brewery's lifetime. By engaging an independent distributor under the current North Carolina regulatory framework, a brewery effectively sacrifices margin for volume, and the ability to manage how consumers interact with the brand and product at the point of sale. With the number of existing breweries continuing to climb, control over the latter is paramount.
House Bill 500 aims to shift that leverage back to North Carolina breweries. Section 12 of the bill grants a small brewery the ability to terminate a distribution agreement for no cause at all, any time it so chooses. House Bill 500 also does away with the "fair market value" requirement. Instead, a brewery and a distributor may predetermine "fair compensation" within the subject distribution agreement to represent what, if anything, the brewery owes the distributor in the event it terminates that distribution relationship.
Ultimately, through Section 12, House Bill 500 recognizes the most salient perceived failure of North Carolina's current three-tier framework—that beer distributors' do not actively compete at the point of sale for each craft beer brand within their respective control. As Olde Mecklenburg Brewery's John Marino noted during this week's press conference, the average distributor portfolio is "tremendously bloated," which makes such a proposition unrealistic at best.
By disarming the the current termination framework, House Bill 500 would invite breweries to forge distributor relationships that represent alignment of business and brand values. It stands to reason that barriers to entry into a consolidating wholesale industry may also be reduced, spurring innovative opportunity for those technology and wholesale entrepreneurs so inclined.
With the addition of House Bill 500, there are now three bills before the North Carolina General Assembly that take affirmative stances to modernizing distribution of beer in the state. House Bill 500 is the only bill of the three that aspires for more than a simple increase of the current production cap as applied to self-distribution.
Beyond its individual components, what House Bill 500 articulates is a formula for dignity in the business of beer.
By raising the self-distribution limit, by exempting production unrelated to bona fide self-distribution, and by affording breweries choice in the risk of beer distribution, House Bill 500 would make the business of beer a more true experience; one the consumer could share in. After all, an enhanced experience is the primary goal of every software update.
As #HB500 takes us into the heat of the summer, we'll be sure to keep you cool and crisp with the updates. Click "Another One" at the top to read the full bill text. Cheers.