Utah liquor laws tighten again, hurting local businesses - Utah Business - Utah Business

Utah is home to some incredible homegrown distilleries, including Waterpocket Distillery, Holystone Distilling, and Hammer Spring Distillers. However, an AI inventory sales system—which makes inventory decisions based on sales trends and favors some of the cheapest, most widely available liquors and boxed wines produced by global players—makes it hard for local distilleries to compete for precious real estate on liquor store shelves. 

Additionally, hard seltzers have seen massive growth across the US in recent years. But the Utah legislature is banishing nearly half of hard seltzers from Utah grocery and convenience stores due to the additive ethyl alcohol, which essentially provides flavoring. 

Alan Scott started Waterpocket Distillery in West Valley City with his wife, Julia. "We're a small 'boutique' family-owned distillery which focuses on niche products like amaro, botanical spirits, and gin," Scott says. Waterpocket currently has listings—meaning they're on the Department of Alcoholic Beverage Services (DABS)'s inventory list—for their Temple of the Moon Gin, Robbers Roost Blue John Port-Finished Whiskey, Robbers Roost Campsite Cordial Rock and Bourbon, and Toadstool Notom Amaro No. 1. Still, Scott has struggled to get his specialty amaros on the shelf because of their price.

"If you cannot provide a product at an often very low price to match an opening, you don't get a listing or distribution for your product," Scott says, adding that these decisions appear to be made by a software algorithm. 

Waterpocket's products are specialized and produced, at least in the first years, in smaller batches. They have not been commodified to the degree large-scale commercialized products are, so the price is usually higher. "There's a good parallel here with artisan cheese, wine, charcuterie, and similar products," Scott says. "Just like there's a big difference between Velveeta and cave-aged English stilton cheese in both quality, uniqueness, and price, so it can go with craft spirits." 

Scott will often talk to his customers and use the comparison that Taco Bell and Red Iguana can both be called Mexican restaurants, though they have very different business models, products, and flavors. "In some ways, I feel like the current listing process is focused on the Taco Bell model and favors the mass-produced, 'cheap as you can get it' approach," he says.

These challenges affect whether a distillery can get a good product listed at all—especially in Utah. 

"The state monopoly in its current unfriendly turn is punishing the craft approach and favoring the 'Walmart' discount approach to spirits," Scott says. "Variety and choice are on the decline in Utah…and our local producers are being squeezed. Meanwhile, the craft distillation business continues to explode in other states where a free-market approach to pricing and competition opens more avenues to success."

Scott has several suggestions to help solve this problem, including loosening the grip of the state monopoly and letting local distilleries work with a variety of empowered retailers and distributors. Another suggestion is working with the legislature to dedicate an employee to work with local businesses, or assigning an ombudsman or dedicated purchasing agent to resolve the needs, conflicts, and special requirements of local businesses as they work with the state monopoly. 

"All this is another way of asking the central question, 'Does the state monopoly have any responsibility to local business?' Or can it use its distribution lock and pricing power to force us into an unwinnable competitive war against established national brands?"

For some, price is more important than flavor or experience, Scott says. With spirits and other alcohols, this is especially true if the only motivation for consuming them is the active effect of alcohol on the brain and body. "Long story short, price is often the main purchasing decision factor for those who only drink to get drunk. That's not to say there aren't fine products sold at low cost, but we're back to Velveeta vs. Brie."

Hammer Spring Distillers in Salt Lake City has faced similar challenges. Founded by JP and Vita Bernier, the company makes Utah's only distilled potato vodka made from whole, fresh potatoes—one of the few farm-to-glass spirits available in the state. When I asked Bernier how his products currently get on state liquor store shelves, he says the state tells him the algorithm is determined by popularity [sales]. 

"I don't know how to ever get popular if it's never on the shelves to begin with, but there's maybe some chance that customers asking their local store over and over again for our products might eventually prompt them to make an order," he says. 

Hammer Spring has eight products. The bourbon is the best-selling from their storefront, followed by the silver gin and the coffee liquor, Bernier says. The Silver Gin and the Hidden Vodka are the only items currently on state store shelves.  

The process, Bernier says, involves sending the DABS all kinds of information about the spirit and hoping they buy it. If it is intended to be sold in state stores, the DABS requests two sample bottles. If they like it, they will place an order, but if they don't, Hammer Spring simply doesn't ever hear anything. Ever.  

"When we send inquiries about why they didn't place an order for that product, there's not a lot of usable information that comes back. They just say 'no,'" Bernier says. "After I submitted my coffee liqueur and did not receive an order, I pressed for details why they weren't ordering any and my response from them was that I should 'consider out-of-state distribution.' That's all they had to say about it."

Bernier says that it may not be as big of a deal for larger operations, but for small shops and startups, the manufacturing license fee is astronomical and is disproportionate to every other liquor license the state offers. 

