Beer battle brewing in the Bluegrass State

FRANKFORT, Ky. – A move by the world's largest brewer to run the beer distributorship in Owensboro, Ky., — as it already does in Louisville — is causing a beer battle throughout the state that could spill into next year's legislative session.

Depending on which side is talking, the decision about whether Anheuser-Busch can have a second beer distributorship in Kentucky either will hurt craft breweries in the state and discourage larger out-of-state breweries from selling their product in Kentucky — or it will have no impact on beer drinkers whatsoever.

Anheuser-Busch, the American arm of Belgium-based Anheuser-Busch InBev (ABI), is trying to buy an Owensboro distributorship in a deal it says poses no threat to consumers, citing its ownership of a Louisville regional distributorship since 1978.

Typically, one sees a three-tiered system with a beer producer, a separate distributor and retailers. Budweiser products are already sold in the Owensboro area, but Anheuser-Bush wants to take over the existing distributorship.

Anheuser-Busch claims in a statement that its Owensboro deal would not impact consumers because, "in fact, there have never been more choices for beer consumers – including those in Kentucky where the craft beer industry is booming."

On the other side, some out-of-state breweries, in-state craft breweries and other distributors say the move is a threat to the three-tier system in place since post-Prohibition that seeks to regulate alcohol sales to protect the public and prevent alcohol sales from being controlled by only a few.

Those opponents say allowing Anheuser-Busch to operate as a producer and distributor restricts options for brewers looking to sell their product in Kentucky and, consequently, causes some out-of-state producers to avoid Kentucky.

Adam Watson, managing member and brewer of Against the Grain Brewery in Louisville, says Anheuser-Busch likely would favor its brands to the point that some smaller brewers eventually "disappear," according to his letter to state Malt Beverage Administrator Stephanie Stumbo.

"If a license is granted to Anheuser-Busch, the applicant would have increased economic power that clearly poses a threat to fair competition in the Kentucky beer market," Watson said in the letter he wrote in his capacity as president of the Kentucky Guild of Brewers. "The combined Louisville-Owensboro territory includes counties where more than 1 million Kentucky citizens reside, approximately 24 percent of the state's population."

Opponents say a win by Anheuser-Busch will lead to a domino effect of the brewing giant trying buy distributorships across the state, reducing jobs and hurting distillers. A loss by Anheuser-Busch in Owensboro would raise the possibility that its nearly 40-year run in the Louisville area distributing its own product could come into question as well.

The battle over allowing brewers to act as wholesalers has been seen recently in other states like Ohio and Illinois and is now in Kentucky with Anheuser-Busch's request to take over the Owensboro distributorship. Anheuser-Busch maintains the legal issue in Kentucky was decided almost 40 years ago by the courts in a 1978 ruling that allowed Anheuser-Busch to be a distributor in Louisville.

The battle was in Franklin Circuit Court on Thursday where Judge Phillip Shepherd heard Anheuser-Busch's request to force the a state regulator to approve its distributors license for Owensboro, which is necessary to complete the purchase of Budweiser of Owensboro by a Dec. 31 deadline from the Tennessee-based Hand family.

Anheuser-Busch argues that the transfer is a formality where Stumbo had no discretion and that, by law, had to be decided within a 60-day period that ended Oct. 17. Stumbo has yet to decide and a Nov. 21 hearing is scheduled.

Anheuser-Busch attorney Richard Clay suggested Stumbo's lack of a decision and her agency's "nit-picking" requests for more information are a stall tactic to get into next year's legislative session when Anheuser-Busch's opponents could lobby legislators to pass a law that would prevent the company from being its own distributor in Owensboro.

"This is an administrator who is out of control," Clay said, suggesting that Stumbo had "assumed the role quite frankly of a super court and a super legislature."

Peter Ervin, an attorney for the state Alcoholic Beverage Control, said in court that Clay's characterization of Stumbo was offensive. Ervin said that Anheuser-Busch's application still wasn't complete, so no deadline has passed and Stumbo has not abused her discretion. He also said the the level of opposition generated in the industry by Anheuser-Busch's request made it an appropriate area for Stumbo to review.

But in pointed questioning, Shepherd asked Ervin to demonstrate how requests for information from Anheuser-Busch about whether it plans to seek other distributors' licenses in the state are relevant to the decision on the Owensboro license transfer.

Shepherd said questions about whether Anheuser-Busch is getting too much power are legitimate public policy questions but likely are for some other forum than the license transfer.

Ervin countered saying that the lack of a legislative prohibition on Anheuser-Busch being a distributor doesn't mean it should be allowed to "operate in violation of anti-trust law."

Shepherd replied: "I couldn't agree more. And I would not say that there would be any issue at all if you approve the license and then called Anheuser-Busch on the carpet and hold a hearing and dealt with any complaints they're acting in an anti-competitive fashion. But that's not what's going on here," referring to the transfer.

Ervin said that even if Shepherd agrees with Anheuser-Busch's arguments, the judge shouldn't rule on which way Stumbo should decide. Shepherd acknowledged one possible ruling would be simply that Stumbo make a decision within a couple days.

Shepherd ordered the state ABC officials and Anheuser-Busch to talk and try to reach a compromise to resolve the situation and report to him Monday. If they are unable to agree, he would make a ruling.

Anheuser-Busch, which notes it has more than 165 employees in Kentucky in addition to sponsorship deals for the Kentucky Derby and the Kentucky State Fair, is not without its supporters, including the Owensboro Chamber of Commerce and its Louisville equivalent, Greater Louisville Inc.

"Anheuser-Busch has operated a licensed distributorship in Louisville, paid taxes, invested in the community and provided well-paying jobs to Kentuckians for almost four decades," Bob Kelley, Anheuser-Busch region vice president for sales, said in the company statement when the lawsuit was filed. "It is unfortunate that instead of making investments to grow our business in Kentucky, we have to take this action," referring to the court case.

Daniel Harrison, the co-founder and president of Country Boy Brewing in Lexington, called the Anheuser-Busch argument about the success of craft brewers in Louisville "kind of a little bit of flawed logic."

Besides Anheuser-Busch's distributorship, which sells its beers, Harrison said he's left with one other major distributor in Louisville – River City – which hurts his ability to negotiate.

"I would say we're doing (as craft brewers) what we're doing in spite of them, not because they're doing what they're doing," Harrison said in an interview. "We don't' have a choice there in Louisville with another distributor there, however, we're still doing it."

David Casinelli, chief operating officer of brewer D.G. Yuengling and Son, wrote Kentucky officials opposing Anheuser-Busch's request saying giving Anheuser-Busch more would discourage it from expanding into Kentucky – citing problems in Ohio where efforts by ABI to become a wholesaler led to legislative action.

The issue could end up in the Kentucky General Assembly as well.

"It more than likely will come up," said Ann Bakhaus, president of the Kentucky Eagle Inc. distributorship based in Lexington. Her firm markets mostly Anheuser-Busch products but is independently owned.

Bakhaus said the current effort by Anheuser-Busch — its first effort to expand its distribution efforts in Kentucky in almost 40 years — only will lead to more if successful.

"That is their whole motive, and then we will never get a Yuengling to come to town," she said.

Whether the dispute could have implications for other alcoholic beverages in the three-tier system like wine and bourbon remains to be seen.

Eric Gregory, president of the Kentucky Distillers' Association, said his group doesn't have a position on the Anheuser-Busch dispute, "but we are watching it closely."

Distributors opposed to the transfer carry liquors and wines and the Kentucky Association of Beverage Retailers, which represents package liquor stores, opposes the transfer as well.