The Return of the Tied House
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With the arrival of 2021 comes news of new pub openings here in Portland—two for Upright and three for Breakside. For Breakside, that doubles their now-substantial little empire, one stretching across three counties. Even Upright’s is noteworthy, given how few hours in the week its hard-to-find taproom was open most of the past dozen years. Even in the midst of a global pandemic, small breweries are doubling down on retail: pubs, they reckon, are the safest and most profitable ways to sell beer. Portland, a draft city with a big emphasis on brewpubs, may be leading this trend, but it’s happening nationwide.
A number of factors are responsible, but one of the biggest is our broken system of distribution. Once justified as a mechanism to prevent producer control over pubs and taverns, consolidation among distributors now effectively requires smaller breweries to open new venues in order to get their product to market.
“We want to sell most of our beer locally instead of creating a large distribution footprint,” Breakside founder Scott Lawrence told me, “and adding some new fun retail outlets helps us with that. I think pubs are important. We aren’t the brewery that rolls out a fleet of sales reps to really push our beers.” The brewery had initially considered opening pubs in cities outside the Northwest, but concluded that sticking to home made the most sense.
In form and function, this resembles the British approach Americans purportedly wanted to escape: breweries building up fiefdoms of local “tied-house” pubs. Yet in the streamlined world of national breweries, distributors, and retailers, these modern-day tied houses are hardly a threat.
It wasn’t always this way. When little breweries entered their start-up phase in the 80s and 90s, most breweries saw distribution as their central growth plan. Unless the model was a brewpub, breweries increased production and sales by expanding their geographical footprints. That was in line with the conventional wisdom of the time, which had been based on the way beer had been sold since Prohibition ended. But it also depended on a suspect story the industry told itself about certain dangers, and how a middleman acted as a regulator to prevent the kind of gigantism that plagued Britain and other countries—and led to Prohibition in the US.
But did those post-prohibition regulators identify the correct risks and establish the best rules to meet their goals? I’ll investigate this question more deeply in future posts, but the short answer is no. Using the clarity of hindsight, it’s obvious they misunderstood the dangers posed by beer, and consequently created a system that has become, in the vastly changed world of 2021, irrelevant and obsolete.
In the 1930s, regulators were trying to solve the last problem, the scourge of all policy-making. Joseph Choate, head of the Federal Alcohol Control Agency, oversaw new regulations that would address the “evils that led to prohibition.” He continued:
“First and foremost of these I take to have been the ‘tied house.’ Before prohibition, a vast number of the retail outlets of the country where liquor was sold for consumption on the premises had fallen into the hands of the distillers and the brewers…. That inevitably threw them into politics, inevitably led them to seek control of State and municipal legislation, and brought about an unhealthy political condition…. I think it has been felt by everyone concerned that particular evil must be suppressed, and no State alone can suppress it, because the distiller or the brewer in one State can lend money, furnish equipment, and otherwise place under obligation the retailers, the on-premises retailer in the State just across the border, in such a way that in a very short time he comes into complete control of that retailer, and the State in which the retailer resides cannot stop him.”
“Brewers or distillers” does a lot of heavy lifting in this analysis, but let’s leave that aside for now. The issue was producer control over an industry that led to corruption politics was ill-equipped to address. In particular, everyone seemed to fear out-of-state businesses owning or controlling retailers. The solution was incredibly successful at severing the tie between breweries and pubs: in the 1980s, when small operators began opening their tiny breweries, not only did state laws not allow them to sell beer onsite, but the idea was so alien breweries had to educate lawmakers about what a “brewpub” even was.
By that time, distributors held all the power. They had extensive lobbying operations at the state and federal level, and had carved out provisions to protect their fiefdoms that would have made other industries blush. Chief among them were the “franchise laws” developed purportedly to protect mom-and-pop distributors during massive brewery consolidation, but used by big distributors to reduce competition. Eventually, the distributors themselves would consolidate, reducing the choice of producers to just two or three in cities with dozens of breweries.
This is the world we inherited. The beer business has evolved to align highly consolidated brewing tiers with a highly consolidated wholesale and retail tiers. It’s a great system for producers working on a national scale, with efficient plants and integrated sales and marketing teams. It’s a challenging one for small producers for the inverse reasons: even when they can enter the mass market channel, small producers can’t compete directly with large producers because their production scale is too inefficient and costly, and they don’t have the infrastructure to oversee wholesale and retail relationships far from home.
So, in order to compete, small producers are quite sensibly doing the one thing the legal structure allows, which is selling directly to customers. Without having to sacrifice margins to distributors and retailers, this makes brewing far more profitable. I don’t know why I didn’t notice this happening when Portland’s McMenamins began setting up a British-style network of pubs in the 1980s—probably because it was such a weird outlier. Now comprising 62 outlets across the Northwest, the McMenamins were the first to identify a seam in the law that allowed them to establish the very thing we’ve been telling ourselves is anathema to our system: a network of brewery-owned pubs and inns. It’s not exactly the same as a tied-house, which implies independent pub ownership “tied” to a producer, but it’s not far off, either. We can also see that these entities pose none of the dangers Choate warned Congress about 87 years ago.
He was right about one thing, though. Political power does follow money and control. All three tiers have gone through consolidation. Yet that middle tier has emerged with the whip hand in this arrangement, dictating which breweries are allowed to compete in a given region. As the blob known as Reyes Holdings—to use the dominant but hardly sole example—slowly gobbles up distributors across the country, Choate’s warning about control of the beer and liquor business by out-of-state actors is also acute.
One thing is clear, however. Whatever dangers we once attributed to tied houses now seem quaint. Even a company like McMenamins, with its stout little empire, accounts for a tiny fraction of all the beer sold in Oregon. We have nothing to fear—and quite a bit to celebrate—when breweries begin seeding their home cities with new taprooms and restaurants. In a final irony, far from stomping out the competition, these miniature pub estates are actually increasing the overall diversity available to customers.
COVER PHOTO: CHILLED MAGAZINE