THE THREE-TIER ROADBLOCK

 20150217-EEB-Distribution3214

White Negroni

2 ounces St. George Spirits Terroir Gin
1.75 ounces Lillet Blanc
.75 ounce Suze

Stir, strain over ice, and garnish with a lemon twist.

TO BARROOM CREATIVITY

BY SHANNA FARRELL | PHOTOGRAPHY BY JOHN MORTIMER

Craft distilling is booming across the nation, but Lance Winters, owner and master distiller of St. George Spirits in Alameda, California, has a piece of advice for anyone interested in jumping on that bandwagon of creative opportunity:

“Don’t start in California. Go to New York, go to Washington, go to Oregon, go to Utah, but don’t start it here because it’s going to be really hard for you.”

As an acknowledged leader in American artisan distilling, Winters isn’t worried about the competition. He’s just being honest about the prohibitive nature of California State laws for distillers in a state otherwise known as a leader in culinary innovation. So how could it be that so many other states are able to give distillers more room to produce creative spirits with interesting flavor profiles?

“Direct sales,” Winters says—which aren’t yet legal in California—“would give small producers greater latitude to be unique.”

Meet the three-tier system

Lance Winters in the lab at St. George Spirits.<br /><p id=Photo by Ben Krantz, courtesy of St. George Spirits” width=”300″ height=”394″ /> Lance Winters in the lab at St. George Spirits.
Photo by Ben Krantz, courtesy of St. George Spirits

To understand what’s holding back craft distilling in California, one needs to start by looking at America’s complicated relationship with alcohol, particularly spirits, which came to a head with ratification in 1919 of the 18th Amendment to the United States Constitution.

Better known as Prohibition, the 18th Amendment made illegal the production, transport, and sale of alcohol. Repealed by the 21st Amendment in 1933, Prohibition lingered in a set of regulations that individual states have been charged to interpret and administer. The heart of the regulatory quagmire is the three-tier system, which requires producers to sell their products only to wholesale distributors, who then sell to retailers, who then sell to consumers. Single ownership crossing all tiers is strictly prohibited. The idea is that excess and abuse will be curbed in the process, and that taxes can be levied at various transfer points

Nearing a century later, California, like most states, has created exemptions to three-tier-regulations for wineries and breweries, where visitors are fully accustomed to walking into a room in or adjacent to the production facility to taste through a dizzying array of product, knowing that they can weave their way out with as many bottles as they care to carry.

Not so for distilleries, where strict interpretations of the system remain in place. The result is absurd situations like this one experienced daily at St. George Spirits:

Lance Winters runs his distillery out of a cavernous airplane hangar on the decommissioned Alameda Naval Air Station. Also on the premises is a small retail store for St. George Spirits, which, by law, is run by a separate company holding a Type 21 liquor license. This store is not accessible from the tasting room, and the third party company cannot directly stock the retail store with the St. George Spirits products from the adjacent distillery. “[Instead,] they pick up the phone,” Winters says, “call our distributor, and say, ‘I’d like three cases of rum. I’d like five cases of Terroir Gin.’ They drive their truck to us from about 70 miles south of here. They put that order onto the truck, drive it up here, unload it at the retail shop, and then go back to their warehouse. When they run out of product, they call us, put in an order, come here, pick that up, drive it down to their warehouse, and then it sits there until it needs to come back here. So, for our spirits to make it 100 feet across the distillery floor, they make a 140-mile side trip.”

Until the implementation of AB 933 on January 1, 2014, California spirit producers, like St. George, were not allowed to charge for tastes poured at a distillery tasting room. And with no sales possible, that meant there was no direct revenue for staffing the tasting facility. AB 933 improves on the situation, but it remains illegal for California spirit producers to add any nonalcoholic ingredients to the tasting glass.

“I see wineries that do sparkling wine advertise that they will make mimosas for you on a Sunday,” says Winters. “We can’t make cocktails at the distillery to showcase our products because the state Alcohol Beverage Control says our license for tasting doesn’t allow [it]. If that happens, we become a de facto cocktail bar.”

