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Competition And Concentration In The Brewing Industry

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Competition And Concentration In The Brewing Industry

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Content Copyright by
HORACE HARDIN FISHER
1965
COMPETITION AND CONCENTRATION
IN THE BREWING INDUSTRY
by
Horace Hardin Fisher
A Thesis Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(Economics)
January 1965
UNIVERSITY OF SOUTHERN CALIFORNIA
THE GRADUATE SCHOOL
UNIVERSITY PARK
LOS ANGELES, CALIFORNIA B 0 0 0 7
This dissertation, written by
............... .....HQRAQ.5..MBP.IJI..FISHER..............
under the direction of h..%JL.Dissertation Com
mittee, and approved by all its members, has
been presented to and accepted by the Graduate
School, in partial fulfillment of requirements
for the degree of
D O C T O R OF P H IL O S O P H Y
Dean
Date J«SOT...A965...................
DISSERTATION COMMITTEE
Chairman
TABLE OF CONTENTS
CHAPTER PAGE
I. INTRODUCTION ............................... 1
The Problem and Its Setting.............. 3
History of the Brewing Industry ........ 3
Advantages in studying the brewing
industry ............................ 4
The Problem of Competition.............. 5
Theories of Competition ................ 6
Neoclassical pure-perfect competition . 6
Theories of partial monopoly .......... 8
The theory of workable competition ... 9
The Problem of Concentration............ 12
Brewing Industry's Concentration Rank . . 13
Classification of Brewing Industry .... 13
Vertical Integration in the Brewing Industry 14
Vertical integration in Mexico........ 15
Vertical Integration in Distribution ... 15
Causes of Concentration in Industry ... 16
The Downie theory........... 16
The Bain theory...................... 18
ii
iii
CHAPTER PAGE
The Baumol theory.................... 20
The Penrose theory.................... 20
The Problem of Over-Capacity............ 22
Methods of Research and Analysis .......... 25
Organization of the Dissertation .......... 29
II. THE BREWING INDUSTRY IN 1964 ................ 33
Numbers of Breweries In Operation........ 33
Economies of Scale...................... 34
Size of Breweries...................... 35
Beer Consumption.......................... 37
Reasons Given for Decline In Consumption . 38
Population Theory .................... 38
The Overweight Theory................ 38
The Snob Theory...................... 39
The Temperance Theory ................ 40
Other Theories........................ 42
Brewery Industry Profits and Advertising . . 44
Advertising.............................. 48
Professor Machlup's Explanation ........ 53
Advertising is Confusing to Entrepreneurs 57
Some Empirical Examples of Advertising
Frustrations .......................... 57
iv
CHAPTER PAGE
Example 1.............................. 57
Example 2.............................. 58
Example 3 . ............................ 59
Example 4.............................. 60
Example 5.............................. 60
Advertising by the Brewing Industry ... 60
Trends in Brewery Advertising .......... 61
Economies of Scale in Advertising .... 65
Conclusion................................ 70
III. THE BREWING PROCESS AND THE RELATIONS WITH
TECHNICIANS......................... 73
The Brewing Process...................... 75
Ingredients.............................. 77
Barley................................. 77
Corn and Rice Products................. 79
Other Grains and Adjuncts.............. 81
Reaction to Grain Restrictions .......... 82
Hops..................... 83
Yeast.................................. 85
Pasteurization .......................... 88
The Bottling of Beer...................... 88
The Taxing of Bottled Beer ........ 90
V
CHAPTER PAGE
Relations with Technicians .............. 91
Brewmaster Associations .............. 92
An Example of Old Fashioned Procedure 95
The Modernists' Argument ........ 97
The Empiricists' Argument........ 98
History of Scientific Stations .......... 98
Extent of Scientific Inquiry ........ . 101
Advisory Functions of Scientific Stations 103
Conclusion.......................... 105
IV. THE INDUSTRY'S RELATIONS WITH GOVERNMENT . . 107
Taxes and Regulation Prior to 1919 .... 108
Dutch Taxes ........................ 108
Regulation and Taxation in the English
Colonies........................ 109
New England.................... 109
Virginia........................ Ill
Pennsylvania........... Ill
New York........................ Ill
Southern Colonies .................. 112
Taxation and Regulation by the United
States Government.............. 113
U. S. Federal Excise Taxes...... 113
vi
CHAPTER PAGE
Excise Taxes and Internal Revenue . . 114
Prohibition........................ 118
Drinking in England in the 17th and 18th
Centuries........................ 119
Drinking in America during the 17th and
18th Centuries.................. 121
Origins of the Temperance Movement ... 123
Legislation...................... 123
Federal Regulations after Repeal ........ 128
Non-intoxicating 3.2 B e e r ........ 129
Regulations on Methods of Sale.... 131
Regulations on Payment of Taxes .... 132
Wartime regulations ................ 132
Wartime taxation .................... 133
State and Local Taxation and Regulation . 134
State Taxation.................... 134
Other State regulations ............ 136
City and County regulations.... 137
Conclusion.......................... 137
V. RELATIONS WITH LABOR.................. 139
The Era of Paternalism.............. 140
The Brewery Workers Pay Scale.... 142
vii
CHAPTER PAGE
The Brewery Workers Organizations .... 143
Local Organizations.................... 143
National Organization .................. 145
Victory for the Closed Shop ...... 146
Industrial Unionism .................... 147
Employer Organization .................... 149
Other Changes Prior to Prohibition . . . 152
Prohibition........................ 153
Relations After Repeal .............. 154
Conclusion .....' ...................... 156
VI. RELATIONS WITH THE PUBLIC AND CONSUMER ... 161
Introduction .............................. 161
Prior to Prohibition...................... 162
The Transition from English to German Beer 162
The effect of the need and use of
capital . ........................ 163
The use of capital in retailing . . . 169
The German Personality . . .......... 170
The Alienation of the Whiskey and Distill
ing Industry.......................... 175
The Tied-House and Broken Promises ... 177
Ten years of disregarded warnings . . 180
viii
CHAPTER PAGE
The alienation of other industries . . 183
Summary of the Period Prior to Prohibition 184
The Period of Prohibition........... 185
Non-Brewer Organizations Working for
Repeal ............... 185
Brewers Activities During Prohibition . 186
The Tied-House Finally Disappears . . . 186
Post-Repeal Problems .................... 187
Sales to minors................... 187
The litter problem................. 191
One brewer makes an effort......... 192
Conclusion on Public Relations ........ 193
Public Relations Since Repeal .......... 194
Dissension in the Brewers' Ranks .... 195
Secession and Reunification .......... 196
The Proposal for Action............. 197
The clean up or close up campaign . . 198
Post World War II Public Relations
Activities....................... 200
Public and customer relations difficult
to separate............. 201
ix
CHAPTER PAGE
Anti-prohibition institutional
advertising...................... 202
Geographical and historical advertis
ing .............................. 203
Civic, Charitable, and Eleemosynary
Activities..................... 204
Post-Repeal Relations with Consumers . . . 205
Shift in Beer Packaging . . ........ 206
The chain store and supermarket . . . 208
Tavern Loyalty to Individual Brewer
Diminished ........................ 209
Grocery Store Loyalty to Individual
Brewers Diminishes .................. 210
Conclusion on Customer Relations .... 211
The Effect of Competition.............. 212
VII. RELATIONS TO TRADE ASSOCIATIONS.......... 215
Origins and History of Trade Associations 215
Trade Associations Today ................ 217
History of the-United States Brewers'
Association.......................... 219
The Advertising Puzzle Again ............ 223
Restrictions on Beer Advertising .... 224
X
CHAPTER PAGE
The Brewers' Association of America . . . 226
History..................... 226
Management of Small Breweries.......... 227
The Small Brewers' Conventions ........ 228
Bulletins of the Brewers Association of
America............................ 231
Special Bulletins .................... 233
Sales bulletins.................... 233
Merchandising bulletins ............ 234
Brewing bulletins .................. 234
Comparison with Large Firms......... 236
B.A.A. Regional Sales Meetings ........ 237
Crusades of the B.A.A................. 237
Beer Concentrate...................... 239
Conclusion.............................. 246
VIII. RELATIONS WITH MIDDLEMEN.................. 248
Brewers and Distributors................ 248
Branches vs. Agencies and Distributors . 249
Relations with Distributors .......... 252
The Small Brewer and the Distributor . . 253
The Large Brewer and the Distributor . . 254
The Need for Greater Distributor Volume 257
CHAPTER PAGE
Relations Between Brewers and "Off Premise"
Retailers........... 258
Relations with Supermarkets...... 260
Salesmanship and the Supermarket .... 261
Costs of Distribution............ 262
Private Brands and Warehouse Delivery . 264
Relations with On-Premise Customers ... 266
Erosion of the Tied-House Laws.... 267
The Problem in "Beer Only" States . . . 269
Tavern Spending......... 270
Other Sales Inducements.......... 272
Additional Proscriptions .............. 273
Relations with On Sale Premises Customers
Who Handle Spirits........... 277
The Influence of Oligopoly........ 278
Conclusion . .......................... 280
IX. RELATIONS WITH SUPPLIERS.............. 282
Relations with Suppliers of Manufacturing
Equipment........................ 282
Suppliers of Processing Equipment .... 287
Can Filling Machines and Monopoly . . . 287
xii
CHAPTER PAGE
Relations with Suppliers of Raw Materials 289
Barley Procurement .................... 290
Contracting for Barley in Advance . . . 292
Government Influence on Barley Strains . 293
Threat of Prohibition and Its Effect on
Relations with Suppliers .............. 296
Conclusion.............................. 298
X. RELATIONS WITH COMPETITORS................ 303
Classifications of Brewers.............. 304
The National or Shipping Brewers .... 305
Uniformity the Sine Qua N o n .......... 310
Snob Appeal and Premium Price........ 313
The Beer Can and Freight Rates........ 315
Retail Price-Demand Relationship .... 315
Chain Breweries...................... 316
Antitrust aid for small brewers ... 321
Will Premium Beer Sales Decline .... 322
Two brands in one plant............ 324
The Anheuser-Busch Explanation ........ 327
National Brewers' Profits and Diversi
fication . ........................ 330
Regional Brewers ...................... 332
xiii
CHAPTER PAGE
Price Cutters........................ 338
The Backward Bending Demand Curve . . . 339
New Developments in the Brewing Industry . 347
Changes in Packages.................. 347
Changes in Products.................. 350
Malt liquor........................ 350
Other brews........................ 351
Processing Changes .................... 353
Beer concentrate.................... 354
Conclusion.............................. 357
CONCLUSION................................ 359
Summary................................ 359
Resumd and Comparison of Theory and
Actuality............................ 363
Harold Fleming's Theory of Competition . 363
Bain's Theory on Entry ......... 366
J. M. Clark's "Workable Competition" . . 369
Wilcox Definition of Competition .... 371
Reply to Wilcox...................... 372
Schumpeter's Theory of Monopoly .... 373
Confirmation of Theories of Concentration 375
xiv
CHAPTER PAGE
Disparities Between Theory and Real Life 377
Maximization Theory Invalid .......... 377
Cost Curves are Flat not U-Shaped . . . 378
Businesses Don't Use Marginal Pricing . 379
Conventional Demand Curve is Unrealistic 380
Forecast............................... 380
Some Small Brewers Will Survive .... 383
Policy Recommendations .................. 386
Improvement of Management............ 387
Education in Antitrust ................ 389
Tavern Ownership...................... 389
Conclusion . .......................... 390
LIST OF TABLES
TABLE PAGE
I. Per Cent of Total.................. 36
II. Total Expenditures for Alcoholic Beverages 40
III. Total Sales, Profits, and Advertising
Expenditures for Selected Years .... 46
IV. Selected Large Advertisers .............. 62
V. Share of U. S. Grocery Sales........ 259
VI. Number of Items Handled Per Supermarket 260
VII. Food Chain Net Profits.............. 260
VIII. Per Cent of Total Value Added...... 278
IX. Comparison for the Ten Largest Breweries
in 1963 vs 1962 325
X. Brewers Sales and Profits 1963 vs. 1962 . 333
xv
LIST OF FIGURES
FIGURE PAGE
1. Average Cost Curve .................... 50
2. The Effect of Advertising Expenditures on
Demand Curves .......................... 52
3. The Backward Bending Demand Curve ......... 341
xv i
CHAPTER I
INTRODUCTION
The problems of competition and concentration grow
every day more Important; not only In the theoretical
world of curves and diagrams of the economist, but In the
everyday real world In which scarce goods are allocated to
unlimited wants. Hardly a day goes by In which the press
does not relate the details of a merger which Is planned
or which has become fait accompli. The Department of
Justice, Antitrust Division announces almost dally that It
will seek to enjoin some union of companies such as
Bethlehem Steel and Youngstown Sheet and Tube Companies,
or the merger of the New York Central and the Pennsylvania
Railroads. Frequently, an effort Is made to dissolve some
corporate marriage, even, as In the case of Du Pont and
General Motors, when the parties concerned are celebrating
a Golden Wedding Anniversary.
Unfortunately there Is no unanimity as to whether
this tendency toward greater concentration Is all good or
all bad. There Is no agreement as to whether, even when
the number of firms in an industry shrinks to five or less,
as in the automobile industry, there is de facto competi
tion. Certainly there is nothing approaching the Marshall
ian concept of pure competition let alone perfect
competition.
There is not even unanimity as to the economies of
scale which result from increased size, the concomitant of
increased concentration. Although practically all
economists and engineers agree that materials handling can
be done more cheaply on a large scale rather than on a
small scale, most of them feel that the law of diminishing
returns sets in long before plants reach the size of the
largest in this country and abroad. Many economists feel,
too, that the complexities of administration increase
disproportionately with the size of a business, and that
the law of diminishing returns has long since taken over
in many of the giant corporations. On the other hand,
most business men and many economists believe that with
computerization, not only can there be increased efficiency
in the plant through automation, but the expansion of
knowledge available to executives will permit efficient
administration of businesses far larger than anything
known today.
The twin problems of competition and concentration,
their levels and their changes, may have a great effect
upon the businesses and industries in an exchange economy.
Much has been written on both the theoretical and practical
level. It is hoped that this study, based on twenty-five
years close acquaintance on the practical level and several
years reflection and study on the theoretical level, can
make Some small contribution to an understanding and
awareness of the complexities of the problem.
I. THE PROBLEM AND ITS SETTING
History of the Brewing Industry
Brewing is one of the oldest if not the oldest of
all industries to be carried on as a business and not as
barter or usufacture. Maynard A. Amerine, professor of
enology, University of California at Davis, has said that
beer and mead undoubtedly antedate wine.* Beer was well
known and widely used in Neolithic times. By 3,500 B.C.
and perhaps even earlier, there were breweries in
Mesopotamia. Despite this prolonged history, however, beer
*Maynard A. Amerine, "Wine," Scientific American
August 1964, p. 46.
remained almost a cottage industry in the United States
until long a£ter the development of the textile and other
Industries into large scale manufacturies.
It was not until after the Introduction of German
type lager beers in 1842 that large scale brewing began in
the United States, and as late as 1873 there were more
than 4,000 breweries. There had been many famous brewers
such as William Penn, George Washington, and Thomas Jeffer
son, and beer had been considered as essential as bread by
many people, but brewing had remained, nonetheless,
practically a cottage industry. The exceptions, such as
the brewery of Matthew Vassar, founder of the women's
college which still bears his name, were few in number and
their plants were pitifully small by today's standards.
Advantages in studying the brewing industry. Since
the brewing industry has been closely regulated by all
levels of government in the United States almost since its
inception, it affords an excellent opportunity to study an
industry where all records of production and consumption
are available. Since, in the period of 90 years the
industry has changed from an industry of more than 4,000
firms, the largest of which produced less than 150,000
barrels per year, to one of 150 firms, the largest of which
will produce more chan 10,000,000 barrels in 1964 Che
induscry also offers an excellenc opportunity to tudy Che
causes and Che results, good or bad of concentration and
Che concomitant effects upon competition and its intensity.
The Problem of Competition
As with many other economic terms, there is consider*
able disagreement as to what constitutes competition. The
great proponent of seller's competition, Adam Smith,^ like
many subsequent economists, knew what he meant by
competition in general. It was when he came to the
particular that he proved, like his successors,* to be less
sure of his footing.
To Smith, of course, competition was the invisible
hand which produced a maximum of goods at a minimum price.
However, Smith does not define competition precisely. For
the most part he contents himself with describing monopoly
and its evils, and then stating that competition is absence
of monopoly. This is a little like defining a straight
line as one that has no bends. A desire for more precision
2
Adam Smith, The Wealth of Nations, Modern Library
edition, pp. 57 ff.
in discussing competition has led to many attempts to
*
define competition both by laymen and economists.
Theories of Competition
Until the late 1920's the neo-classical theory of
pure competition had ruled unchallenged despite the fact
that there was little resemblance between theory and any
real market past or present. In 1928 Professor Chamberlain
wrote his doctoral dissertation which later became the
book The Theory of Monopolistic Competition.^ Almost
simultaneously Mrs. Robinson^ published her book and the
race to get a satisfactory theory was on. To give some
idea of the amount of literature on the subject, Professor
Chamberlain in the 1956 edition of his book listed a
bibliography of some 1700 books and articles which he
considered relevant. Lastly there is the concept of
workable competition, set forth by Professor J. M. Clark.
Neo-classical pure-perfect competition. This theory
of competition refers to an industry where each producer is
^E. H. Chamberlain, The Theory of Monopolistic Com
petition. (Cambridge: Harvard University Pressx 1933).
4Joan Robinson, The Economics of Imperfect Competi
tion. (London: McMillan and Company, 1933).
so small that the quantity which he has for sale cannot
affect the market price. He is a price taker. The good
he sells is indistinguishable from that of any of his
competitors. The perfection element is added in order that
there may be perfect knowledge and perfect freedom of entry
and exit. The theory has of course no versimilitude,
approaching it only in the actions of sellers on the
larger stock exchanges, and to a lesser degree in the
commodity markets such as wheat and corn. It did, however,
in combination with neo-classical cost theory, the theory
of consumer preference, and the assumption of the principle
of maximization make a nice, rounded body of thought that
is theoretically unassailable, as Professor Bator pointed
out. The theory is also an example of what Schumpeter
called the Ricardian Vice.
He then piled one simplifying assumption upon
another until, having really settled everything by
these assumptions, he was left with only a few aggre
gate variables between which, given these assumptions,
he set up simple one way relations so that, in the end
the results emerged almost as tautologies . . . It is
an excellent theory that can never be refuted and
^Francis M. Bator, The Question of Government
Spending; reprinted in Private Wants and Public Needs.
Edmund S. Phelps, editor, (New York: W. W. Norton and
Company, Inc., 1962), p. 102 ff.
lacks nothing save sensed
Theories of partial monopoly. Dissatisfaction with
the lack of reality of the neo-classical, theory of pure-
perfect competition led to the development of a variety of
theories which might better explain reality. After
Mrs. Robinson and Professor Chamberlain, the hair-splitting
began in earnest.
Imperfect competition meant few sellers of differ
entiated products and consequently a degree of market
control. Oligopoly meant few sellers with undifferentiated
products and a large share of the market tor each, which
could mean 'administered' prices and other forms of collu
sion. Professor Fritz Machlup^ attempted to bring some
*
sort of order into the maze of terminology and definitions
with only limited success. Many scholarly and elaborate
conjectures were put forth to explain the operations of the
market of which only those of Von Neumann,® Stackleberg,^
*\J. A. Schumpeter, The History of Economic Analysis.
(Oxford University Press, 1954), p. 472.
^Fritz Machlup, The Economics of Sellers Competition
(Baltimore: The Johns Hopkins Press, 1952).
Q
John Von Neumann and Oskar Morgenstern, Theory of
Games and Economic Behavior (Princeton, New Jersey:
Princeton University Press, 1947)
^H. von Stackleberg, Marktform und Gleichgewicht,
and Sweezy^ will be mentioned. All these models and
theories suffered from the same defects: if they strove
for generality, they lacked versimilitude; if they were
realistic they lacked generality; if they admitted the
fallacy of the maximization hypothesis they were
indeterminate.
The theory of workable competition. The unsatis
factory state of theories of competition has led first to
the founding of institutional economics by the Americans
Thorstein Veblen, J. B. Clark, and Wesley Mitchell, and
second to the attempt by J. M. Clark, the son of J. B.,
to develop a theory of workable competition. Professor
Clark has insisted the "imperfectly mixed economy [in the
United States] is better than the impossible abstraction
of 'perfect competition.
This interpretation of the facts of competition
which is similar to that of Schumpeter is much like that
(Wien, 1932).
^Paul M. Sweezy, "Demand Under Conditions of
Oligopoly," The Journal of Political Economy. Vol. XLVII
1939, pp. 568-573. Reprinted in Readings in Price Theory
(Homewood, Illinois: Irwin, 1952), p. 406.
^J. M. Clark, Competition As A Dynamic Process.
(Washington,D.C.: The Brookings Institution, 1961), p. 490.
10
of the men in business and completely at odds with those
of many economists such as the prolific Professor Joe Bain.
He, on the basis of numerous statistical studies, concluded
that most prices are administered by tacit or overt agree
ments between so-called competitors. His contentions will
be considered in more detail in the section on concentra-
in this chapter.
The business man, conversely, denies hotly that
there is a lack of competition in business. His opinions
are summed up in the following quotations from Harold
Fleming writing about the petroleum industry. This
industry has been selected because in many ways, as will be
brought out later, it has similar problems to the brewing
industry. Fleming said:
Most oil men feel that their industry is one of the
country's 'fightin'est' as to prices and competition,
and this has been true ever since the breakup of the
old Standard combine in 1911.12
Some people may have concluded that the oil industry
is in a perennial state of cutthroat competition.13
Yet other people may have been thinking in other
l^Harold Fleming, Oil Prices and Competition. (American
Petroleum Institute, 1953), p. 7.
13Ibid.
i
11
parts of the country that there Isn't much competition
in oil prices after all.14
The facts about oil prices are of almost infinite
variety. They differ from one segment of the industry
to another and from company to company. And they keep
on changing. They Involve the varying personalities
of 1000's of men. They involve, as one student of the
industry has put it "behavior patterns beyond the
powers of the imagination of even the most fertile
minded theorist.
In fact the retail gas business . . . offers an
excellent field for study by economists and students
of marketing. A really hard look at this highly
American and highly competitive business might dispel
some of the conclusions drawn deductively about the
Oil industry from such cloudy concepts as monopolistic
competition and oligopoly.^
Fleming has been quoted at considerable length
because his views in a great many cases correspond to those
expressed in the study. Reference will be made again to
his work in Chapter X.
Finally, the business man always emphasizes the
competition of substitutes. The economist is aware of this
factor and he subsumes it under 'the cross elasticity of
demand.' Since it is almost impossible to measure, it
remains in the area of assumptions—‘those factors of
14Ibid.. p. 7.
l5Ibid., p. 8.
16Ibid., p. 21.
12
"plausible topology" of which Professor Boulding^ spoke
which seem logical and empirically justified but which are
hard to prove and even more difficult to measure. If the
price of coffee goes up, more tea will be drunk, but how
much, and at what price? Thus there Is Intra-Industry
competition and Inter-Industry competition. Or to put the
problem differently, should Industries be classified by
products or materials?
The Problem of Concentration
Attention should be called again to the frequently
mentioned caveat about the pitfalls of regarding the
degree of competition In an Industry as being a simple
Inverse function of the degree of concentration. The pain
staking efforts of economists to determine the degree of
"effective competition In particular Industries amply
Illustrate that structure Is a necessary but hardly the
18
exclusive peg on which to hang one's judgment." This
emphasizes once more the fact that competition and
^Kenneth E. Boulding, The Skills of the Economist
(Cleveland: Howard Allen, Inc., 1958), p. 17.
*®Ralph L. Nelson, Concentration in the Manufactur
ing Industries of the United States (Yale University Press,
196371
13
concentration are interrelated but not necessarily
correlated.
Brewing Industry’s Concentration Rank
In the United States the common measures of concen
tration have been the share of the four, eight, or twenty
largest firms in an industry. By whichever of these
measures the brewing industry is gauged it ranks approxi
mately in the lowest quartile of manufacturing industries.
This is in contrast to the bottled liquor industry where
the four firm concentration ratio is 67 per cent which puts
this industry in the top quartile of the more than one
thousand classes of products into which manufacturing is
divided.
Classification of Brewing Industry
Some of the other problems that beset classifiers
are not present with the brewing industry. Of 430 four-
digit Censds Bureau classifications in 1958 only 94 or 22
per cent are comparable over the whole period. Brewing, of
course, was not comparable from 1929 because of prohibition,
but since 1933 its classification has been unchanged.
l^Ibid.. p. 49.
14
Vertical Integration in the Brewing Industry
Vertical integration in the processing and manufac
turing section of the brewing industry has always been
minimal in the United States. At one time Colonel Pabst
made a great point of growing special hops for his beer.
Marginal cost so far exceeded marginal revenue that the
project was short lived. Today Coors Brewing Company of
Golden, Colorado is the only U. S. brewery which grows all
the malting barley used by it. The reasons for this
situation are obvious. The ingredients of beer are
agricultural products. These have never lent themselves
to economies of extremely large scale operation. A single
brewing plant might require, for example, the barley grown
on 70,000 to 100,000 acres— considerably above the size of
maximum farm efficiency. In the Pacific Northwest where
the Olympia, Rainier, and Blitz-Weinhard breweries have
long owned controlling interest in the Northwest Malting
Company, the company has been operated as a conventional
malting operation and there has been no effort to raise a
particular type of grain. The three breweries kept the
malting company as an investment and as 'insurance.' If a
surplus of malt was produced it was sold to outside brew
eries at the market price which was what the breweries
15
charged themselves.
Vertical integration in Mexico. In this connection
the large brewery Cerviceria Guahtamoc of Monterey, Mexico,
might be mentioned. This is owned by the Sada family which
in addition owns a steel factory. Some years ago when
bottle shipments from the United States became expensive,
the family built a glass factory and now is in a position
to take care of all its construction and packaging needs.
