Why Tap Rooms Matter

There’s a lot to read below, you can skip to certain parts, but the end will tie it all together: Introduction | Existing Rules | What Might Be Coming | Types of NJ Breweries | What does it mean?

It’s a hot weekend in New Jersey, where we’re all watching to see if our state shuts down, and social media buzz about impending regulations for New Jersey’s flourishing Taprooms/Sampling Rooms is rapidly growing!  But the question is, what is happening, why, and what’s next?

Last year, we wrote about our experiences in a somewhat-fizzled boycott of local craft beer by a handful of bars.  After our article was published, the boycott never went further than the bars written about in the article from NJ Monthly, but the debate on the role of Craft Breweries as manufacturers versus retailers continued with lines drawn on both sides.  Even earlier this year, the Brewers Association highlighted the national debate that mirrors the one here in New Jersey that has some retailers and distributors pushing back against breweries due to the change in consumer behavior that has helped Craft Brewery Sampling Room popularity.  Recently, Don Russell (aka Philly’s Joe Six Pack) wrote a great piece about why would anyone want to drink in a factory (brewery)? that discusses the debate in a new light compared to some of the rhetoric that continues to echo online and offline.

The “Existing” Rules for Craft Breweries

Before 2012, when you could count the Micro- and Macro- breweries on your fingers and toes here in New Jersey – breweries were limited in any activities that were allowed on their premises.  On-premise sampling was non-existent and new breweries had difficulties entering the fold without millions in capital (or debt) to build a facility, introduce a new brand to the market through retailers, and maintain a wholesale supply chain that was dependent on the consumer-facing side by third parties (distributors and retailers).  Even today, years after the reforms of 2012 – there are “old guard” breweries that are limited by the pre-existing agreements with distributors that do not allow them to expand their in-state footprints.  This situation was unique to the craft beer industry (even among alcoholic beverage manufacturers) as wineries and other producers were able to present their products to the consumer again and again with little obstacles or penalties.

Starting in 2013, things changed and a new piece of legislation redefined the rules for Craft Breweries went into effect that allowed breweries to operate sampling rooms with restrictions such as no food sales and a mandatory requirement for a tour before any on-premise consumption of beer can take place.  It was amazing progress for our industry, but continues to be unusual since no surrounding state has similar restrictions – and other alcohol producers in the state are held to a different, lower standard that allows many of the activities prohibited to breweries.

Under current law, the holder of a limited brewery license is entitled to brew up to 300,000 barrels of 31 fluid gallons capacity per year of malt alcoholic beverages to sell and distribute to wholesalers and retailers. These licensees are authorized to sell their product at retail to consumers on the licensed premises for on-site consumption, but only in connection with a tour of the brewery. The licensee is prohibited under current law from selling food and operating a restaurant on the licensed premises.

These reforms changed the entire industry in New Jersey and led to explosive growth, but New Jersey continues to lag behind the rest of the United States as evidenced by this recent Craft Beer & Brewing infographic last month.  Within our state, the first nanobreweries became possible, as brewers could introduce their beers to consumers and build their brand without the massive capital or debt required by the older business model.  Small breweries could then grow into a larger footprint, fill a special niche in the market (we all know those particular beers), or begin small-scale local distribution to build a premium corner of the market.  The beer would already be introduced through the Sampling Room to the consumers (and retailers, and distributors), which further reduces the risk of failure in the market.  Within months, it changed the nature of New Jersey beer and made our state more competitive (although still behind) nearby Pennsylvania and New York states.

A Preview of What Might Be Coming

We walked that path from last year, because it contrasts with what may come in the future.  For the record, as of this writing, there are no changes to the regulations and guidance that New Jersey breweries must operate under… yet.  As our article last year discussed, there is vocal opposition to the legislative reforms that allowed Craft Breweries to have a Sampling Room on-premises and a vocal minority of retailers that feel that this change has negatively affected their business.  The law quoted above did not provide regulators with guidance on implementation, so a slightly bumpy road ensued where different interpretations of the tour, tap room policies, allowances, and what was allowed at the brewery led to the need for a review that regulators have long mentioned is necessary.