Winters likes to give perspective on how things have changed—or not changed—from state to state during the 33 years since his company was founded:

“It all started here in California,” he says. “Thirty-three years ago, there really were no small distilleries. Jörg Rupf got the first license [in California] to be a small producer and started St. George Spirits. Thirty-three years ago in the state of Utah you couldn’t get a beer that was over 3.2{94d79dd6af1e87a94e700e4c297236468333f22e27ed5757b44711974a9a4b91} alcohol. If you wanted to get a cocktail at a bar, you had to get a membership to a private club. They would make your drinks using 50ml bottles—those little airplane bottles—because that guaranteed you wouldn’t get a drink too strong. That’s how tightly it was regulated.”

Fast-forward 33 years and the Beehive State appears far more progressive than California: “In Utah, where artisan distillation did not start, you can ski in Park City right up to High West Distillery’s restaurant, walk into their James Beard Award–nominated bar, and have a cocktail. If you like that cocktail, you can buy a bottle direct from them to take out with you.”

Left:   St. George Spirits Terroir Gin on the shelf at Alchemy Bottle shop. Right: Hangar 1 Vodka, originally created by St. George Spirits, is now owned and distributed by Proximo Spirits in New Jersey.

Left: St. George Spirits Terroir Gin on the shelf at Alchemy Bottle shop. Right: Hangar 1 Vodka, originally created by St. George Spirits, is now owned and distributed by Proximo Spirits in New Jersey.

But the distributors can help change that, can’t they?

“There are no laws that compel a distributor to carry our product and do decent service by it,” says Winters. “Let’s say that you’re a craft distiller and you’ve got an idea to make a spirit that is totally cutting edge, something that nobody has ever tasted before. While producers must sell through a distributor, there is no incentive for a distributor to carry a product.”

To further illustrate, Winters flips the viewpoint: “I’m a distributor and have been working with Smirnoff and Stoli and Gilbey’s, and their products have been my bread and butter for years. You bring me something that is totally different. I taste it and am like, ‘Well, maybe it will sell and maybe it won’t, but I’m not going to make a bet on it or take your product on.’”

So, the onus is on the small producer to establish a customer base that will give confidence to the distributor who might carry their products. St. George Spirits has been able to accomplish this after three decades of distinguishing themselves among a growing field of distillers operating in states that have better incentives for their producers. “We are very fortunate that we have a distributor that has a large infrastructure and a great team of salespeople, and we have a long enough history that they trust what we are doing, but it’s not the same for everybody. A lot of small guys starting out right now have the odds stacked against them in the state of California.”

Furthermore, as many distribution companies have consolidated over the past 15 years, there are fewer opportunities for a small producer to break into the market.
Three-tier laws also dampen creativity in retailing . . .

Peter and Tova Mustacich, owners of Alchemy Bottle Shop in Oakland, love the exceptional qualities they find in craft and artisanal spirits, bitters, wine, and beer:

“We strive to support small, independently owned producers who are honest about their ingredients and put a level of care and attention into their process that can’t be matched on an industrial level,” says Peter Mustacich.

But that highly curated selection at Alchemy is not always easy to maintain.

“We’ve found some small producers that make products we really like but don’t have distribution in Northern California,” he says. “It’s disappointing that we can’t carry them at our shop.” Furthermore, as Mustacich explains, distributors can effectively distance them from the producers, making it hard to foster relationships that might lead to unique products they could be selling at their store. The Mustaciches use 30 different distributors to obtain the diverse stock they desire, while bigger bottle shops may use only a handful. “California is the most expensive state in which to distribute,” says Mustacich.

On the job at San Francisco bar and restaurant Beretta, bartender John Fragola puts together an Agricole Daiquiri.

On the job at San Francisco bar and restaurant Beretta, bartender John Fragola
puts together an Agricole Daiquiri.

Agricole Daiquiri

Recipe courtesy of Beretta

2 ounces St. George Spirits Agricole Rum
.75 ounce fresh lime juice
.5 ounce Martinique cane syrup

To make the Martinique cane syrup, boil ½ cup water and add 1 cup Martinique sugar. Stir until sugar is dissolved. Cool before using.

Combine rum, lime juice, and cane syrup.* Shake, strain, and serve up.

