I Want My Beer Direct-to-Consumer

Alex Koral | March 23, 2016

Many years ago, long before I joined ShipCompliant and entered the wild world of alcohol beverage regulation, I had the pleasure of attending the Great American Beer Fest in Denver. At this wonderful event, hundreds of breweries from across the country–and the world–come to showcase their beer. As a lifelong Coloradan, raised under the belief that our beer excels among all others, this was a fantastic chance to experience exciting new tastes and varieties–and to be disabused of the notion that great beer was limited to a few breweries in only a few states besides Colorado.

One brewery in particular, from northern Michigan (I won’t name it, to avoid accusations of product placement), sparked an intense curiosity, even a craving, for more. So I asked the vendor, where in Colorado can I get more of this exotic beer? Sorry, was the answer, we don’t distribute wholesale in Colorado. But, I then inquired, how about ordering it directly from the brewery? Surely if I can order pretty much anything I want online, I could do the same for beer from Michigan? Sorry, again was the answer, not only do they not have that kind of ordering system set up, they weren’t even permitted to, even if they wanted. And so I had to content myself with another ounce-sized taster, and several lingering questions.

Now, years later and with tons more exposure to the nitty gritty of alcohol beverage compliance, I much better appreciate the restrictions that exist on beer distribution and understand why this Michigan beer stays mostly in Michigan. The simple answer is that beverage alcohol laws are largely (but not universally) not set up to allow direct shipments of beer. As we all know, alcohol beverage is highly regulated and almost every step in its production, marketing, and distribution has to comply with a myriad of rules–if the rules don’t positively permit something, then it simply cannot happen (that is, if you want to be compliant with the law). But there is also a much longer, more complex answer to why direct shipping of beer, for the most part, doesn’t occur.

In this post, I’ll attempt to provide clarity to this situation, discussing the current state of direct beer shipping laws and how they compare to the huge market for direct wine shipping, what could be done to change this reality, and what lingering impediments there are that prevent me from buying directly a six-pack of that wonderful Michigan beer.

What We Talk About When We Talk About Direct Shipping of Beer

Beer botle

First, it will probably help to briefly go over what direct shipping of beer means. For our purposes, this means when a beer manufacturer or supplier receives an order directly from a consumer over the phone or Internet, and then fulfills that order by having the beer sent directly to that consumer’s residence–especially when this occurs across state borders. Alcohol is normally sold by a supplier to distributors who then sell it to retailers who then sell it to consumers (or in the control states, a governmental body will stand in for the distributor, and occasionally for the retailer too). Direct shipping seeks to work around this three-tier system by putting consumers and suppliers in direct contact with each other. Because entering the wholesale market is complicated and expensive, smaller producers especially can benefit greatly by dealing directly with their end consumers.

Direct shipping has over the last few decades become a key part of the wine industry–particularly after the U.S. Supreme Court decided Granholm v. Heald in 2005 (more on that later). But for reasons that will (hopefully) be made clear soon, that hasn’t happened with the beer industry. Instead, beer largely operates within the three-tier system, consigning consumers to the marketing decisions of suppliers and wholesalers.

Direct Shipping of Beer–the Law as it Stands Today

 

The Twenty-First Amendment to the U.S. Constitution repealed prohibition. But it also consigned the regulation of alcohol beverage to the individual states and their interests–section 2 states that the production, distribution, and sale of alcohol within a state must comply with that state’s laws. With this power, the states have set up licensing schemes, making it a crime to produce, distribute, or sell alcohol without the proper authorization from the state. Thus, simply, the reason why direct sales of beer is still restricted is that most states have just not set up a system that would authorize it. Only licensed wholesalers may distribute beer, and only licensed retailers can sell it to consumers. Direct shipping of beer remains illegal without a process for permitting the shipment of beer directly from the producers/suppliers to the consumers.

I do say most states, though, because it is not all states. There are in fact seven states (and one federal district) that permit breweries to sell directly to their residents. They are:

Each of these states has set up a special license that permits beer manufacturers to sell directly to their residents. And under the dictates of the Constitution, this permission is extended to all breweries across the country, not just those located in these states (*except, Oregon only permits direct shipments of beer from states that give Oregon breweries the reciprocal privilege of making direct shipments of beer–so only from the other six states.)