"Without sustainable purchases made by the DABS, it is nearly impossible for a distillery without national representation to remain in business in Utah for very long," he says. "Creating a 'local' category for each spirit would eliminate the contest for sales against national brands—but this would still not provide a level playing field for small manufacturers."

Bernier says that if the state is going to refuse liquor to be sold anywhere but in state liquor stores and Type 5 package agencies (storefronts, to which distilleries are limited to just one), he feels they have an obligation to stock every locally-produced spirit in every single store so the entire state has equal access to those spirits.

Both Scott and Bernier brought up the fact that the highest-selling brand of alcohol in Utah (Barton Vodka) happens to also be the cheapest. 

"Are kids who want to get wasted going to buy an $80.00 bottle of craft bourbon? Or, are they going to buy 10 bottles of $8 rot-gut vodka in a plastic bottle?" Bernier asks. 

This certainly goes against the mission of the DABS, whose website states that "the purpose of control is to make liquor available to those adults who choose to drink responsibly—but not to promote the sale of liquor. By keeping liquor out of the private marketplace, no economic incentives are created to maximize sales, open more liquor stores, or sell to underage persons. Instead, all policy incentives to promote moderation and enforce existing liquor laws are enhanced."

Ashley Cross thinks the DABS is working against that mission. She and her husband, Chris, founded New World Distillery in Eden, Utah. "By delisting products that cost more because they are actually made locally vs. sourced from 'big booze,' the DABS fills the stores with inexpensively sourced and/or repackaged products, thus creating a sort of 'Walmart of booze' selection. Ironically, I believe that doing so fosters underage drinking and encourages overconsumption," she says.

Michelle Schmitt is the communications director of the DABS, and she stresses that Onebeat (the DABS' digital inventory system) is commonly used for retail operations across the globe. Its purpose is to track sales data so the retail operation can make data-informed decisions about which products are in demand at individual store locations. 

"The State of Utah and the DABScontracted with Onebeat in 2019 to modernize our store inventory operations and more efficiently track inventory to better understand customer demand and appropriately stock shelves in response to that demand," Schmitt says. "The DABS is currently working with local manufacturers to review processes and what improvements can be made for locals who understandably don't have the name recognition and marketing dollars behind the larger national products." 

Schmitt didn't say how. 

"It is important to note that because the DABS is a public enterprise, it must fall in line with the dormant commerce clause, which is the main reason the DABS must treat—by law—all manufacturers equitably. The 'made in Utah' tag is one way we can stay within the bounds of that law while highlighting locally-made products," Schmitt says.

Locally distilled spirits are more difficult to access in Utah, but hard seltzers are also about to become much harder to find. According to Kate Bradshaw, executive director of the Utah Beer Wholesalers Association and director of government affairs at Holland & Hart, products that meet the definition of beer are less than 5 percent ABV and do not have any added "spirituous liquor" can be sold in Utah grocery and convenience stores.

According to Bradshaw, federal regulations recognize "malt substitutes" (rice, grain, bran, glucose, sugar, or molasses) for beer production, but Utah's unique beer definition does not. Anything made using a "malt substitute" is technically not beer in Utah and thus ineligible to be sold in off-premise retailers, despite its low alcohol content. 

In late 2021, it was discovered that some hard seltzers in Utah off-premise stores were dually non-compliant with the Utah definition of beer because they used ethyl alcohol as a flavoring stabilizer. 

Many artificial flavorings use either glycol or ethyl alcohol as the flavoring stabilizer and are found in all kinds of foods like mustard and teriyaki sauce. Neither the glycol nor ethyl flavor stabilizer contributes to the overall alcohol content of the product, which would still need to meet the five percent ABV threshold for off-premise retailer sales. Citrus flavoring often uses ethyl alcohol as the flavoring stabilizer because it "carries" the fruit flavor better than glycol. 

Although the legislature could have also addressed the unique Utah flavoring law by either matching the federal flavoring regulations in relation to ethyl-based flavoring or setting a unique Utah flavoring standard with regard to ethyl alcohol flavorings, Bradshaw says they chose not to do so. 

Instead, the legislative policy leads chose to leave the current flavoring standards in place. According to Schmitt, the changes in the hard seltzer law will go into effect on June 1, 2022. However, the DABS built in a grace period for items to sell through the summer to support product makers and retailers to sell-through products. 

"On November 1, 2022, all non-compliant items that were not sold during the grace period must be removed from shelves. The number one product constraint in state liquor stores is available shelf space, so the added products would contribute to this challenge," Schmitt says. 

Thirty-nine hard seltzers will be removed from grocery stores this spring—none of them based in Utah and all of them big-box companies. Still, the fact remains: if you're a Utah distiller, read the fine print first.

NOTE FROM THE EDITOR: A previous version of this article listed the Department of Alcoholic Beverage Services (DABS) as the Department of Alcoholic Beverage Control (DABC)