Bye-Bye Bell's 

How Illinois beer distribution laws, fiercely protected by a powerful industry, drove away one of Chicago's favorite small brewers.

At the Map Room, a Bucktown bar with a tap list the length of a novel, the beers of Bell's Brewery are suddenly what everyone wants. "They've never been more popular," says bar owner Laura Blasingame. "If you can't have it, you really want it."

Wanting won't help. Due to a much-publicized dispute with its Chicago

distributor, the southwest Michigan brewery has pulled out of the state entirely. It might seem like a bewildering decision for a brand that's been a fixture in local bars and stores for more than a decade: Chicago is a bottomless beer market, and craft beer doesn't have a ceiling in sight. Sales were up 11 percent nationwide in the first half of this year--that's on top of a 9 percent increase in 2005 and a 7 percent increase in 2004. Meanwhile sales of American mass-market brands fell in 2005 and are up less than 2 percent this year.

But Bell's founder Larry Bell has had it with a state law that legally ties him to a distributor he says doesn't care about his beers. The only way he feels he can control what happens to his brand is to take his ball and go home.

And Bell isn't the only brewer who feels hamstrung. Many industry experts say the law keeps small brewers out of Chicago, already a notoriously competitive market, and constrains those who are already here. In short, it does a lot to dictate what beers end up on the shelf at your local liquor store or on tap in your local tavern. And not surprisingly, distribution law, which has been deeply influenced by business interests, has a lot to do with politics and little to do with beer.

"Consider this," says Larry Bell. "Of the three fastest-growing craft brands in the midwest"--Bell's, Boulevard, and New Glarus Brewing--"none of them do business in Chicago."

To understand what happened to Bell's, you have to understand what happened in the 1930s, after Prohibition, when modern alcohol law and the three-tier system were created. The system, which stipulates that all alcohol has to pass through a middleman, was established to ensure that producers couldn't run bars and limit consumer choice by exclusively serving their own drinks, a situation known as a "tied house." The repeal of Prohibition effectively gave states the right to regulate alcohol within their borders, and the resulting patchwork of laws has meant that distributors are usually in-state companies.

Many say the three-tier system has made distributors a protected class, but distributors maintain that liquor requires special rules to this day. "Alcohol is not toothpaste or anything else," says Bill Olson, the executive vice president of the Associated Beer Distributors of Illinois, a lobbying group. He argues that distributors protect consumers against counterfeit products, pay the taxes on liquor brought into the state, and prevent teenagers from getting their hands on a bottle of Everclear. But California State University economics professor Glen Whitman, who has conducted a study on the economic logic of the system, pooh-poohs this rationale. "The arguments are in no way specific to alcohol," he says. "Why aren't we concerned about people producing counterfeit Coca-Cola? We have sales taxes on all kinds of goods, but we don't feel the need to create a third party for them." And the chief legal counsel for the Illinois Liquor Control Commission, Bill O'Donaghue, says that in his two and a half years at the ILCC he's received only one formal complaint from someone whose kid bought liquor over the Internet. Teenagers still get alcohol the old-fashioned way, he says: they sneak it out of the liquor cabinet or get a friend or relative to buy it for them.

"The distributors are incredibly powerful," Whitman says, "and in part that's because they're so concentrated." Thirty years ago there were more than 4,000 beer distributors in the United States. Through consolidation and attrition that number's fallen to about 1,800. But the number of breweries has increased dramatically. In the mid-70s most of the beer in America came from national and regional brands, and local craft brews were all but extinct. The number of breweries in America hit its all-time high of 4,100 in 1873; by 1983 there were just 80. But as of this past August there were 1,409--a remarkable resurgence due largely to the rise of craft beer.