Here, in an underdeveloped country, dependability of supply
is perhaps a stronger motive than that of additional profit
for encouraging vertical integration.
Vertical Integration in Distribution
As to vertical integration in the distribution end
of the business, breweries are prohibited by law from own
ing retail outlets so any such integration must consist of
distributors, i.e., the handling of products between
producer and retailer. Where brewery distribution has been
handled successfully it has almost always been done by
small and medium sized brewers rather than by large ones^
although Anheuser-Busch in 1964 owned nine distributorships.
This is the opposite of the situation described by
16
20
Professor Bain in his study of the automobile industry
where a great deal of the success of the surviving
companies is attributed to the efficiency of their
distributor organizations.
Causes of Concentration in Industry
Many reasons are given for concentration in indus
try. This study will review briefly in this section the
21 22 23
ideas of Jack Downie, Professor Joe Bain, Edith Penrose,
24
and Professor Baumal. Each of these writers has a
different explanation for the growth of individual firms
and the concentration found in industry.
The Downie theory. In general, business has an idea
of what a desired and obtainable profit should be. This
may be higher in some industries than in others, but within
each industry the expected and desired profit rate will be
Joe Bain, Barriers to Competition. Harvard
University Press, 1956.
21
Jack Downie, The Competitive Process, (London:
Gerald Duckworth and Company, Ltd., 1958).
^Bain, oj>. cit.
^Edith penrose, The Theory of the Growth of the
Firm (New York: John Wiley and Sons, Inc., 1959).
^Sfilliam J. Baumol, Business Behavior, Value and
Growth. (New York: The Macmillan Company, 1959).
17
the same for all firms. Costs almost always will be much
larger than profits— Downie said up to ten times as large.
Assume this is the case. Then if firm A is ten per cent
more efficient than firm B, A can sell and receive a normal
profit at a price that will yield B zero profit. Downie
called this the "transfer mechanism." As he said, this
mechanism would lead to a much greater degree and speedier
rate of concentration unless there were some offsetting
mechanism. The offsetting mechanism is innovation.
The company which is at a cost disadvantage must
reduce its costs or quit business (assuming no cartel or
similar agreements). It can reduce costs by one of two
ways: it can eliminate wasteful use of human energy, or it
can replace human energy with mechanical energy. Since
these are the methods the low cost firm used to obtain low
costs, the high cost firm can adopt these methods, or more
likely, improve on them. Thus, if there is no alteration
or change in the relative costs of different firms in an
industry, there will be a tendency to monopoly and high
concentration. Where there is a tendency for first one and
then another firm to have lowest costs in an industry, and
where the difference between the high costs and low costs
is great, there is little concentration and no monopoly.
18
There is also a high degree of innovation and the industry
is progressive. Downie said empirical data confirm his
hypothesis but admitted that the data are sparse and do not .
cover a sufficient time period. The Downie thesis, like
the others in this section, will be discussed in greater
detail in Chapter X, Relations Between Competitors.
The Bain theory. As the title of his book indicates,
Professor Bain's main concern was with the manner in which
firms protect themselves from attacks from the outside,
i.e., from entry. In explaining this, however, he had to
explain how the firm became large in the first place, and
how concentration developed. Like the other writers in
this section he found the neo-classical model of pure-
perfect competition unsatisfactory. Professor Bain, how
ever, to a greater extent than the other authors cited
here, was dealing with the fait accompli of large oligopo
lists who prevent others from penetrating the gilded inner
sanctum. He did not explain how the oligopolist attained
his present size ab ovo.
Downie stressed that expansion by companies within
an industry is a more likely form than by entry from the
outside. Professor Bain agreed with this and ascribed it
to "condition of entry," which is:
19
*
evaluated roughly b£ the advantages of established
sellers in an industry over potential entrant sellers.
these advantages being reflected in the extent to
which established sellers can persistently raise their
prices above a competitive level without attracting
new firms to enter the industry.
Departures from conditions of easy entry can be ascribed
to (1) absolute cost advantages of established firms; and
(2) significant economies of large scale firms. Since the
ideas developed in this study and the empirical data of the
brewing industry do not accord with Professor Bain's
findings, discussion of them will be postponed to the
chapter on the industry's relations with its competitors.
Suffice it to say here that in his study of twenty indus
tries the results can be briefly summed up as follows:
Absolute advantages such as buyer preference, company
reputations, control of superior product designs, and con
trol of the best distributive outlets was the most import
ant "condition of entry." Economies of the large scale
firm such as quantities of factors used per unit of output,
large scale buying, and real or strictly pecuniary
economies of large-scale advertising or other sales
promotion were not very important.
^Bain, oj>. cit.. p. 3.
20
Professor Bain concluded that it would be an almost
impossible task to equal!te the opportunities for all firms
in all industries. It would undoubtedly prove in a
multitude of cases to be economically inefficient as well.
He believed, however, that stricter and more intelligent
enforcement of the antitrust laws could be genuinely
helpful in permitting greater freedom of entry, less
concentration, and a more "workable," competition.
The Baumol theory. Profit maximization is the item
of received doctrine that came under attack by Professor
Baumol. From his own work as a business consultant and
from his studies of empirical data he did not observe any
confirmation of the theory that firms try to maximize
profits. Instead, he believed a target rate of profit is
set and then an effort is made to maximize dollar sales.
It is this effort at maximizing sales that makes the
American economy grow in Professor Baumol'8 judgment. Much
of his argument is not pertinent to this study, but the
portions which deal with Schumpeterian concepts, both of
big families and of innovation, will be discussed at length
later.
The Penrose theory. Mrs. Edith Penrose found,
unlike Professor Bain, not only that large firms are more
efficient than small, but that there is no evidence of
'diseconomies of size' which arise at some point in a
firm's growth. Like Professor Bain and others, however,
she felt that large-scale operation only shows increasing
efficiency up to a plant size much smaller than that of
the largest plants in operation both here and abroad.
Mrs. Penrose felt that the limiting factor in firm growth
was management. In fact, poor management was the chief
reason small firms remained small. There is a limit to
the size firm that management can handle at any given time,
of course. The reason firms continue to become ever
larger is that management grows, through the use of new
techniques, through expansion of the management team, and
through management's increase in knowledge. The reason
the large firms do not take over all business is that there
are areas which do not lend themselves to mr.ss production
and computerization; areas of custom design, areas that
require flexibility and versatility in production distri
bution and service. These areas, which she called
'interstices' are often the training fields for growing
management. Mrs. Penrose felt that wise policy would be
that which prevents closing these interstices. Since
22
there are nearly 150 firms in the United States brewing
industry her theories on management and interstices are
particularly pertinent and will be discussed later.
The Problem of Over-Capacity
The third problem to present itself in an attempt to
analyze competition and concentration is what seems to be a
case of built-in overcapacity. None of the writers
mentioned has treated this subject. However, in the year
1964 there was more than sufficient brewing and storage
capacity to take care of the industry's requirements for
the next several years unless growth accelerated consider
ably over that of the past several years. Simultaneously
there was furious building of new capacity.
It is true, of course, that much of this overcapacity
was in plants whose sales were declining. It is also true
that some of it was obsolete, even though brewing and
storage equipment have a long, useful life. It is the
opinion of this study, however, that there is a built-in
tendency to overcapacity in all competitive American indus
try due to the business's unconscious approach to marginal
pricing.
Most economists like Professor Baumol, whose work has
23
been mentioned, who have studied the activities of busi
nessmen have concluded that they pay no attention to the
equating of marginal cost to marginal revenue. Marginal
cost is almost impossible to determine and at best could
only be approximated. As a result a policy of full cost
pricing is used.
Questionnaires and empirical studies confirm this.
A recent study in Los Angeles showed that:
Forty percent of the companies considered gross
margin most important in setting prices. Return on
investment and likely buyer reaction were only identi
fied as being of equal importance by half as many
concerns.26
One reason for this practice is, of course, that
most businessmen believe and many engineering studies
demonstrate, that within quite a large range of production
variable costs are constant. More will be said about this
in a later chapter.
If the above is true it would seem to contradict
the earlier statement that overcapacity is the result of
the businessman's unconscious reaction to the marginal cost
principle. The reason there is no contradiction is
^^Pricing for Profitability; A Study Conducted by
the Sales and Marketing Association of Los Angeles
Research Projects Committee, 1964, p. 2.
24
explained as follows: although there Is a wide range of
production where variable costs stay the same, there Is a
point where added production can cause costs per unit to
Increase rapidly. This point comes when overtime and
night time premiums must be paid, when excessive use causes
machine breakdowns, when excessive overtime supervision
must be employed; when inefficient new workers must be
hired, et cetera. The economist refers to this point as
that quantity of production where marginal cost exceeds
marginal revenue. The businessman who would sneer at such
an eggheaded description calls it the point "where it costs
me more than I'm getting out of it."
The businessman's reasoning follows this line. If
gross profit is computed on sales then a profit will be
made on every unit of production beyond a theoretical
"breakeven," point up to an equally theoretical point of
capacity. Perhaps the per unit profit will not be maximum,
indeed it is difficult to see how maximum possible profit
could be computed, but some profit will be made. Beyond
the "capacity" point, however, there is the certainty of
losing money. For that reason the businessman in the great
majority of cases errs on the side of over-capacity.
There is, of course, one final reason for
25
over-capacity and it is the reason that so many of the
operations of the business world are frequently difficult
if not impossible to analyze. This is the perennial
optomism of businessmen. In the words of Lord Keynes:
If human nature felt no temptation to take a chance,
no satisfaction (profit apart) in constructing a fac
tory, a railway, a mine or a farm, there might not be
much investment merely as a result of cold
calculation. * ■ '
and again,
Enterprise only pretends to itself to be mainly
actuated by the statements of its own prospectus,
however candid and sincere. Only a little more than
an expedition to the South Pole is it based on exact
calculations of benefits to come.28
II. METHODS OF RESEARCH AND ANALYSIS
This study was originally Inspired by a desire to
attempt to reconcile the realities of the brewing industry
with the theoretical maxims of price theory. It was felt
that many of the writers on price theory had not had a
sufficiently intimate knowledge of the practical conduct of
business. It was felt, too, that many efforts of economists
^J. M. Keynes, The General Theory of Employment
Interest and Money. (New York: Harcourt Brace and Company,
1936777. 158.
28Ibid.. p. 162.
26
to study Individual industries had been handicapped by a
failure of communication between the economists and
businessmen. In many cases there had been manifested a
lack of cooperation on the part of the business representa
tives. It was felt that a study which included a knowledge
of formal economic theory and terminology combined with an
intimate and personal knowledge acquired over a period of
more than two decades might make some contribution to
economic thought.
As a first step it was necessary to review the
literature on price theory. The second step was to go back
to the literature of the early 1930's when the concepts of
imperfect and monopolistic competition were introduced.
This led to a review of terms used and their definitions as
well as the later studies on 'workable competition.' Some
of the better known empirical works on concentration in
industry and on real and apparent semi-monopoly were
studied to see if there were any industry whose history
paralleled that of the brewing industry. The famous
economic controversies on competition of the 1940's were
reviewed to try to discover to what extent the efforts of
this study had been anticipated.
Since the ideas gained from experience and
27
knowledge at first hand were completely at variance with
the neo-classical theory of maximization, It was necessary
to search for works which advanced other theories of the
objectives of the firm. Fortunately there are several
such works, some of which have already been referred to.
As a consequence of the strict regulation of the
brewing industry by almost all levels of government-
federal, state and local— there is available, as has been
mentioned, a vast amount of data pertaining to the industry
as a whole. The United States Brewers' Association which
was founded in 1862 and which has been keeping records
ever since has been the source of much of the material
used in this study, which could not have been completed
without the cooperation of the Association, and particu
larly Mary C. Dunnigan, librarian for the Association.
The extent of the research that has been done on the
Brewing industry is shown by the range of the bibliogra
phies of two books which have been used as source material
throughout the course of this study. Thomas C. Cochran's,
The Pabst Brewing Company.^9 lists over four pages of
^Thomas C. Cochran, The Pabst Brewing Company (New
York: New York University Press, 1948).
28
documents from the records of the Pabst Brewing Company
from 1844 to 1944; In addition six manuscripts, seventeen
government documents, sixteen convention reports, forty-
seven state and local histories, over eighty-seven books,
articles, and lectures, and numerous magazine and newspaper
articles. Stanley Baron's Brewed in America. has an even
more encyclopedic bibliography. Baron lists over sixty
unpublished books and articles dealing with brewing, and
approximately four hundred general books and articles.
Many breweries are owned entirely by one family.
For this reason data pertaining to financial matters and
official matters of policy are not available to the
researcher as they are in the financial statements of
publicly owned concerns. This study, therefore, owes a
real debt to the officers and owners of many of these
companies whose willing cooperation made the study possible.
As a result of this no questionnaires or routine and
systematic requests for information were sent out.
In large part this study, therefore, is the result
of nearly a quarter of a century in the brewing business,
attending sales schools and advertising meetings and
3®Stanley Baron, Brewed in America (New York: Little
Brown and Company, 1962).
29
organizing the same for a small individual plant. It is
the result of reading trade publications such as Printers1
Ink and Advertising Age for a period of years. It is the
result of informal exchanges of information with competi
tors and those in other lines of business. A chance
remark at a social gathering, (vino veritas) a nod, or an
inflection can often give a better Insight than a carefully
worded response to a questionnaire. Plutarch said,
Sometimes a matter of less moment, an expression or a
jest, informs us better of their characters and
inclinations, than the most famous sieges,tfefe greatest
armaments, or the bloodiest battles whatsoever.3*
III. ORGANIZATION OF THE DISSERTATION
For purposes of organization this dissertation has
been divided into eleven major sections or chapters.
Chapter I is this introduction. It is designed to give an
explanation of the dissertation. It has included a state
ment of the problem. It has also gone into the theoretical
background of the problem at considerable length because
much that follows in the empirical study is at variance
with the more widely accepted economic theories of price
^Plutarch's Lives, Alexander. Modern Library ed.
Random House, Inc., p. 801.
30
and competition. The remaining chapters of the disserta
tion have approached the brewing industry as a case study
and have traced in some detail the various industry
relationships. In every case where it was deemed relevant,
the theoretical aspect or comparison has been brought out.
Chapter II is a description of the brewing industry
in 1964. Such matters as numbers of firms, trends in beer
consumption vis a vis that of other beverages both
alcoholic and non-alcoholic are treated. There is a
discussion of advertising in general and the brewing
industry's advertising in particular.
Chapter III discusses the brewing process and its
relations with technicians. The long association of the
industry with the biological sciences is shown. Emphasis
is placed on the ambivalent nature of the brewmaster's task
which requires rich scientific knowledge and the wisdom to
know when to let empirical judgment rather than scientific
data dominate the brewing process.
Chapter IV traces the industry's long period of
supervision and regulation by government. State and local
as well as federal laws have been examined. The laws and
regulations prior to the period of national prohibition
have been compared with those subsequent to that period.
31
Chapter V reviews the Industry's relations with
labor. It shows that unionism has prevailed In the brewing
Industry for over a century and In 1964 there Is what might
be termed a feeling of solidarity as well as amity between
employer and employee. These feelings will probably
diminish In Intensity as plants become larger and the
threat of prohibition recedes.
Chapter VI deals with the relations between the
brewing Industry and the distributor as well as consumer.
It traces the steps that lead to national prohibition and
the steps that have been taken to avert a recurrence.
Chapter VII tells of the Industry's relations with
It8 trade associations. One association has public
relations as Its primary function. The other attempts to
educate the small brewer and keep him In business.
Chapter VIII describes the rather complex relation
ships which exist between brewers and the two categories
of middlemen— distributors and retailers. Because of the
numerous federal, state, and local laws and regulations
these relations are more than usually complicated.
Chapter IX is a description of the brewing indus
try's relations with its suppliers. Here, as was the case
with labor, a background of common misfortune and the
32
threat of possible recurrence make the relations somewhat
more cordial than would be expected in a monopsonistic
situation.
Chapter X contains a detailed description of the
different classes and sizes of breweries. In recounting
the history of the relations between competitors this
chapter shows what advantages accrue to each size and class
of brewer.
Chapter XI is the conclusion. Here a resum£ is
attempted. The differences between theory and the facts
are brought out. An attempt is made to predict the future
course of competition and concentration. Finally, three
recommendations are made which it is believed will help to
make the optomistic conclusions of this study a reality.
The final section, which completes this dissertation
is a bibliography. Here are listed all the public sources
i
of materials used in this study.
CHAPTER II
THE BREWING INDUSTRY IN 1964
I. NUMBERS OF BREWERIES IN OPERATION
In June of 1964 the number of brewery plants operat
ing In the United States was approximately 200. Of these
one company operated eight. Two companies operated seven
each. Seven companies operated four plants each. Eleven
companies operated two plants each. This means that there
were approximately 150 brewing companies. This is a
reduction of ninety per cent from 1910's total of 1500,
which was itself a considerable decrease from the all time
high of 4,131 in the year 1873.*
Although these failures included some breweries of
a size sufficient to achieve competitive costs, the
majority of the fatalities had occurred among the small and
very small breweries. Many of the latter had supplied beer
to little more than the "Biergarten" which was an inte
gral part of the brewery itself. Such establishments were
^Stanley Baron, Brewed in America (Boston: Little,
Brown and Company, 1962), p. 226.
33
34
numerous in the late 1800's and early 1900's prior to
prohibition. After the repeal of prohibition because of
the nature of the legislation passed, such breweries, with
the exception of two in Chicago, never came back.
Economies of Scale
In the opinion of most brewery operators the per
barrel cost to build a brewery of less than 100,000 barrels
annual capacity would be prohibitive. The cost to build a
brewery of 100,000 - 500,000 barrels annual capacity will
run about $30 per barrel. If the brewery is built to
operate at 500,000 - 1,000,000 barrels the cost to build
the additional 500,000 barrels would be about $20 per
barrel. Capacity above 1,000,000 barrels per year would
cost about $18 per barrel. Thus the interest charge on
the required investment for a brewery of 100,000 barrels
would be 15 cents more per barrel than for a brewery of
1,500,000 barrels. Operations, i.e., variable costs,
decrease in the same proportion. As Professor Stigler said;
Small machines are very uneconomical in their
demands on labor, in both construction and operation.
The fitting together of the parts of a 10-horsepower
motor does not require 10 times the labor necessary
to fit those of a 1 horsepower motor. Similarly a
truck requires 1 driver whether it has 1/2 ton or
35
2
2 ton capacity.
This estimate of the economies of scale also agrees
with the findings of Professor Baln^ and D. C. Hamilton.^
Their empirical work In the petroleum Industry shows that
beyond a certain volume the economies of scale are so small
as to be negligible for practical purposes. This means
there Is a wide range of capacity for what Professor Bain
calls the 'optimum' plant size. The economies of large
scale as regards purchasing are small as are those from
Increased efficiency In management and organization. There
are, however, contrary to Professor Bain's contention, real
and considerable economies of scale In advertising. These
will be discussed In the last section In this chapter.
Size of Breweries
Despite mergers and acquisitions Anheuser-Busch with
9.9 per cent of the U. S. market was the country's largest
In 1963. In 1963 the four largest breweries had less than
2George J. Stlgler, The Theory of Price (New York:
The Macmillan Company, 1946), p. 136.
3Joe Bain, Barriers to New Competition (Cambridge:
Harvard University Press, 1956), p. 5& ff.
^Daniel C. Hamilton, Competition In Oil (Cambridge:
Harvard University Press, 1958), p. 47.
36
30 per cent, the ten largest had 57 per cent and the
twenty-five largest had 80.4 per cent. In 1959 no brewery
was doing as much as 8 per cent and the 15 largest brewer
ies were doing about 55 per cent of the total beer
business: about the same percentage as General Motors did
in the automobile industry. For earlier years the figures
are given in Table I.
TABLE I
PER CENT OF TOTAL
For Year 4 largest 8 largest 20 largest
1956 23.8 40.0 61.4
1955 24.3 39.1 60.8
1954 25.6 39.6 58.3
1949 21.6 29.9 42.9
Ralph L. Nelson, Concentration in the Manufactur
ing Industries of the United States (New Haven and London:
Yale University Press, 1963), p. 156.
Thus by any of the accepted standards, concentration
in the brewing industry is slight. Failures, mergers and
combination continue, however, and at least one brewer
believes that concentration will soon be much greater.
37
E. P. Taylor5 board chairman of Carling, the Canadian owned
brewery, has predicted that the present number of firms in
the U. S. will be reduced to 10 or 12, and the largest of
these will be Carling. Other brewers see concentration
continuing but not at such a rapid rate or to such a
drastic extent.
II. BEER CONSUMPTION
The consumption of beer in the United States has
declined on a per capita basis since 1948 and total con
sumption declined in the years from 1948 to 1960. The
total of 87 million barrels sold in 1948 was not reached
again until 1960 when 89 million barrels were sold. This
means that annual per capita consumption had dropped from
18.6 gallons in 1945 to 15.4 in 1960. In 1961 a further
drop to 14.9 gallons occurred with a slight recovery to
15.1 gallons in 1962. By 1963 total sales of beer had
jumped to 93.8 million barrels for the biggest year to year
gain in 15 years. The United States Brewers Association
expects sales to continue to increase in 1964.
5Fortune, "The Brotherly Brewers," August 1959,
p. 168.
38
Reasons Given for Decline in Consumption
Population Theory. During the 1930's the birth rate
declined. The decline was so protracted that demographers
and such eminent economists as Keynes and Hansen felt that
it was safe to extrapolate a trend toward a lower or at
least a stationary population level. With the advent of
World War 11 the trend reversed itself and the birth rate
has been increasing at a rapid rate. Brewers see these
trends as responsible for the changes in their sales.
People under twenty and over sixty do not drink much beer
and these are the two population sectors which have been
growing. The actual numbers in the in-between, beer-
drinking sector have been decreasing. Only in 1963 has
there been an increase in the beer drinking age group—
particularly the younger 20-24 year-old sector. As the
numbers in this group grow brewers expect their sales to
grow.
The Overweight Theory. The United States is the
most weight conscious of countries. Diet fads and weight
reducing programs abound. Beer has always been associated
with obesity. The standard caricature of the brewer shows
a round-faced, obese individual. The term "beer-belly" is
universally used to describe an outsize abdomen. The
39
association of beer and corpulence is so strong that the
United States Brewers' Association, which does the
institutional advertising for the industry, ran a campaign
in magazines and country newspapers to try to educate
4
people to the fact that beer was not fattening. The
calories in a glass of beer were compared with those in
soft drinks and fruit juices and bran muffins. Like most
such advertising, the efficacy was extremely difficult to
measure. Some brewers believe that the public today is
more informed about caloric content of all foods, and as a
consequence no longer considers beer a particularly
fattening beverage.
The Snob Theory. Just as beer and obesity have long
been associated so have beer and workingmen. Beer has
always been considered the drink of the blue collar workers.
Such expressions as "a champagne appetite and a beer
income" have become part of the language. Prior to the
advent of television, the tavern, especially the beer
tavern, was known as the workingmen's club. Rightly or
wrongly many brewers have felt that as people become more
prosperous they up-grade themselves from beer to more
expensive drinks. Certainly beer and wine sales have not
kept pace with the sales of distilled spirits since 1935,
40
the first full year of sales after repeal of the eighteenth
amendment.
TABLE II
TOTAL EXPENDITURES FOR ALCOHOLIC BEVERAGES (MILS)
Year
Beer Wine
Distilled
Spirits
1935 $1,530 $140 $ 995
1949 4,435 495 3,650
1961 6,000 600 5,400
United States Brewers Association, Almanac 1963
535 Fifth Avenue, New York.
The Temperance Theory. There is a small group
which believes, with some verification in the figures, that
the people of the United States are becoming more temperate.
They contend that the absolute amount of alcohol consumed
4
per capita in the form of beer, wine, and distilled spirits
is decreasing. One explanation which these people give for
this supposed phenomenon is the ever increasing automobile
traffic problem. Driving, they contend, has become so
hazardous that only the inexperienced drinkers and the con
firmed alcoholics attempt it when their reflexes are slowed
by alcohol. If it were not for the decline in per capita
41
consumption of all alcohol this theory could be dismissed
as mere conjecture, surmise, or wishful thinking. Even the
decrease in consumption can be explained. First: specific
year8 must be selected for the comparison. After World War
II restrictions on the manufacture of beverage alcohol were
lifted, per capita consumption of distilled spirits rose
to 1.44 gallons in 1945 and 1.65 gallons in 1946. In 1962
6
it was only 1.37. What these figures do not disclose is
that, once the wartime depleted stocks had been built up,
consumption dropped to 1.27 gallons per capita in 1947 and
1.17 in 1948. It remained as low as 1.18 until 1954 and
then began its gradual climb to the 1962 figure. (It has
already been pointed out that per capita beer consumption
declined about 16 per cent in the years from 1946 to 1963).
A second factor that makes it difficult to state
precisely the figures for consumption of distilled spirits
is the fact that there is a great deal of 'bootleg' or
'moonshine' liquor manufactured and consumed illicitly.
Estimates of the quantity vary, but the law enforcement
officials in a position to know state that it amounts to
&Facts About the Licensed Beverage Industry. (New
York: Licensed Beverage Industries, Inc., 155 E. 44th
Street, New YOvk).
50 million gallons a year.^ This, of course, is because
of the excise tax on distilled spirits. Napoleon's advice
to "tax the vices" has been followed. As of 1962 the
federal tax on distilled spirits was five times the cost of
production and federal, state, and local taxes combined
amounted to $2.70 per fifth bottle of distilled spirits,
g
or 58.2 per cent of the retail cost.
Other Theories. There are numerous other explana
tions or "theories" for the decline in per capita consump
tion of beer. Only two more will be mentioned. The first
is what might be termed the "hard work" explanation.
