Alcohol Producers Describe Business Challenges at the Nevada Economic Development Conference
Nevada’s home-grown alcohol producers found themselves overshadowed at the 2019 Nevada Economic Development Conference by two recently arrived sectors. Technology and professional sports took center stage at the Green Valley Ranch Resort in Henderson, with keynote speeches and sessions focused on smart cities, the workplace of the future, and the pro teams that have rebranded Las Vegas as a sports city.
In a small meeting room, a five-person panel of craft beer, spirits, and winery entrepreneurs spoke to a sparse audience of conference attendees. The panel painted a familiar picture for those who know the craft alcohol and winery sector. Time after time, aspiring licensees find Nevada regulators surprisingly ill prepared to deal with them.
Somehow, in a state where fortunes were built on a business model featuring free drinks for tourists in the gaming establishments, small brewers, vintners, and distillers struggle to carve out their rightful place.
These job creators say they sometimes wonder why their contribution is not not more valued by the state. To start up and stay in business, each has run an obstacle course dotted with frustration, delay, and impediments to growth. Uncertainties in the law have forced each of the five to become legal researchers and citizen lobbyists at the state and local level, advocating on their own behalf.
“The state and local governments have not caught up to the industry yet, in terms of their regulations,” said vintner Tim Burke, who is poised to open his first commercial wine tasting room soon.
It’s an understatement.
Panelist Mike Schoenbachler is co-owner of Vegas Valley Winery. Leading up to the winery’s 2018 opening, Schoenbachler had repeated consultations with the Nevada Department of Taxation, which has state licensing jurisdiction. But department officials balked when the time came to issue the license.
“At this point, I’d had the Department of Taxation on site at least four times,” he said. “I’d reviewed all of the plans with them.”
Because the Vegas Valley team also owns the Grape Expectations School of Winemaking, the taxation department was uncertain it could legally issue a license for the winery. Nevada law prohibits the urban wineries from opening more than one location. But there’s a separate Nevada law enabling the school to exist. It spells out specifically that a winemaking school is not a winery.
“But it’s hard to make people understand that when they’re looking at a room full of wine barrels,” Schoenbachler said of the school’s cavernous production room stacked floor-to-ceiling with student-made wine.
Vegas Valley was forced to request an opinion from the state attorney general. A nerve-wracking move, considering the investment of thousands of dollars toward the winery. A negative opinion could have shut down the project.
“You can only imagine the knots in my stomach,” Schoenbachler said.
Every one of Nevada’s urban wineries have endured costly and harrowing confrontations with government entities prior to opening day. In these episodes, permits have been withheld or revoked, product has been seized, and owners have been ordered to halt business plans they believed were legal. With each new winery, the state of Nevada and its local governments seem to stumble through a maze of ill-defined and contradictory laws, clarifying rules as they go. In each case, there’s been a frantic business owner sweating bullets, and a clock ticking past the targeted grand opening date.
Craft brewers have their own challenges. Wyndee Forrest and her husband took the bull by the horns in the city of Henderson, pushing changes and ultimately writing new law that enabled their CraftHaus Brewery to launch. But she articulates a frustration shared by vintners and craft alcohol producers across the state. Nevada shows favoritism to large, out-of-state producers through its enforcement of the three-tier distribution system. The system requires Nevada-made alcoholic beverages to be handled by a licensed distributor if they are sold outside of the craft pubs and tasting rooms. No retail sales at supermarkets, restaurants, or liquor stores are possible without a distributor.
Even transporting beer to their second tasting room location in downtown Las Vegas required Crafthaus to sell the beer to a distributor, Forrest said. Then, to stock the new location they had to buy back the beer, at a markup. (California breweries, Forrest notes, can self-distribute.)
A handful of large, powerful players dominate alcohol distribution. Few small producers make enough product to spawn a meaningful business relationship with one of these distributors. Story continues below…
“Currently, we can’t produce enough to open the distribution doors,” said Schoenbachler of Vegas Valley Winery. “If we did we would run out of wine… Believe me, I would love to sell every bottle of wine we make. But at the same time, if you don’t have wine to pour in your tasting room, you’ve kind of defeated the purpose.”
The distribution problem exists alongside a battery of regulations that challenge these businesses. Chief among them are state-mandated production caps. Each producer feels constrained in their own way by the limits, which hamper their growth and their ability to produce a sufficient supply to capture the interest of the distributors.