*The proportions can be changed if less syrup is desired, but stick to the 2:1 sugar:water ratio when making the syrup.

. . . and at the bar as well.

The three-tier-system limits what bar managers can order and stock. Spirit conglomerates with deep pockets can dominate the portfolios of distributors, limiting bar owners’ access to small artisanal and craft producers.
Bar Agricole and Trou Normand owner Thad Vogler was feeling so dismayed in January 2007 that he wrote an open letter to distribution companies, published temporarily on Tablehopper, discussing the way the distribution system serves to cut off cocktail culture from its history by limiting access to small producers who don’t have the financial capacity to compete with larger companies.

“[Cocktails] speak of the history and tradition of the places that spawned them.” Big spirit companies, with their established reputations and wide distribution abilities can “actively . . . destroy the cultural terrain [that bartenders] mine for recipes and ideas.” Classic cocktails like the Daiquiri and Mojito of the Caribbean are inherently tied to the places “that made them famous by their ingredients.” The system is designed to support companies with more money to spend on marketing, which they derive by compromising the quality of ingredient. He asks why cocktail bar owners or management would want to support brands that compromise quality for profit or work with distribution companies who perpetuate this cycle.

Inching forward in a new direction

Lance Winters, who formerly served as the president of the California Artisanal Distillers Guild (CADG)—whose mission is to protect and promote the art and craft of small-batch and artisanal distilled spirits, as well as support the three-tier system—has tried twice to overturn laws that prohibit producers from making sales directly to end users. He enlisted 38 small distilleries to help revise distribution laws in California. “We hired lobbyists and worked with Nancy Skinner, who is an amazing legislator,” he says. “She worked really hard to get us direct sales.” Although they were unsuccessful in the past, there has been a recent push to try again.
On February 27, 2015, California Assembly Members Marc Levine and Susan Eggman introduced Bill AB 1233, which would allow distillers to sell a maximum of three bottles per person per day on premises directly to consumers. “States that have overturned Prohibtion-era laws have seen a booming craft distilling industry,” Levine said at a news conference and reiterates in a press release. “Direct-to-consumer sales have been particularly beneficial for small distilleries. California distillers are currently unable to truly market themselves, build brand recognition, and remain competitive due to the regulatory hurdles dating back to Prohibition.”
Timo Marshall, who with his wife owns and runs Spirit Works Distillery in Sebastopol, replaced Winters as president of the CADG earlier this year. He, as well as the CADG, supports Bill AB 1233. Marshall, who spoke with Assembly Member Levine before he introduced the bill, feels that this will only serve to positively strengthen the three-tier system. “We’re not asking to be distributors, but to be able to have the modest ability to supply people who visit our distilleries with a bottle,” Marshall explains. “This will allow us to connect people with our product, who are often shocked we don’t have this right. It’s a great way to promote California spirits so consumers know what to look for in stores and bars.”

Winters says that he, too, wants to go through a distributor. “Distributors have fleets of trucks, armies of salespeople, and banks of phones for people to collect on debt. I have one person in California that I get a check from every couple of weeks for the stuff that they buy from me instead of me having to call 500 different restaurants and bars and retailers to say, ‘Hey, where’s my money?’ That is fantastic. But, for me to be able to sell my product out of the tasting room here to a handful of people who come through to [be] educate[d] about the product and seal the deal, it gives me a little bit more of a profit margin here and gives us the ability to make small-batch items that wouldn’t be worth a distributor’s time, which we could sell to our tasting room visitors.” He adds that this is especially important to new distillers: “It gives them the ability to get started, get a name, and then go out and find distribution.”

Marshall echoes this perspective and feels that it’s not a matter of if direct sales will be made legal but when. “California is one of the last states to adopt this change,” he says. “There’s a lot of support for this under the surface, and the more conversation we have about it, the more people know and the more likelihood we have to improve the three-tier system.”

Indeed, the more ability consumers have to taste and buy spirits directly at distilleries, the more demand there will be for distributors to carry small-batch craft spirits. Thus, this will enable bottle shops, like Alchemy, and bars, like Bar Agricole and Trou Normand, to stock products that are made with care and integrity, something that mirrors their business philosophies.