The existing licensing system in New Jersey is a by-product of both Prohibition and the era that gave us the story of Boardwalk Empire.  Retailers, who pay massive sums of money to local municipalities up front for their license, feel that breweries (manufacturers) are not “paid into” the same system that has captured so much of their capital to open their doors.  However, those retail licenses are assets that maintain or increase their value in the market and can be sold or transferred by the retailer at some future point.  Most retailers that you encounter within New Jersey are part of that system that has them purchasing licenses from previous holders and not being issued new licenses (that are only available based on changes in a municipality’s population).

Breweries, on the other hand, have lower up-front licensing costs but astronomical equipment costs that create the same level of entry.  The licensing may only be a fraction of the retail costs, but continued taxation (every drop of beer that you consume in a sampling room has been taxed at least three times before it reaches your glass), fees (i.e. every beer variety we sell gets registered for a fee, every label needs approval, etc.), and the fact that a brewery’s production license is not an asset that maintains value or can be transferred makes the comparison of these two data points… apples and oranges.  However, regulators have indicated that they are sensitive to the retailers who have an issue with the perceived disparity of licensing costs – and shared the fact that if the small group of retailers are speaking the loudest, those concerns will be heard in Trenton first.

Our industry has not been quiet during this debate, but the wide range of brewery types, business plans, models, and goals have made it difficult to find common ground between the two sides or even some items that both larger micro-breweries and smaller nano-breweries agree upon.  Since there is not a concrete proposal issued for public comment or review, anything we can share is pure conjecture and anything that is issued may be administrative until overturned by legislation or future regulations.

That said, it’s expected to be some or all of the following: a limitation of on-premise events at Craft Breweries (this can range from live music to the fitness hosted by some), removal of items already within the Sampling Room (such as menus from nearby restaurants, televisions, or even radios), possible regulation of retail versus wholesale ratios (i.e. the amount of beer sold on-premises versus sold to retailers), the allowance of permits to extend premises (such as during township festivals or events), the allowance of off-site permits (meaning that Craft Breweries could offer their beer at some events not at the brewery itself), and the continuation of the self-distribution privilege that lets New Jersey manufacturers act as the distributor for in-state sales to retailers.

As you can see, there is both good and bad in a wide span of ideas above – but nothing is concrete and even today (on the eve of a state government crisis), everything is under review to possibly create the best scenario for all parties.  It would be an understatement to say that I don’t envy the regulators who will inevitably have someone at the table upset, and agree that at some time in the future – the answer will be legislative to continue New Jersey’s progress towards a competitive Craft Brewing Industry.

The Different Types of New Jersey Breweries

It might be handy, now that we’ve run the marathon of “what might be”, to have a quick breakdown of the different business models and brewery types that we have here in New Jersey.  It seems almost silly to reduce all of us to a handful of labels, but may help in whatever happens next in this ongoing debate.  Remember, New Jersey law does not offer a different definition for Craft Breweries except for the Limited Production Breweries (all of the manufacturers that we’ll divide up below) and Restricted Breweries (all of the brewpubs that brew on-premises, required by statute to hold a retail license as well).