Brewers contend that of all drinks beer is the most satis
factory thirst quencher. That, they say is what made beer
the working man's drink. Today very little hard manual
labor is done compared to thirty years ago. Workers no
longer pack hods. The air hammer has replaced the double
jack. Machines, not men with picks and shovels, dig
ditches. Trucks have hydraulically operated tail gates to
raise and lower loads. Toil and sweat have in large part
disappeared from the American scene and with them has
43
disappeared a great part of the beer market.
Another explanation has to do with the composition
of beer itself. In 1934 brewers used 38.1 lbs. of malt
and 0.70 lbs. of hops per barrel of beer. In 1962 the
figures were 28.2 lbs. of malt and 0.31 pounds of hops. A
small number of brewers believe that this decrease in
materials has produced a bland product with little to dis
tinguish one beer from another. Reflecting this attitude,
in recent months, Joseph Schlitz Brewing Company,
Milwaukee, introduced a malt liquor; Lone Star
Brewing Company, San Antonio brought out a husky
"Continental" beer, and Theo. Hamm Brewing Company,
St. Paul, marketed a new premium price brew.9
The case for the contention that the consumer wants a
different type beer is strengthened by the success of the
Coors Brewing Company of Golden Colorado. Coors grows its
own malting barley which is a different strain, Moravian,
than any other malting barley now in use in the United
States. Coors is the largest selling beer in Colorado, its
home state, New Mexico, Utah, Arizona, and California— the
states in which it sells 90 per cent of its product. These
sales have been achieved with what amounts to a minimum of
sales expenditure and advertising.
^The Wall Street Journal. June 11, 1964, p. 1.
44
Two other breweries have records which might lend
weight to this contention. Olympia Brewing Company of
Olympia, Washington, and the Anheuser-Busch Brewing Company
of St. Louis, Newark, and Los Angeles also have definite
ideas on how a beer should taste. They have adhered to
ingredients and methods which many other brewers have come
to consider unnecessary and old-fashioned. These will be
discussed in more detail in Chapter III. It is also
perhaps not without significance that Olympia, Coors, and
Budweiser are three beers that even an inexperienced beer
drinker can identify as having distinctive flavor. This
is in sharp contrast to the majority of beers which have
a uniform blandness.
There are, then, numerous explanations or theories
of declining beer consumption and its moderate recovery in
the past two years. Per capita consumption in 1963 had
reached 15.2 gallons per capita from 14.9 gallons in 1961.
III. BREWERY INDUSTRY PROFITS AND ADVERTISING
Since the brewing industry is closely regulated by
the Alcohol Tax Unit of the Department of Internal Revenue,
it is possible to get accurate figures on all phases of
brewing receipts and expenditures as a whole. The figures
45
in Table III are from the United States Treasury Department
Internal Revenue Service Source Book.
In 1959 net profits after taxes amounted to 2.5 per
cent of sales compared to 3.2 per cent for all manufactur
ing and 7.7 per cent of brewery sales in 1946. The postwar
high was 9.5 per cent in 1949. In 1963 profit had climbed
back to 4.3 per cent of sales. Data on earnings and
profits are available for only a few United States brewer
ies which have sufficient capital stock outstanding to
enable outsiders to learn about their operations. Such
breweries as Schaeffers, Coors, Hamms, and Ballentine have
never divulged their earnings and profits. In 1963
Anheuser-Busch showed a net profit of $15,586,000 on sales
of $343,582,000, or almost 4.6 per cent. Schlitz showed
$12.9 million profit on sales of $214 million or a trifle
over 6 per cent. Pabst had profits of $8 million on sales
of $202 million or 4.5 per cent. Falstaff earned $6.3
million on sales of $132 million for a profit rate of 4.8
per cent. These are four of the five largest firms in the
industry. In brewery circles it is generally believed that
Coors, a 100 per cent family owned firm, makes the highest
per cent profit since its advertising expenses are much
lower than those of other large brewers and the platform
46
TABLE III
TOTAL SALES, PROFITS, AND ADVERTISING EXPENDITURES
FOR SELECTED YEARS
Year Total Sales
$Billions
Total Profits
$Millions
Advertising
$Millions
1954 2.8 79 191
1955 2.89 91 193
1956 2.96 72 197
1957 3.07 80 209
1958 3.19 80 210
1959 3.30 83 215
Brewers Almanac 1963 (New York: United States
Brewers' Association).
47
price received is higher.
For some years Carling published the figures on its
U. S. operation separately from the Canadian figures.
Since the U. S. operations showed a consistent loss and the
Canadian figures showed a much larger proportional profit
than other U. S. breweries, this attracted considerable
attention. This was increased when a Canadian antitrust
action showed Carling had forced to close or bought up 65
breweries in Eastern Canada. Simultaneously with its money
losing operations in the U. S., Carling was purchasing the
Frankenmuth Brewery in Michigan and building a brewery at
Natick, Massachusetts. Prior to the time that Carling
announced its intention of building breweries in Atlanta,
Georgia (1959) and Maryland (1961) it began putting out a
consolidated statement for all brewing activities, Canadian
and U. S. The consolidated statement for 1963 showed sales
of $398 million with after tax profits of $17 million.
Since most of the very large breweries are making a
larger than average profit it must be assumed that the
numerically larger group of smaller breweries is making a
mode8t profit if, indeed, any. This can be easily verified
not only from the number of small breweries which close
every year, but also from the price paid for those breweries
48
which are purchased. Control of Liebman Breweries, Inc.
was acquired in February 1964 by Pepsi-Cola United
Bottlers, Inc., Los Angeles. The amount involved was
reported as $26,077,000. The Liebman plant is capable of
turning out 3 1/2 million barrels of beer a year. Con
trasted with this is the fact that Anheuser-Busch is
building a 1,000,000 barrel plant in Houston at a cost of
$30,000,000. It would seem that had the Liebman plant
been earning at a rate comparable to Anheuser-Busch it
would have commanded a higher price.
IV. ADVERTISING
Except for emotional outbursts such as John
Galbraith's, most economists admit to being rather puzzled
by advertising. It seems a waste and certainly should not
be classified as a cost of production. It cannot be fitted
into a model. On the other hand it seems difficult to
imagine how the benefits of the economies of large scale
mass production— Boehm-Bawerk's round-about production—
can be spread broadcast through a wide— possibly world wide
market— without something considerably like advertising.
It is also difficult to incorporate selling costs,
including advertising, into a cost-price diagram, as the
49
efforts of Professor Machlup10 show. Selling costs have
as their objective, changing the demand curve. Selling
costs change both the height and shape of the demand curve.
The interdependence of cost and demand curve, like the
demand curve of an oligopolist whose demand curve depends
upon his competitor's reactions to the oligopolist's price,
makes the demand curve indeterminate. Mrs. Robinson was
thus in error when she said:
It may be assumed that expenditure on advertisement
necessary to increase the sales of a firm can be
treated as equivalent, from the point of view of the
entrepreneur, to a reduction in price having the same
effect on sales.H
They cannot be and are not so treated.
12
Professor Chamberlin was closer to the truth when
he observed that a firm engaged in monopolistic competition
can influence its sales by increasing its advertising
efforts, in which event we have an interdependent shift in
both the cost and the revenue curves of the individual firm
*®Fritz Machlup, The Economics of Sellers' Competi
tion (Baltimore: The Johns Hopkins Press, 195i), p. 162.
Hjoan Robinson, The Economics of Imperfect Competi
tion (New York: St. Martin1s Press, 1959), p. 20.
l^E. h . Chamberlin, The Theory of Monopolistic Com
petition (Cambridge: Harvard University Press, 1933).
50
The curve which is customarily used to depict this
situation is a variation of the average cost curve diagram
(Figure 1). Actually it should be like the more compli
cated diagram in Figure 2.
Figure 1
Figure 1 is taken from Professor Malanos who said
of it:
The entrepreneur does not have to choose the most
profitable output in reference to a given demand curve,
for he is actually confronted with a series of posi
tions depending on his advertising efforts and the
related shifts in his demand curves. He obviously
chooses the one which maximizes his profit. The
existence of selling costs is illustrated in Figure £l-
1 by a shift in the average cost curve from AC to AC1.
Corresponding to these two cost curves are the demand
curves DD and 0*0', the latter representing the demand
curve for the product as modified by the incurred
advertising costs. Area A B C D represents total
profit before advertising. The entrepreneur embarks
upon his advertising campaign if the latter area is
greater than the former; otherwise he foregoes such an
51
13
expense.
The entrepreneur will be delighted to learn he
"obviously" will select the AC' and D'D* curves which yield
the greatest profit, just as a sculptor would be delighted
to learn that to carve a statue he "obviously" must only
chip off the marble he doesn't need. That advertising
expenditures vary in their rates of marginal productivity
and that the cost of advertising depends on the volume
purchased, which in turn depends on the volume of sales
that are created by the advertising doesn't appear in
Professor Halanos' statement. Also ignored is the possibil
ity that advertising may antagonize some or many possible
purchasers and lower the demand curve or alter its slope
in part or all of its path.
The three curves AFC, AVC, and AC stand for average
fixed cost, average variable cost, and average total cost.
In the conventional diagram, however, the average variable
costs are generally defined as the productive services that
are used in varying quantities as greater amounts of goods
are produced. Advertising and selling, however, are not
13
George Malanos, Intermediate Economic Theory
(Chicago: J. B. Lippincott Company, 1962), p. 513-14.
52
PyiC^
A
RFC
______________________________________ __________ p
Figure 2
The effect of Advertising expenditures on Demand
Curves.
costs of production, nor in the economist's sense, produc
tive services. Finally, the cost curve for advertising
and selling may look like the dotted line AVC^ and produce
a total cost curve AC^. So the height and slope of the
average cost curve have been changed by the addition of
advertising and the entrepreneur is faced with a far more
complicated decision than the "obvious" one which Professor
Malanos suggests.
A great part of the difficulty occurs, of course,
because, while the demand curve is a handy tool of economic
53
analysis, there is no such thing in real life. Every entre
preneur is constantly seeking to find his demand curve. In
drawing a demand curve the economist assumes that at
certain prices certain amounts of goods can be sold. He
marks these points of supposition on a graph whose axes
he labels price and quantity and connects the points with
a line. This line becomes the demand curve. Like many of
the economists's tools the demand curve is useful for
theoretical analysis but bears little resemblance to real
life.
Professor Machlup1s Explanation
The producer can make a reasonably accurate estimate
of the marginal costs of production of increased output.
He can add the costs of materials, labor (including over
time), power, light, speedier wearing out of machinery and
equipment, and the need for extra supervision. Offsetting
these costs he can deduct the decrease in per unit make-
ready time and cleanup time. He then divides the new and
greater output into the fixed costs and arrives at a figure
for fixed as well as variable costs per unit.
The matter is completely different with advertising.
One local meat packer asked the advertising agency
representative, "How many extra frankfurters will an
Illuminated, moving billboard at the corner of Wllshlre
and Morton sell?" The answer of course Is, "Mo one knows."
Moreover, since advertising Is used either to sell more at
the same price, or the same amount at a higher price,^
the assumption can be made that marginal cost Is less than
marginal revenue and In most cases still decreasing.
Professor Fritz Machlup has devoted a great deal of
effort and thought to this problem. It was his opinion
that there were two approaches, both of which offered
satisfactory solutions.
The first method was to find a single net demand
curve:
There are several methods of deriving one single
'net' demand curve, or an average revenue curve net of
selling expense from the practically Infinite number
of gross demand curves that correspond to the practi
cally Infinite number of alternative selling efforts.
(1) For quantity of product all gross prices obtainable
through all possible selling techniques are plotted
vertically and from each of these gross prices the
expense of selling effort (per unit of sales) Incurred
for the sake of obtaining the particular price Is
deducted. The highest of the resulting 'net prices'
the one that counts for the particular quantity. (2)
For each selling price all quantities salable through
all possible selling techniques are plotted horizontally
*^Fritz Machlup, The Economics of Sellers Competition
(Baltimore, Johns Hopkins Press, 1952), p. 187.
55
and from the selling price the expense of the respec
tive selling efforts (per unit of sales) are deducted,
yielding a variety of 'net prices,' obtainable from a
variety of quantities. For each net price the largest
saleable quantity counts as the quantity demanded at
that particular net price.15
The businessman is apt to feel that the degree of
prescience, and indeed the omniscience, required to plot
such curves, particularly ex ante, like that needed to
solve a Walnasian system of equations, removes the procedure
from the realm of practicability. Professor Machlup
acknowledged this in part in a footnote to the above.
The graphical representation of this construction
is more cumbersome because the alternative selling
efforts at each particular selling price yield differ
ent sales quantities as well as different net revenues
[it is just this point which figure 2 attempts to
illustrate] whether the resulting points are optimal
cannot be ascertained before a very large number of
combinations of alternative selling efforts at all
possible prices has been tried.
Actually then, in the real world and from the point
of view of the seller, the demand curve is completely
indeterminate, ex ante, if selling costs are introduced.
Professor Machlup's second and simpler solution to
the problem was to turn it around:
15Ibid.. p. 191.
16Ibid.
56
To deal with selling costs by treating them not as
additions to production costs but as deductions from
gross receipts has several advantages. It avoids the
entanglement of selling cost with production costs and
with questions of technological efficiency in produc
tion; it permit8 separation of the problem of optional
promotion policies from the problem of determining
price and output of the firm; it substitutes a single
demand curve (in terms of net prices) for an infinite
number of demand curves (in terms of gross prices); and
it overcomes the apparent interdependence of cost and
demand curves. At the same time it conforms to good—
although not very common— accounting practice.I7
This sounds a little like an admission that economic
theory can not deal satisfactorily with the problem and
that that whipping boy of economists— full cost pricing—
may be the most practical way to handle it after all.
As for the situation with rigidly fixed selling
prices, Professor Machlup felt this too could be handled
easily:
Again it would be possible to draw the whole series
of curves and to compare the various sets of cost and
demand curves (where the cost curves containing larger
selling expense would correspond to longer horizontal
demand curves) but again there would be simpler methods.
For example, we can do with one cost curve counting
the absolute minimum of selling effort and deduct any
additional selling cost from the fixed selling price.
Thus we obtain for different sales volumes, average
revenues net of the respective selling cost. Since
the average selling cost need not increase with increas
ing total selling cost, we may not for all ranges have
increasing average revenues with increasing sales. But
soon decreasing average revenues must set in.18
17Ibid.. p. 193-4. 18Ibid.. p. 201.
57
The above conclusion sounds much like the contention
of this study that once selling costs are introduced, cost
and demand curves become interconnected and indeterminate.
The demand function then comes to depend upon the selling
cost and it is logically impossible to formulate a theoret
ical solution upon the basis of the assumptions made and
the data known or estimated. The answer to the elaborate
proposals of Professor Macklup is that advertising is
subject to the law of diminishing returns. Indeed, it may
even prove to be antagonistic and result in fewer sales.
Advertising is Confusing to Entrepreneurs
John Wanamaker, the Philadelphia department store
magnate is reputed to have said: "50 per cent of my
advertising does me absolutely no good. If I just knew
which 50 per cent!" William Wrigley, the founder of the
chewing gum business of that name, was a vociferous
proponent of the value of advertising. He compared it to
the locomotive on a railroad train. It seems likely, how
ever, that almost every entrepreneur who has ever purchased
advertising has felt like Wanamaker at one time or another.
Some Empirical Examples of Advertising Frustrations
Example Phillip Morris Tobacco Company sponsored
58
the "I Love Lucy" television show with Desi Amaz and
Lucille Ball. This was perhaps the most popular television
show of all time, attracting as much as 60 per cent of the
total potential television audience. Sales of Phillip
Morris cigarets did not increase, and when the expensive
show was dropped by Phillip Morris, sales of Phillip Morris
cigarets dropped too.
Example 2. When the "Fight of the Week" program
was introduced by Pabst Brewing Company members of the
industry unanimously agreed it would be a great asset for
Pabst. Beer drinkers are often the same people who are
interested in sports events, especially the rougher,
contact sports events. The so-called musical signature or
jingle for the program was so catchy that it was as popular
as the most popular tunes. The commercials were persuasive
and, to most of the audience, appealing. The program
achieved great popularity. The ratings were 48, meaning
that 48 per cent of all television sets were tuned in on
the program.
When Pabst first sponsored the program Pabst,
Schlitz, and Anheuser-Busch were selling almost the same
amount of beer--about 4.5 million barrels per year.
Schlitz in the meantime sponsored "The Schlitz Playhouse,"
59
a 'prestige1 television show, and Anheuser•Busch' TV adver
tising was negligible. After several years, during which
Schlitz abandoned the "Playhouse," Schlitz sales had
increased to nearly 6 million, Anheuser-Busch had increased
to 5.7 million, and Pabst had dropped to 3.9 million.
Example 3. With the coming of repeal Liebman
Breweries in New York City was one of the smaller breweries
in that area and produced "Rheingold Beer." An advertising
campaign called the "Miss Rheingold Contest" was undertaken
in which, every year, beer drinkers voted for their
favorite "Miss Rheingold" from seven attractive young lady
models. The advertising campaign was such a success that
"Rheingold Beer" became the most popular beer in the
eastern United States and one of the three or four largest
selling beers in the entire country.
In 1952 Liebman Breweries bought out the Acme Brew
ing Company of Los Angeles and San Francisco. The plants
were remodeled and renovated,and Rheingold was introduced
into California via a carefully selected group of the most
successful distributors in the area who had been lured away
from other beers. The introductory and follow-up advertising
campaigns in the California area were the most extensive and
costly ever seen in the U.S. beer business. Sales from
60
the first were poor. They continued to get worse. Within
three years Liebman closed its west coast plants with a
loss estimated by the trade at $8 million.
i
Example 4. Coors Brewing Company of Golden,
Colorado has been doing business in California since
repeal. The original distributorship was run by a brother
of Adolph Coors II, who preferred to live in Los Angeles.
The business has grown with little advertising help, and
in 1964, with almost no advertising whatever, Coors is the
largest selling beer in California.
Example 5. The Hershey Chocolate Company has never
spent one cent for advertising.
Advertising by the Brewing Industry
For the past several years advertising in the brew
ing industry has averaged slightly less than 7 per cent of
sales. This is an extremely high percentage and places
breweries in the same category as department stores. A
19
recent survey by McGraw-Hill of 893 manufacturers of
machinery, materials and ingredients, and equipment and
19How Advertising Affects the Cost of Selling. A
McGraw Hill Research Report, New York, 1963.
61
supplies, shows that over-all average advertising expense
ran about 2.2 per cent of sales. Companies with sales
under $1 million averaged 3.4 per cent of sales spent for
advertising. Companies with over $5 millions in sales
averaged 1.56 per cent of sales spent on advertising. In
the case of large companies, over $25 million in annual
sales, advertising dropped to as little as 1 per cent of
sales. Table IV gives some representative figures for
advertising by groups of firms who were listed in the IOC
Top Advertisers. It can easily be seen that the brewing
industry is one of the largest advertisers as per cent of
sales.
Trends in Brewery Advertising
Breweries have long been associated in the public
mind with sports events, particularly baseball. Many in
the industry believe this dates back to the days of Colonel
Jacob Ruppert who owned both the Ruppert Brewing Company
and the New York Yankee baseball team. In addition to being
a strong and colorful personality in his own right, the
Colonel's employees were some of the most colorful and
spectacular sports figures of the time. The association
between Ruppert and baseball, it is contended, was so close
62
TABLE IV
SELECTED LARGE ADVERTISERS
Advertising Sales %
(millions) (millions)
5 Tobaccos $183.1 $3,469 5.2
5 Foods 199.4 4,777 4.1
2 Soaps 207.1 2,636 7.4
3 Motors 241.6 28,742 .87
3 Drugs 74.6 659 11.3
3 Distillers 55.4 2,031 2.74
Gillette 31.5 296 10.6
Coca Cola 29.2 637 4.6
The Top 100 National Advertisers of 1963, Advertis
ing Age. June 29, 1964, p. 50, and Standard and Poors.
63
and so well known that It has continued to this day. If
this is so it is truly remarkable since the early days of
the New York Yankees' greatness were from 1921 onf i.e. the
days of prohibition which lasted until 1933. For the first
twelve year8 of his baseball ownership, then, the Colonel
must have been known as "the former beer baron."
Whatever the reason, the tie-in between beer and
baseball still exists. Baseball broadcasts on both radio
and television are sponsored with surprising frequency by
breweries. Where scoreboards can be sponsored by brewers,
as in New York, advantage is nearly always taken of the
opportunity. When the Boston National League team trans
ferred to Milwaukee it was Fred Miller of the Miller Brew*
ing Company who was the prime mover and the man who
received the credit for the move. (Miller was also active
in Notre Dame football circles.) Apparently inspired by
this, Augustus Busch III, president of Anheuser-Busch, in
1956 purchased control of the St. Louis National League
baseball team. So despite the fact that with Colonel
Ruppert's death the ownership of his baseball team went
into non-brewery hands, the traditional association of beer
and sports with emphasis on baseball continues.
Recently breweries have begun to become active in
64
sponsoring golf tournaments. Lucky Lager Brewing Company
of San Francisco and Los Angeles (now General Brewing
Company a subsidiary of John Labatt Breweries of Canada)
has been most active in this line. Breweries have been long
time sponsors of bowling teams. As mentioned earlier in
this section Pabst Brewing Company was a long time sponsor
of prize fights.
Again it is the exceptions which have proved most
interesting. Four extremely successful breweries have
seldom used sporting figures or events in their advertising.
Olympia, Coors, and Hamm have stressed water. Olympia's
slogan is "It's the Water." Coors says "Brewed with Pure
Rocky Mountain Spring Water." Hamm's slogan is "From the
Land of the Sky Blue Waters." These slogans scarcely seem
remarkable for either ingenuity or persuasiveness, but they
appear to be successful. Schlitz, the fourth successful
brewer to depart from the sports appeal, has relied on the
snob appeal with emphasis on expensive ingredients and the
slogan "Step up to Schlitz." It was mentioned earlier that
Schlitz had sponsored the 'prestige' television show "The
Schlitz Playhouse."
65
Economies of Scale In Advertising
It has often been pointed out that in many busi
nesses the make-ready costs form a major portion of total
cost. Mrs. Joan Robinson has used the example of a calling
card. Here the work of making a die with all the precision
and difficulty attendant on its manufacture is several,
possibly several hundred times the cost of one printed
piece of paper. If the manufacture of the die is taken as
fixed cost, and the costs of paper, ink, and labor as
variable cost, then average total cost will decline for
many thousands of printings.
This very high make-up cost applies to practically
all advertising from direct mail throwaways to television
spectaculars. The result is that the small local brewery,
and often the larger regional breweries, are at a great
cost disadvantage in advertising. A small brewery in Utah,
for example, may find that for a billboard advertisement,
the cost of art work by a distinguished and popular painter
such as Norman Rockwell is $5,000 to $10,000. If the
brewery has 400 billboards this brings the cost for art
work alone to $12.50 or $25.00. Conversely Schlitz or
Anheuser-Busch may use 20,000 billboards across the entire
country. This brings their cost down to 25$ to 50$ per
66
board.
In 1957 a twelve-spot one-minute story-board for
television cost $60,000. The brewery in Utah which
purchased twelve such spots could show them to a maximum
audience of 600,000 beer drinkers. This meant a cost of
10 cents per 'viewer.' The national advertiser on the
other hand had a potential audience of 120 million and a
cost for preparation of 1/2 cent per viewer. There is no
intent here to evaluate the effectiveness of television
advertising in Utah as opposed to national averages. The
fictitious examples used here are merely to show the
economies of scale possible in advertising.
These economies run through almost the entire list
of advertising media; direct mail, decalcomanias for trucks,
point of purchase signs, neons, labels. The only area in
which the small advertiser has equal costs is in space
rates in local newspapers. Even here he is at a disadvan
tage because the 'per reader cost' of makeup, artwork, and
mats will be higher than those of the large advertisers.
20
Professor Bain felt that the economies of scale of
advertising do not constitute a major barrier to entry. It
^Ojoe Bain, Barriers to Competition (Cambridge:
Harvard University Press, 1956), p. 138.
67
should be remembered that he was talking about an "optimal
plant" I.e. one In which the capacity might be from 2 to 10
per cent of the Industry output. In this study the effort
has been to show the great economies of sale In advertising
between the sub-optimal small plant and the optimal plant.
Professor Bain did say that smaller plants have a heavier
per unit advertising cost. ". . .in consequence the
entrant finds an added sales-promotional disadvantage in
21
entry at scales below that of a single optimal plant."
In Professor Bain's opinion the greatest barrier to
entry, i.e. the factor that places the would-be entrant at
the greatest disadvantage vis-fr-vis the established firms,
is product differentiation. He summarized his findings as
follows:
Although the simple force of heavy advertising plays
a significant role in most cases, the strategic under
lying considerations in strong product differentiation
seem frequently to include (1) durability and complex
ity of the product (and corresponding infrequency of
purchase by the individual consumer), generally
associated with poor consumer knowledge or ability to
appraise products, and thus with dependence on 'product
reputation' and also with dependence on customer-
service organizations: (2) integration of retail dealer*
service organizations by manufacturers, either through
ownership or exclusive— dealing arrangements (related
to the first phenomenon mentioned): (3) importance of
21Ibid., p. 139.
conspicuous consumption motives on the part of pur
chasers attributable mainly to the manner or
surroundings in which the goods are used by the buyer
. . . [these things] suggest that advertising per se
is not necessarily the main or most Important key to
the product-dlfferentlatlon problem as it affects
intra-industry competition and the condition of entry.
Although instances are found in which it is, we may
need in general to look past advertising to other
things to get to the heart of the problem.22
The temptation is strong to dispute Professor Bain's
conclusions here. Except for rare instances such as Hershty
Chocolate and the few beers mentioned earlier it is diffi
cult to think of products which have achieved an eminent
position in the public's esteem, where that position was
not achieved in large part by advertising. In fact, in
looking back at three "underlying considerations" of
Professor Bain— durability and complexity of product,
retail dealer-service organizations, and conspicuous
consumption motives— it is difficult to see how the con
sumer becomes aware of these real or fancied "differenti
ators" unless it is by means of advertising.
