Out-of-State Billionaires vs. California Small Businesses: The Rigged System Blocking Local Craft Spirits

Small craft distillers in California are sounding the alarm on the government-protected distribution monopoly owned by out-of-state billionaires who are locking small producers out of the market, Aaron Bergh, a 10 year veteran of the alcohol industry and owner of Calwise Spirits Co. in Paso Robles, told the Globe this week.

Bergh explained that the alcohol distribution laws set up after prohibition ended still plague distillers. The government-mandated three-tier system requires distillers to sell exclusively to licensed wholesalers, who then sell to retailers. Distillers cannot sell to consumers directly. This creates a government-protected middleman layer that has resulted in a small number of distributors acting as gatekeepers to the market.

California has made it clear it does not want billionaires telling the state what to do, so why allow out-of-state billionaire distributor wholesalers to wag the dog?

Without robust direct-to-consumer options, small producers are more dependent on wholesalers who may deprioritize them in favor of bigger, more profitable national brands. This dynamic is common across beverage alcohol and has been criticized as creating barriers for startups while benefiting established players and middlemen, VinePair reported in 2020.

Bergh said that in 2015 a bill was passed to allow distillers to sell directly to consumers, and allow distillers to offer tastings, as wineries have done for decades. The Craft Distillers Act of 2015, via Assembly Bill 1295, was signed into law by Governor Jerry Brown in October 2015.  This legislation leveled the playing field for California’s craft distillers, specifically those producing under 100,000 gallons per year, compared to wineries and breweries, which had long enjoyed more direct-to-consumer privileges. Before this, distillers faced stricter three-tier system restrictions and couldn’t easily sell bottles on-site or charge meaningfully for tastings.

But the direct sales are another story – big distributors don’t want to give up their government-protected position as middleman between distillers, retailers and the consumer, Bergh says.

During the COVID-19 pandemic, California’s Department of Alcoholic Beverage Control (ABC) issued temporary regulatory relief that allowed licensed craft distillers to ship distilled spirits directly to consumers. This began around March 2020 to support businesses hit hard by tasting room closures and restrictions.

Under an executive order from Gov. Gavin Newsom, which originally expired  December 31, 2021, California distillers were able to ship direct-to-consumer (beginning March 2020), as a temporary economic relief measure during the pandemic. This move was said to have saved many distilleries from permanent closure.

Bergh said this was extended several times.

Distillery.com goes into detail:

“Our temporary Direct-to-consumer shipping pilot expires at the end of the year,” Bergh said. “As major wholesalers like Reyes and Southern Glazer’s tighten their grip on the market, local distillers are facing a sobering reality: the elimination of this direct sales lifeline will leave us at the mercy of gatekeepers who prioritize national brands.”

“Reyes and Southern Glazer’s have spent a combined $500,000 this election cycle to kill our attempt for a meager reform.” These major wholesalers and their trade groups have opposed expansions of direct-to-consumer shipping for craft distillers in California.

This would force more reliance on the traditional three-tier system (producer → wholesaler/distributor → retailer), where large distributors Southern Glazer’s Wine & Spirits and Reyes Beverage Group act as key gatekeepers, protected by state government.

Bergh shared more detail:

The federal government has acknowledged there’s a problem. Following the Biden Administration’s 2021 Executive Order on Promoting Competition in the American Economy, the Alcohol and Tobacco Tax and Trade Bureau (TTB) launched an investigation into competitive conditions in the alcohol industry. Their report concluded that the wholesale tier has become dangerously consolidated, creating de facto duopolies in many states where small producers have little to no choice of distributor. While confirming that the creation of the three-tier system was originally meant to break organized crime’s grip on the alcohol industry and prevent vertically integrated monopolies, the report concludes that the system has artificially propped up middlemen and exacerbated the very issue it was meant to prevent.

“Alcohol distributors don’t have to operate as responsible contributors to the market because their oligopoly is protected by the government,” says Bergh.

“If new legislation isn’t passed by the end of summer, California distillers will lose the same e-commerce rights enjoyed by businesses in nearly every other industry. Distillers are asking for a simple, limited right to ship directly to consumers without going through gatekeepers who prioritize national brands,” Bergh said.

Bergh told the Globe that Republic National Distributing abruptly ceased operations last year, laying off thousands of union employees. Reyes Beverage Group, from Illinois, moved in, and now Reyes and Southern Glazer’s Wine & Spirits continue to consolidate the market and tighten their grip on market access.

“Both distributors have signaled they’re not interested in or have the capacity to support California craft brands. Southern Glazer’s laid off its California craft division in 2024 and Reyes doesn’t carry spirits from a single California craft distillery.”

Craft distillers’ aren’t proposing to eliminate the three-tier system, but Reyes and Southern are still spending heavily on California legislative races in an apparent effort to kill distillers’ attempts at meager liberalization of direct-to-consumer commerce laws.

Bergh said Reyes Holdings, owned by Illinois billionaires Jude and Chris Reyes, contributed $300,000 to California state legislators. Miami-based Southern Glazer’s contributed $200,000, for a grand total of $500,000. “While these out-of-state corporate giants are pouring money into Sacramento to influence lawmakers, California distillers are struggling to find support in Sacramento for legislation that would simply allow them to ship directly to their own customers.”

“Legislators have a choice,” Bergh said. “They can keep protecting a system that benefits out-of-state billionaires’ mega-distributors, or they can give California’s own entrepreneurs and consumers a fair shot. The federal government has launched investigations into these anti-competitive conditions and a dozen other states have recently passed laws allowing their distillers to ship. It’s time Sacramento caught up – California should lead the way.”