Craft brewers seek the ability to distribute their own beer

HASTINGS, Nebraska — Right next door to Nathan Hoeft’s First Street Brewery is a restaurant that sells his golden brews on tap.

But under Nebraska’s decades-old liquor laws, he can’t just haul kegs over to the eatery. They must be picked up by a beer distributor, located 25 miles away, who must dispatch a truck to Hastings and then make the delivery.

If there’s a problem, say, like a shortage of drivers during a pandemic, Hoeft might miss a sale because a truck can’t make it to his brewery.

To complicate matters more, he lost his distributor during the pandemic for the two largest markets in the state, Omaha and Lincoln, where he had up to 10 customers. So far, he’s been unable to find a new distributor to fill the gap.

These issues and others make Hoeft and his fellow craft brewers wonder why brewers in Nebraska can’t “self-distribute.” In at least 31 other states, breweries are allowed  to haul their fermented products to retail outlets themselves.

“I can honestly tell you I’ve never wanted to be a distributor,” Hoeft said. “But when we have a situation when no one else wants to take me on, why can’t I sell my own beer, especially when I have customers in those markets who want my beer?”

Three approaches proposed

Get ready for another battle between brewers and distributors in the Nebraska Legislature over the state’s three-tier system to get beer to the lips of consumers: producers, distributors and retailers.

Three legislative proposals have been introduced this year designed to give craft breweries more flexibility in distributing their product.

This comes 31 years after the first craft brewery opened in Nebraska and as the state’s 67 brew pubs and micro-breweries are seeking to recapture some of the sales lost amid pandemic shutdowns and diminished walk-in trade from COVID-wary customers.

While there’s always been some tension between craft breweries and the distributors who haul their beer to bars and restaurants, Nebraska breweries are hoping that now, as they’ve become more established as community assets, some distribution rules can be relaxed. 

“We’re not trying to level the playing field, we’re just trying to get onto the playing field,” said Jim Engelbart, operations director for Lincoln-based Empyrean Brewing, the state’s oldest craft brewer.

Prohibition-era rules

First, some history: The so-called “three-tier system” of liquor distribution grew out of Prohibition. If alcohol sales were allowed to resume, it would have to be sold through a well-regulated system of three, separate tiers — producer, distributor and retailer. And, it was an effort stop breweries from owning bars and selling only their products.

State regulators tend to like the three-tier system, in large part because it provides for the orderly collection of taxes, which is done at the wholesale, or distributor, level. And distributors tend to like the current system, in large part because it maintains their business. They would lose some if breweries could handle distribution themselves.

But craft breweries have long complained that because they’re such a small segment of the market — only about 4% of all beer sold in Nebraska — it’s hard to find a distributor who’s willing to bother handling their beer.

That hurts their business because, without a distributor, they are limited to sales they can make at their brewery/brew pub and any satellite locations.

There’s also grumbling about the “franchise” agreements brewers must reach with distributors.

Craft breweries argue these agreements are too one-sided in favor of wholesalers, giving brewers little leverage, or alternatives, if they become dissatisfied with a distributor and want to change wholesalers.

“It can be incredibly expensive,” said Lindsey Clements of Omaha’s Vis Major Brewing, because an existing distributor can force a new distributor to “buy” the rights to haul someone’s beer.  

Competing proposals

Other problems can crop up. Clements and her husband run Vis Major, a small brew pub at 35th and Center Streets. They were required by state law to obtain a distributor so they could participate in charity beer festivals. But an informal agreement they reached for hauling beer to three or four festivals a year got out of whack, according to Clements, when their distributor started straying from the agreement by marketing their beer to grocery stores.

“I never agreed to that,” she said.

Two competing proposals introduced in the Legislature attempt to help brewers by allowing them some opportunity to self-distribute directly to restaurants and bars, such as the one next door to Hoeft’s brewery in Hastings.

Legislative Bill 1235, introduced by State Sen. John Lowe of Kearney, would allow a craft brewer who produces less than 500 barrels of beer a year to self-distribute, as long as the brewer obtained a distributor’s license and used vehicles the business owned or leased. The bill grew out of a proposal by the Nebraska Liquor Control Commission, which had called for the creation of a new class of licenses for smaller, “nano” breweries.

 LB 1236, also introduced by Lowe, is an alternative proposal from the Nebraska Craft Brewers Association, which represents 62 of the 67 breweries in the state. It would place a limit on the amount of beer that could be self-distributed, rather than a cap on what could be produced. It would allow all craft breweries to do some self-distribution, not just those that agreed to produce less than 500 barrels a year.

Craft brewers prefer the second bill because it provides some flexibility for breweries if delivery problems arise. And, they say, it would be hard to operate under a production limit. What if business took off, they asked. Would they have to shut down if they hit the 500-barrel a year limit?

Changing franchise agreements

It is unclear how distributors will react to the two proposals.  Joe Kohout, a lobbyist for beer distributors, said his clients are withholding comment until the bills come up for a public hearing, which may be as early as Jan. 31. 

But distributors likely would not like a law that allowed breweries to pick which accounts they want to service themselves because it could cut the distributors off from the most lucrative customers.

 A third bill, LB 1239, might be the most controversial. Introduced by Omaha Sen. Tony Vargas, it would amend state laws concerning the required “franchise” agreements between brewers and distributors. Brewers maintain the bill would put more balance in the brewer-distributor relationship and make such agreements similar to  other contracts between business entities. 

In Hastings, as the Friday evening crowd began to filter in last week, Hoeft is hoping this is the year craft brewers get some help from state lawmakers to expand their sales by changing state laws.

These 67 breweries are now part of the fabric of Nebraska communities, he said, creating jobs and tax revenue.

“I understand why the (current) laws were written,” he said, “but we have to change with the times if we’re going to continue to grow and contribute to our communities.”