On pages 49 to 57 of this study it was shown that
advertising makes the demand curve for the firm indeter
minant. It also makes the demand curve for the industry
69
indeterminant since an increase (or decrease) in the
advertising produced can affect the demand for distant as
well as close substitutes. Advertising which increases
the consumption of beer can affect the consumption of soft
drinks, coffee and tea, as well as that of wine and
distilled spirits. When this occurs there will probably
be a response by those losing sales. The response will be
in the form of increased advertising especially "institu
tional" advertising by the trade associations outlining
the merits of the products produced by the rival industry.
The question then arises, if some firms succeed
without advertising, if no one can determine the value or
power of advertising, if as is strongly hinted by tele
vision, "viewers" advertising can repel customers, why do
advertisers advertise? The answer seems to be four-fold:
(1) Advertising is sold to advertisers by sellers of
advertising. (2) Advertisers believe from their own
experience and judgment that advertising is effective.
(3) Advertising as will be pointed out in Chapter X on
Competition, is a less lethal form of competition than
price cutting. (4) Advertisers feel about advertising like
politicians feel about political campaigns. No one is sure
of the worth-whileness of the effort,, if any, yet none
70
dares discontinue lest his rival continue and perhaps
derive some benefit from it.
V. CONCLUSION
The number of breweries in the United States has
decreased from a high of 4,131 in 1873 to approximately
200 plants operated by 150 firms in 1964. This decrease of
approximately 96 per cent in numbers of breweries has been
accompanied by an increase of approximately 1100 per cent
in output. The tremendous increase in the average size of
plant brings up the question of economies of scale.
Research shows that up to a plant size of one half of one
per cent of the total output in the United States economies
of scale are great. Beyond that size, economies of scale
increase slowly, and at a diminishing rate. Nevertheless,
by any standard of concentration such as per cent of
business done by the four, eight, or twenty largest firms,
per cent of concentration is not great. In 1963 the ten
largest breweries had 57 per cent of the business.
Despite the increase in total output, per capita
consumption has declined particularly since 1948. Numerous
reasons have been given. These include a decrease in the
number of manual laborers, an overall increase in
71
temperance, a shift in population age groups, a nation
wide concern with overweight, and finally a diminishing
taste appeal in the product itself. The decrease in per
capita consumption is particularly disconcerting because
there appears to be no such decline in the consumption of
wines and distilled spirits.
Although many breweries are privately owned concerns
and hence do not make their financial statements public,
full statistics are kept by the Alcohol Tax Unit of the
Department of Internal Revenue. The data show that profits
for the industry as a per cent of sales have been declin
ing, and for the year 1959 were only 2.5 per cent. The
profits of the four largest breweries who make their
figures public were over 4.5 per cent of sales. This shows
that the rate of profit for the rest of the industry was
extremely low.
Advertising expenditures have averaged just under
7 per cent of sales for the past ten years. It is
difficult to evaluate the effectiveness of advertising and
several examples were adduced to show that there is no
absolute correlation between advertising and sales.
Advertising is nevertheless a most potent factor. As a
consequence any study of concentration and competition in
72
any industry must have due regard for the fact that the
economies of scale in advertising are greater than they
are in any other area of industrial operation.
CHAPTER III
THE BREWING PROCESS AND THE RELATIONS WITH TECHNICIANS
Adolph Coors II once said:
We have three plants, a malted-milk plant, a
ceramics plant, and a brewery. However, none of
my three sons has been trained to operate any one
plant. All three have been educated at Massachu
setts Institute of Technology as engineers. I can
train an engineer to be a brewmaster in six months,
but I can never make an engineer out of one of
these prima donna German brewmasters.1
Carl Badenhousen, president of P. Balientine and
Sons, at one time also incurred the displeasure of the old
guard of brewmasters by the remark, "a brewmaster is
nothing but a cook."
These two statements by two highly successful
brewery operators show the change that has occurred in the
attitude toward beer manufacture. As was pointed out in
Chapter II, in pre-industrial revolution days and in the
half a century following, brewing recipes abounded and beer
made on a commercial scale was the exception rather than
^-Adolph Coors II, President of Coors Brewing
Company in conversation with the writer in 1949. (The
writer was assistant brewmaster at the Fisher Brewing
Company in Salt Lake City from 1935 to 1942).
73
the rule. Even in the commercial operations the brewer
performed all the administrative functions of his small
entrepreneurship. At the inception of the business he was
generally the workman who physically produced the beer. As
the business grew and he could no longer perform all the
manual chores, he employed help but he retained the direct
supervision of the brewing. Most of these men kept their
recipes secret much as professional chefs, especially those
famed for their haute cuisine still do. If they did make
their recipes public property, they often withheld minor
segments of the ingredients or procedures, in much the same
way as the housewife with the reputation of being the
finest cook in the neighborhood does today.
The indenture of Anthony Morris, Jr. in 1696 has
been cited by Baron. Morris, Jr. was the son of a brewer
and was apprenticed to another Philadelphia brewer, Babcock,
for seven years. Baron said:
It was stated in the indenture that he was to spend
seven years learning "the art or trade of a Brewer."
He undertook to keep the brewing 'secrets' of Babcock
and his wife Mary, "and from their service he shall
not absent himself, nor the art and mystery of brewing
he shall not disclose or discover to any person or
persons during ye said term."2
^Stanley Baron, Brewed in America (Boston: Little
Brown and Company, 1962), p. 46.
This informal but effective 'guild' and partial
monopoly of brewmasters continued through the years as the
brewmaster did nothing to diminish his reputation for
indispensability. It was almost universally conceded that
brewmasters were the only men who possessed the necessary
skills to turn out a product which would meet with public
acceptance. True, 'scientific stations' had been in opera
tion since the 1880's but the production of beer was still
dependent on the empirical knowledge of the brewmaster
right up to prohibition in 1919. This dependence on the
brewmaster and the lack of skilled practitioners of the art
subsequent to repeal in late 1933 was no doubt responsible
for the failure of large numbers of small breweries.
I. THE BREWING PROCESS
As with many manufacturing processes, the brewing
process is, in essence, simple. Crushed grain is mixed
with water and heated until part or all of the starch is
converted by the organic catalysts, called enzymes, into
sugars. The liquid is strained or filtered and then boiled
for the trifold purpose of sterilization, clarification by
coagulating plant albumin, and extraction of flavor from
the added flavoring substances. This boiled extract is
then once more strained, cooled and placed in 'cellars'
where yeast is added. After fermentation which may require
from six or seven days up to two weeks, the beer, as it
officially becomes after fermentation, is removed from the
yeast and placed in storage tanks for aging. Different
brewers prefer different methods and duration of storing
and aging, but the period lasts in general from three to
an extreme of ten weeks in American beers. Ales, such as
British "Stock" ales, which undergo secondary and even
tertiary fermentation in the storage cellars, are allowed
to age for as long as six months or more.
When the aging process is completed, the beer, which
by now has been carbonated with its own carbon dioxide gas,
collected during fermentation, is given its final filtra
tion and packaged into bottles, cans, or kegs. It has been
the practice in the United States to pasturize bottled and
canned beer, but not keg or draught beer. About 82 per
cent of all beer in the United States is sold in bottles
and cans; a complete reversal of the pre-prohibition
percentages.
77
II. INGREDIENTS
Barley
Although many grains have been used through the
history of brewing, malted barley has come to be almost
the universal basic ingredient of beer and ales. During
Uorld War II some experimenting was done with the use of
oats in England and wheat in the United States, but as soon
as barley malt was again available brewers in both
countries as well as those on the continent returned to it.
Various strains of barley have been used at differ
ent periods and in different areas. In general it can be
said that the European brewers have used a barley which is
called two-row while those strains most used in America
have been of a six-row type. Two and six-row refer to the
grouping of the barley berries around the stalk to form the
barley head. The berry of the two-row barley is in general
larger and has a greater starch to protein ratio than has
the six-row berry. In order to bring the balance between
starch and protein into the proportions which have appeared
to have the greatest popular appeal, American brewers have
added 'adjuncts' i.e. pure raw starch from either corn or
rice. Few U. S. breweries use two-row barley today.
78
Olympia Brewing Company, Sicks Seattle Brewing Company, and
Blitz Weinhardt Brewing Company, all located in the Pacific
Northwest use a percentage of two-row barley malt.
Anheuser-Busch uses two-row barley malt in its 'premium'
and high priced "Michelob" all malt draft beer.
The malting process for barley consists of steeping
or soaking barley in water especially prepared with the
proper proportions of minerals and salts at precisely con
trolled temperatures for thirty-six to forty-two hours.
The grain is then removed from the water and permitted to
' sprout' — actually to begin the growth process of the
grain— for from three and a half to six days. At the end
of this period the sprouts or rootlets have grown to a
length almost twice that of the barley berry. Kilning in
hot air causes the sprouts to wither and drop off. The
malting process thus serves to remove the sprouts with
their bitterness and to develop the starch reducing enzyme,
diastase.
Since a considerable percentage of raw starch is
required to bring the ratio of starch to protein containing
husk to the correct relationship, it is necessary to use a
barley with a high diastatic or starch converting power.
Until recent years such barley strains, however, have had a
79
lower yield in bushels per acre chan have 'feed' barleys.
In addition the brewing barleys had a rough awn or beard
which made harvesting and threshing less pleasant than the
same operations with feed barley. In former days the
natural processes of the market took care of these differ
ences. A sufficiently higher price was paid for brewing
barleys to make it worth-while for farmers to grow them in
great enough quantity for the brewers' needs. With crop
supports and experimental agricultural stations, all that
has been changed. New smooth-awned, high-yield, high
diastase barleys have been developed by the agricultural
stations using tax payers moneys to aid private business.
It is perhaps only coincidence that the decline of per
capita consumption of beer dates from the introduction of
the newer type barleys. Adolph Coors II, however, feels
that the newer barleys produce beers so lacking in flavor
and taste appeal as to justify his brewery raising an older
strain of brewing barley.
Com and Rice Products
As stated earlier, the American barleys require the
use of 'adjuncts' i.e. raw starch. These consist almost
exclusively of refined com and rice. The two are almost
perfectly pure starch after the grains have been dehusked
and treated for the removal of oils which could adversely
affect both the flavor and foaming capacity of the result
ant beer. In Europe in the rare instances where adjuncts
are used in the production of beers with an especially high
alcoholic content, rice is preferred to com. Com is
considered fit only for animal, not human consumption. The
best Informed opinion today states that there is practic
ally nothing to be preferred in the use of one as against
the other since both are practically pure starch*
If it were not for government meddling in price
supports, the brewing industry would offer the rare chance
to observe the operation of opportunity cost in a market
where two commodities are perfect substitutes. In most
discussions of cross elasticity of substitution the goods
are "practically perfect substitutes." In the case of the
brewer, it is a matter of complete Indifference to him
whether he uses com grits or milled rice. The cost per
pound of extract is the only determinant from a cost or
product standpoint. Any failure to have 100 per cent
changeover from one product to the other with any change in
price must be attributed to inertia, built-in resistance to
change, loyalty to suppliers, a 'feeling' that one product
81
is superior, lack of knowledge of the market, or
excessive inventory.
Other Grains and Adjuncts
During World War II the amounts of all grains which
brewers were permitted to use were rationed. Brewers also
came under the wage and price regulations of O.P.A. The
obvious happened. With incomes and employment soaring,
with prices held down by law, demand increased at a pace
that astonished the brewers. Attempts were made to
'stretch' the use of grains. Lower extract, meaning lower
alcoholic and protein content beers were produced. It is
axiomatic in business that Mark Antony's warning, "the evil
men do lives after them," applies nowhere more appropriate
ly than to manufacturers. Surprisingly, such did not prove
to be the case in this instance. The public complained
about the products of some of the leading brewers and in
many cases it was assumed that post-war retribution would
set in. It never did. In fact, some of the brewers who
put out a markedly inferior product during the war emerged
with reputations unimpaired and sales positions greatly
improved.
The war period also produced attempts to use
82
substitute materials In order to expand production and yet
stay within the grain usage limitations set by O.P.A.
Wheat and some oats were malted, as has been mentioned.
To replace the starch adjuncts, or to Increase the ratio
of raw starch to malted grains, such materials as manloca,
tapioca, casava, and taro were used. All of these, howevei;
were difficult to handle In the mashing process since they
did not saccharify completely and could produce a
gelatinous starch paste In the mash.
Reaction to Grain Restrictions
Before leaving the subject of World War II one more
Item should be mentioned. At the urgent request of the
secretary of a brewers' organization called The Small
Brewers1 Association, grain restrictions were lifted to the
extent ttuit any brewery regardless of size was permitted to
purchase and use a minimum quantity of grain. By astute
'stretching' this amount could be used to produce approxi
mately one and one quarter million cases of beer a year.
Immediately small and tiny breweries were in great demand.
One individual with no previous experience in the beer
business owned seven such breweries at one time. None of
the beer from the great majority of these plants went into
83
kegs for draft beer and little of it went to local
consumers. Because of the wording of the O.P.A. regula
tions it was possible to change ownership, or change brand
names or to ship into areas where the brewery had never
previously done business and to realize from 50$ to $1 per
case above the going O.P.A. price.
That unscrupulous individuals will take advantage of
opportunities to profiteer during wars is indeed not news.
The situation with the small brewers in World War II,
however, was somewhat different. They pleaded that rigid
enforcement of O.P.A. rules based on percentage of previous
use, affected them and their customers adversely vis a vis
the large brewers. This, they maintained, was their oppor
tunity to establish themselves in their communities so that
when hostilities ceased they might compete on a basis of
greater equality with their gargantuan competitors. The
actions of many Of them, once their lachrymose pleas were
granted, make even the staunchest advocate of private
enterprise blush.
Hops
The use of hops in beer goes back several centuries
and the brewer's legend attributes their introduction to
84
the legendary patron saint of brewers, Gambrinus.
Gambrinus is probably based on Jan Primus, thirteenth-
century Duke of Brabant. Hops serve the dual purpose of
flavoring and helping to clarify beer. A great many other
substances such as coriander seed, caraway, hartshorn
shavings, ginger, cinnamon, Alexandria Senna, cocculus
indicus berry, and fabla amora have been tried as beer
flavoring but over the years the hop flower is the one
which has proved most acceptable to the greatest numbers
of beer drinkers.
Hops again demonstrate some of the peculiar results
of tampering with a market. The part of the hop plant that
is used in brewing is the flower of the female vine. A
typical blossom is somewhat shorter but about the same
diameter as the first joint of a man's thumb. In the
middle 1930's the price of U. S. hops which are raised
almost entirely in Northern California, West Central
Washington, Oregon and Idaho, dropped to about 14 cents a
pound. Experts from the Department of Agriculture advised
the hop growers to disregard the advice of the hop buyers,
who had pleaded with the growers not to plant any male
vines. Male vines, said the U.S.D.A., would pollenate the
female flowers making for larger blossoms and an increase
in yield per acre from leas than fifteen hundred to as much
as two thousand pounds. The agricultural knowledge of the
agronomists was sound, but the economic knowledge was weak.
The yield did increase but the blossoms became much larger
— as long as a man's middle finger with seeds the size of
BB shot and thick core stems or strobiles which imparted a
harsh flavor to the beer. The price elasticity of demand
prove small, and U.S. hops dropped to seven cents a pound
while the European hops with the small flower, no harshness,
and delicate aroma brought forty, fifty, and even sixty
cent8 a pound.
Yeast
The microorganism which is responsible for fermenta
tion— yeast— is truly of vital importance to the brewing
industry. In the study, research, and development of yeast
cells the brewing industry has made its greatest contribu
tion to science. Since much has been made of Pasteur's
contributions and since many brewers have been overly
enthusiastic in their claims as to Pasteur's debt to the
brewing industry, it is perhaps best to quote at length
from Baron's excellent work.
The nature of yeast, while it might still at that
time [1870] have been a mystery to most brewers, was
8 9 6
not entirely unknown to chemists who, as early as 1835,
had recognized that It was simply a form of plant life.
The genus was called Saccharomvces (sugar fungus), and
the credit for proving that It was not just present at,
but essential for, fermentation Is given to Mitcherllch,
who made this finding In 1841. Pasteur's main contri
bution was to prove that the so-called diseases of
fermented liquids were caused by bacteria, and that a
yeast free of bacteria produced a fermentation free of
disease. The practical result of his research Into
bacteria was the process which was at first called
"steaming" and then "pasteurizing"; that Is, heating of
the finished product at temperatures high enough to
kill all harmful microorganisms or bacteria that might
still exist in it.
A necessary step beyond was taken in the early
1880's by the Danish biochemist Emil Christian Hansen;
backed by Carl Jacobsen, the owner of the Carlsberg
Breweries in Copenhagen, he was able to prove that
certain yeasts, once identified and differentiated,
were harmful in the fermentation process while others
worked exactly as desired. . . .
Through the experiments of Hansen, two favorable
brewing yeast strains were isolated: Sacchromvces
cerevislae (top-fermenting) and Sacchromvces
carlsbergensis (bottom fermenting). There are numerous
other varieties, all of which are called "wild" yeasts,
in contrast with the two above which are "culture"
yeasts. It was in November 1883 that Hansen introduced
at the Carlsberg Brewery the first absolute pure
culture . . . ; a yeast, that is, that had been
propagated from a single selected cell.
The findings of Hansen were much slower to make
their Impact on American brewers than those of Pasteur
. . . [due to] characteristic American brewing methods
which had developed a natural pure culture yeast
through empirical means rather than in the laboratory,
and second, the use of unmalted cereals (such as rice
or corn grit) in brewing, an American practice which
reduced certain dangers of failure that were present
87
o
when only malt was used.
Professor Amerine, on the other hand, felt that
Pasteur*8 contribution was vastly greater than was Implied
in Baron and that the "father of bacteriology" did as the
vintner8 and brewers have always maintained, owe a great
debt to their industries. According to Professor Amerine:
The German chemist Justus von Liebig put forward
another hypothesis: that the fermentation arose from
the 'vibrations' [sic] of a decomposing 'albuminoid'
substance. Liebig's authority was so powerful that
his view was not seriously challenged until the young
Pasteur embarked on his studies of fermentation in the
1850's. ... He showed that an infusion of yeast
would convert even a simple sugar solution into alcohol.
... . Pasteur announced his main discoveries in two
historic papers: Mtaoire sur la fermentation appel&e
lactique (published in 1857) and etudes sur le vin
(1866).4
Regardless of whether Mitcherlich or Pasteur
deserves credit for the discovery of yeast's role in
fermentation, the importance of the discovery to the
brewing industry was quickly recognized.
Naturally the brewers who were competing on a
national scale were quick to perceive the need for, and the
possibility of, a uniform product. Schlitz is supposed to
3Ibid.. pp. 239-40.
4Maynard A. Amerine, "Wine," Scientific American.
August 1964, p. 46.
88
have Imported a pure yeast culture in 1883, Pabst in 1887
(and also installed a research chemist the same year), and
in the same year the F. J. Dewes Brewery in Chicago.
Universal pure culture yeast was not adopted until after
the repeal of prohibition, however. Even then some of the
'prlma donnas' referred to at the start of this chapter
considered the purchase of a pure culture yeast a
reflection on their abilities.
Pasteurization
Pasteurization was another story in the United
States, however. Perhaps^the brew-master felt that here
was a further chance for him to display his knowledge and
experience, in any event it is possible that pasteuriza
tion or steaming had begun at Anheuser-Busch by 1873 and
certainly by 1877 at that plant.
III. THE BOTTLING OF BEER
Glass bottles had certainly been used for beer as
early as 1759,^ and bottle manufacture in England amounted
to more than 3,000,000 bottles as early as 1695.^ In
5Ibid., p. 59.
6Ibid.. p. 60.
America glass making and bottle manufacture had rather a
spotty career until the mid-eighteenth century when bottle
manufacturing began in good earnest. Thus by the time
that Anheuser-Busch decided to ship its product nationwide
there was a plentiful supply of glass.
There was a true bottleneck in the beer business,
however, and that was the stopper. Corks were expensive,
difficult to handle, and unreliable. Wired down rubber
seal stoppers were preferable since they were more reliable
and could be reused. In 1892 William Fainter patented the
crown.^ The crown was and is actually a bottle cover
rather than a stopper. It has a composition cork disk
affixed to the inside of the crown. The crown is clamped
onto the outside rim of the bottle so tightly that the
high pressure carbonated gas cannot escape from the beer,
and the beer does not come in contact with the metal of the
crown. If beer was properly crowned and pasteurized, and
reasonably protected from light and temperature changes,
it could be transported hundreds of miles and kept
indefinitely. The crown signalled the advent of real
economies of scale, and with them the demise of the smaller
90
and less efficient plant. Pasteurizers, pumps, boilers,
bottle filters, labellers, crowning machines— all lent
themselves to large scale efficient production.
The Taxing of Bottled Beer
Before leaving the subject of bottling one other
aspect of the early bottling operations should be mentioned.
Beer, like whiskey, was taxed by the barrel which in the
case of beer was thirty-one gallons. When the barrel was
filled, a tax stamp was placed over the spigot hole in such
manner that the stamp was punctured and hence cancelled
when the keg was tapped. Apparently no one could think of
any other way to tax beer for years and therefore bottles
had to be filled from properly filled and stamped barrels.
This meant, however, that if bottles were permitted on the
brewery premises they might be filled with beer on which
the tax had not been paid. The procedure then, according
to Dreesback as quoted by Baron, was that bottling could
not take place:
. .in the brewery or warehouse, or anywhere on the
brewery or warehouse premises. This rule also prohibits
washing or storing of bottles, steaming and all opera
tions connected with bottling. Bottling must be done
in a building separate and distinct from and having no
communication with, the brewery or warehouse. This
means that the location and arrangement of the brewery
91
or warehouse and the bottlery must be such that It Is
a physical Impossibility to take beer from the former
to the latter without carrying the beer over the
surface of a street or road which is a public highway
and actually and commonly used by the public as a
thoroughfare.8
Pabst was at one time filling 75,000 barrels a year
in the racking room and carrying them across the street to
be filled into bottles. Under such circumstances there was
little to be gained by vertical integration, and although
Pabst and Anheuser-Busch owned their bottling operations,
most breweries did not. When the Internal Revenue Act was
changed in June 1890 to allow "the construction of pipe
lines from storage cellars to bottling houses,"^ even
though the brewing and bottling premises were to be kept
separate, the efficiencies of vertical integration became
so evident that breweries almost without exception began to
operate their own bottle shops. It is significant, too,
that with these developments the number of breweries has
steadily declined since the year 1890.
IV. RELATIONS WITH TECHNICIANS
The ambivalent attitude toward the brewmaster
8Ibid.. p. 245.
9Ibid., p. 246.
92
mentioned in the first part of this chapter still persists
in the industry. So, too, does the question, "is the brew
master a chemist and biologist, or is he simply a cook? Or
is he a combination of all of these?" Most brewery owners
would probably agree that he is a combination. They are
unwilling to believe that the manufacture of beer can be
completely computerized and dehumanized like the making of
light bulbs or steel wire. As for the brewmasters them
selves, they have no doubts whatever. They are Indeed
chemists and biologists, and in addition most will readily
admit themselves possessed of an acute sense of smell and
taste as well as a sixth sense developed through long
empirical practice which enables them to determine which
ingredients are superior, even if scientific analysis is at
variance with their normative evaluations.
Brewmaster Associations
Brewmasters have an association, "The United States
Brewmasters Association" of hoary lineage, which includes
brewmaster members from Mexico and Canada. Annual meetings
are held at which papers on brewing and allied subjects are
read. In the past fifteen years there has been a marked
increase in the scientific sophistication and profundity of
93
the paper8 presented. Representatives of suppliers attend
these conventions and here, too, there has been a marked
change from the hearty drink buyer to an informed and
educated individual competent to expound on the technical
excellences of his product. Present day "technical ses
sions" of conventions are far better attended than were
those of a generation ago.
In addition there are "district" meetings and con
ventions of brewmasters. These are candidly spoken of as
"bummels" or good fellowship get togethers. Gossip is
exchanged and an old friend or confidant'8 advice may be
sought with a problem. Some papers are presented but the
programs are neither as pretentious nor as well attended as
the sessions at the national meetings.
Every third or fourth year an "exposition" is held
in conjunction with the Brewmasters' Convention. On these
occasions all the newest brewing, handling, and packaging
equipment is displayed. At these combination meetings
there are apt to be many brewery owners, particularly those
with some technical background and competence, in attend
ance, as well as an almost 100 per cent brewmaster
attendance.
Approximately sixteen years ago, in 1948, the
94
"American Society of Brewing Chemists" was founded. The
membership consisted almost entirely of men employed by the
scientific stations. Gradually, as scientifically trained
brewmasters have replaced the old guard, the membership has
been expanded to include them. The meetings of this group
are sober and serious affairs. The papers presented are of
a very high order of sophistication and scientific compe
tence. It is not without significance that an increasing
number of brewmasters are attaining skills of this nature.
These organizations demonstrate the anomalous
situation of empirical skill on the one hand and scientific
training and precision on the other. Actually the situa
tion is not too different from that of petroleum geologist^
each of whom considers himself a scientist but each of
idiom feels he is mote skilled than his fellows in using
the tools of science. Brewmasters feel even more strongly
about the matter. Science and its tools are essential but
they will never replace, at least in the brewmaster's
opinion, and, indeed, in the opinion of many brewery
owners, "the trained intuition" of the master brewer.
That this should be the situation is not surprising.
In the everyday world of real life everyone has had
experience with good and bad cooks. Using the same
95
ingredients and equipment, and selecting from the same
array of seasonings, two people will prepare a supposedly
identical dish. Mot only will the flavor of the two
preparations be different but a majority of tasters will
prefer preparation A to B or vice versa.
It is not astonishing, therefore, that many brewery
owners, particularly those whose present successful enter
prises were begun by grandfathers with empirical skill and
a complete absence of scientific knowledge, are loathe to
discard all "time-tested1 1 judgment decisions. When it is
suggested to such an owner that he discard a rule of thumb
procedure and substitute a more precise scientifically con
trolled method he may feel that he is taking a risk of los
ing the indefinable and immeasurable 'something' that has
made his product popular and his business a success.
