Tapped Out?

Written by Jess Harter Category: Valley News Issue: July 2014
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Arizona breweries battle restrictive liquor laws to keep pace as craft beer flourishes across the U.S.

Brewmaster Andy Ingram stands behind the bar at Four Peaks’ Tasting Room on Wilson Street in Tempe and considers the grim alternative confronting the state’s largest craft brewery if it wants to keep up with growing demand for its beer. “The statute says we have to surrender our retail licenses, which means we’d have to close the north Scottsdale and Phoenix Sky Harbor restaurants and let go of 200 people,” he says.

Ingram is referring to Arizona’s liquor laws, which are based on the traditional three-tier system that strictly separates producers (brewers, wineries and distillers), distributors and retailers (including bars, restaurants and stores). It’s a complicated regulatory maze not always enforced evenly in Arizona, giving out-of-state brewers a leg up against locals, even as Arizona craft beer producers try to keep pace with growing national demand.   

Four Peaks is essentially a victim of its own success – a thriving craft brewery that no longer fits comfortably in the tidy pocket of exceptions to Arizona’s three-tier law that officials created to help small-scale breweries. An Arizona microbrewery license, known as a Series 3, allows breweries to self-distribute up to 3,000 barrels (93,000 gallons) of beer per year. It also allows them to open retail locations, like a restaurant or tasting room. But these exceptions are only available until a brewery’s annual production reaches 40,000 barrels. At that point, breweries are expected to switch to a producer license, known as a Series 1, which has no production cap but also no exceptions for retail or self-distribution.

Four Peaks has two microbrewery licenses – one for its Eighth Street brewpub (producing 38,000 barrels per year), and another for its Wilson Street production facility, which Ingram expects to exceed 32,000 barrels next year. “I think we’ll have two locations knocking on the door [of the 40,000 barrel cap] next year, so there’s a definite sense of urgency,” he says. If Four Peaks exceeds the cap, the restaurant licenses for their Scottsdale and Sky Harbor Airport locations – currently “stacked” on top of its Series 3 license for the Eighth Street microbrewery –  could be endangered.

The Arizona Craft Brewers Guild represents 49 breweries, most of which produce less than 3,000 barrels per year. Only two – Four Peaks and Chandler’s SanTan Brewing Company – meet the 15,000-barrel threshold necessary to be designated a regional craft brewery. SanTan opened a new production facility last year with a producer license, allowing it to brew an unlimited amount of beer. It also still brews at its downtown Chandler brewpub under a microbrewery license.  

“I don’t want to see anyone stop growing, much less Four Peaks,” says SanTan brewmaster Anthony Canecchia, who worked at the Tempe brewery for seven years before launching his own. “They’re the biggest craft brewery in the state. They make it easier for all of us. I also want to protect what I have. There might come a time when it’s suggested if you want to grow unlimited you have to divest yourself of all retail. Then I’d have to fire 140 employees.”

But to make changes to Arizona’s liquor laws, one must run a daunting gauntlet of industry lobbyists. The brewers guild hired Phoenix attorney Camila Alarcon to lobby this year’s Arizona Legislature for an increase in the Series 3 cap, but the proposal was rejected by almost everyone, including distributors, retailers and other producers. If production caps for microbreweries are increased, then other producers like wineries and distilleries will want their caps changed, too. “Cap increases make everyone nervous,” Alarcon admits, adding they’re a temporary solution at best.  

Raising the cap also wouldn’t address why national chains like BJ’s and Gordon Biersch already brew in Arizona under producer licenses for multiple retail locations – exactly what Four Peaks was inexplicably denied when they inquired with the state last year. So the brewers guild switched strategies and now is pursuing clarifications to Arizona’s no-cap producer license, most notably a grandfather clause to retain a yet-to-be-determined number of freestanding retail locations.

It’s hard to craft laws that will accommodate the future needs of Arizona’s various breweries, since each has its own business model. Four Peaks, for example, has focused solely on the Arizona market. It’s the second-largest brewery in the U.S. to sell its beer only in its home state, and eventually hopes to usurp Wisconsin’s New Glarus for the top spot.

Ingram, Canecchia, Alarcon and Steve Barclay, executive director of the Beer and Wine Distributors of Arizona, are all cautiously optimistic an agreement on Series 1 clarifications can be reached by the time the Legislature meets again in January. Says Barclay, “No one wants to say, ‘OK, divest yourself of that restaurant. Shut it down. Terminate your employees.’”

Highest-Producing arizona Craft Breweries
*numbers are self-reported

Four Peaks Brewing Company (Tempe)
70,000 barrels/year

SanTan Brewing Company (Chandler)
25,000 barrels/year

Nimbus Brewing Company (Tucson)
7,000 barrels/year

Grand Canyon Brewing Company (Williams)
6,000 barrels/year

Lumberyard Brewing Company (Flagstaff)
4,700 barrels/year