If you want to begin making direct sales of your beer in these states, it is necessary to be aware of the unique provisions that each of these states impose on direct shippers. For instance, along with licensing rules, there are laws on how packages should be labeled, how and by whom a delivery can be made, reporting requirements, and special tax rules. Along with these general provisions, there are special wrinkles in certain states–for example, in New Hampshire, unless the beer is otherwise not available in the state (i.e. sold wholesale), you may not sell more than 60 containers (each less than one liter) of any one beer annually.

These states don’t make special provisions for beer, but instead have added beer products to their existing rules permitting direct shipments of wine (and in Nebraska, North Dakota, and New Hampshire, spirits). Direct shipping of wine has had a long and complex history of illegality, semi-legality, and finally approval.

How it Works For Wine

Currently 43 states allow wineries to receive and fulfill orders directly from their residents. The last ten years have seen an extensive shakeup of direct wine shipping, with more and more states establishing licensing arrangements and bringing this market out of the shadows where it previously lived. But the effort to make direct wine shipping a legitimate and widespread practice has been a decades-long process, picking up greatly after the 1976 Judgement of Paris, when American wines finally began receiving their deserved reputation for excellence. Americans all over the country became increasingly aware that there was high-quality wine made in this country, and began actively seeking it out.

vineyard

 

However, much of it was unavailable outside of California (where the vast majority of American wine is produced), as distributors in other states weren’t necessarily selling the wines that people now knew they wanted. Undeterred, these would-be consumers began making orders directly to wineries, who, in turn, began fulfilling these orders. However, the regulatory landscape had not yet developed to support this practice, so most of these wineries operated in a legal limbo. This began to change with industry and consumer organizations like Wine Institute and Free the Grapes! working to amend state rules to permit direct shipping of wine. Through the 80s and 90s, this work picked up steam, and states began opening up to direct shipping of wine.

States saw direct shipping as a positive, in that they could help foster their native wineries and vineyards by giving them wider access to the market, in that they wouldn’t need to rely on wholesalers picking up their products. However, many states discriminated in favor of their local wineries by, for instance, only permitting local wineries to get permits, or requiring out-of-state wineries to establish a business location in the state. This changed with the Granholm decision, when the Supreme Court found that these discriminatory practices violated the Commerce Clause of the Constitution. Despite the 21st Amendment’s provision that states could set up their alcohol rules however they saw fit, that did not permit them to violate other parts of the Constitution that prohibit discriminating against out-of-state businesses. If these states were going to allow direct shipping of wine, they had to give that permission to wineries across the country.

Unfortunately for beer lovers, these actions, which have led to a $2 billion industry in direct wine shipping, largely did not include beer.

Why Not Beer?

There are any number of reasons why beer hasn’t matched wine as a product for direct shipping. But for the most part, they all revolve around key differences between the wine and beer industries, how it’s produced, how it’s sold, and how it’s consumed.

In developing this article, one of the most interesting explanations I came across was the geographic spread of beer production versus wine. The vast majority of wine in America is produced along the lower 48’s Pacific coast–with most of that production occurring in California alone. This centralizes the industry in a way that the beer industry isn’t.

This, in turn, has two effects for wine. First, it is much easier to create unified industry action groups, like Wine Institute, which has been more than instrumental in affecting the spread of direct wine shipping rules. Second, there is little elasticity in a wine consumer’s purchases. When a Texan or Minnesotan wants a bottle of wine, it’s likely coming from California, and there aren’t a great number of local wines to substitute. With most of American wine coming from California, all the action gets focussed on a single source, which both commands the attention of its consumer base and can unify in its policy positions.

beer-milk-barrels2

 

Beer, however, is a different beast. In past decades, beer was dominated by large producers, like Coors and Anheuser-Busch, which were universally available, obviating any need for direct sales. However, even the welcome rise of the craft beer industry hasn’t spurred a drive for direct sales. This can partly be ascribed to the widespread of craft beer. Every state has its own small breweries, so if that same Texan or Minnesotan wants a good beer, she’ll have a wide variety of local options to choose from–she doesn’t need to look across the country for something nice to purchase.