Simple economics might dictate that small distributors would start up to serve these small brands, but in Chicago it's hard for the existing specialty distributors to keep up with the big guys. "Chicago is the worst market," says an industry veteran who's worked in both brewing and distribution and asked to remain anonymous. Salesmen for powerful distributors often control what goes where in liquor stores, and though it's illegal for them to give bars beer or promotional goods--tap handles, glassware, neon signs--he says it's common practice in Chicago. "The big guys all do it," says a distributor rep who also asked not to be named. "The most widespread strategy is a free keg for a tap line, where the bar can 'try it out.'" According to another distributor rep who asked to remain anonymous, all the swag has created unfair expectations for smaller operations, which simply can't afford to keep up: "I've been lambasted by customers saying that we have to give away five free barrels to get a line."

"Distributors aren't supposed to give us anything," says Michael Roper, owner of the Hopleaf in Andersonville. "It's illegal but widely ignored. I've recently been in a new bar--I won't name the name--where [a distributor] built the tap system. It cost thousands of dollars." The freebies technically "remain the property of the distributor. They don't really 'give' them to you. It's all wink wink, nod nod."

As the number of breweries has increased, it's become more difficult for a smaller brand with a limited promotional budget to secure distribution. And since Illinois doesn't allow brewers to self-distribute in small quantities--a few states do--it's nearly impossible for a start-up to build a name here. "It's a catch-22," says Paul Gatza, director of the national Brewers Association, based in Colorado. "You can't get to market if you don't already exist."

Only two craft breweries in the Chicago area, Goose Island and Two Brothers, have distribution--and it didn't come easy. Two Brothers, founded by Jim and Jason Ebel and headquartered in Du Page County, is currently available in six states. But ten years ago, when the brand was just starting out, "we couldn't find anyone to distribute the product," Jim says. So the Ebels created their own middleman, Windy City Distribution, and formally split up their companies to keep things kosher: Jason took the brewery, Jim the distributor. It was a risky, unusual move in an industry dominated by third- and fourth-generation companies. Stores and bars didn't take Windy City seriously for years, Jim says, and only in the last year has either brother finally taken a salary.

Goose Island took advantage of the only exception to the three-tier system: if you serve the beer where you brewed it, you can sell it yourself. "When we first came into the market in the 1980s," says brewmaster Greg Hall, "we went with a brewpub instead of a microbrewery because no one was interested in talking to us." The brewpub was a hit, but seven years passed before Goose Island inked a deal with a distributor, Union Beverage. Goose Island did phenomenally well until 2000, when sales leveled off. Union was selling Goose Island everywhere it went; to get bigger, the brewery needed a distributor who went everywhere, period. That's why this August Goose Island agreed to sell a minority interest to the Portland-based Widmer Brothers Brewing, which is partially owned by Anheuser-Busch. The move gave Goose Island the skeleton key of beer sales: access to Anheuser-Busch's distribution network.

Mass-market brands don't actually own their distribution networks--that'd be a violation of the three-tier system--but they can effectively control them. Even in a declining market, there's a lot of money to be made in distributing the best-known beer brands, and wholesalers want to keep their biggest clients happy. The identification is so complete that if a distributor handles Miller or Anheuser-Busch, people in the industry almost always refer to the company--even if it carries multiple unaffiliated brands--as the "Miller distributor" or the "A-B distributor."

There's been at least one instance in which Big Beer has tried to make the association even stronger. In 1997 every Anheuser-Busch distributor in the country signed a contract that included an "exclusivity incentive program" based on a concept company officials referred to as "100 percent share of mind." The program offered a number of benefits--extended credit lines and cash, in particular--to distributors who chose to drop beers not aligned with Anheuser-Busch. Those who declined to participate were still required to give A-B brands priority. Additionally, the contract gave Anheuser-Busch a certain amount of veto power over ownership and management decisions. The Justice Department launched an antitrust investigation of the program in 1998, but it was closed the same year with no action taken.

The strategy was hugely successful for Anheuser-Busch but it had an obvious flaw: if the popularity of its products declined, so would wholesaler profits. When mass-market brands began to slip several years ago, wholesalers rebelled and Anheuser-Busch backed off. A deal like Goose Island's is, in this new world, a win-win: the wholesaler gets a beer that's taking off and Anheuser-Busch gets a piece of its competition.