An Example of Old Fashioned Procedure
This attitude extends even to the largest plants
including those which have pioneered scientific controls
and have striven to make them even more precise in their
operations. An example is the use of chips by Anheuser-
Busch. The yeast used in the fermentation of beer is the
bottom-fermenting Sacchromyces carlsbergensis, as stated
96
earlier in this chapter. This yeast, when it has reached
its limits of ability to digest sugar, splitting it into
alcohol and carbon dioxide gas with minute quantities of
esters, becomes inactive and settles to the bottom of the
fermenting tanks. Today almost all beer in the United
States is given a primary or 'coarse' filtration as it
passes from fermenting to storage cellers.
Prior to the Introduction into the brewing business
of diatomaceous earth filters, filtration was accomplished
almost exclusively by filtration through compressed 'cakes'
of cellulose fibers. The washing and sterilizing of this
filter material was, and still is, where such filters are
used, an expensive and time consuming operation. The
longer the beer remained in 'rest' or storage, the greater
the amounts of yeast which settled out, and the less
remained in the beer to be filtered out.
This settling process can be aided by the introduc
tion of chips, thin sterilized strips of wood, generally
beech, measuring six to eight inches in length and one and
a quarter inches approximately in width. A quantity of
sterile chips is placed in a 'chip cask' and beer is pumped
into the cask and allowed to rest for several days or even
a few weeks. Yeast cells and various protein and albumin
97
particles adhere to the chips during this time, and when
the beer is pumped from the chip casks it is appreciably
clearer than when it was introduced. The chips are then
removed from the cask, an awkward and laborious process,
and taken to special washing apparatus for cleaning and
sterilizing prior to reuse.
Anheuser-Busch is the largest brewery in the United
States and is also the only one so far as this study has
been able to determine, which still uses this expensive and
lengthy process. The Brewer1s Digest Buyers Guide and
Directory for 1964 does not even list chips as a category
of materials, and lists no manufacturer of chips as such.
The perpetuation of the chip process here is truly a triumph
for empiricism over science. The technician has overruled
the scientist.
The Modernists1 Argument
Most brewmasters and all scientific stations consider
their use an anachronism, and a messy and troublesome
anachronism at that. Even some of the production personnel
at Anheuser-Busch have been known to question the efficacy
and efficiency of the use of chips. They wonder if, with
proper supervision, the modern, easily operated and cleaned
98
filters can't do everything that chips can do without
removing 'too much'; i.e. those immeasurable almost
infinitesimal but vital flavoring elements which the old
guard feels chips do not remove, but which it is possible
that mechanical filters may.
The Empiricists' Argument
The sponsor8 of empiricism insist, in a word, that
flavor and taste appeal can not be measured in cardinal
numbers like the carbon atoms in steel or Brinnell hardness.
They feel, to use a cooking metaphor, that they know how
much 'a pinch of salt' is, and how long is meant by the
instruction "cook until done." They resent strenuously the
attempts of laboratory workers to weigh the pinch of salt
or specify to a half degree and a precise number of minutes
the temperature and time of "cook until done." They
insist, with some reason, that no two batches of grain are
identical and that some discretion and latitude must be
permitted.
V. HISTORY OF SCIENTIFIC STATIONS
Since the attitudes just described have been
prevalent in both the period when British beers dominated
the U. S. market and the later period when Germans and
German-style beers came to the fore, it is not surprising
that scientific brewing did not make its appearance until
the 1880'8, although J. E. Siebel had established his
Zymotechnic Institute in 1872. There followed several
others. Max Henius, a pupil of Hansen in Copenhagen,
claimed to have introduced pure yeasts cultures to the
United States. This claim was disputed, as has been
mentioned, by the Uihleins of Schlitz. Henius went on to
found a "scientific station" called the Wahl-Henius
Institute with a partner Robert Wahl. In New York Robert
Schwartz founded the American Brewers' Academy and Leo
Wallerstein the Wallerstein Laboratories. In Milwaukee
there was the Hantke Institute.
These stations, or to use the grander term, insti
tutes, served many functions. Some, such as Wallerstein
and Siebel sold materials to brewers. Such materials
might be foam intensifiers, substances to prevent beer,
bottled beer particularly, from becoming hazy or cloudy,
pure yeast cultures, et cetera. The stations also tested
beers in all phases of production and would render judg
ments as to its merits or demerits. Raw materials could be
sent for checking to see if the supplier was meeting his
specifications. Finally, Wahl-Henius, Hantke, Siebel,10
and Schwartz rah schools to teach the practical and
theoretical aspects of brewing. These schools charged a
high tuition and the sessions usually consisted of an
intensive six month course which covered practical or
'brewery' organic and sugar chemistry, sufficient bacteri
ology to be able to prepare pure yeast cultures, practical
information on heating, disinfecting, refrigeration,
electricity> and other practical aspects of brewing
operations. Small brews were made in the schools 'model'
breweries, and numerous trips were taken to give the
student first hand knowledge of how grain was malted, corn
refined, et cetera. The prestige of the schools gradually
increased until today it would be hard to find a brewmaster
who was not an alumnus, and often a fiercely proud and
loyal alumnus, of a brewing school.
In addition to fledgling master-brewers many sons of
owners who had no intention of being production supervisors
attended these schools. It was generally felt that the
brewing process was sufficiently esoteric so that it
^The writer attended the Wahl-Henius school in
1934-5, attended a refresher course at Siebel in 1942, and
took a course in quality control at Wahl-Henius in 1953.
101
behooved the operator to have some production knowledge
and not to be completely at the mercy of his production
chief. To the extent that breweries continue to be family
concerns this practice will probably continue, in the
publicly owned or 'corporate' type of brewery there appears
to be a growing tendency for production men to be elevated
to the top administrative positions. In the State of
California the brewers have succeeded in persuading the
University of California to teach courses in brewing at
Davis.
Extent of Scientific Inquiry
Until the mid 1930's the extent of study and know
ledge of beer constituents and processes was definitely far
in advance of anything that had been achieved in the dairy
industry. Admittedly much of the early work had been done
in government sponsored laboratories in Europe, and also
much was taken directly from the great amount of work that
was done in sugar and biochemistry. None-the-less, the
extent of research done by the scientific stations in
polysaccharides and enzymes was astonishing and represents
a real contribution to the total present knowledge in these
areas.
103
Thanks to the "scientific stations" beers no longer
develop a haze when they have stood on the vendors shelves
for only a short time. Chilling beer no longer makes it
turn hazy or cloudy. The head of foam on a glass of beer
is no longer subject to variation as it was a few years ago.
Many of the developments in adhesives, detergents, cleaning
compounds, commercial disinfectants, pasteurizers, centri
fuges, as well as laboratory techniques in growing special
microorganisms, all owe their inception to the stations.
In the larger breweries today, of course, many of
the functions that were once the exclusive province of the
"station" are performed in the breweries' own laboratories.
"Pabst research laboratory, by 1945, employed five Ph.D's
in chemistry."H As has been pointed out, almost all
breweries today have pure culture apparatus for yeast
selection and growth. Tests on materials are routinely
made. Quality control engineers and methods are well estab
lished in breweries of any size. None-the-less, the
stations are still busy. The smaller brewers obviously
need them more than ever if they are to avoid the disaster
^Thomas C. Cochran, The Pabst Brewing Company (New
York: New York University Press, 19480, p. 379.
103
that might be caused by Ignorance of scientific operation.
The large brewers use them as a check on their own
operations.
Advisory Functions of Scientific Stations
Perhaps the most important function of the sclenti-
fic station today, however, is in rendering an opinion of
the product. No matter how much sampling is done by "taste
panels" and "expert" tasting personnel at the brewery, the
brewer wants qualified outside judgment to confirm his own
opinion. A steel maker can measure the strength and hard"
ness of his steel and compare it with his competitor's
steel. The turning radius of a Ford can be measured by the
maker of Fords and compared with that of Chevrolet and
Plymouth. No outside expert opinion is needed. Beer is
different, says the brewer, and it is. The brewer and
brewmaster are apt to make the kind of beer they like and
to like the kind of beer they make.
Seldom do they hear unflattering and unkind things
said of their product. In addition, whatever derogatory
comment may come to the ears of the brewer is generalized
and imprecise. Such comments as "that beer is green," or
"so and so's beer is sour," are absolutely worthless in
104
determining why the beer was disliked. They mean only that
the beer did not appeal to the complainer at the time he
drank it. The cause of the lack of appeal is no more
apparent to the consumer than to the producer. The fact
that he does not know whereof he speaks never deters a
critical beer drinker. It has been said that after puberty
every American male considers himself an expert in
managing major league baseball teams and in judging beer.
In circumstances such as this the stations are
invaluable. Candor is to their advantage. Favoritism
between clients would be ridiculous. Flattery might result
in continuation of an unappealing product and the bank
ruptcy of a client. Sampling and tasting are the business
of the station, and they have been refined to the point of
an art. Hundreds of different products may be sampled
monthly by a large trained staff. The terms used to
describe flavors are those understood by all in the busi
ness, and as a result, corrective measures can be taken.
Samples can be compared with previous samples. Thus, the
stations perform an essential and valuable service for
large as well as small brewers.
105
VI. CONCLUSION
The type of person who becomes a brewmaster is dif
ferent today than it was a generation ago. Most of today's
brewmasters are college graduates with a background and
often degrees in chemistry, biology, bio-chemistry and
other natural sciences. The brewmaster is today often
called vice president in charge of production as befits a
man who supervises as many as a thousand employees and
whose administrative duties consume the bulk of his time.
More and more owners seem to be coming around to the senti
ment expressed by Adolph Coors II at the beginning of this
chapter. Science which was used in the food industry
earliest, and to the greatest degree in brewing, has
finally come into its own and supplanted the rule of thumb
and empirical judgment.
But beer is still a product which must have an
appeal of its own or it will not be consumed. Therefore,
at Coors brewery tap room, opinion polls are held. When
management and production and sales personnel are satisfied
with the product, and the scientific stations pronounce
satisfactory judgments, a small cross section of the beer-
drinking public is asked in to drink beer. These people
are not experts. They are not given different beers and
asked their preferences. Their opinions are not solicited
by researchers. They are just given glass after glass
after glass of beer. If they drink, continue to drink, and
finally must be courteously evicted, management rejoices.
The wonders of modern science have been confirmed.
CHAPTER IV
THE INDUSTRY'S RELATIONS WITH GOVERNMENT
The relations of the brewing industry with govern
ment have been always of a sufferance nature.1 In the
Revolutionary War, perhaps because of the participation in
the conflict of such prominent brewers as Washington,
Jefferson, Adams, et al,, in an effort to reduce the con
sumption of spirits, there was imposed a beer ration.
Subsequent to that time there have been almost innumerable
regulations at the federal, state, and local level. At the
present time only gasoline, tobacco products, wine, and
distilled spirits are taxed as heavily as beer, and only
narcotics are supervised as closely as alcoholic beverages
in their manufacture and distribution.
In this chapter the first section will deal with
regulation at the federal level, and the history of the
^Much of the material in this section, particularly
that dealing with the activities leading up to the passage
of the Eighteenth Amendment, is taken from Stanley Baron's
Brewed in America (Boston: Little, Brown and Company,1962).
The United States Brewers' Association has also been most
helpful.
107
108
losing fight which culminated in national prohibition in
1919. The second section will deal with the federal
regulation since repeal. Section three will deal with
state and local legislation and regulation since repeal.
I. TAXES AND REGULATION PRIOR TO 1919
Dutch Taxes
In 1638 William Kieft became governor of New Amster
dam. Shortly afterwards he and the council approved an
excise tax on liquors and beaver skins to pay for the
2
prosecution of the war with the Indians. It is signifi
cant that these excise taxes in New Amsterdam antedate
excise taxes in England. The first English excise tax was
copied from one existing in the Netherlands and was
established on 28 March, 1643.
The New Amsterdam tax amounted to two guilders a
half barrel of beer. The literature of the time indicates
that evasion was widespread. In 1644 Kieft levied a tax
of three guilders per barrel and ordered the brewers to
make a report of all beer brewed. When the brewers refused,
their beer was confiscated and handed over to the soldiers.
2
Baron, oj>. cit., p. 26.
109
Indirectly excise taxes on beer contributed to the
development of representative government in New Amsterdam.
Resentment against the high taxes levied by Peter
Stuyvesant, but especially resentment against the excise
taxes on beer, led to the uprising against him and the
Dutch West Indies Company, and to Stuyvesant18 capitulation
in 1653.
Regulation and Taxation in the English Colonies
New England. As early as 1634 steps were being
taken to regulate the local 'ordinaries' (taverns or inns)3
in the Massachusetts Bay Colony.
By an order of 4 March 1635, no person was allowed
to keep a "common victualling house without a license
from the court," and as a result of widespread drunk-
eness, a General Court held at Newtown on 20 November,
1637 laid down a number of stringent rules for inn—
and tavern-keepers. They were to sell or have in
their houses only wine, spirits or beer that could be
sold by law for no more than Id a quart; they were not
to brew their own beer but to buy from a "common
[commercial] brewer." What was more the "common brewef
had to be licensed by the General Court or the Court
of Assistants, and the prices he could demand were
also specified.4
The Puritan Fathers of Boston and New England were
firm in their stand against drunkenness and in consequence
3Ibid.. p. 11.
4Ibid.
110
promoted the consumption of beer. This led to price control
and then (as early as 1651) to regulation of the quantities
of ingredients to be used in order to prevent exploitation
of the consumer.5 A second purpose was to prevent putting
the population to "needless expense" in wines.
The Massachusetts Acts and Resolves in 1692 spelled
out that a tax of "1/6 would be collected for every barrel
of perry, beer, ale, and cider.Apparently beer brewed
for the household's own use was not subject to this excise
tax, nor to the other regulations laid down for "common
brewers."
The other colonies soon followed Massachusetts' lead.
In 1636 New Plymouth passed a law restricting the sale of
beverages to public houses. Price control was also estab
lished in this colony. In Rhode Island in 1655 it was
established that only two innkeeper licensees should be
permitted in a town. In the same year sale of liquor to
Indians (since they became antagonistic when drunk) was
prohibited. Regulatory laws for taverns and the sale of
wine, beer, and liquor were passed as early as 1644 in
5Ibid.. p. 35.
6Ibid.
Ill
Connecticut, and by 1650 a Code of Laws was in effect.
Virginia. Official controls of public houses in
Virginia came much later than in New England. It was not
until 1658 that the General Assembly took it upon itself
to set rates and regulations. In Virginia, too, price
. 4
controls were imposed on both imported and home brewed
beers.
Pennsylvania. William Penn received his famous
grant of land from Charles II in 1680. In 1682 he set out
for America. In 1683 he established his "Great Treaty"
with the Indians. In his Frame of Government adopted at
Chester in 1683 "certain laws regulating the licensing of
taverns, taxing of beer, sale of alcoholic beverages to
Indians, et cetera."^ were established.
Similar laws varying only in minute detail were
eventually established in all the colonies and differ
merely in detail.
New York. As early as 1664 in New York, after the
British takeover, import duties were imposed, generally on
wine and spirits. The purpose was twofold; first to
protect the infant beer and cider industries, and second,
^Ibid., p. 44.
112
to promote temperance. The drinking habits of the Dutch
had established such a foothold, however, that the second
was never achieved. Soon after 1720, in an effort to
bolster Pennsylvania's flagging economy and encourage home
industry, similar measures were adopted. In Maryland in
1660 and again in 1663 acts were passed to encourage
ordinary keepers.
Southern Colonies. Except for Virginia there was
almost no evidence of anything but home brewing. The
facilities for growing and malting barley were poor. The
land could be more profitably used to grow tobacco, rice,
or cotton, and as a result beer was imported, especially
from Philadelphia.
The short-lived Stamp Act and its successor the
Townshend Act would have worked no great hardship on
Americans, but they helped intensify a growing dislike of
all things British, and undoubtedly helped hasten the
advent of the Revolutionary War. The sole effect of the
Acts on brewers who imported beer for resale, as well as
malt, was the same as that on any other importer who was
affected by the embargo on British goods as retaliation
for the Acts. Like all embargoes, those on British goods
failed and the only lasting effect was an increased
113
bitterness between England and her colonies.
Taxation and Regulation by the United States Government
During the revolutionary war, of course, there was
no national tax on beer. Records on taxes levied by the
colonies as emergency war-time measures are scanty, but In
a manuscript In the possession of U. S. Brewers' Associa
tion a 1779 act of the Mew Jersey legislature states that
"all brew-houses that brew for sale or hire, shall be
rated at the discretion of the Assessors and chosen
Freeholders any sum not exceeding one hundred pounds."
U. S. Federal Excise Taxes. Excise taxes In England
go back to those granted Edward I on taxes levied on
Imported wine and exported wool. These were exceptions,
however, to the general sentiment expressed In the Magna
Carta that the monarch should have no power of excision of
part of the sums paid to the payee. Mercantilist theory,
however, Inclined toward excise taxes, although often
excises were difficult to distinguish from tariffs. It was
under the Influence of mercantilist economics that the
first English excise tax on beer was levied In 1643 as
pointed out earlier In this chapter.
Adam Smith was studied, at first, more assiduously,
and his work had greater Influence in the newly founded
United States than in England. It is not surprising,
therefore, to find Thomas Jefferson, a devoted disciple of
Smith, referring to the tax imposed on distilled spirits
in 1791 as that "infernal system." The expansion of this
tax to include other items in 1794 led to the Whiskey
Rebellion of that year, and in 1802 the legislation and
Tax were swept away. Except for the brief War of 1812
period of excise taxes from 1813 to 1818 there were no
federal excise taxes on beer or whiskey; or indeed excise
taxes of any kind until the Civil War year 1862.
Excise Taxes and Internal Revenue. In the Civil War
there was no beer ration such as had been officially the
case in the Revolutionary and 1812 Wars. The brewers were
called upon to help financially, however, by paying an
excise tax of one dollar per barrel on all beer sold as
well as paying a license fee. Baron quoted Smith, U. S.
Federal Internal Revenue Tax History (p. 1) as saying that
"The internal revenue system of the United States, during
the Civil War period was essentially a new creation."®
The imposition of this tax made the brewers realize
1X5.
that their8 was considered a national industry and they
immediately took steps to operate like one. They formed,
in 1862, an association which in 1864 became known by the
title of United States Brewers' Association.
One of the functions of the first convention was to
make formal protest not only to the amount of the tax but
also to other portions of the act which they felt were
punitive. The act required brewers to post a bond as a
guarantee of tax payment. It gave excessive power, they
felt, to minor officials of the tax department. Finally,
the act provided that the government could collect taxes
on beer brewed before the act went into effect. The first
negotiations were successful and the tax was temporarily
reduced to sixty-cents a barrel. By 1863, however, the war
situation was such that the brewers were fortunate not to
have their taxes raised more than back to the original one
dollar per barrel.
The brewers did succeed in getting rid of the other
inequities against which they were protesting. It should
be remembered that this was new legislation and mistakes
were bound to show up at first. Actually the brewers of
this period, by then mainly German, seemed anxious to show
their loyalty to their adopted country and were extremely
116
patriotic. (Even some of those In the South were loyal to
the Union cause.) They paid their taxes in full without
attempts at evasion such as was charged against the
distillers, among others, and soon became the darlings of
the Internal Revenue Department.
Baron pointed out that the effect of the tax on beer
was, curiously, to strengthen the brewing industry. It
unified the industry. It resulted in the formation of a
national association. It made it difficult for small
manufacturers with small capital to stay in business. This
had the result of making, as even the prohibitionists
recognized, those who remained even stronger. They
enlarged their businesses which meant more capital. More
capital meant better management and organization. To sup
port all these, greater sales from an expanded market were
necessary. It seems ironical that the efforts of the
government to obtain revenue should help result in the
elimination of what was probably very close to pure or at
least atomistic competition. It also offers, however, a
chance to compare the strides made under slightly impure
competitive conditions toward greater efficiency, product
improvement, lower costs, and customer satisfaction with
those made earlier under a relatively more nearly pure
117
competition.
In the panic year of 1873 it was claimed by the
brewers that 55 per cent of all the "Internal Revenue Tax
collected from all sources subject to it throughout the
country"^ was paid by brewers and distillers.
In 1898 a war-tax was imposed. This doubled the
tax from $1 to $2 a barrel. The Tax was to be only for the
duration and some optomistlc brewers felt since the tax
amounted only to one fifth of one cent per glass it would
have little or no effect on consumption. Baron's figures
are hard to reconcile here since he estimated that beer
sales dropped one million barrels or seven per cent in 1899.
The United States Brewers' Association Almanac for 1944, as
quoted by Cochran,however, lists total U. S. withdrawals
in 1898 as 36,682,838 barrels, compared with 33,836,651 in
1899, or a drop of nearly three million barrels and nearly
eight per cent. On these figures the government's revenue
from beer, nevertheless, increased nearly thirty one
million dollars. The brewers felt, with some reason that
^United States Brewers' Association, Documentary
History, parts I and II, (New York 1896-1898), p. 365.
*®Thomas C. Cochran, The Pabst Brewing Company.
(New York: New York University Press, 1948)7 p. 186.
118
they and the beer drinkers were paying a disproportionately
large share of the war costs. In the five months between
1 July and 30 November, 1898 they estimated that "forty per
cent of the entire war tax (some $15,000,000 out of almost
$38,000,000)"** had been contributed by brewers.
The duration for the brewers lasted considerably
longer than the military combat. The brewers' efforts
finally bore fruit, however, and on 1 July, 1901 Congress
reduced the tax to $1.60. One year later the tax was
reduced to $1. There It remained until 1914, when It was
again raised to $1.50 per barrel. On 4 October, 1917 the
tax was raised to $3.00 per barrel, and finally on 25 Feb
ruary, only four months before sales of beer were
prohibited, the tax was raised to $6.00 per barrel.
II. PROHIBITION
Pleaders for temperance are as old as civilization.
As Smith and Helwlg*^ pointed out, the Old Testament
abounds with condemnation of excessive drinking. Domltlan
**Baron, 0£. cit., p. 293.
*^Walton Hall Smith and Ferdinand C. Helwlg, Liquor
the Servant of Man (Boston: Little, Brown and Company,
1940), pp. 8 ff.
119
In 81 A.D. "ordered the destruction of half the British
vineyards" to check intemperance:
James I passed drastic laws for the punishment of
drunkenness. The laws were Ineffectual. Hard drinking
prevailed to such extent in the reign of Charles I that
regulations were introduced to suppress it altogether,
and failed.13
Until 1826, however, when the American Society for the
Promotion of Temperance (later to become the American
Temperance Society) was formed, no movement of a group of
citizens had arisen to protest the use of alcoholic drinks
of any and every kind. This was a different and more
spontaneous expression than the prohibitions against
drinking by the Mohammedans and Buddhists.
Drinking in England in the 17th and 18th Centuries
Professor Yandell Henderson1^ placed the date of
great drunkenness in England somewhat later than Smith and
Helwig. The latter said, "During the Commonwealth drunken
ness was so prevalent in England that other nations called
her TThe Land of the Drunkards.They also stated that
13Ibid., p. 14.
^^Yandell Henderson, A New Deal in Liquor (New York:
Doubleday, Doran and Company, Inc., 1935), p. 19.
!3smith and Heljig, oj>. cit., p. 14.
120
"there was a notable entertainment given for Elizabeth,
which twenty-thousand guests attended, each averaging a
gallon of ale.Professor Henderson said, "It was only
toward the end of the seventeenth century that distilled
spirit8 came into general consumption, and that drunkenness
of the more intense sort began to be common.(Both
Smith and Helwig's and Professor Henderson's books were
extremely popular with brewers following repeal since both
reported scientific findings proving that a given quantity
of alcohol was less intoxicating if consumed in diluted
form [beer] than in the concentrated form of distilled
spirits).
According to Professor Henderson, England's hatred
of France led to a high tariff on French wines under Queen
Anne and the encouragement of distillation of gin. In 1703
the Methuen Treaty with Portugal led to the importation of
strong fortified wine, chiefly Port. This quickly became
the drink of the gentry and resulted in the "three bottle
man" so vividly depicted by Fielding.
As a result, never was drunkenness more general or
of a more revolting intensity. Never was misery
l6Ibid., p. 11.
^Henderson, oj>. cit., p. 20.
121
greater than among the urban population of England In *
the eighteenth century. An Inn In Southwark carried
the sign, "Drunk for a penny; dead drunk for twopence;
clean straw1 1 ' (In which to sleep It off) "for nothing."
Hogarth's prints picture the degradation of the gin-
sodden populace; and as a popular verse said of Queen
Anne,
"When Brandy Nan became our Queen
T'was all a drunken story."*®
The Bishops and the College of Physicians ... In
1751 . . . claimed that "no less than 2,494 houses are
known to sell gin In one parish, besides what Is sold
In private places, not one-sixth licensed."19
The effort to correct this situation lasted nearly
two centuries, during which laws regulating the sale of
liquor became more stringent and the taxes more severe. By
1922 the British tax on spirits had increased to $12.88 per
gallon as compared with $0.45 per gallon in 1760.
Drinking in America During the 17th and 18th Centuries
It was Professor Henderson's opinion that America
was bora to high alcoholic beverages,
Our national civilization and the wide use of dis
tillation developed, unfortunately in the same histor
ical period. In all the countries of Europe wine and
beer were well established before distilled spirits
were introduced on an extensive scale.28
18Ibid., p. 22.
19Ibid.. p. 23.
20Ibid., p. 28.
122
While both Professor Henderson and Baron agreed on
the sobriety of the early New Englanders in the 17th
century, the picture appears quite different in the two
views after that. Baron said that, as might be expected of
people who called themselves Puritans, temperance was
encouraged and drunkenness was punished by whipping and the
stocks. Spirits in the hands of the Indians had proved to
be dangerous. Baron, however, left the impression that the
New Englanders remained temperate and that the prohibition
movement was almost an unjustified surprise.
