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Business/Economy

Bar wars: Proposal to limit activities in Alaska breweries and distilleries stirs tension inside state’s alcohol industry

As Alaskans’ drinking habits change, how far should the state go in regulating events and entertainment allowed in craft-brewery tasting rooms? The issue may be headed to the Legislature.

Lee Ellis, director of operations at Midnight Sun Brewing, photographed in the tasting room on Thursday, Aug. 29, 2019. Ellis is also president of Brewers Guild of Alaska, which is concerned about proposed state regulations that would restrict certain kinds of activities in the brewery and attached tasting room. (Loren Holmes / ADN)

Another round in the Alaska bar wars is exposing friction between bars and breweries as consumer drinking habits change, and the future of a booming multimillion-dollar industry is at stake.

New proposed rules from the state’s Alcoholic Beverage Control Board would further tighten restrictions on what types of events and entertainment are allowed in breweries, distilleries and wineries — places where rules already outlaw pool tables, dancing, darts and other games.

State law prohibits “live entertainment, televisions, pool tables, dart games, dancing, electronic or other games, game tables, or other recreational or gaming opportunities” at breweries, distilleries and wineries, but that wording has left regulators struggling to decide whether art events should be allowed, or whether music played outside a taproom — but still audible in the room — violated the rule.

In July, regulators offered a revised regulation, which is now up for public comment. The proposed rule would expand the list of forbidden “recreational or gaming opportunities” to include festivals, games and competitions, classes, presentations, parties (except private ones) and more.

Brewery owners worry the broader crackdown could hinder business, potentially threatening everything from informal group gatherings to tours of their operations. On the other side, some bar owners believe breweries and distilleries are pushing the boundaries of state law, infringing upon legal rights they have paid a premium for.

The rift between manufacturers and traditional taverns and retailers is not new. This most recent flashpoint dates to a June 2017 complaint against a Juneau distillery, which was accused of improperly serving cocktails and providing entertainment.

Distilleries across the state worry they would lose the ability to serve cocktails, and their supporters inundated the board with requests to preserve the privilege. The alcohol board spent months attempting to resolve the cocktail issue by regulation. It was only settled when the Alaska Legislature stepped in.

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The entertainment issue, however, remained.

Changing tastes

Global alcohol consumption fell by 1.6% between 2017 and 2018, according to figures from IWSR Drinks Market Analysis. In the United States, the IWSR — a firm that tracks global alcohol consumption — noted that “consumer interest in craft beer remains healthy, however … and a continued rise in on-site consumption at domestic breweries.”

“Premiumization” has been the trend in the U.S. for the past 20 years, said Brandy Rand, chief operating officer of IWSR in the Americas.

“American consumers have been trading up to more premium wine, spirits and beer, with sales of these products growing in volume and value,” she said in an email.

In a sign of that shift, breweries in Alaska have proliferated in recent years, even though the amount of alcohol Alaskans buy has dropped.

The amount of alcohol sold per drinking-age Alaskan declined over the past two decades, from 42.8 gallons in fiscal year 2000 to 34.2 gallons in fiscal year 2019, according to the state Department of Labor and Workforce Development and the Department of Revenue. (Beer consumption has fallen even more steeply than alcohol consumption overall.)

The decline likely would be even steeper if not for the state’s tourism growth during the same period. Alaska tourism boomed during those same years, but it’s unclear from the state data just how much alcohol those tourists bought.

Kelly Champagne drinks a beer at the Kodiak Island Brewing Company. (Loren Holmes / ADN)

Still, new breweries continue to pop up. There were 14 Alaska breweries in 2007, according the state. Today there are 45, with more planned. Between 2002 and 2019, Alaska-made beer grew from 1% of all beer sold in Alaska to just under 7% — and that growth does not include sales to distributors that also sell within the state.

The newly proposed rules from Alaska regulators are just the most recent attempt to stifle the state’s craft breweries, said Ben Millstein, owner of Kodiak Island Brewing Co. It’s an effort he thinks is misplaced.

“We as small-brewery tasting rooms — we’re not driving this trend,” he said. “We’re following this trend. This is a trend in the marketplace all over the country which has exploded. It’s way bigger than all of us, it’s bigger than Alaska.”