  • Microbreweries – There is no federal or state tax definition of a “microbrewery” but a generally accepted definition includes all New Jersey breweries 7 BBL or over with a common size for the small end of the scale in New Jersey being 10 BBL (930 gallons).  Although this sounds larger than the nanobreweries below, their combined output in our state still represents a small fraction of the macrobrewer’s (AB Inbev, MillerCoors) capacity in the region.  A common joke among industry insiders is that a macrobrewer spills more beer in a day than many microbreweries make in a year.  Most microbreweries might be what you’d imagine, large stainless steel tanks tucked away in a warehouse in an industrial park.  Many have become a new center to local events including everything from community charity drives to supporting new tourism avenues for their municipalities where none existed.
  • Nanobreweries – Non-existent in New Jersey before 2012, but very common in Craft Beer powerhouse states like Colorado, Oregon, Vermont, and California – a nanobrewery is generally 3 BBL (approx. 93 gallons) or less in brewhouse/batch size, although for our purposes we will argue that any brewery in New Jersey under 7 BBL (651 gallons) will fit this definition.  There are few breweries between 3 BBL and 7 BBL, many of New Jersey’s nanobreweries are under 2 BBL (62 gallons), meaning that they are barely making enough kegs to supply a small tap room let alone wholesale.  In the industry, this is the most experimental space where the next big trends in beer are born.  Many small nanobreweries can take risks with recipes and brewing that even breweries at 7 BBL can not afford to try.  Beer fans caught up in the hazy “New England” IPA fads of today can thank small nanobreweries from a few years ago for pioneering the style and making it popular enough to spread among breweries. A large amount of nanobreweries are located in the center of smaller towns.  Downtown revitalization in towns such as our own Medford, Evesham, Merchantville, Oaklyn, Pitman, and many more municipalities have been centered on the new breweries that have opened along “Main Street” corridors.  In-brewery attractions such as Open Mic Nights, Local Artist Shows, and other small events have become the nucleus of township efforts such as the Medford Arts Center ArtWalk or the Uptown Pitman Fourth Friday tourism efforts.
  • Farm Breweries – Common in nearby New York (who has created a classification for Farm Breweries that use local ingredients) and Pennsylvania, but still relatively new to New Jersey – Farm Breweries are a unique hybrid of manufacturing, tourism, and agricultural efforts.  Sometimes all of us forget that New Jersey is the “Garden State” and part of the advantage that wineries have (that we breweries complain about) is the fact they are part of our state’s amazing agricultural portfolio.  As they continue to grow, it will be interesting to see the impact of this new category of breweries in our state in both public perception and legislative efforts.  I mention them here, because restrictions in the Sampling Room will unfairly restrict their agri-tourism efforts in their infancy – and their positive impact on both our industry and the state has yet to be measured.

What does it all mean?

We can’t speak for all breweries, but we can speak as a 3 BBL nanobrewery located in the middle of a downtown neighborhood that is still being revitalized with some authority.  While Lower Forge Brewery is not the smallest brewery in the state, we are one of the smallest who wholesale and distribute our beer to accounts from Camden to Monmouth Counties.

The changes that are rumored would be incredibly harmful to our model, including even our wholesale efforts.  Examining a typical wholesale sale (this story can be applied to almost every one from our retail store presence to the Applebee’s locations that carry our beer), it starts with a bar owner, manager or retail store buyer visiting our brewery and trying a few beers.  They may be attracted by social media ads, an interest in our Trivia Thursdays, our involvement in Medford’s ArtWalk with our Open Mic Night, or in one of the many ways we support local artists and musicians.  This buyer ends up enjoying the beer and learns that we love partnering with retailers.  Their visit ends with an exchange of information and within a few days, a delivery of kegs or cases of beer.

Many large breweries have marketing and advertising budgets that eclipse our entire annual budget; medium-sized breweries have dedicated salespeople to cold call accounts and push sales into the market; a brewery like ours has only the staff you meet who wear many hats from bartender to cellar person to brewer to sales manager to janitor.  Small breweries use the Sampling Room as the invisible sales person, because it offers us the ability to showcase our beer and act as an ambassador to both the buying public and potential retail buyers in ways that can not be duplicated.

Additionally, losing the ability to host on-site events hurts a number of others:

  • Our Neighborhoods – Before we opened Lower Forge, there were an abundance of vacancies on South Main Street following the 2008 Recession.  As news of the brewery construction spread, these spaces began filling where our district is slowing reaching the high points it experienced when it was an “Antiquing Destination” in the 1990s.  Additionally, our brewery gives back to our neighborhood with cooperative marketing and tourism efforts, hosting the meetings for local shop owners with our Main Street Initiative workshops, and using our advertising to attract visitors to the entire Downtown Medford area.
  • Neighboring Restaurants – Medford eateries (including nearby bars) have experienced a boom in visitors from our foot traffic and tourism efforts.  A side effect of the way that craft beer fans follow breweries creates the notion of the “brewery road trip” attracting customers from well outside of local areas to breweries and their neighbors.  We had a laugh with a food critic from Northern New Jersey, who discovered nearby ITA 101 after visiting Lower Forge Brewery and ended up crowning them the best Italian restaurant in New Jersey.  His readership in the New York City vicinity has attracted hundreds of visitors and customers to Downtown Medford, who would have never heard of our town or visited without that brewery-based introduction.
  • Local Musicians & Artists – A large part of “brewery culture” is centered around the embracing of independent creativity.  Whether it’s hosting a metal sculptor for a meet-and-greet or being known for hosting local artists for their first “paid gig”, helping to launch new musicians in our area – breweries add to this cultural core of local New Jersey towns by offering a venue that is far different from the ordinary.  Breweries are a unique hybrid of the classic coffee house atmosphere and the fun experience found in many bars.  Many of our musicians move on to perform at local bars & restaurants, some even moving on to semi- or professional musical careers.
  • Municipalities – This is where our conclusion gets interesting, because local municipalities will be hurt by the regulations that are meant to assist them in their balancing efforts.  Breweries, being tourism centers, are contributors and sometimes founders of the outreach that brings new customers to shopping districts and keeps township commercial areas viable in a time of economic uncertainty.  Here in Medford, when the township lacked a tourism outreach program, Lower Forge (together with a few of our Main Street neighbors) started the Destination Medford program that has successfully attracted new business to all of us including the manufacturers and retailers at the core of this debate.
  • The State of New Jersey – It’s easy to argue the employment numbers of breweries, with numbers spanning from single brewer shops to small breweries such as ours with around a half dozen employees to large operations with dozens of employees… but our focus today is simpler and easier to calculate.  Retail operations at breweries are State Sales Tax revenue machines at a time when the State Government is examining how even small changes in this rate may help balance the total budget.  Breweries sell gift items such as glassware, souvenirs, collectibles, alongside higher ticket items that generate repeating monies for the State like clockwork.  Each glass is taxed three times before a retail sale, twice by New Jersey – meaning that excise taxes for production also generate additional revenue for state coffers.  Finally, as outlined above – if we can successfully demonstrate our beer and wholesale sales increase as a result of that Sampling Room introduction… even more tax revenue is generated at each retailer.
  • Retailers Themselves – This may be the one part of this stream of thought that may outweigh all of the other sections of this article.  Retailers who stock craft beers, more than just our own brewery’s portfolio, enjoy higher margins on these sales with more charged per glass and a higher upsell percentage than many macrobeer drinkers.  Small New Jersey breweries, without the marketing weight of these macrobeer brands – use our Sampling Room events, large and small, as our brand ambassadors that directly lead to consumer perceptions that enable these more lucrative retailer sales.  If I’m a New Jersey Alcohol Retailer, I would argue in support of my neighboring breweries because it isn’t competition – it’s cooperation to create a more profitable market for all of us at every level.  Positive brewery experiences will lead to higher retail sales with a higher rate of customer retention and return for these retailers, whether it’s a store that stocks local cans and bottles or a bar that has moved away from macrobeer to local beer.

Hopefully, we did not lose you with what our web site tells us is our longest article we’ve ever posted – there is a lot to digest, but it’s not something to be ignored.  If a minority of retailers can tip the scales through regulatory lobbying – it may fall on each of you reading this to help the pendulum swing back towards progress by contacting your legislators, contacting municipalities so they can inform regulators of any harm that changes carry, and spreading the word (which you do right now) on social media!

One Comment Add yours

  1. Bill Gurden says:

    Well stated, Sean! The craft brewery industry helps the restaurant and bar industries in a special way and is in no way competition. By serving local craft beer, restaurants and bars appeal to customers who should not otherwise be spending money at their establishments. The traditional “bar” patron does not visit craft breweries and craft beer aficionados do not patronize bars that do not specialize in craft beer. End of story. In the end, breweries add an immeasurable positive influences in the community and the state.
    Personally, I have visited a dozen towns in New Jersey Jersey recent months that I’d NEVER go to and provide business to their local restaurants and stores that I never would have gone to if not for the craft brewery that I visited.

Leave a Reply