The brewers and distillers have enjoyed measured success raising their limits. As a member of the Nevada Craft Brewers Association, Forrest lobbied Carson City in two successive legislative sessions to get an increase craft beer limits. Lawmakers in 2017 raised the annual limit to 40,000 barrels from 15,000. (The Association initially asked for 60,000.) For perspective, California’s cap is 250,000 barrels. Utah has no cap on production, she said.
As part of the deal to raise their barrel limit, the brewers had to agree that they would not return the next session to ask for more, Forrest said.
“We were told to sit that one out. Do you think the distributors sit out a legislative session?” she asked. “No. There’s no cap on beers being brought into our state domestically and internationally. They can flood our market with beers that are not made in our state, and not creating Nevada jobs, and not paying Nevada taxes.”
Most policy makers dismiss Nevada’s craft alcohol industry as “miniscule,” Forrest said. The point was made at the state capital when the brewers testified before a legislative committee, and one of the lawmakers asked how they would go about becoming “real breweries”.
In that same 2017 legislative session, two of Nevada’s northern craft distillers were able to persuade the state legislature to create a new business category. The law now recognizes estate distilleries, which must have a farming operation that grows 85 percent of the agricultural ingredients used in their product. An estate distillery can sell up to 475,000 cases annually, following a prescribed distribution scheme.
A craft distillery is not an estate distillery. Katalin Racz makes craft spirits at the Las Vegas Distillery in the same light industrial warehouse complex with CraftHaus and the Vegas Valley Winery. Racz does not have a farm. Story continues below…
Her urban plant includes a tasting room, where the state restricts both tasting and retail selling. No patron may taste more than 4 ounces of spirits per day, and Racz may not sell more than one case per month to any single customer. Notwithstanding the monthly case purchase allowance, the annual sales per customer is capped at six cases, which means no customer can truly purchase a case every month. Total sales are capped 10,000 cases of spirits per year within Nevada, and 40,000 cases for export.
Racz is less preoccupied with case limits than she is with limitations imposed by three-tier distribution. As an example of a business coup that caused distribution heartburn — Racz’s late husband, George, helped design the Mob Museum’s History of Prohibition exhibit, which opened last year. Las Vegas Distillery also signed on to brew private label spirits for a party facility decked out as a speakeasy.
“When we are manufacturing products for somebody else… it has to be on the label that we are the manufacturer,” Racz told the conference audience. “But somebody else owns the brand.”
Both parties to such a contract end up in a bind, she said. The entity with the private label can’t engage the distributor it wants, because Las Vegas Valley’s distributor has the right to distribute both products.
Racz and Forrest both deplore the enforced loyalty they must give to the first distributor that takes on their brand.
“When you sign on to a distributor you are married for life,” said Forrest. Some of them, she said, become “‘brand stackers’… They go and gobble you up, but it doesn’t mean they will distribute your product.”
The urban wineries have a compound problem arising from a Nevada fruit quota that’s tied to their case limits. Their first 1,000 cases can contain grapes from anywhere. After that, 25 percent of the juice must come from fruit grown inside the state. The vintners on the panel support the concept of a Nevada fruit quota, but they wish it could be applied differently.
“The purpose of the quota was to grow an industry from the ground up,” said Schoenbachler of Vegas Valley Winery.
But the quota becomes problematic in a state where there aren’t many grape growers. New vineyards are costly and require at least four years to mature before the fruit produces good wine. The panelists would like to see the 25 percent quota phased in over time while they step up production to a level that would fund vineyard development and support retail distribution.
“Currently, we can’t produce enough to open the distribution doors,” Schoenbachler said. “The only place that you can get our wine, is you can come into our tasting room and you can buy it by the glass. You can do a tasting by the glass or you an purchase a bottle to go.”
Each producer exists with separate limits, but everyone agrees that Nevada applies the limits in a way that stifles growth.
“Why should a lender fund us if we can’t have exponential growth?” asks Wyndee Forrest from CraftHaus.
The audience members in this session were people who work for assorted economic development agencies at the state, regional and local level. Their questions to the panelists suggested they may become allies. Some offered suggestions, and some asked what they can do to help.
The annual Nevada Economic Development conference is produced by the Nevada Economic Development Association. The conference location alternates each year between northern and southern Nevada. The alcohol producers panel was recruited by Teri Bath, who managed the agribusiness track for the conference. Bath is also the president of Nevada Vines & Wines.