Professor Henderson felt that the trouble began early
in the 1700's when the rum, slave, molasses triangular trade
began. With prosperity it became increasingly difficult to
avoid rum or to condemn it.
While the North Atlantic colonies were growing rich
on rum, the reaction that led to the Prohibition move
ment had already set in. Drunkenness had become a
national vice. Even in 1711, the Reverend Cotton
Mather wrote to the ministers in Connecticut on "The
fearful circumstances into which love of rum had
brought some of their number." In 1744 Benjamin
Franklin, acting as foreman of a grand jury in Phila
delphia, reported that the increasing number of
shiftless poor was due to the consumption of spirits
and recommended a restriction on the number of houses
licensed to sell spirits. In 1792 spirits in the amount
of nearly five million gallons were imported; but the
domestic production was far greater ... in 1807
Boston had only two breweries, but is reported to have
had 40 distilleries; and every town of any consideration
123
in Connecticut and Rhode Island had one or more
distilleries.21
Professor Henderson said that one of the chief hard
ships of the Winter at Valley Forge was the inadequate
supply of rum. As the soldiers said, "there was no pay,
no clothes, no provision, no rum."22 Baron, it will be
recalled, spoke of the beer ration and told of Washington's
efforts to requisition more beer from the surrounding
farmers during the winter at Valley Forge. If Henderson
23
who took as his principle source Krout was correct, the
revolutionary liberators of our country were not complete
sobersides.
Origins of the Temperance Movement
The organization of the American Temperance Society
was, as noted earlier, the first formal banding together of
citizens to protest the use of alcoholic beverages of any
sort whatever. Two earlier movements, the Temperance
Society of Moreau and Northumberland [upstate New York]
21Ibid., pp. 37-39.
22Ibid., p. 34.
2^J. A. Krout, The Origins of Prohibition (New York:
1925). Quoted by Baron, op. cit. p. 311.
124
formed In 1808 and the Massachusetts Society for the
suppression of Intemperance (1813) preached only abstinence
from strong drink. Professor Henderson felt this swing to
temperance was long overdue. (It will be recalled that In
1790 a population of 4,000,000 Imported 5,000,000 gallons
of spirits). By 1810, the earliest date at which figures
are available, only slightly more than 1 gallon per capita
of beer was being brewed commercially,^ and by 1820 the
per capita consumption had declined. He also felt that the
still small voice of conscience became more audible when
the profit went out of the rum trade.
Between 1807 and 1811 Great Britain forbade further
importation of slaves into her colonies; in 1808 the
United States likewise banned the slave trade; and in
1814, by the Treaty of Ghent, the two countries bound
themselves to put an end forever to the transportation
of Negro slaves across the Atlantic. And with the
slave trade the importation of molasses and the manu
facture of rum on a great scale came to an end.25
Whatever the causes, the temperance movement was
highly successful. Originally it was instigated by men of
religion and was a genuinely religious movement from which
only the Lutheran, Episcopal, and Roman Catholic Churches
^^Baron, o£. cit., p. 123.
^Henderson, oj>. cit.. p. 35.
125
26
kept aloof. It was not until 1849 that the Catholic
Father Theobald Mathew came to the United States and pro
selytized for two years. By 1829 the American Temperance
Society claimed 100,000 members; by 1833, 1,250,000.
Senators and representatives formed the American Congres
sional Temperance Society. Temperance societies sprang up
in legislatures, colleges, factories, Negro groups, women,
27
and even children. In 1836 the Society changed its name
to the American Temperance Union. The first organization
of women in the cause was the 1841 Martha Washington
Temperance Society.
Legislation
In the 1840's the sale of liquor began to be prohi
bited by law. Local option, or prohibition of liquor, wine,
or beer, or all of them became the popular form. In
Massachusetts by 1842 there was only one county where the
sale of spiritous liquor was licensed. The temperance
battle entered the strictly political arena in Maine where
the prohibitionists elected a governor and passed a
^Baron, 0£. cit., p. 193.
126
prohibition law in 1851.28 "Maine Laws" had a considerable
vogue.
. . . in 1852 the Territory o£ Minnesota ratified a
"Maine Law," but it lasted only a short time; Rhode
Island followed suit in the same year (repealed in
1863); also Massachusetts (repealed in 1868, re-enacted
in 1869, repealed again in 1879), and Vermont. Mich
igan passed a prohibition law in 1853; Connecticut in
1854; New York, New Hampshire, Nebraska Territory,
Delaware, Indiana an d Iowa in 1855. Sooner or later,
all of these were declared unconstitutional or were
repealed.**
After the 1855 surge there was no new legislation
passed for almost a quarter of a century; perhaps, as Baron
suggested, because the far more fundamental problem of
abolition engrossed everyone's attention and energies.
Also, this seems to have been a period in which prohibition
forces were maturing and regrouping. "From 1860 to 1880
only three states were continuously dry, [but] from 1869
on, the national Prohibition party ran candidates in
in
presidential and many state elections. Also a new form
of regulation appeared,
28Ibid., 197-198.
29Ibid., p. 198.
30
Thomas C. Cochran, The Pabst Brewing Company
(New York: Oxford University Press, 1948), p. 303.
In Wisconsin . . . the Grand Lodge of the Good
Templars [passed the] Graham Law of 1872, requiring a
$2,000 bond from licensed liquor sellers on which they
could be sued for a long list of possible civil
offenses.31
The Woman18 Christian Temperance Union was founded
in Ohio in 1874 and the labors, not for temperance but for
prohibition, began in dead earnest. "In 1881 Kansas wrote
an absolute prohibition clause into the state constitution,
South Carolina adopted a liquor control system and Illinois
established local option."3^ In the period from 1883-1887
"a majority of the counties of West Virginia and Maryland
adopted no-license provisions, and Georgia, Mississippi,
and Missouri passed general local option laws.3^ Iowa,
Rhode Island, and the Dakotas went totally dry. Finally,
in 1887 Senator Blair of New Hampshire introduced a prohibi
tion amendment to the Federal Constitution.
/ This marked r.he apogee of the second prohibition
movement. Again there was a lull but in 1895 the Anti-
Saloon League of America was formed and the prohibition
movement was revived and became ever stronger culminating
128
in the Eighteenth or Prohibition Amendment. This amendment
provided, among other things, that brewing should cease as
o£ May 1, 1919, and the sale of beer on July 1, 1919. At
the time that the law took effect, however, twenty-seven
states were already dry, the tax per barrel had been
increased, and the maximum percentage of alcohol permitted
had been specified at 2 3/4 per cent.
III. FEDERAL REGULATIONS AFTER REPEAL
The methods by which repeal of the Eighteenth Amend
ment was achieved, and the efforts of the brewers to assist
in accomplishing this result, are not the subject of this
study. The literature on the subject is astounding in its
amount and variety. Unfortunately almost all of the works
have a highly emotional bias. Some reference will be made
in other chapters of this study to the parts pi«yed by
various members of the brewing industry in anti-prohibition
activity.
Here it will be sufficient to observe that in order
to get back into business, brewers made numerous conces
sions and commitments. Almost all of these involved
greater and more detailed supervision of all phases of the
breweries' operation, and curtailment of activities which
129
pre-prohibition brewers would have considered their
inalienable rights.
Non-intoxicating 3.2 Beer
Actually 3.2 per cent beer was available before
repeal of the Eighteenth Amendment. The Volstead Act gave
to Congress the right to decide what percentage of alcohol
constituted an intoxicating beverage. The Anti-Saloon
League had insisted, and its opinion had prevailed with
Congress right from the start of prohibition, that one half
of one per cent of alcohol by volume was the upper limit of
alcoholic content of a non-intoxicating beverage. By early
1933, shortly after the inauguration for the first time of
Franklin Roosevelt, the Cullen Bill was passed,
It permitted the production and sale of beer no
stronger than 3.2 per cent by weight in states which
did not have state prohibition; it provided for a
tax of $5 a barrel and a brewer's tax of $1,000 a year,
and it prohibited shipments of such beer into states
where it was illegal.34
A technical discussion is unavoidable at this point.
Alcohol weighs approximately 0.79 as much as water. A
designation of alcoholic strength can therefore be made in
^Baron, oj>. cit.. ~p. 321.
130
terms either of the volume of alcohol or its weight.
It is interesting to read the lengthy explanations given
by brewers and their representatives for using the weight
measure of alcoholic strength, obviously a lower numerical
designation, in pleading before Congress. Apparently the
reasons which had such cogency in the legislative halls
were not necessary in dealing with the public where the
higher volumetric designation was almost universally used.
This points up an age old dilemma of the brewing
industry. Drunkenness has been excoriated since time
immemorial. It can be achieved far more readily and
rapidly by the consumption of distilled spirits with an
alcoholic content of 42 to 50 per cent alcohol by volume,
and fortified wines with an alcoholic content of 20 to 26
per cent alcohol by volume, than by the consumption of beer
with 4 to 5 per cent alcohol by volume. Nevertheless,
studied and sustained concentration on the consumption of
beer can produce a state of intoxication sufficient to
satisfy the most exacting dipsomaniac. On the other hand,
the disastrous experiences during the prohibition period,
of brewers of low alcoholic content or 'near' beer,
demonstrated, if proof were needed, that the alcohol in
beer is the chief reason for its appeal to consumers.
131
Thus Che Industry, like Ring Creon, walks fortune's
razor edge, and it is perhaps not surprising that the
decisions made under these circumstances are not those
which hind-sight would have dictated. An example is the
effort of the brewing industry to divorce itself in the
minds of the public from "strong drink" and drunkenness.
This, it has been argued, enabled the prohibitionists to
divide and conquer. It also alienated a possible ally.
Finally, it was a curious protestation since prior to
prohibition the brewers in many cases owned and in some
instances actually operated the saloons where "the demon
rum," as well as beer was sold.
Regulations on Methods of Sale
To remove the horns of the dilemma, the brewers
hastened to adopt a Code similar to other Fair Competition
Codes under the terms of the National Industrial Recovery
Act.
The Brewers' Code, adopted in December 1933, placed
no controls on methods of production or prices but
strictly defined the methods of selling. No beer
could be sold on consignment or on the basis of
secret rebates or allowances. Brewers could not buy
licences for retailers, lend money or supply equipment
beyond one hundred dollars worth of signs per year for
each outlet. No prizes or premiums could be
distributed except advertising novelties of nominal
132
value. No contract could be made for the exclusive
sale of one brand of beer.
Following the overthrow of the N.R.A. by the Supreme
Court, similar conditions were established by Regula
tion 6 of the Federal Alcohol Administration Act. . . .
These regulations are substantially in effect at the
present time.35
Regulations on Payment of Taxes
In addition new regulations were adopted for metering
bottled beer instead of the older system of having
"government men" lock and seal cellar casks prior to
removal of the beer to the bottling premises. Even then,
however, for almost two decades brewers paid in advance
with certified check for stamps which were later cancelled
by officials of the Alcohol Tax Unit after the beer had
been bottled. This cumbersome method of tax payment was
finally changed in 1951. At the present time brewers pay
their excise taxes to both state and federal tax units just
as the petroleum Industry does. Following each month's
operation, the amount of tax due is calculated and a check
is mailed.
Wartime Regulations. During World War II many
35(jochran, oj>. cit.. p. 367-8.
133
special regulations of the brewing Industry came Into being.
The use of tin plate for crowns was prohibited In 1942.
Supplies of malt and hops were rationed In February 1943
and quotas were revised from time to time by various
amendments. The alcoholic strength of beer which could be
sold on army posts was limited to 3.2 per cent alcohol by
weight. Wage Increases, finally, were regulated by O.P.A.
However, the military said beer was necessary for soldiers'
morale, and O.P.A. said It was necessary for workers' moralq
so beer could be manufactured and sold, and the brewers
cheerfully accepted the wartime regulations.
Wartime Taxation. In July of 1940 the federal
barrel tax was raised from $5 to $6 per barrel. On
November 1, 1942 It was raised to $7. On April 1, 1943 It
was raised to $8. These Increases were all "defense meas
ures" and temporary taxes. Not surprisingly, although
wartime restrictions on materials use, wages, and prices
have long since been rescinded, these taxes have not.
Indeed, on 1 November 1951 another temporary Increase to $9
per barrel was made to help finance the Korean War. This
tax Is still In effect.
134
IV. STATE AND LOCAL TAXATION AND REGULATION
Prior to prohibition no state had ever levied an
excise tax on beer. This was changed radically by Section
2 of the 21st Amendment which stated:
Transportation or importation into any State, Terri
tory, or possession of the United States for delivery
or use therein of intoxicating liquors, in violation
of the laws thereof, is hereby prohibited.
The states took this to mean that any regulatory legisla
tion which was desired could be passed. This contention
was in large part confirmed by the decisions of the
Supreme Court.^
State Taxation
State excise taxes were levied almost immediately
and by the start of World War II these ranged from 32 cents
a barrel to $4.65 per barrel with an average around $1 per
barrel. Today (1964) state excise taxes range from $1.60
to $14.88, with ah average of $4.00 per barrel, or less
than half the amount of federal tax. Those states where
36premier-Pabst Sales Company et al v. McNutt, Gov
ernor et al. , F. Supp. 708 (D.C.S.D. Ind. 1935); Premier-
Pabst Sales Corporation v. Grosscup et al. 12 F. Supp. 970
(D.C.E.D. Pa. 1935); off'd 298 U.S. 226; State Board of
Equalization of California v. (1936), 229 U.S. 59.
135
the taxes are highest, such as North Carolina and Georgia,
are those in which there is the strongest sentiment for
prohibition. During the 1930's some states became so
impressed with their new found power to tax that they
applied discriminatory excise taxes on beer imported from
other states. This "shove they neighbor" policy, as it
quickly came to be identified, resulted in anti-
discriminatory states laws. When anti-anti-discrimlnatory
laws were seriously proposed, the patent absurdity of the
situation became apparent and with the urging of individual
brewers and the Associations (at that period there were
more than one) all such laws were eliminated.
States have in almost every instance imposed fees,
sometimes as high as several thousand dollars, to operate
breweries. Distributors and wholesalers of beer pay fees
as do retail dispensers. The latter are generally grouped
into separate categories with different fees. There are
off-premise bottle licenses, on-premise bottle licenses,
draught beer licenses, seasonal or summer resort licenses,
et cetera. Colorado distinguishes between establishments
dispensing only 3.2 beer for on-premise consumption and
those dispensing stronger beer and whiskey. In addition
the former may stay open on Sunday; the latter may not.
Other State Regulations. In many cases states have
set up even more stringent regulations than those in the
Federal Alcohol Administration Act. This is especially
true with regard to "tied-house" regulations. The prevail
ing sentiment at the time of repeal was that many of the
abuses of the use of alcohol prior to prohibition had been
due to brewery ownership of outlets. This, it was felt, as
a result of competition had resulted in too many outlets.
In order to survive they had been forced to solicit sales
from minors. They had encouraged the presence of undesir
able persons and had endeavored to present drinking in an
altogether too attractive light. It was felt that limita
tion of numbers and exclusion of brewery or wholesaler
ownership would preclude a recurrence.
States have, on occasion, prohibited billboard
advertising, advertising in newspapers, or on local radio
and television on Sundays. The size of signs, both indoor
and outdoor, has been limited. Some states have prohibited
both the installation of draught beer equipment and any
repair, maintenance, or replacement of that equipment.
States have specified that 51 per cent of the ownership of
beer distributors, wholesalers, or retailers operations
must be owned by bona fide residents of the state. In some
137
states advertising which Includes drinking scenes or
children's pets is prohibited.
City and County Regulations. This list could be
extended almost indefinitely. In addition cities and
counties have adopted their own regulations. Special
license fees (advertising regulations are generally held
to be the exclusive province of the state) and regulations
as to hours and days of sale are specified by most local
governments. Local option in one form or another exists
in almost all states.
V. CONCLUSION
Thus the brewing industry's relation to government
is now, as it has been for over a century, one of suffer
ance. The brewers have come to expect rigid regulation.
Privately many welcome it because they feel it is their
salvation. Without it they feel that competition would
encourage excesses in the areas of advertising, premiums,
and giveaways that would furnish fuel for the prohibition
ists' fires, and quickly have the brewers frying again.
The prohibitionists' activities are such as to keep
the brewers constantly on the defensive.
138
Bill8 with the purpose of outlawing the advertising
of alcoholic beverages for interstate commerce on
radio and television, or in newspapers or periodicals
have been proposed in Congress time and again.37
Therefore it is not surprising to find the brewers cheer
fully accepting restraints which would have been considered
intolerable sixty years ago.
The final reason for passive acceptance of rigid
regulation and restriction is that it seems to have worked
no hardship on the brewers financially. Indeed, there is
evidence that it may have helped. In 1959 approximately
14,500,000 people or 9.6 per cent of the population lived
in dry areas. The corresponding figure in 1910 was
44,000,000 or approximately 50 per cent.
^Baron, oj>. cit., p. 347.
CHAPTER V
RELATIONS WITH LABOR
It was pointed out in Chapter II that the majority
of breweries in the United States began as small operations
in which an individual with a reputation for making a bevev
age superior to that of his neighbors began to sell it.
Frequently there was a complete absence of transportation
or distribution requirements since the brewer sold only in
his own beer garden at retail and at wholesale to those
who supplied their own means of transportation.
Under such circumstances a system of employer-
employee relationships not dissimilar to the medieval
guilds sprang up. (It should be emphasized that the guilds
were in no sense unions of employed workers, but rather
organizations of skilled workers who were also employers.)
By 1850 the German "lager" beers had already begun to sup
plant the British type of beer, especially in the larger
Northern cities. Frequently both employers and employees
spoke only German. It was not until 1875 at the fifteenth
convention of the United States Brewers' Association that
139
140
English became the official language.1 In an altercation
with employers in 1889 a worker's handbill urging the boy
cott of Anheuser-Busch and Pabst was printed in both German
2
and English.
I. THE ERA OF PATERNALISM
The United States Brewers' Association Year Book for
1910 as quoted by Baron, described the situation in the
middle 1800's thus:
Before the organization of labor unions the employing
brewers in the smaller cities maintained a sort of
patriarchal relational toward their workmen, eating with
them at the same table and otherwise treating them as
members of their household. In the larger cities the
relation between employer and employed was not quite so
close and intimate; but the friendly feeling between
them was no less sincere.3
The number of employees was small, often from two to
fifteen. As a consequence any attempt at organizing a
union would have been as unsuccessful as such efforts have
traditionally been where only small numbers of relatively
unskilled workers are employed; vide agriculture in the
^Stanley Baron, Brewed in America (Boston: Little,
Brown and Company, 1926), p. 216.
^Thomas C. Cochran, The Pabst Brewing Company (New
York: New York University Press, 1948), p. 289.
^Baron, oj>. cit.. p. 274.
141
United States. Indeed, the first local organizations of
brewery workers were mutual aid societies to which both
employers and employees belonged. The first was founded in
Cincinnati in 1852 and the second in New York in 1867.4
In other industries the workers were better organ
ized, especially in the crafts, where the shoemakers had a
tradition of organization going back to 1792 in Philadelphia
However, a national labor organization was not considered
practicable until 1866 when the short-lived National Labor
Union appeared and fought for an eight-hour day. This
suggestion must have appeared almost as radical to the
brewery workers, who, although well paid, worked incredible
hours, as it did to the bosses. Cochran quoted Fred Pabst
reminiscing in 1936:
I dare say that there are many of our old timers who
remenber very well when the men started at four o'clock
in the morning and worked until half-past six when they
stopped for breakfast. At seven o'clock they went back
to work and worked until twelve and then worked in the
afternoon from one to six.5
Pabst was referring to conditions that continued
into the 1880's.
4Ibid.. p. 275.
^Cochran, oj>. cit., p. 272.
142
The Brewery Workers Pay Scale
The evidence is not too clear as to whether or not
the brewery workers' pay scale was equal to or better than
that of other labor prior to the formation of the brewers'
union. Herman Schluter, writing in 1910^ described the
conditions before organization as intolerable and the wages
as of a subsistence nature. Baron, who has done the most
thorough job of all in researching old brewery pay records,
costs of commodities, and wages in other manufacturing
industries, was inclined to believe that Schluter's casti
gation was actually special pleading.? One factor which
makes positive analysis impossible is the matter of meals.
Many, particularly small brewers, provided breakfast and
Q
sometimes lunch for the employees. However, from the
early account books of Miller and Best (later Pabst) in
Milwaukee and others, it appears that the brewery workers'
^Herman Schluter, The Brewing Industry and the
Brewery Workers1 Movement in America (Cincinnati: 1910);
quoted by Baron, op. cit., p. 279.
^Baron, oj>. cit.. p. 277.
®The writer'8 grandmother prepared a six-thirty
breakfast, like that described by Fred Pabst, for 22
employees of the A. Fisher Brewing Company in Salt Lake
City, from its founding in 1884 until it was an assured
success in 1890. During this time she bore three children.
143
remuneration even In those days was above the average for
all manufacturing. It should be pointed out in addition
that the brewery owners were not insensible of the fact
that the working men, i.e., the blue collar workers
particularly, were their best customers, and wage and hour
concessions were frequently made in answer to requests even
when strikes had been demonstrated as futile, as in New
York in 1872, or in Milwaukee where Cochran cited the
following advertisement in the Milwaukee Seebote of
March 24, 1886:
We the malsters of the Phillip Best Brewery, feel
that we owe thanks to the above mentioned firm for
granting all the demands we justly made of them, and
herewith express our gratitude publicly. There was no
strike in prospect, for after the malsters in malting
house No. 2 organized and elected a leader, the remain
ing malsters joined the movement, and the president of
our firm granted all our demands after a brief confer
ence. Honor to whom honor is due. Honor to our
leaders who led us to victory in a just cause and honor
to our employer who granted our just demands. In the
name of all. G.N.9
II. THE BREWERY WORKERS ORGANIZATIONS
Local Organizations
In addition to the abortive brewery workers' strike
referred to above, there were many other efforts. The
^Cochran, o£. cit.. p. 274.
144
Cincinnati brewery workers formed an organization in 1879
called the "Brauer Gesellen Union." After joining the
Central Trade Assembly the Union drew up and presented
demands, struck when they were refused, failed in an
attempted boycott, and then broke up. The demands, however,
are interesting. They were (1) a reduction from a thirteen
to a ten and a half-hour day, (2) a reduction of Sunday
work from eight to four hours, (3) a minimum wage of $60
a month, and (4)^freedom for the worker to seek board and
lodging wherever he liked.^ Provision (4) would indicate
that the worker was required to pay for his meals and that
the employer was making a profit on them—*an early form of
the company store.
In New York in 1881, when the "Brewery Workmens'
Union of New York and Vicinity," was formed, the breweries
fired the ringleaders. The resulting boycott, however,
was so effective that the men were rehired. Elated at
their success the men presented demands for "a twelve hour
work day including two hours for meals, and on Sundays a
two-hour day at fifty cents an hour."^ After refusal, a
*®Baron, oj>. cit.. p. 279.
11Ibid.
145
five-week strike took place which the workers lost. There
was no further union activity In New York until 1884 when
Brewers' Union No. 1 of New York was formed as a local
assembly of the Knights of Labor. By 1885 the Union was
strong enough to win a strike against the Peter Doelger
Brewing Company, and In 1886 the brewery workers signed a
contract with the United States Brewers' Association with
a wage of $60 to $72 a month, a ten-hour day and no Sunday
work.
National Organization
Eighteen eighty-six was one of the most momentous
years In the history of the labor movement and the brewery
workers participated In the activity. By this year brewery
workers were organized at Baltimore, Chicago, Newark,
St. Louis, Philadelphia, and Detroit, as well as Milwaukee
and New York. In August of 1886 the "National Union of the
Brewers of the United States" was formed. Within four
months It had a membership of 4,000. A year later In the
Detroit convention It was decided to Include brewery engi
neers, firemen, maltsters and beer drivers. The name was
changed to "National Union of United Brewery Workmen of the
United States." Since Terence Powderly of the Knights of
146
Labor was an ardent prohibitionist, it is not surprising
that application for membership was made to the rival
American Federation of Labor. A charter was granted in
March of 1887.
. *
Victory for the Closed Shop
National organization was no guarantee of winning a
strike, however. In 1887 a strike took place in Milwaukee
which resulted in a four year lockout. Ostensibly the
strike was to prevent the use of non-union made malt.
Actually it was over the question of the closed shop. The
lockout ended only because of the keen rivalry between
Pabst and Anheuser-Busch. As long as both were suffering
equally from union boycotts they continued the lockout.
When Busch felt the pinch was greater on him and signed
with a Knight8 of Labor union, Pabst immediately signed
with the A. F. L. union in Milwaukee.
In 1887 the New York brewers refused to renew con
tracts and this became the first of a nation-wide series of
such occurrences. The battle continued for more than ten
years in some instances, but the end of the costly struggle
in every case was victory for the union. The union demands
for the closed shop, shorter hours, and a minimum wage were
147
acceded to In almost every case.
Industrial Unionism
In 1893 the brewery workers finally divorced them
selves completely from the, by now, almost moribund Knights
of Labor, and recognized the complete authority of the
A. F. of L. The bfewers did insist on and won the right to
have an industrial type of union. In 1902 the international
craft unions made their first efforts to get their crafts
separated from the brewery workers union. The A. F. of L.
supported these demands and in 1902 ordered the brewery
workers to release the engineers and firemen. The team
sters also sought to have their members released during the
period from 1904 to 1906.
The engineers, firemen, and teamsters refused to
leave the brewery workers union, and after other efforts by
the A. F. of L., the charter of the Brewery Workmen was
revoked on June 1, 1907, and beer drinking was banned to
all union workmen. The Brewery Workmen's union was in a
far better position to resist pressures at this time than
it was to be in similar circumstances thirty years later.
