Pennsylvania debates new beer flow

To Chris Kunda, the incredulity is as predictable as it is understandable.

"We get 10 people a day who say, 'What do you mean, I have to buy a case!?' " said Kunda, owner of a King of Prussia beer business on Henderson Road, a bustling commuter strip and highway feeder in Montgomery County.

For fourscore years, Pennsylvania has been an island among the states, requiring its beer "distributors" to sell beer by the case or keg or not at all.

Now, that system may be confronting its most serious challenge to date. On Monday, the state House is scheduled to resume debate on a proposal that would overhaul the way alcoholic beverages are sold in the commonwealth - this time with a revolutionary twist involving beer.

The plan has tapped the anxieties of longtime beer merchants, some of whom have been at it for more than 60 years. Kunda, for example, said his family's business dates to before Prohibition (and even operated during Prohibition).

States have adopted various strategies in the 79-year effort to prevent pre-Prohibition alcohol abuses, but Pennsylvania has been particularly idiosyncratic, said Eric Shepard, longtime editor of Beer Marketer's Insights in Suffern, N.Y.

"Pennsylvania is unique," he said. "You are by far the weirdest state."

The bill under consideration, introduced by state House Majority Leader Mike Turzai (R., Allegheny) with Gov. Corbett's backing, is just the latest effort to get the state out of the liquor business. But Turzai's new twist would permit beer distributors and other businesses that could afford a license to sell beer in any quantity, along with wine and liquor.

In short, one-stop shopping for alcohol buyers, a la New Jersey.

Pennsylvania already has a modified version in that food establishments, such as Wegmans and Whole Foods, have licenses that allow them to sell beer at retail, with purchases limited to 192 ounces.

Frank Palladinetti, an owner of the massive Bell Beverage at Front and Oregon in South Philadelphia, which sells 2,500 varieties of beer and competes with stores in New Jersey and Delaware, said the whole debate gives him heartburn. "I'm exhausted from it," he said.

Already, this overhaul proposal has advanced farther than any other, said Franklin and Marshall University's G. Terry Madonna, a veteran Pennsylvania political observer.

But don't expect to be buying wine or whiskey at a beer store or wine and beer at the local Costco or convenience store before schools open in September, or, for that matter, before the Christmas decorations go up at Macy's, or the swallows head back to San Juan Capistrano.

Industry opposition is a mighty bottleneck, and even those who would welcome changes say they may be a long time coming.

The system is entrenched; its proponents argue that it works, that it is a reason Pennsylvania is among the national leaders in the brands it offers, and that it inarguably has generated a generous stream of cash for businesses and state coffers. According to the Beer Institute in Washington, the heady brew generated $187 million in sales and excise taxes in 2010.

Gifford Pinchot, Pennsylvania's first post-Prohibition governor, who became a legendary alcohol regulator as well as conservationist, was oft-quoted as saying he wanted to "discourage" alcohol use by making it "as inconvenient and expensive as possible."

Pennsylvania beer drinkers, evidently, have accepted the challenge.

In 2011, on average, Pennsylvania adults guzzled the equivalent of 300 12-ounce beers each - some more than others, sources say - spending $500 per household, according to industry statistics. That was above the national average, and 30 percent higher than per-capita consumption in free-market New Jersey.

Alex Piermani, whose family has owned a distributorship in Conshohocken since 1945 - that's a year before Pinchot died - said the changing borough's newcomers are nonplussed and crestfallen when they wander into his crammed beer shop and ask for 12-packs.

A "case only" sign hangs over the cash register, and his son David volunteers a pantomime of a dejected would-be customer.

But as much as they may complain about the case-only system and the entire State Store system - and polling affirms overwhelming opposition, Madonna said - millions of veteran Pennsylvania consumers, such as Kunda customer Justex Collins-Propper of Norristown, evidently have adapted. He said he didn't want anything to disrupt the state revenue stream, and if nothing changed, he would be content to keep buying by the case. "Either way," he said, "I'm for it."

"If it ain't broke, don't fix it," said David Piermani, encapsulating the position of the Malt Beverage Distributors Association of Pennsylvania.

"These guys have played by the rules forever," said Maryanne Origlio of Origlio Beverage, one of the state's largest wholesalers and a major national player. "To change it drastically, they're going to be gone."

Variations of the so-called three-tier system of beer sales have been in effect nationwide since Prohibition ended in 1933, said Paul Pisano, vice president of the National Beer Wholesalers Association, outside Washington. Authorized suppliers sell it to licensed, regulated wholesalers, who in turn sell it to licensed, regulated retailers.

He said the system was designed to filter out organized crime, curb underage drinking, and enforce beer-making standards to protect the public from some of the toxic swill circulating during Prohibition.

Here's how it works in Pennsylvania, where beer is treated differently from higher-alchohol beverages: Beer is regulated but remains a private business.

Importers, such as Crown Imports and Heineken, and brewers, including emerging giant Yuengling of Pottsville, now No. 8 in the nation, and the rapidly growing craft company Victory Brewing in Downingtown, sell their products to the wholesalers.

By buying the beer, wholesalers such as Origlio, which operates out of a mammoth complex off Woodhaven Road in Northeast Philadelphia, insulate suppliers from being stiffed by the misnamed "distributors," a term that is a vestige from an era when beer shops regularly delivered cases and kegs to customers. Today, they actually are beer retailers.

Piermani said Pennsylvania added the case-only provision to throw a bone to tavern owners, who traditionally have sold six-packs at a healthy markup.

Along with the distributors, the wholesalers have lined up against the Turzai plan. The distributors account for about 70 percent of the beer business, so what's bad for them is bad for the delivery people, said Jay D. Wiederhold, president of the Pennsylvania Beer Alliance.

Wiederhold said the system works for retailers because the wholesalers provide storage space and inventory on demand. Microbreweries benefit, he said, because the wholesalers save them the cost of a fleet of trucks, plus they don't have to hire an army of salesmen to go begging for shelf space.

Pennsylvania is among the national leaders in the variety of beers offered in its stores, according to the website seekabrew.com. "Pennsylvania has a vibrant, awesome beer scene," Pisano said. "The current system has helped that."

Wiederhold said that if beer distributors were going to get into the wine and alcohol business, they'd have to make room by eliminating some beer products. That, he said, "would reduce the availability of beers."

"That seems to be a valid concern," said Bill Covaleski, president of Victory Brewing, which has products in 29 states. "Something's got to give, and there's going to be some beer products that are going to go."

"We would love to sell 12-packs," said Conshohocken's Piermani, but he is dead set against the Turzai plan.

The plan - which faces considerable union opposition - calls for closing down the state's liquor stores and instead issuing 1,600 licenses to private vendors to sell wine and spirits, with the first 1,050 offered to beer distributors and the rest auctioned off, county by county, to the highest bidders.

But according to Turzai's figures, those licenses for beer sellers wouldn't come cheap - in Montgomery County, for example, the estimated fee would exceed $650,000. Plus, the distributors would incur capital costs for renovations and retrofitting.

"We don't have the space," Piermani said, looking around his 2,400-square-foot space stacked solid with beer boxes. "We can't afford it."

Kunda, who does have a larger space, isn't as dismissive. Asked whether he would consider buying a license, he said, "We would, absolutely."

In Downingtown, Victory's Covaleski said he was keeping his mind open. "In the end," he said, "everyone is supposed to be addressing consumer desires."