Changing times

The roots of Alaska’s alcohol regulations go back to the 1930s and the end of Prohibition. At that time, the state — like many others — enacted a three-tier system. Manufacturers make the alcohol, distributors buy it from the manufacturer and send it to retailers, who sell it to the consumer.

Alaska put strict lines between each of those tiers, granting each particular rights.

As drinking habits have changed, the state has tried to keep pace. In 1988, with the support of the Cabaret, Hotel, Restaurant and Retailers Association (Alaska’s main alcohol trade group), the Alaska Legislature allowed breweries to open taprooms and sell beer directly to drinkers, bypassing the other two tiers.

Sixteen years later, the Legislature granted distilleries the same privilege, and again CHARR supported the move.

Dale Fox, CHARR’s director at the time, “concluded that the bill is fair and uncontroversial and it helps a new Alaska industry,” according to Legislative meeting minutes.

Each time, bars, distributors and liquor stores believed “tasting rooms” would account for only a fraction of the manufacturer’s business. Most of the alcohol, they believed, would be sold to them.

But as time went on, those traditional liquor license holders became vocal in their belief that taprooms themselves had become the main business for many manufacturers.

“It’s kind of come back to bite retailers because they weren’t foreseeing that manufacturers would cut out the other two tiers entirely,” said Sarah Oates, a former alcohol regulator who now works as CHARR’s director.

Sarah Oates, president and CEO of the Alaska CHARR, at her office in Anchorage on Tuesday, June 18, 2019. (Bill Roth / ADN)

The distinctions between bars, breweries and brewpubs can be opaque to the casual visitor. In a single Juneau block, for example, a visitor can find a bar, beer garden and brewery all serving beer and food under different licenses. There’s also a distillery nearby.

With a brewery or distillery license, a business can sell alcohol made on-site, in an atmosphere that might resemble a bar, but the business itself has restrictions. Unlike bars, breweries can only be open until 8 p.m. Patrons there can’t play music or games, or dance. Breweries and distilleries can sell alcohol made on-site, but they also have strict serving limits. On the flip side, a bar holding a beverage dispensary license can make and sell its own beer if it also buys a brewpub license, but the amount of beer it can make is limited.

Tasting rooms are a crucial way for breweries to build relationships with customers and also hone new products, said Lee Ellis, director of operations at Midnight Sun Brewing Co. in Anchorage and president of the Brewers Guild of Alaska. They offer a different environment compared to traditional bars, he said, in part because breweries can only serve each patron 36 ounces of beer in one day.

“Not to say every bar is full of people who are intoxicated,” Ellis said. “But we have a different public perception, different character, and different way of engaging with our consumers than I think most bar owners do.”

Millstein, in Kodiak, said his brewery provides something unique in a town “that doesn’t have a lot of indoor spaces for people to just gather," whether for a birthday party, a painting class, or other community events.

Darwin Biwer owns the bar Darwin’s Theory in downtown Anchorage, and he’s also a CHARR board member. From his perspective, different players in the state’s alcohol industry aren’t fighting the way they have in the past. Alaska’s strong craft brewing scene even helps his business, he said, because he sells those products.

But breweries should operate more clearly within the parameters of a manufacturing license, he said, and alcohol businesses should all adhere to that three-tier system.

“I don’t have a problem with a new brewery, a small brewery starting up. That’s fine,” he said. “But it shouldn’t be having music and pool tables and all that stuff, because that’s not a tasting room anymore.”

‘Death blow’

Turnagain Brewing is a newer player in Anchorage’s craft beer industry; it opened just last year. Having a tasting room for customers to spend time and have a few drinks is what drives the revenue for a new business until it scales up into a larger packaging facility, said Ted Rosenzweig, one of the owners.

“At the beginning stages … it is often a matter of life or death,” said Paul Gatza, vice president of the national Brewers Association.

Gatza, who is familiar with regulations across the country in his role as a booster for craft breweries, said, “When I’ve read through some of Alaska’s (regulations), it’s like — you’re kidding me, right? Alaska seems like an outlier, not just geographically.”

Ellis, with Midnight Sun, thinks the intent of earlier regulations “to make sure tasting rooms didn’t become sports bars” was fair. But this round of proposed rules goes too far, he said.

It would be “really difficult” to do business under broader rules that cast doubt on whether a wider net of social gatherings and activities are allowed, said Rosenzweig.