Beer geeks love to hate the Anheuser-Busch and Miller distributors. "They don't know anything about beer," says Roper. "The business they're in is selling pallets to Osco." Ernie Olfe, president of Cardinal Wine and Spirits in Gurnee, says, "The salesmen who come in and sell me [Goose Island], they're not educated in the beer and it's probably not what they drink." That's why people who've watched distributors disappear are worried about the future of small, eccentric brands in Chicago. "In ten years you may have just two avenues of distribution: Bud and Miller," says the vet who asked not to be named.

It doesn't bother Greg Hall to be associated with Big Beer--his sales have gone up, though he won't say by how much. "We're in the beer business; we're not in the delivery business," he says.

But it bothered Larry Bell.

"Larry Bell is into beer," says Ernie Olfe. "He's a beer person--the same way Jim Koch is." (Koch, the founder of Samuel Adams, still sells crazy niche beers that won't make him any money.) Bell, a Park Forest native, started his operation in 1985, selling beer he'd made in soup kettles out of his homebrew shop in Kalamazoo, Michigan. One of the oldest craft breweries east of Colorado, Bell's owes its success in part to Michigan's flexible distribution laws at the time: every account the brewery had during its first four years Bell's delivered to directly. Chicago eventually turned into the brand's fourth biggest market, worth $1.3 million a year, and Oberon, a seasonal wheat beer, became ubiquitous here during the summer. "I built my business on Bell's," says Michael Roper at the Hopleaf. "We've sold it our entire life. It defined us. We have the only Bell's neon in Chicago in our window. We made it."

Until October Bell's was distributed in Chicago by Union, which is owned by National Wine and Spirits. (NWS is currently enmeshed in court proceedings; NWS vice president Greg Molloch says a gag order prevents him from commenting for this article.) Bell was happy at NWS. But according to state law, NWS was entitled to sell Bell's distribution rights to another wholesaler without his approval, and a few months ago it decided to do just that, in a deal with Chicago Beverage Systems--the Miller distributor in Chicago. CBS is part of Reyes Holdings, the biggest beer distributor in America and, according to Crain's Chicago Business, the biggest privately held company in town.

CBS has recently acquired a stable of large regional breweries: Colorado-based New Belgium signed with CBS when it entered the market last year, and NWS sold Sierra Nevada to CBS in the deal that was also to include Bell's. People in the industry are skeptical about whether CBS can properly distribute these smaller brands. "What they do, before they started dabbling [in regional beers], they did very well," says Laura Blasingame at the Map Room. She buys Heineken and Amstel from CBS. "Those brands are hard to mess up. CBS takes care of beers that don't need as much love. I understand why Larry Bell would be nervous. I don't know if they really know how to handle craft beer." CBS officials didn't answer questions on its approach to distributing craft beer.

State law says that a distributor can drop (or better yet, sell the rights to) a brewery at any time. But outside of identifying "just cause" like gross professional misconduct--such as selling beer past its sell-by date--there's no easy way for a brewery to dump its distributor. It happens rarely--multiple industry sources couldn't cite a single example. Approximately 30 states have similar laws, known as franchise laws. Illinois's, called the Beer Industry Fair Dealing Act, dates back to 1982. It was originally established to protect little distributors from big brewers: if a brewer wanted to leave its distributor, the distributor was entitled to compensation, a sort of alimony, if you will. "The law was designed when we didn't have craft beers and the brewers were a lot bigger than the distributors," says Jim Ebel. Now "the distributor has more power over the supplier than he's ever had before."

Bell was worried that CBS would push only the beers that had the potential to sell widely, like Oberon and Bell's Amber Ale, and neglect his more obscure varieties. He didn't feel reassured when he met with CBS executives in August. "They asked what the history of the company was and I said, 'Well, haven't you looked at the Web site?' Normally when you go see a distributor, they say, 'We've gone out and tried the beers and we're very excited about selling Oberon.' There was none of that. Their answers to questions about carrying all the brands were extremely unenthusiastic."

