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Minnesota’s liquor laws are throttling its distilleries

I wrote recently about how state regulations are hurting Minnesota’s craft brewers. A similar story can be told for the state’s distillers.

As The Growler reports, recent progress in liberalizing Minnesota’s arcane liquor laws, such as the Surly Bill and Sunday sales, has largely left our distillers behind. They face the indefensible three-tier distribution system in which “manufacturers make spirits, beer and wine; wholesalers distribute across and within the state to retailers; and retailers sell to the consuming public”. As this obsolete bit of rent seeking legislation has caused trouble for the state’s brewers, so it causes problems for its distillers.  

First, distilleries are prohibited from self-distributing the way beer and winemakers can. Craft brewers in Minnesota producing under 25,000 barrels annually can apply for a wholesaler’s license through the state, which allows them to sell product directly to restaurants and liquor stores around town and maximizes the profit margin on those sales.

But in order for a bottle of Minnesota-made gin to end up at your local liquor store or the shelf of your favorite bar, it must go through the three-tier system, forfeiting to distributors a sizable chunk from the distillery’s already razor-thin profit margins in the process. 

There’s also a growing disparity between the number of distilleries in Minnesota and the number of available distributors.

“Back when we started five years ago,” says Jon Kreidler, co-founder and chief executive of Tattersall Distilling, “the craft market wasn’t what it is today.” Craft spirits were a novelty and made up a smaller portion of a distributor’s roster. “Now there are 27 craft distillers in the state all fighting over that same number of distributors.”

When you factor in out-of-state craft distillers looking to grow their footprint here, it quickly becomes an incredibly competitive marketplace to stand out in.

Many states have similar laws but Minnesota’s contain a particular poison pill.

Subdivision 4 of [Minnesota Statute Section 340A.22] prohibits distilleries from selling more than one bottle of spirit per person per day and that bottle can’t be bigger than 375 milliliters. This aggressive cap has a significant impact on the trajectory of the business, especially early on when a new distillery is simply trying to get off the ground.

“No business is ever going to survive by selling one bottle to one person per day,” Dailey of Studio Distilling says. She jokes she’s been able to buy spirits with fewer stipulations in Utah.

In contrast to breweries, where consumers can purchase multiple bottles and growlers at a time, distillers must break it to customers that not only are they limited to one take-home bottle, but one that’s half the size of the standard 750-milliliter bottle they’re used to seeing at a liquor store.

“It breaks my heart to not be able to help someone,” Dailey shares. “But I’m also turning down business. It doesn’t seem like a smart business model for anyone.”

And since liquor stores don’t like to stock 375-milliliter bottles, small distilleries who are trying to distribute are having to carry significant inventory for two different-sized bottles, and even have to submit two separate labels for TTB approval.

“If it was not for that law,” Tattersall’s Jon Kreidler says, “most of us would not carry a 375-milliliter bottle.”

With such a hard cap on bottle revenue on-site, a cocktail room becomes almost a necessity despite the massive capital investment, becoming one of the distillers’ only path to fast cash for their budding business.

These laws serve no useful purpose for the consumer nor for Minnesota’s innovative, entrepreneurial distillers. It is time for them to go.

John Phelan is an economist at the Center of the American Experiment. 

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