In the first place, there was the rival and socialistic
Industrial Workers of the World to whom /the Brewery Workmen
148
could turn. In the second place, the experience with boy
cotts has shown that they are extremely difficult to
enforce under optimal circumstances, and those in 1907 were
hardly that. Union membership throughout the country was
small and beer was the workingman's drink. Finally, the
Brewery Workmen's Union was at that time, one of the
strongest members in the A. F. of L. and was quite capable
of acting independently. As a consequence the A. F. of L.
backed down, and restored the charter February 24, 1908.^
Although data are lacking, the boycott could not have been
very successful. The U.S.B.A. Brewer's Almanac for 1944
shows that U. S. beer sales for 1907 increased nearly four
million barrels to 58,546,111 barrels from 54,651,637
barrels in 1906. In 1908 despite the effects of the 1907
panic, sales increased another 200,000 barrels.
The Brewery Workmen's union was even able to maintain
its jurisdiction over the various skilled craft unions
whose members had no connection with brewing, but who still
worked in the breweries. These were chiefly members of the
building trades unions and the question was aggravated
because a great deal of building was going on in the
^Cochran, oj>, cit.. p. 294.
expanding brewing industry. In 1901, the Building Trades
Council boycotted Schlitz on the question of jurisdiction
over men doing plumbing work in the brewery. The Feder
ated Trades Council of Milwaukee objected to the boycott
and the Brewery Workmen officially denounced it. The
brewery owners through the Milwaukee Brewers' Association
abrogated their agreements with the Building Trades.
Finally the executive council of the A. F. of L. sustained
13
Schlitz and the Building Trades Council gave way, in 1901.
The matter was ultimately settled.
A strike of the building trades in May of 1909 led
to the first collective contract covering all locals in
American building trade history, and presumably set
tled the jurisdictional disputes that had harassed the
brewers since the late nineties.^
III. EMPLOYER ORGANIZATION
The United States Brewers' Association attempted in
these earlier days of union activity to fill a far greater
role than it has in the post-repeal period. The Associa
tion acted not only as consultant and advisor, but in
several instances as the industry's bargaining agent.
13ibid., p. 295.
150
There Is no evidence that these efforts were successful on
an industry-wide basis, and only local districts such as
that in Milwaukee seem to have negotiated to the satisfac
tion of all members. An example of this occurred in 1901
when the New York and Philadelphia brewers were engaged in
a bitter struggle to prevent the union shop.
... [a] policy of the earliest trade unions was not
to work with nonunion men. The union shop, like the
union wage scale was enforced directly through a pledge
by unionists "not to work for anybody who does not pay
the rate, nor beside anybody who does not get the
rate."15
A rumor started that the Brewers' Association would call a
general lockout to support the Eastern brewers. Gustav
Pabst, whose brewery at that time was the largest in the
country, quickly and publicly disassociated himself from
such activity. Pabst was in a production race with
Anheuser-Busch. Pabst was making money. Pabst was
satisfied with his labor contract. Pabst had no intention
of participating in any lockout.
Whether as a result of Pabst's action or not, the
1902 meeting of the Brewers' Association decided against
1^Lloyd G. Reynolds, Labor Economics and Labor
Relations. (Englewood Cliffs, New Jersey: Prentice-Hall,
Inc., 1956), p. 45.
V
151
further resistance to collective bargaining, and set up a
three-man board for labor arbitration. The aim of this
board was to work toward an over-all agreement between the
members of the Association and the United Brewery Workmen.
(The Association's role in 1964 bargaining is discussed in
Chapter VII).
Cochran made no intimation that the actions of the
Brewers' Assoc^At^on and those of Pabst were more than
coincidental. He wrote:
A week later, in Milwaukee, a new three-year union
contract was agreed to. Six weeks before the old con
tract was to expire on May 1, 1902, Gustav Pabst had
led the way among the brewers in expressing his willing
ness to grant the eight-hour day. The contract as
finally agreed upon on June 20 called for; the eight-
hour day for all but the teamsters; a general 10 per
cent wage increase; slack season rotation of work; and
a continuance of the former arbitration clause. In
return, the workers allowed the foremen to leave the
union, conceded the employers' right to hire and fire
if reasons for discharge were stated in writing, and
agreed to substitute March for May as the termination
date of the three-year contract.
It is perhaps unfair to make judgment at this distance, but
it would appear that the Brewers' Association was con
fronted with a fait accompli and had no alternative for its
16Ibid.. p. 297-8.
152
generous actions toward labor. Cochran continued,
The unions covered by this and subsequent contracts
were: Brewers Local 9, Bottlers Local 213, Teamsters
Local 72, and Engineers and Firemen Local 25, all
affiliates of the United Brewery Workemn, A.F. of L.
The coopers and machinists were covered by separate
contracts.17
Other Changes Prior to Prohibition.
In 1918 Hugh F. Fox, secretary of the United States
Brewers' Association stated:
The brewers were, 1 think, perhaps the first great
industry to become, and perhaps they are to-day the
only industry to be, 100 per cent unionized.
[asked for what period this situation had obtained, he
replied]
I do not know. I have been associated with it for
II years and I should say before that time.18
With the industry completely unionized, the changes
that occurred from 1907 to the advent of prohibition in
1919 were chiefly routine wage and hour-discussions with
two important exceptions. The first was the admission of
women into the bottlers union in 1910. Schlitz and Pabst
had been using women, chiefly young girls, in the labeling
department, but the management felt they should not be
17Ibid., p. 298.
*-®Baron, oj>. cit., p. 284.
153
union members. The union's view prevailed, however. The
other change was in the number of apprentices permitted.
The union contended in the 1912 negotiations that the
brewers were economizing on labor by excessive use of
apprentices whose wage rates were lower than those of
regular men. It was finally agreed that since brewery work
was skilled labor the number of apprentices would be only
one for every 20 men in the brewery. In the bottlehouse
the ratio could be one for each two men. Wages, of course,
were lower for all personnel in the bottling department
than for those who worked in the brewery.
IV. PROHIBITION
With prohibition the Brewing Workmen's Union to all
intents and purposes disbanded. A few brewers such as
Pabst continued to make near-beer, but the overwhelming
majority ceased all brewing operations.
To cover most of the new types of brewery operations
the International Union of the United Brewery Workmen
was expanded under the title of the Brewery, Flour,
Cereal, and Soft Drink Workers of America, and the
A.F. of L. executive council granted it jurisdiction
over all cereal workers.**
l^Cochran, oj>. cit., p. 339.
154
While the impoverished or defunct condition of the
brewers permitted an end to the closed shop, among other
union concessions, the union and indeed organized labor as
a whole never relaxed in their opposition to prohibition
and the drys. Labor's continued insistence on modification
of the Volstead act undoubtedly accelerated the movement
to end prohibition.
V. RELATIONS AFTER REPEAL
Within a short time subsequent to repeal of the
Eighteenth Amendment, breweries were again 100 per cent
union operated: this time the affiliation was with the
prohibition-period merger, the International Union of
Brewery, Flour, Cereal and Soft Drink Workers of America.
For the first few years following repeal the national labor
movement and its leaders were concerned with more momentous
decisions than who should claim the craft members of the
Brewery Workers' Union. First came the Norris-La Guardia
Act, then the Wagner Act. Then came the Sitdown Strikes of
1937 and the titanic jurisdictional battles of the CIO-AFL.
Finally, on the West coast came the internecine warfare
between Harry Bridges and his Longshoremen, and Dave Beck
and his Teamsters Union. The smoke had not cleared from
155
this last battle when Dave Beck demanded that the brewery
drivers leave the Brewery Workers' Union and join the
Teamsters' Union. The Brewery Workers Union refused and
appealed to the A. F. of L. for aid. Dave Beck at that
time was West Coast vice president of the Teamsters' Union
and he wasted no time in arguing. When jurisdictional
picketing produced no results a slight show of violence
was sufficient to persuade the brewery drivers to change
allegiance. This caused the Brewery Workers in the
breweries to go on strike and Beck replaced them with
members of the Teamsters Union. By the time the United
States entered World War II all the employees in the
breweries in the States of Oregon, Washington, Idaho, and
California were members of the Teamsters' Union. As will
be discussed in more detail in Chapter IX, high wage and
featherbedding demands by teamster drivers have almost
eliminated brewery owned distributorships on the West Coast.
In 1946 the International Union of Brewery, Flour, Cereal
and Soft Drink Workers of America joined the C.I.O.
Several local groups, however, saw their memberships split.
In Newark for example, although the brewing department
employees joined the C.I.O., the drivers and bottling
employees remained in the A. F. of L.
156
Today, of course, the jurisdictional battles of the
fifteen years following repeal are a thing of the past.
Thanks to the Taft-Hartley and Landrum-Griffith Acts,
although raiding is not altogether unknown in today's union
activities, rival union leaders no longer resemble a group
of Mongolian war-lords waiting to pounce upon and enslave
each other's subjects. This has pleased the brewery owners,
of course, because they have been aware ever since 1933
that their industry was certain once more to be 100 per
cent union. They were accustomed to collective bargaining
and willing to accept it. While many brewers may have felt
that the Brewery Workers Union was less captious, and
certainly easier to bargain with than the Teamsters Union,
what they desired most was industrial peace. As a conse
quence, they have sought to avoid altercations where they
felt they could only lose.
VI. CONCLUSION
The brewing industry in the space of little more
than one century offers a panorama of labor relations from
the individually operated cottage industry, through a guild
system, thence to paternalistic small machine industry, to
the large impersonal manufacturer of the 1950's and later.
157
In this short span, too, the relationships of
employer to employee have ranged from a semi-feudal lord-to-
serf relationship to the impersonal relationship of foreign
owned corporation management to union employee.
As late as 1914 this lord-to-serf relationship still
existed as the following example will show:
The epitome of the dynastic brewer was St. Louis's
Adolphus Busch, a man with a great zest for life,
habits of ostentation unfamiliar to puritan American
society and a regal attitude toward the world.20
He had a home near the plant, a great country estate,
"Grant1s Farm"; two homes in Pasadena; a property and hop
farm at Cooperstown, Mew York; two villas at Langenschwal-
bach, Germany; and a private railroad car called Adolphus.
When a son, Adolphus, Jr. was born, as befitted the birth
of a Crown Prince, a salute of guns was fired in the
brewery yard. Each year when Adolphus left for his annual
trip to Germany all the workers in full working regalia,
boots, leather aprons, malt shovels, et cetera, stood at
attention in two rows forming an aisle down which the
elegantly clad "Patrone" strode. As he entered his
handsomely caparisoned equipage the brass cannon in the
^Baron, o£. cit., p. 288-89.
158
courtyard was fired in salute. The ritualistic ceremony
was repeated when he returned some months later.
Despite the growth in the size of breweries there has
never developed the bitterness and acrimony in employer-
employee relationships that have been present in other
industries. Cochran stated that in Milwaukee brewing,
prior to prohibition, there had been less than 30 daya time
lost in strikes in 27 years of unionization. The brewery
workers had contributed time and effort in the fight
against prohibition, admittedly in a spirit of self-
preservation. In 1918, however, jobs were easy to get and
the workers could easily have abandoned ship.
Part of the answer seems to lie in Cochran's state
ment that even when the work week was 70-80 hours a week,
it was not exhausting and was pleasant. Except for the
bottling department there were no machines to keep pace
with. Natural processes could not be hurried. There was
leisure, free beer, and an ethnic group with the same
background in religion, politics, culture, and language. To
a degree this was still the situation after repeal, though
considerably less than prior to prohibition.
^Cochran, oj>. cit., p. 301.
It is not without the realm of possibility, too,
that the continuation of family name and family ownership
has had some influence in preventing the acrimoniousness
which so often characterizes labor disputes in other
industries. There has been little plant vandalism or con
flicts between management and mass pickets. Paternalism
has shown itself in many ways. Brewers have often given
pensions before the matter ever became a subject of contract
discussion. The same is true of sick leave and accident
and health insurance. Brewers have rather prided them
selves that wages for brewery workers have stayed ahead of
wages in other industries. In 1960 the average weekly wage
in the malt beverage industry was $120.56 compared with
$90.91 for all manufacturing industries.22 The 1964
contract between the brewers and the Brewery Workers Union
in Cleveland specifies eight-week paid vacations with no
paid holidays and an increase in base pay to $3.32 per
hour.2^
That the conditions, which in the past have led to
22grew er8 Almanac, 1961, (Mew York: United States
Brewers Association) p. 49.
23
Brewers Bulletin. April 30, 1964.
160
relatively more harmonious relations between labor and
management In the brewing than In other Industries, are
disappearing Is not to be questioned, it would appear,
however, that In many companies, for some time to come,
the acerbity and duration of disagreements will be
relatively minor.
CHAPTER VI
RELATIONS WITH THE PUBLIC AND CONSUMER
I. INTRODUCTION
In the brief history of the brewing industry given
in Chapter II of this study it was shown that in the early
days of America and the United States, beer was in effect
the universal drink. George Washington, Thomas Jefferson;
at an earlier date William Penn, members of the gentry all,
were proud of their proficiency as brewers. Beer was a
family beverage endorsed by leading members of the medical
fraternity such as Dr. Benjamin Rush. Brewing was a cottagp
industry and remained so until well into the nineteenth
century. What commercial brewing was done was for the
most part on an extremely small scale. Relations between
consumer and brewer were intimate since the beer garden
connected to the brewery was the main if not the sole
retail outlet. "As late as 1864 there were 1,986 breweries,
of which 1,142 brewed less than 500 barrels a year."* Any
*Dwight Avis, United States Brewer Association
Convention Proceedings. 1964. p. 127.
162
active retail draught beer outlet could easily dispense 500
barrels of beer In a year.
This chapter tries to trace the means by which the
manufacture and consumption of a beverage so generally held
In esteem for such a long period of time, could be outlawed.
The reasons for the repeal of prohibition will be discussed.
Finally, the steps which have been taken to Improve public
and customer relations will be discussed and an appraisal
of their effectiveness will be made.
II. PRIOR TO PROHIBITION
The rise of prohibition sentiment toward beer In the
United States can not be attributed to any single cause.
Three main reasons might be assigned; these are: 1. The
change In beer from a British to a German type of lager
beer. 2. The alienation of the whiskey and distilling
trade. 3. The failure of the brewing Industry to back up
Its promises with actions.
The Transition from English to German Beer
In a discussion of the relations of the brewing
Industry with the public It Is again necessary to stress
the national origins of the majority of American brewers.
As was pointed out in Chapter II, lager beer was intro
duced in the United States in 1842. A decade later it had
begun to supersede the British ale type of beer. By the
outbreak of the Civil War the British product was almost
completely out of the»picture and lager beer completely
dominated the beer market. This affected the industry in
two ways. First, what had been essentially a cottage
industry became a manufacturing industry with large plants
and the need for large amounts of capital to permit large
scale production and the use of newer technologies— Boehm-
Bowerk's "round-about production." Each step in this
process of increasing plant size caused a change, and in
most cases a deterioration in consumer and public relations.
Second, the industry came to be dominated by Germans, a
group of people whose many sterling attributes have
frequently not included diplomacy and tact.
The effect of the need and use of capital. There
had been one wave of prohibition sentiment prior to the
advent of German type lager beer. This occurred in New
England. Thomann^ believed it was the fault of
^G. Thomann, American Beer (New York: United States
Brewers' Association, 1909), p. 12 passim.
164
discriminatory legislation. Professor Henderson,^ however,
as was mentioned in Chapter IV, attributed it to economic
causes. In his opinion the cessation of importation of
slaves into the United States ended the rum trade. By this
time New Englanders were all so accustomed to strong drink
that rum making rather than beer making became the beverage
cottage industry.
The three later waves of prohibition sentiment each
coincided with changes in the technology of producing,
processing, and distributing beer. Each of these changes
also required the use of larger amounts of capital as the
operations of necessity became larger.
One reason that the brewing of lager beer required
larger scale operations was the difference in fermenting
temperatures. Ale yeasts ferment at a temperature 8 to 10
degrees fahrenheit warmer than do lager beer yeasts. Thus
batches of ale could be fermented in a room in a home and
produce a product that could be considered potable if not
palatable. With lager beer, however, such temperatures
would create off flavors, particularly in the primitive
^Yandell Henderson, A New Deal in Liquor (New York:
Doubleday, Doran and Company, Inc., 1935), p. 42-44.
165
state of bacteriological knowledge of the mid-1880's, which
would render the resultant product completely unpalatable
as a beverage. It was, therefore, necessary to have a
room of almost uniform coolness to produce lager beer.
Such rooms were almost invariably cellars, either artifi
cially dug, or naturally eroded in hillsides. Such
specialization of brewing location meant larger scale and
fewer brewing facilities.
The need for more scientific controls of the German
lager beer meant a shift from cottage manufacture. The
home brewer who ceased his small operation and became a
customer at the neighborhood saloon was no longer the
bulwark against prohibition that he had been formerly.
Certainly, it may be assumed that his wife was no great
admirer of the new order. Second, the conflicting atti
tudes toward life of the beer garden habitud and the
straitlaced Puritans inevitably led to less forceful and
enthusiastic cooperation between brewer and consumer.
This first wave of prohibition fervor reached its
climax in 1851 with the passage of the "Main Law" described
in Chapter IV, "Relations with Government'.1 ^ The intensity
^Stanley Baron, Brewed in America (Boston: Little
Brown and Company, 1962), p. 290.
166
of the prohibitionists' efforts relaxed somewhat after 1855.
A second wave of Sate-wide prohibition, which began
during the 1880's, represented, in part at least, the
return to dry status of those states in which this
experiment had previously been tried and discarded.
Altogether eight states were enrolled under the prohibir
tlon flag during this period, of which five later
withdrew. By 1904 only three remained.
A third wave especially Southern and Western
developed at the end of the first decade of the
Twentieth Century. When we entered the war in 1917,
25 states had prohibition laws.5
The second wave referred to by Professor Henderson
corresponds with the development of bottled and pasteurized
beer which was discussed in Chapter III, "Relations with
Technicians." Here the capital requirements were far
greater than ever before and kept on increasing. Here truly
was the start of the great impersonal "shipping brewery."
Also in the chapter on technicians it was pointed
out that Anheuser-Busch under the direction of Adolphus
Busch was quick to perceive the possibilities of pasteur
ized beer. Busch was pressed closely in this entre
preneurial venture by Pabst. From the late 1870's the
rivalry between these two for the position as largest
brewery in the United States was intense, with Schlitz
^Henderson, oj>. cit.. p. 163.
167
challenging for leadership toward the close of the century.
It seems that the smallness of the market potential of the
Milwaukee and St. Louis brewers may have encouraged them
to pioneer the bottled beer innovation, whereas the New
York brewers with a larger population to draw upon did not
feel the necessity for bottled beer. Cochran said, "in
the long view of the history of brewing, the introduction
of large-scale bottling for shipping purposes may well
have been the most important development in the industry."6
Beer and ale had been bottled long before pasteuri
zation was discovered. The product had been, for the most
part thick ale, or else beer and ale designed for consump
tion near the place of bottling. Cochran felt that bottled
beer was as much a product of the railroads and improved
transportation, as it was the product of improved scientific
developments. None the less, it was not until 1893 that
bottled beer represented 10 per cent of Pabst sales.
However, other new methods of distribution need capital
also. For a long time, too, beer "was shipped in kegs and
bottled by local agents whose methods might not be up to
^Thomas C. Cochran, The Pabst Brewing Company (New
York: New York University Press, 1948), p. 123.
168
[the Pabst owned] Stamm and Meyer."7 In the chapter on
technicians it was mentioned that the last requisite for
successful large scale bottling, the crown, was invented
in 1892. The breweries now had a non-foaming filling
machine, an efficient pasteurizing machine, and a means to
permit the beer to be pasteurized— the crown.
The constant increase in capital placed the brewer
at an ever farther remove from the public and his customers.
It seems more than coincidence that this second wave of
prohibition was concurrent with the period of development
of bottled beer in the late 1870's and early 1880's. Again
the small merchant and small manufacturer were being
replaced by large and impersonal "foreigners" (it will be
recalled that the zenith in numbers of breweries was
reached in 1873) and the feelings of loyalty and intimacy
between customer and supplier diminished correspondingly.
Cochran said, "Local production, however, sometimes had the
advantage of giving the beer some of the standing of the
local products in areas where the 'home market' feeling
t.8
was strong."
7Ibid.. p. 125.
8Ibid.
169
The use of capital in retailing. As great as was
the need for capital in production and brewing, it became
even greater in the ownership of retail outlets. These
expensive retail establishments were purchased to insure a
retail outlet for the brewer's product.
Few will deny that the saloon deal laid the founda
tion for most of the great brewing fortunes in America.
A brewer simply went out and captured as many locations
as he could, then rented or deputized the premises to
a saloonkeeper who sold the owner-brewer's beer
exclusively.9
It will be recalled that Pabst's great increase in
investment in taverns and real estate began in 1893. That
this date is the same as that of the expansion in bottled
beer production is no coincidence. It also marked the
first in a series of changes in the relations of the brew
ing industry with the consumer. Eighteen ninety-three is
also the year of the founding of the Anti-Saloon League
[it became a national organization in 1895].
Schlitz was reported in 1887 to own something like
fifty retail outlets in Milwaukee.In 1893 Pabst had
more than $2.2 million invested in hotel and saloon
property, and in the eight years 1894-1901 inclusive,
^"The Brotherly Brewers," Fortune.April 1950, p.101.
l^Baron, oj>. cit., p. 273.
170
Invested approximately $3.5 million more. In 1899 alone
135 pieces of property were purchased.** Not all of this
real estate was for saloons. It included restaurants,
taverns, beer gardens, even hotels. The bulk of the
investment, however, was in the corner saloon and the
saloon sold whiskey.
The German Personality
The brewers of lager beer were Germans. "During the
summer [1844], Rhinelanders and other Germans came to
Milwaukee at the rate of oyer a thousand a week, most of
12
them headed farther west." After the Civil War heavy
German immigration resumed. Even such partisans of the
brewing industry as Baron and Cochran have failed to list
diplomacy and tact as among the chief characteristics of
these people.
As has been pointed out, the rise in prohibition
sentiment began at approximately the same time as the brew
ing of lager beer, which was also a period when consumer
relations changed. Cochran said:
These native elements [in Milwaukee] came largely
from New England, and from the "burned over" section
^Cochran, oj>. cit., p. 196-7. ^ Ibid.. p. 7.
171
of upper New York, famed for its religious fanaticisms
during this period. Northeastern Puritanism and
Southern German love of good living were bound to come
into more or less violent conflict. Each civilization
had its merits but they were different and conflicting.
While the first temperance society i[n Milwaukee was the
Catholic Total Abstinence Society, started in 1842, the
German or Irish Catholics never supplied any real
impetus to the prohibition movement. The total absti
nence groups sponsored by the Protestant church, such
as the Washington Temperance Society formed in 1843,
the Sons of Temperance, Wisconsin Division No. 1,
founded in 1846, and other similar societies that mush
roomed all over southern Wisconsin, were far more .
active. It was in opposing this prohibition movement
that the Germans became important in the political life
of the state.13
In this chapter, while seeking to avoid any dis
paragement, it will be shown that certain characteristics
and forthright activities of the German brewers made them
particularly vulnerable to the denunciations and crimina
tions of the prohibitionists. Furthermore, most brewers
were completely insensitive to the effects and emotions
their actions and statements were arousing and, indeed were
in general unaware, until prohibition was upon them in 1918;
that it constituted a serious threat. Mbst of the writers
on the brewing industry, such as Baron and Cochran, tend
to gloss over the inadequacies of the brewing industry's
public relations. By way of confirmation of the opinion
13Ibid.. p. 37.
172
expressed above, it can be cited that despite all the
abuses of alcohol and the early efforts of temperance
groups in the 1820's, there was no prohibition legislation
passed in the United States until the "Maine Law" of 1851.
In other words, there were ample reasons for prohibition
sentiment and activity prior to the entry of the Germans
into the brewing Industry. Some such sentiment and
activity had indeed developed prior to 1842, but no legis
lation had been enacted. By 1851, however, nine years
after the first lager beer was brewed in the United States,
the first prohibition act, the Maine Law was passed.
The ostentation of brewers at times when prohibition
activities were at their height will be detailed later, as
will the failure to recognize their peril. The tactless
ness of the German brewers continued through the early days
of World War 1 and, indeed, right up to the advent of
prohibition. Cochran recognized this:
The close tie that had naturally been formed with
the German-American Alliance turned out to be a
liability as the World War I situation progressed and
the Alliance fell under the suspicion of disloyalty.
Any examination of the record of the German-American
14Ibid.. p. 318.
173
brewers will demonstrate that they were as loyal and
patriotic a group as any other in the United States. They
helped in Liberty Bond campaigns and bought tremendous
amounts themselves. The older brewers devoted time and
money to the war effort. The younger men enlisted and went
to war. In addition they did one more thing which they
felt they were entitled to do as citizens of a free country.
They talked. Furthermore they talked in rafter shaking
tones about the British, right up to the time the United
States entered the war. They didn't like the British and
with typical teutonic lack of subtlety said so. Baron said:
In a German-language publication, the Jahrbuch der
Deutchamerikaner fur das Jahr 1918. the editor, Michael
Singer wrote a long article citing British "atrocities."
The British, he charged, unable to beat Germany with
arms, had begun starving her babies by means of a naval
blockade.
Such statements were neither subversive nor traitor
ous, but as Baron has pointed out, in anti-German days when
the music of Beethoven and Brahms could not be played in
public, and sauerkraut became "liberty cabbage," they were
suicidal for the brewers' cause. Wayne Wheeler and his
Anti-Saloon League cohorts jumped on them. They called for
!5Baron, oj>, cit.. p. 304.
174
investigations and eventually a hearing was held. The
hearing determined what was common knowledge and, indeed,
what the brewers had never attempted to hide; namely, that
most of them were of German descent and that they had spent
money lobbying to protect their business. That, however,
was enough. The hearings came out strongly against them.