CBS president James Doney responds in an e-mail that "we were looking forward to representing ALL of Bell's craft brands in Chicago (as were many of our fellow distributors in the Chicago suburbs). We certainly conveyed our positive interest in a 2 hour meeting with Mr. Bell. We were disappointed that he chose not to work with us."

Bell says that although there was a point early on when he was told he could possibly get out of the deal, "in the final week NWS said you're going to be sold to CBS and that's it." On October 9, he says, he got a letter from NWS telling him that in accordance with the Beer Industry Fair Dealing Act, Bell's distribution rights were being sold to CBS.

Had Bell refused to cooperate he would have been sued, he says, and "the onus would be on me to prove why I couldn't go to CBS." He could've tried to get out of the deal under a subsection of the law that applies to brewers whose sales total less than 20 percent of a distributor's business. The subsection, used infrequently, requires the distributor and the brewer to negotiate an arbitrated financial settlement within two years of a dispute. But if a brewery pulls out of a state entirely it doesn't owe anybody anything. Under normal circumstances it wouldn't make sense for a popular craft brewer to leave one of its primary markets, but Bell concluded he'd be worse off if he stayed. "Whether or not I mismanaged it legally, I don't know," he says.

Distribution law is so murky that it's not clear when or if Bell's could return to Illinois with a clean slate. Bill Olson of the Associated Beer Distributors of Illinois says a brewery reentering after a year's absence would have a good case, but not everyone thinks so. "Illinois has no lapse period," says Jim Ebel. Windy City currently distributes a brand that had been out of Chicago for two and a half years; when it turned up on Ebel's roster, the old distributor demanded compensation. Ebel paid it. Larry Bell doesn't expect he'll be given a fresh start either. "I don't believe that to be the case, and certainly NWS doesn't believe that to be the case," he says. "They've made it clear that whether it's a year or five or ten, they're going to be waiting for me at the border."

Wine and spirits distributors aren't protected by franchise laws, but they clearly covet them. The infamous "Wirtz Law," nicknamed for William Wirtz, Chicago Blackhawks president and owner of the giant liquor distributor Judge & Dolph, was passed by the state legislature in 1999, after Wirtz and other liquor lobbyists contributed over $700,000 to state legislators, according to the Illinois Campaign for Political Reform. Officially known as the Wine and Spirits Fair Dealing Act, it prevented wineries and distillers from leaving their distributors without just cause. After it passed, distributors raised prices across the board. The law was on the books for less than three years before a U.S. district court judge struck it down on the grounds that it violated the commerce clause of the Constitution. Newspaper editorials at the time often called the Wirtz Law a corrupt document, and it has since become a case study for campaign finance reform. But what has gone largely unnoted is that it only applied the same strictures to wineries and distilleries that already apply to breweries.

Bill Olson says that since beer is perishable and costs more to store and ship, it isn't comparable to wine or spirits. Beer distributors also operate with lower profit margins than their counterparts in wine or spirits, says Jerry Glunz, general manager of the 118-year-old specialty distributor Louis Glunz Beer, whose largest brand is Beck's. "Thank God for protection laws--they provide the security a distributor needs to build a brand. Without them, take 90 percent of the beers that are available and throw them in the trash."

Yet the beer industry has thrived in states with looser laws. Neither California nor Colorado, the states with the most breweries in the nation, has a franchise law. "Colorado's certainly an example of how not having franchise laws has helped foster a bunch of start-ups," says Paul Gatza of the Brewers Association. He dismisses beer's perishable quality as irrelevant. "I'm at a loss to see how that connects to franchise laws."

"The question is, why do I have to have somebody else own my brands and decide what's best for my beer in the state?" says Larry Bell. "I'm the owner--shouldn't I get to decide what's best for my beer?"

