The Crony Capitalists of Craft Beer
How independent breweries are mooching off state subsidies.
"Virginia is for beer lovers," Governor Terry McAuliffe (D) proclaimed at a recent press conference. He was obviously not referring to a lawsuit challenging the state's use of an antiquated "habitual drunkard" law to jail indigent citizens without due process, but rather to $3 million in corporate welfare from the state's Commonwealth Opportunity Fund that he approved to lure Bend, Oregon based Deschutes Brewing to Roanoke for the construction of their first East Coast brewery.
For those of us who follow the beer industry, the announcement stirred feelings of déjà vu. It was less than two years ago that McAuliffe was tapping a keg from San Diego's Stone Brewing and putting Virginia taxpayers on the hook for a $5 million grant to bring Stone to Richmond. That was in addition to a $1.5 million economic development grant, a $500,000 sustainability grant, and $31 million in bonds from the city to build a brewery and bistro.
North Carolina has been similarly profligate, ponying up $13 million for New Belgium and just under $5 million for Sierra Nevada to build new facilities in Asheville. Lately it seems that any large craft brewery in the western parts of the United States can successfully lobby for government handouts in the east.
And it's not just the United States. When Stone Brewing announced that it had chosen Berlin to be the home of its first European brewery, I suspected that they were exporting more than just hoppy IPAs to the German market. Might they be bringing American-style crony capitalism with them as well? My colleagues at Mixology magazine in Berlin filed a freedom of information request and confirmed that, sure enough, the city has promised 2.3 million euros to the company if employment and investment goals were met. Stone will presumably soon lay claim to the dubious honor of being the first craft brewery to receive government subsidies on two continents.
Even the brewers one might least expect it from have accepted public assistance. Take BrewDog, the Scottish brewery that relentlessly promotes its punk credentials at every turn, from the name of their flagship "Punk IPA" to the extremely low-alcohol "Nanny State" beer they cheekily released in response to complaints that their strong beers encouraged excessive drinking. "The independent, anti-authoritarian spirit, which is punk's greatest legacy, needs to be ingrained into your entire business approach," advises BrewDog co-founder James Watt in his recent book Business for Punks, which features chapter titles like "Make banks your bitch" and "Don't waste time on bullshit business plans."
"Take a DIY approach and learn the skills you need to survive and build your business," Watt continues. "Don't depend on anyone for anything." But elsewhere in the book, Watt advises hitting up local governments for money:
As well as the obvious places, there are several other ways to get more cash, legally of course. There are very often loans, soft loans, grants, job-creation assistance, tax relief and a myriad of other types of funding available from various public bodies, business development agencies, local authorities and government organizations. This type of funding is often very tough to get and intrinsically linked to job creation but given its potential to supercharge your growth it is definitely worth the effort. Over the years we have to become experts in maximizing the amount of grant support we could get into our business. Indeed, BrewDog has only been able to grow at the speed we have due to the amazing support we have received in the form of grant funding.
Approaching government development agencies cap in hand with promises to be a job creator seems likely to clash with most conceptions of the punk identity, which may be one reason the subject didn't get its own chapter heading. (BrewDog's anti-authority stances have often been a bit opportunistic; a few years after releasing Nanny State they advocated on behalf of laws aimed at increasing the price of cheap supermarket lagers. They pitched it as a sound policy to promote responsible drinking, but forcing competitors to raise their prices was surely a pleasant bonus.)
It's easy to understand why politicians like funding breweries. They get to play with other people's money, and much like when funding a new sports arena, they get to associate themselves with a product that many voters consider fun and pleasant. But the economic benefits are dubious. If the brewery expansions make business sense, they will be built regardless (though perhaps not in the specific locations handing out the goodies). It's hard to imagine that Deschutes, which is investing $85 million in its eastward expansion, would scrap the project without $3 million from Virginia. The subsidy is just a bonus it's able to reap by being big.
And it's not as if consumers would go thirsty for beer without the government's assistance. Virginia currently boasts nearly 150 breweries. Asheville, North Carolina alone has more than a dozen. These businesses, which have been paying excise taxes for years, now see that revenue going toward much larger competitors from out-of-state.
Given the many hurdles governments place in front of beer entrepreneurs, they can be sympathetic recipients of government grants. A 2014 report from the Mercatus Center examined the barriers to entry for opening a brewery in Virginia. "We find that an entrepreneur attempting to enter the brewing market in Virginia must complete at least five procedures at the federal level, five procedures at the state level, and multiple procedures at the local level," write Matthew Mitchell and Christopher Koopman. "All of these barriers are in addition to the standard regulatory hurdles that all small businesses must surmount… This means that starting a microbrewery in the state of Virginia requires as many procedures as starting a small business in China or Venezuela, countries notorious for their excessive barriers to entry."
Lowering these barriers or making it easier for businesses to navigate them would encourage entrepreneurship across the board, rather than concentrating benefits on big breweries that cultivate political connections. When California's Lagunitas Brewing expanded to Chicago, cutting through red tape was far more important to founder and CEO Tony Magee than getting subsidies. In fact, he admirably rejected offers of cash from the city. "You start realizing you make the world around you by the decisions you make as you move through it and if I don't feel like the government should be looted [or] whored out for businesses… we don't need it," Magee told The Sun Times. "So why ask for it?"
However popular giving tax money to breweries may be, the practice is not really any different from the kinds of crony capitalism practiced by companies like Wal-Mart and Cabela's, two big box retailers notorious for negotiating tax breaks that give them advantages over their competitors. It unfairly skews the market toward big, politically connected brewers who go venue shopping for subsidies, pitting city versus city and state versus state to score the sweetest deal.
In the case of loans, it also puts public funds at risk if the business ventures don't work out, as Rhode Island found out the hard way acting as angel investor for Curt Schilling's failed video game company 38 Studios. There hasn't yet been a similar failure of a subsidized brewery expansion, but Richmond has found itself paying potentially millions extra to Stone to cover cost overruns at the city's new brewery.
Aside from the occasional grumpy blog post, beer fans have been fairly complacent about brewers receiving subsidies. Yet they react fanatically when craft breweries they love finance their growth by selling out to big beer conglomerates. Beer brands can unceremoniously lose their "craft" reputation when they enter into such arrangements, even if they continue to make great beer. Why does growth via a private sale raise the ire of beer drinkers while growth via government subsidies gets barely any backlash?
In other contexts, opposition to crony capitalism bridges ideological divides, animating everyone from Tea Partiers on the right to anti-corporate activists on the left. Big beer companies shouldn't get a pass. By the time breweries have the track record needed to attract multi-million dollar grants, they already have plenty of options for private financing. They should use them.
Many a story has been written on allegedly faux "craft" beers owned by big companies, with the implication that consumers should shun them and support independent breweries instead. Whatever the merits of that, perhaps they should do the same for breweries that finance their growth with loans or outright gifts from taxpayers. As Lagunitas' Tony Magee says, "you make the world around you by the decisions you make as you move through it."
If you'd rather see breweries live or die by the quality of their beer rather than the strength of their political connections, that's something to consider the next time one scans a tap list deciding what to drink.
Jacob Grier's work in the beverage industry sometimes includes contracting with beer companies, though he has not worked with any of the brands mentioned in this article.