This widespread of beer producers also makes it harder to create a unified front, which might fight for direct shipping. Instead, beer producers are more focussed on their local concerns–though that is not to discount these local concerns, which can severely limit the ability to sell of beer. Issues like franchise laws and product registration rules, which affect a brewery’s ability to sell its product at wholesale, currently demand a lot of attention in the beer industry. It is these issue that command the focus of beer industry group. This focus may be perfectly valid, but direct shipping does then get much less attention.

One might think, then, that, just as direct wine shipping has largely worked in helping small wineries avoid the vagaries of the wholesale market, the beer industry could similarly benefit. However, the costs of shipping and the nature of selling beer have tended to not support this view. This is largely because beer has a much lower price-point than wine. Whereas a case of wine may cost hundreds of dollars, a case of beer is unlikely to be more than $30 (true, a case of wine holds more volume than a case of beer, but the point is still valid: wine costs more than beer). As such, it may cost as much to ship the beer as the beer itself costs–adding ten or twenty dollars for shipping wine that costs $250 is much more justifiable. Ultimately, shipping beer across the country just doesn’t make as much economic sense as it does for wine. While I might have a burning desire for certain Michigan beer, and could be willing to pay a premium on it, this has very limited application and doesn’t spur the kind of industry-wide, nationwide efforts that would be required to drive the development of direct beer shipping.

Could Direct Beer Shipping Ever be a Thing?

Ultimately, all that is lacking in making direct beer shipping a real and widespread industry is a lack of will–a lack of industry will, political will, and consumer will. We’ve seen how popular and effective direct wine shipping has become, and there’s no real reason why it couldn’t happen for beer as well (except, again, those economic concerns). The same rules that permit wine shipping can easily be adapted to include beer; and the Constitutional principles of Granholm, which require states that permit direct wine shipping to accept wine from all other states, would apply to beer. However, I don’t want to sound blithe about the efforts that were required to make direct wine shipping big. It took years–even decades–of profound effort: getting industry members together, establishing relationships with legislators across the country, litigating against discriminatory rules in court, and ultimately passing statutes that could satisfy the needs of all parties, from wineries to distributors to consumers to regulators concerned with the possibility of abuse in the system.

While much of this groundwork is laid out for anyone seeking to expand direct beer shipping, it would still require years and years of lobbying efforts, working bills through state legislatures, mollifying industry members whose business operations could be upset (i.e. wholesalers), and fighting the inevitable lawsuits that would arise. And then there would still be the economic challenges involved with shipping heavy beer (in terms of weight, not ABV) across the country. This is not to say the efforts would be impossible, or even not worth it (for instance, the market for unique and limited release products in bomber form could be huge and more economically viable), but it will be a struggle.

But Wait, Plenty of People Already Ship Beer Direct . . .

As a final word, I think it’s necessary to quickly talk about where direct beer shipping of beer does
currently occur. A quick Internet search will lead you to numerous beer clubs and other marketers offering to deliver beer directly to your door. Direct beer shipping seems to be a common practice here, and so, we are often asked, why don’t you support direct beer shipping?

The short answer is that, frankly, we do not have a perfect understanding of their business models. Certainly there are shipments going into the six permissible states, which are perfectly valid. In addition, fourteen states permit out-of-state retailers to sell to their residents. Some businesses may be operating in compliance under their retail license. Further, there are ways to fulfill sales directly to customers that effectively, if not actually, work through the three-tier system. However, these kinds of operations can be very complex and involve a lot of moving parts. Perhaps this could evolve into a broader conversation on our Beverage Alcohol Community board, with breweries and retailers discussing their business models and how they comply with the laws.

We at ShipCompliant, however, are focussed on ensuring that compliance with the rules governing the sale and distribution of alcohol occurs. Unless we completely understand how a business does operate in compliance with the law, we can’t advise others on how to do it. As laws develop, we would be happy to support a new area of the alcohol beverage industry–and, on a personal level, would be happy to enjoy the privilege of buying beer direct. Until then, however, this will remain in the legal hinterlands, and my dreams of buying that elusive Michigan beer directly will have to remain just that, a dream.

Want to learn more about out solutions for breweries? Check out our brewery page. We can’t help you ship directly, but we can help your brewery stay compliant and grow!