While Bell certainly isn't the only brewer to raise the question, to the best of anyone's knowledge only one other brewer has pulled out of Illinois because of the franchise law. "I had a very bizarre experience," says Deb Carey, president of New Glarus Brewing in Wisconsin, perhaps the most respected brewery in the midwest. Carey says that after River City Wine and Spirits, her distributor in parts of northern Illinois outside Chicago, was bought out by Southern Wine and Spirits in 2002, she was told that the new company wouldn't be distributing her beer. "So I wrote them saying I'd like to buy back the product and POS [point of sale merchandising] and anything else. I got a letter back saying, 'If you don't want us to distribute your product, you owe us $20,000.' They would not give me a justification for that price. I thought that was ludicrous since they had no intention of selling my beer." (Southern Wine and Spirits officials did not return calls for this story.) Carey didn't have $20,000, she didn't have money for lawyers, and she was already having trouble meeting demand in Illinois. She felt her only option was to pull out of the whole state--including Chicago, where she was having no problems with her distributors. And so she did.

There are signs that the three-tier system is no longer sacrosanct. In May 2005 the U.S. Supreme Court ruled that laws giving preferential treatment to in-state wineries--allowing only in-state producers to ship directly to consumers--violated the commerce clause of the Constitution. Then this past April a U.S. district court judge took Costco's side in a lawsuit against the state of Washington, ruling that the three-tier system violated federal antitrust law by impinging on the company's freedom to conduct business. That decision opened the possibility that big-box retailers could cut deals directly with producers.

The Supreme Court decision motivated wholesalers across the country to push for legislation that would strengthen their traditional role. The Associated Beer Distributors of Illinois--which doled out more than $335,000 in campaign contributions to state legislators in the first half of 2006, the most it has contributed in any six month period in at least the last decade, according to the St. Louis Post-Dispatch--backed a bill that would have severely restricted how much product Illinois wineries could sell directly to customers. (They can currently ship an unlimited amount, but some out-of-state wineries can only send in two cases a year per customer.) That provoked bitter opposition from the Illinois Grape Growers and Vintners Association, but after months of negotiations a compromise was reached that would have prevented in-state wineries from selling directly to stores and restaurants. The bill, passed by the Illinois senate in February, was never called by the house. State representative Mike Bost, whose district falls squarely in southern Illinois wine country, says several wineries lobbied to block it, believing it was still too restrictive.

The inaction means Illinois law still conflicts with the Supreme Court decision. In January and February a task force formed by the Illinois Liquor Control Commission will meet publicly to discuss and recommend how the state should resolve that. Meanwhile "the plan is to leave it as it is until the time when we get sued," says Bost. That time has already come: in June an Italian winery, Villa Monteleone, filed suit in Sangamon County on the grounds that the state law amounts to economic protectionism and asked that the court remedy the situation by forbidding all wineries to ship directly to consumers. That wouldn't seem to benefit Villa Monteleone directly, but it would clearly benefit its Illinois distributor, Judge & Dolph. Villa Monteleone's lawyer Bill Roberts, a former U.S. attorney who also served as Governor Jim Edgar's chief legal counsel, declined to comment on the case.

Regardless of how the revisions shake out, Paul Gatza says, there will always be distributors. "Even in markets with self-distribution, you've still got a three-tier system. It's an orderly way to get beer to market for large companies." But he also thinks that soon distributors will no longer dominate the industry. In five to ten years, he predicts, there will be an almost unrecognizable new distribution system. "And I don't think anyone knows what that'll be."

Larry Bell isn't counting on it: "I don't think things will change because the wholesalers have all the money and they're very well entrenched politically." He doesn't see Bell's back in Illinois anytime soon, he says. "But we certainly intend to make sure there are key retailers on the border who are well advertised."

Art accompanying story in printed newspaper (not available in this archive): photo/Godfrey Carmona.

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