“If three people walk into the brewery, is that a party? What about a tour?” he said. The new definitions are more confusing than what’s in place now, he said, and he thinks the change would curtail the state’s growing craft beer industry.

“This might be a death blow,” he said.

King Street head brewer Maxwell Crutch, in red hat, leads a tour of the brewery Thursday, Aug. 29, 2019. The tour is operated by Big Swig Tours, which takes patrons on tours of breweries, which would not be possible under proposed state regulations. (Loren Holmes / ADN)
Big Swig Tours owner Bryan Caenepeel pours samples of beer during a tour of the King Street brewery Thursday, Aug. 29, 2019. Proposed state regulations would not allow tours like this. (Loren Holmes / ADN)
King Street head brewer Maxwell Crutch, in red hat, leads a tour of the brewery Thursday, Aug. 29, 2019. The tour is operated by Big Swig Tours, which takes patrons on tours of breweries, which would not be possible under proposed state regulations. (Loren Holmes / ADN)

A lot of money is at stake for traditional bars, too. State law limits the number of alcohol licenses in a community based on population, but when that law was enacted, existing licenses were grandfathered in. Furthermore, those licenses don’t return to the state when they’re sold. They can be kept in circulation on the open market.

That means Fairbanks should have no more than 34 bars. It has 67. Juneau should have no more than 11 bars; it has 20. Anchorage should have no more than 99 bars. Instead, it has 117.

Because of that overage, anyone who wants to open a bar can’t get a license from the state. They must buy one from the open market, and demand means prices are high.

“I’d say it’s about $250,000 to $300,000,” Oates said, estimating prices for a bar license in Anchorage. Meanwhile, licenses for distilleries and breweries can be bought over the counter from the state for $1,000, plus fees.

Oates compared the situation to the one faced by taxi drivers who have spent money on pricey taxi medallions in order to operate, only to be faced with competition from more loosely regulated Uber.

“They want to have a minimum payment but then go into competition with all the bars in their area without having to pay the full price,” said Biwer, at Darwin’s Theory, referring to breweries. “They’re not playing by the rules, and that’s not right.”

What’s next?

Alcohol board chairman Bob Klein, CEO of Anchorage Distillery, couldn’t be reached for this article. By email, Glenn Hoskinson, special assistant to Department of Commerce Community and Economic Development Commissioner Julie Anderson, provided a written statement from Anderson saying that the department opposes the draft regulation on entertainment.

“We have serious concerns that this regulation is overly restrictive, exceeds the legislature’s intent, and does not support the Open for Business initiative. We will be discussing these concerns with the board," Anderson wrote.

Alcohol board member Sara Erickson, who holds the seat representing the public, said the board is “really limited and restricted” by state law. While it can approve regulations interpreting what the law is, it can’t change the law itself.

“It’s so frustrating to the board, because it’s not like we want to stifle business,” she said.

Since 2012, regulators, alcohol sellers and those who deal with the problems caused by alcohol have been working on a broad revision for Title 4, the section of state law that covers alcohol.

It would be the first significant rewrite since the 1980s, but the Legislature has thus far has been unable to pass the bill.

Oates said the hope is to get it passed in 2020.

“It’s in desperate need of rewrite and hopefully we’ll have that soon, and until then, the ABC (alcohol) board is going to be hated on by both sides,” Erickson said.

The rewrite doesn’t currently deal with the entertainment issue, but Oates said CHARR and the Brewers Guild have been negotiating with each other on changes that would solve the problem.

She said it would be fair to say the proposed regulation change landed like a hand grenade in the middle of their negotiations.

“We’re trying to come at this from a collaborative stance, from a genuinely collaborative, consensus stance instead of duking it out during legislative hearings,” she said.

Ellen Ganley, who served on the alcohol board until 2018, said she believes CHARR and the Brewers Guild can negotiate a solution, but the Legislature must implement it. Otherwise, the alcohol board will be left to its own devices.

“I think the Legislature has to do it. That seems to be the only thing that’s worked up to this point,” she said.

Erickson agrees. She’s the sister of Rep. Chuck Kopp, R-Anchorage, and she didn’t hesitate from poking her brother.

“They need to get in there and make some hard decisions,” she said of the Legislature. “If people understand that, they really need to pound on their legislators and say, ‘We want this changed.’”

James Brooks reported from Juneau and Annie Zak from Anchorage.