Blanket indictment and castigation of all pre-
prohibition public relations is of course unfair and not
precisely accurate. Baron has reported:
As early as 1882 the United States Brewers Association
had established a Vigilance Committee which took over,
generally speaking, what would nowadays be called the
Association's public relations responsibility. The
state associations, doubtless following this lead,
began the Vigilance Bureaus on the state level; the one
begun in Ohio in October 1907, for example, investigated
saloons, reported "obnoxious" ones and took legal steps
to have them barred.16
These steps had been only minor, however, and in
general, as Baron concedes, the industry's public relations
were "surprisingly maladroit." As an example he cites the
fact that the brewers for years had stressed the amounts of
farm goods they used in helping maintain the national
economy. In 1917, when they were threatened with extinc
tion in order to conserve the nation's grain supply, they
16Ibid., p. 330.
175
brought forth statistics and graphs to show that in fact
they required the tiniest fraction of the nation's grain
output. The Anti-Saloon League, of course, jumped on this
type of contradiction. Conversely the brewers, while
admittedly lacking the hysterical emotional appeal of the
Drys, failed to take similar advantages. The fact that the
prohibitionists who insisted that they were saving the
nation's food supply in wartime, permitted beer to be
manufactured for export, went all but unnoticed and
completely unused by the propaganda forces of the brewing
industry
The Alienation of the Whiskey and Distilling Industry
The brewing industry early attempted to disassociate
itself from the widespread drunkenness which was referred
to in Chapter IV. The industry had powerful allies, too,
as for example, Dr. Benjamen Rush, signer of the Declara
tion of Independence and during a period of many years the
most prestigious medical authority in the new union. On
the first page of his work, An Inquiry into the Effects of
Ardent Spirits Upon the Human Body and Mind; published in
1814, the good doctor said:
17Ibid., p. 312.
176
Fermented liquors contain so little spirit, and that
so Intimately combined with other matters, that they
can seldom be drunken In sufficient quantities to
produce Intoxication, and Its subsequent effects, with
out exciting a disrelish to their taste, or pain, from
their distending the stomach. They are, moreover, when
taken in moderate quantity, generally innocent and
often have a friendly influence upon health and life. ®
That the preachings of Rush could be so completely
perverted as to have him become the reference work of the
total abstinence group of prohibitionists, is difficult to
understand. Professor Henderson attributed it to the fact
that there was a lack of either of the true temperance
beverages, beer or light wine. Certainly at this period
there could be no incrimination of the Germans who had not
at that period in history begun their immigration to the
United States, let alone the manufacture here of lager beer:
Thomann felt that rural distilling had become so universal
that there was a "firmly rooted predilection for spirits"
by the time prohibition came to New England and that the
only beverage which was excluded from the dry states was
beer. "Ardent spirits, manufactured outside of, but freely
sold within the borders of these States, tended to confirm
the rum habit."1^
*-®Henderson, oj>. cit. . pp. 42-44.
19
Thomann, £&• cit.. p. 12 passim.
177
Such statements as these are typical of brewery
statements over a period of a century and a half at least.
By 1917 they had succeeded In alienating the distillers
and guaranteeing that there would be no united front against
the forces of prohibition, nor would there be any financial
assistance forthcoming In election campaigns or lobbying
efforts. Conversely, the brewers having put themselves on
record as being almost as opposed to strong drink as the
prohibitionists, then did nothing. They never In any way
tried to capitalize on the evident Intoxicating power of
spirits, In contrast to the many fine things which had been
said about beer by many prominent and respected Individuals.
Half a century later the German brewers were com
pounding the erfor. They decided that the sensible
procedure to Insure sales was to own their outlets.
The Tled-House and Broken Promises
The corner saloon was one of the most Important
economic props of the brewing Industry before prohibi
tion, but It may have been the Industry's undoing In
1919, for It was exactly at the saloon that the
prohibition pressure groups aimed the attack which won
them a temporary victory.2®
^Baron, oj>. cit., p. 273.
178
"The Anti-Saloon League . . . made the saloon out to
be the very focus of all evil; drunkenness, political
chicanery, corruption of all kinds, seducer of the young.
Professor Henderson, while he was firmly in favor of
mild beer as opposed to strong drink, was so solely as a
proponent of temperance and not as an admirer of the
brewers and their activities. Of a 1930 temperance tract
he said:
It presents a picture of the political corruption of
the pre-Prohibition era, which is essentially correct;
and it places the responsibility, where it largely
belongs, on the brewers. The brewers generally used
their political power to obtain as many licenses as
possible; they owned the saloons and rented them to the
saloon keepers. Because of the excessive number of
saloons, each was under strong financial pressure when
ever possible to sell, not only beer, but the far more
profitable whiskey and thus develop that appetite for
strong drink that is the tap-root of all the evils of
alcohol.
Even Baron, though more sympathetic than Henderson,
admitted, "There seems to be no doubt that the saloon was
an easy target for the drys."23
The four quotations cited above show one of the
major causes of the decline in brewers' relations with the
21
Cochran, op. cit.._p. 313.
^Henderson, oj>. cit.. p. 53, 54.
^Baron, oj>. cit., p. 290.
179
public. The ownership of the saloon, often by out of town
and out of state breweries, broke whatever chain of
Intimacy had previously existed between consumer and
brewer. The conduct of the saloon was such that no cus
tomer could defend his right of patronage with a vigorous
display of righteous Indignation. Finally the breweries
whose capital assets were greatest and who as a consequence
were best able to Invest In corner saloons, were the large
shipping breweries.
Two statements can be made, If not In defense of, at
least In an attempt to soften the charges against the
brewers. The first Is that although there were undoubtedly
many abuses connected with the pre-prohlbltion saloon, and
although the cause of these abuses was In large part
attributable to the fact that there were an excessive
number of saloons due to tled-house practices, the estab
lishments could scarcely have been so attractive as their
opponents painted them. Had they been so, the majority of
the population would no doubt have succumbed to their
enticements and American civilization would long since have
gone the way of Sodom and Gomorrah.
In the second place, the system was no different, as
Baron has mentioned, from that which prevails and has
180
always prevailed in Great Britain and Germany. That it was*
however, at a minimum, inconsistent for brewers to maintain
that they were only producing a temperance beverage, and to
own and operate the saloon that sold beer and whiskey,
never seems to have occurred to the brewers.
Ten years of disregarded warnings. That the
brewers should fail to appreciate their peril and take
steps to avert it is even more astonishing when it is
realized that as early as 1908, Hugh Fox, the able and
respected secretary of the United States Brewers'
Association, wrote;
Control and not elimination is the key to the solution
of the saloon problem .... The encouragement of
beer-houses is most desirable. My own belief is that
the system can only be operated successfully when
brewers actually own and operate the places where their
product is sold. At present, brewers finance most of
the saloons but do not operate them or even actually
control them .... If the saloonkeeper was the
agent or employee of the brewer, he would have no
interest in selling spirits.
The Nation, a liberal friend of temperance and the
brewers, gave its advice:
The responsible agent in the liquor-selling business
is not the man behind the bar, but the man behind the
brewery. The direct responsibility of the brewer for
^Cochran, 0£. cit.. 313.
181
the character of the liquor traffic is not well
recognized.25
With such warnings the brewers did pay some attention
to the problem, if only to give it lip-service. According
to Baron, "in 1909 the yearbook of the United States
Brewers' Association devoted a whole section to the saloon
problem and the 'cleanup movement. '"2^
The brewers, however, would not go so far as to
accept full responsibility for the saloons they owned.
Cochran described their compromise activies as follows:
The Milwaukee brewers as a compromise developed the
"Wisconsin idea" of vigilance committees to clean up or
close up disreputable establishments. The committee
set up a bureau to take responsibility for the conduct
of retail liquor selling in so far as violations of the
law were concerned, but this was only one angle of the
problem. Meanwhile, the Liberty League and the Model
License Leagues, supported by the brewing interests,
were stirred to fresh activity.27
The American Brewer urged the distribution of the
"excellent literature" available to saloon customers to
make them aware of their peril. Prizes were given for the
best letters on temperance, et cetera. Some territory was
25The Nation, LXXXIX No. 2306 (September 9, 1909)
227-228.
°Baron, oj>. cit.. p. 290.
27
Cochran, oj>. cit.. p. 314.
won back from local option in 1910 and 1911, and in 1910
President Carl J. Hoster told the members of the
Association,
The convention concludes the most important year in
our organization in that we feel that since the last
convention we have finally succeeded in breaking the
backbone of the prohibition w a v e.28
And in 1911 he assured them, "It is, I believe, true that
the Prohibition movement is on the wane." Gustav Pabst
took the same view in his annual report to his
stockholders.29
Organized labor was enlisted in the battle and
appears to have done a more competent job than the brewers.
Also, in an effort to enlist professional assistance,
Percy Andreae, a public-relations counsel was paid $40,000
a year to organize a National Association of Commerce and
Labor. Propaganda emphasizing the independence of brewing
from the whiskey interests and emphasizing the value of the
family beer garden on the European model was commenced.
The results were what, on the basis of past experience,
might well have been anticipated. The brewers' opponents
28Ibid., p. 315.
29Ibid.
183
could well maintain that the pledges had been mere sound
and fury.
Some bad saloons had been closed, but no essential
change in the brewer-saloon relationship was attempted, nor
was there any real break with the hard liquor interests.
In Cochran'8 words:
This failure to take real, positive action made the
speeches of Andreae and the literature of the National
Association of Commerce and Labor and the Liberty
League seem somewhat meaningless to many liberals.
"After making . . . allowances," Hugh Fox warned the
Brewers' Association of Massachusetts at their annual
dinner in 1915, "I think we must concede that the
brewers lacked vision and perspective in their public
relations." The New Republic editorialized this same
year, "The most cross-grained and arid of prohibition
ists seem radiantly wise alongside the special pleaders
of the liquor trade."30
The alienation of other industries. At this period
of development of labor relations many employers felt that
the saloons and bars were the spawning beds of "radical"
labor demands, strikes and general "anarchy." For this
reason many employers who had no personal convictions about
temperance felt that prohibition and closing the saloons
would be to their advantage. Apparently the brewers felt
they did not have a sufficiency of enemies because in the
30Ibid.. p. 318
184
period from 1909 to 1915 they attempted to boycott firms
advocating prohibition. That such tactics should have
unfavorable repercussions could have surprised only the
brewer8.
As for the latter-day Cassandra, Mr. Hugh Fox, it
seems typical teutonic irony that his employers recognized
his gift of prophecy, paid him well to use it, and then
ignored his warnings and advice; a drama by Euripides
against a Gotterdammerung backdrop.
Summary of the period Prior to Prohibition.
There were, in all, four phases or waves of prohibi
tion fervor. The earliest was the result of excessive
drunkenness in New England, especially Massachusetts, after
the termination of the slave trade. The other three waves,
culminating in national prohibition in 1919, came after the
introduction of German lager beer in 1842. Mass production,
cheap transportation, and large scale manufacture served
to alter the consumer-producer relationships from the
intimacy that had existed in the cottage industry days.
The brewers alienated their potential allies in the liquor
industry and eliminated any possibility of presenting a
united front against the forces of prohibition without
185
improving their own image in the public's eyes. Finally,
the brewers promised constantly to do something about the
conduct of the saloons which they owned, but fell down
completely in performance. These factors, plus teutonic
tactlessness, were sufficient to alienate consumer and
public, and permit the prohibition forces to triumph.
III. THE PERIOD OF PROHIBITION
That the brewers' associations and groups of brewers
were among the least effective in accomplishing the termi
nation of prohibition cannot be denied.
Non-Brewer Organizations Working for Repeal
Such groups as the Association Against the Prohibi
tion Amendment started by William H. Stayton and backed by
the du Pont family, the Moderation League, the Women's
Organization for National Prohibition Reform, the Voluntary
Committee of Lawyers, the Crusaders, and the American
Federation of Labor, were among the many groups whose
exertions and effectiveness outshone those of the brewers
themselves. Increasingly the newspapers, particularly the
New York World and the Hearst papers, supported the cause
of modification or repeal. Increasingly, too, prominent
186
and Influential citizens such as Nicholas Murray Butler and
John D. Rockefeller, Jr. a one-time prohibitionist, became
disenchanted with the attempt to enforce "universal total
abstinence by law."
Brewers Activities During Prohibition
It is certainly an understatement, however, to say
that there were mitigating and extenuating circumstances
for the brewers reticence. No industry, with the exception
of the slave trade, had ever been the object of such
excoriation and vilification as had the alcoholic beverage
industry. The income of most brewers had ceased the day
prohibition tookeffect. As a result the majority had either
closed forever and had disposed of their properties, or had
been forced to undertake alternative and frequently
unprofitable endeavors for which their training and back
ground had left them ill-equipped for success. In view of
the low estate to which the brewers' fortunes had fallen,
it is surprising to find that within three months after the
re-legalization of beer manufacture, 31 brewers were back
in operation.
The Tied-House Finally Disappears
One of the many concessions which the brewers found
187
it necessary to make in their efforts to bring about repeal
of the Eighteenth Amendment, was that no brewer could own
an interest in a retail outlet. Vertical integration which
caused the industry's downfall once, cannot by law, do it
again.
IV. POST-REPEAL PROBLEMS
The implacable drys having failed in their efforts
to bring prohibition into military encampments during World
War II and also to revive any feeling for national prohibi
tion, have resorted to other Fabian attacks. In addition
to introducing legislation to increase excise taxes on beer
in numerous states at almost every meeting of the legisla
tures, and to petitioning for local option elections
wherever these can be put on the ballot, the drys have come
up with two new lines of attack. They have asked for
strengthening of the laws preventing the sale of beer to
minors, and they have proposed laws forbidding brewers to
use non-returnable packages, i.e., cans and one-way bottles.
The United States Brewers' Association stays alert
to these problems and at its 1964 convention considerable
discussion was held on both these matters.
Sales to minors. In the matter of sales of beer to
188
minors the brewers find themselves in a precarious position.
First, comes the question of who is a minor. In some stateq
e.g., in Georgia the legal voting age is 18. Men can serve
in the army at eighteen and persons 18 years old may get
married. In most states, however, adults are considered to
be persons 21 years old or older. It is against the law
also in most states to sell alcoholic beverages to minors.
Some states have specified that it is against the law to
sell 3.2 beer to minors. This law has been successfully
contested in Colorado where there are* special licensees who
sell only 3.2 beer. Here the original repeal ruling that
3.2 beer is non-intoxicating has been upheld after much
scientific testimony was adduced to this effect. In
Colorado too, the local breweries as well as the U.S.B.A.
have made an effort to alert and educate the 18-21 year-
olds, the 3.2 tavern proprietors and employees, and the
licensing and enforcement authorities, as to their
individual responsibilities.
This is being done largely through the distribution
of effective kits to 3.2 tavern owners and licensing
and enforcement officials. Also, the wide distribution
of table tents in the tavern and as walk-out flyers in
the off sale spots, remind the 18-21 year old that his
privilege of legally purchasing 3.2 is under attack,
and whether or not he loses it largely depends on his
189
Individual behavior.
It is when dealing with beer stronger than 3.2 that
the brewer8 face a dilemma. The brewing industry has msde
strenuous efforts,as has been pointed out, to divorce
itself from any association with strong drink. Institu
tional advertising has stressed that beer is "the beverage
of moderation," and that the whole family can enjoy this
temperance drink which "belongs." Despite this the
industry is aware that the appeal of beer would be almost
nil if it were not mildly alcoholic: a fact dramatically
illustrated by the disasterous efforts to sell near beer
during prohibition.
The brewer8, therefore, have been confronted with
two equally unhappy choices. They could produce a beer
with little or no alcohol and be unable to sell it. They
could produce a beer with considerable alcohol and face the
charge that beer was in fact little different from wines
and strong drink, thus laying themselves open to even more
savage attacks from the prohibitionists.
For the most part they have attempted to pursue a
^William Coors, Proceedings United States Brewers'
Convention 1964. p. 27.
190
middle course. They have made a beer with as low an
alcoholic content as possible consistent with maintaining
sales appeal: about 3.7 per cent on the average. They have
continued to call their product "the beverage of moderation']
but they have never denied that, In the words of one old
brewmaster, "I guess a man could get drunk on beer If he
worked at It and made a pig of himself."
The U.S.B.A. has continued Its close cooperation
with the local enforcement authorities. In the words of
Robert Dalton, attorney for the Association: '
A specific example of the constructive benefits that
flow from this close relationship with enforcement
officials Is In the difficult area of purchases of malt
beverages by minors. The U.S.B.A. has worked out a
procedure with the authorities designed to reduce or at
least to make It more difficult for these talented
minors to misrepresent their age In attempts to pur
chase beer. Age affidavit forms have been supplied to
thousands of licensees as have posters calling atten
tion to the provisions of the law. While the problem
Is a continuing one, we are witnessing Improvements In
many jurisdictions. We have been greatly encouraged
by the reception we have had at the hands of college
and university officials In working closely with them
to eliminate the problem of purchases of beer by
students who are not of legal age. The U.S.B.A. staff
In Missouri, last year, undertook such a program with
the colleges and universities In Missouri. Not only
has there been a marked Improvement In this problem,
but the school officials have expressed thanks and deep
appreciation of our cooperation with them.32
^Robert c. Dalton, U.S.B.A. Proceedings 1964. p.17.
191
The litter problem. Rightly or wrongly the brewing
industry is blamed for much of the defacement of the
American "great outdoors." It is tragically true that
wherever one drives one sees roadsides and landscapes
littered with cans, bottles, papers, and other debris and
refuse. Man apparently believes one of his inherent rights
in a democracy is to foul his own nest. Kleenex manufac
turers and the makers of sandwich wrappings are not told
that unless they see to it that their product is disposed
of in a manner that will not offend the sensibilities of
others, there will be punitive legislation passed. Auto
mobile makers and dealers are not threatened because of the
hideous junk yards of car skeletons. Canners of soft drinks
are not so threatened. Brewers are told, however, that they
are to blame for litter and that the public can be pro
tected from itself if laws are passed prohibiting the sale
of beer in non-returnable packages. Francis P. Hurley,
General Counsel, U.S.B.A. reporting to the convention said:
Bills relating to packages failed of enactment in
all twelve jurisdictions where introduced. Here, too,
the proposals covered a wide area; limitation of sizes,
unequal tax treatment depending upon size, and prohibi
tion of non-returnables under the guise of litter
prevention.33
■ ^ F r a n c i s p. Hurley, U.S.B.A. Proceedings 1964.p.15.
192
Later at the same convention, speaking to the
assembled brewers Dalton said:
You have for more than 10 years been principal sup
porters of the outstanding and nationally recognized
program for litter prevention executed by Keep America
Beautiful, Inc. Not only Is Keep America Beautiful
doing a highly creditable job In the normal channels of
litter prevention work, but because of Its recognized
position and the knowledge It has gained In the field
of litter It has been able to effectively counter
punitive legislation of regulatory proposals In several
states designed to deny our industry the free selection
and use of containers.34
One brewer makes an effort. In addition to the
industry public relations efforts, the Coors Brewing
Company has made an attempt of its own. At great expense
it has developed a method of extruding aluminum beer cans
from aluminum slugs. These cans have the advantage that
they can be melted after use and recast into slugs to be
stamped again into cans. This of course, means a great
saving in cost of materials as cans can be recovered and
Coors is able to pay boy scouts and others one cent for each
can returned to the brewery, or to Coors distributors who
have can presses for flattening the empties. It is Adolf
Coors' II contention that, rightly or wrongly, the litter
stigma has been fastened on the brewing industry and this is
^Dalton, U.S.B.A. Proceedings 1964. p. 30.
193
his effort to counteract it.
Conclusion on Public Relations
The relations of the brewing industry with the public;
although they have not attained all the results which had
been hoped, are infinitely better than they were two
generations ago. It is scarcely likely that a situation
could again occur such as did at the time when, with the
prohibitionists shouting imprecations on every street
corner to the effect that brewers were the ruination of
American family life and the impoverishers of the working
man, the news wire services of the world carried the news
of Adolphus Busch' gift to his wife of a $200,000 tiara at
the celebration of their golden wedding. As of now, beer
may not belong, but it has been accepted into the home in
many of its manifold and convenient packages. The threat
of prohibition, although ever present, now concentrates on
such nose in the tent legislation as advertising restric
tions which the Washington office of the United States
Brewers' Association does an excellent job of combatting.
The percentage of people living in dry areas, as was
pointed out in Chapter IV, is less than it has been in
nearly 100 years and the absolute number is less than half
194
what it was in 1910. Understandably the brewing industry
considers this number, 14,500,000 in 1959, considerably too
great, unlike the self-delusion of 1911. The problem is
being worked on and the brewers feel that they are not
losing ground. It was Baron's opinion that beer was being
brought back to its original position: ". . .a universal
beverage. It is no longer the workingman's drink, it is
no longer a German drink, it is no longer exclusively a
man'8 drink."^
V. PUBLIC RELATIONS SINCE REPEAL
The regulations which were written into the Code for
the Brewing Industry under the Fair Competition Codes of
the National Industrial Recovery Act were in large part
created and developed by the officers and directors of the
United States Brewers' Association. The essence of the
Code, however, was that it was left to industry "in virtue
of self-regulation, itself to invoke the sanctions of the
codes— the government willing to prosecute and punish code
violators only at industry's own command." With the N.R.A.
declared unconstitutional in 1935 the Federal Alcohol
^Baron, oj>. cit.. p. 348.
195
Administration Act was passed by Congress, and the Federal
Alcohol Administration was set up as a division of the
Treasury Department.
The provisions of the act and its regulations have
been set forth in detail in Chapter IV, "Relations to
Government," of this study. It was the opinion of many
brewers at that time (1935), and is that of many of the
older members of the industry today, that the strict regu
lations of the early period were absolutely essential to
prevent excesses which were similar to those which had
precipitated the original prohibition debacle. In addition
to the brewers who had been established prior to prohibi
tion and who, considerably chastened, were financially
capable of re-entering the beer business, there was a large
group which saw repeal only as an opportunity to make a
fast dollar. Had these latter been free to follow their
inclinations prohibition could easily have returned in a
short period.
Dissension in the Brewers' Ranks
The one organization which "had kept a small flicker*
ing light glowing all through Prohibition,"-^ was the
■^Baron, oj>. cit.. p. 328.
196
United States Brewers' Association.
The Association had maintained an extensive library
and the secretary, Hugh F. Fox had periodically issued
a publication called Periacope . . . there were no
regular meetings ... no regular collection of dues.
It was mainly a few Eastern brewers who supported Fox's
office and work. When the association started up again
after Repeal, there were about sixteen active members
and $7,000 in the treasury. At the end of 1933, how
ever, membership had increased to 120. Most of the
large brewers in the country rejoined .... There
appeared, however, some dissatisfaction with the
Association's basic attitudes as reflected mainly by
Colonel Ruppert and his Eastern supporters.3?
Secession and Reunification
This "dissatisfaction" manifested itself in a schism.
Harris Perlstein [of Pabst] shared the conviction of
some of the more forward-thinking brewers that not
enough was being done to protect the industry from a
renewal of dry activity, and that a positive program of
public relations must be undertaken. Failing to secure
action in that respect and indignant over the failure
of the U.S.B.A. representatives on the code authority
to protect the right of Pabst to a hearing before
certifying an alleged code violation to the Department
of Justice, Pabst withdrew from the association in 1934.
Anheuser-Busch subsequently followed suit and as a
result, by 1936 two of the three largest brewers were
outside the association.38
Actually much of the friction which continued until
1938 was due in large part to the clash of personalities of
17
'Cochran, oj>. cit., p. 379.
38Ibid.
197
proud and strong men. Colonel Ruppert was president of the
Association and Harris Perstein and Augustus Busch were the
leaders of the separatist movement. Time has healed the
wounds and brought unity to what were at one time three
separate groups. With the death of Colonel Ruppert on
13 January, 1939, It became easier for a raprochement and
... in January of 1941 all the brewers trade associ
ations joined under the title of United States Brewers'
Association, although the public relations corporation
(which changed its title in 1942 to Brewing Industry
Foundation) remained separate until 1944.3”
(Baron makes no reference, and Cochran only one, and that
of one sentence, to an organization— The Small Brewer's
Committee--which was founded during World War II, and which
has been so important in keeping small brewers in business
that almost an entire chapter of this study will be devoted
to it.)
The Proposal for Action
The original contention of the separatists was that
more action and less propaganda was needed— that the brew
ers were repeating the errors of the pre-prohibition
Andreae period. They employed Bernard Lichtenberg, head of
3^Baron, oj>. cit., p. 331.
the Institute of Public Relations to help with public
relations. The plan that Lichtenberg and his associate
*
T. Howard Kelly presented in August 1938 to the joint
meeting of representatives of the United States Brewers'
Association, Brewing Industry, Inc. (Perlstein et al.),
American Brewers' Foundation, and United Brewers' Industrial
Foundation, had as its main principle the translation of
promises into performance. Prior to the meeting:
. . . the plan had been tested in Nebraska, where
action against offending taverns and the organization
of responsible state and district committees had
succeeded in thwarting a proposed drive by the dry
forces.^®
By 1940 Carl W. Badenhousen, chairman of the Foundation
could report:
. . . state committees have conducted 18,002 investiga
tions which have resulted not only in 2,158 warnings to
retailers to correct certain conditions, but also in 23
probations, 38 license suspensions, 71 injunctions,
125 prosecutions of bootleggers, and 459 license
revocations by enforcement authorities.
The clean up or close up campaign. The representa
tives of all the breweries selling beer in a state asked
for an audience with the authorities responsible for the
199
enforcement of the beer regulations. The brewers then told
these authorities that they were even more anxious than the
law officials to have offensive and obnoxious taverns out
of business. The brewers would notify the authorities when
they found such taverns and would also notify the offenders
to "Clean up or Close up," which was the way the campaign
came to be designated. It was emphasized, that once having
committed themselves, the brewers could not back away from
the responsibilities of their promises. With fear and
trembling the brewers took the plunge and found, to the
amazement of many, that the plan was successful.
Success and unity came just in time. War came
December 7, 1941. Despite the efforts of the prohibition
ists, bills to outlaw sales of beer to servicemen were
voted down. "In order to make sure that the drys1 argu
ments might have minimum validity, the self-regulation
program of the Brewing Industry Foundation was strengthened
and extended." Thus in Chicago in January 1943, Chairman
Alvin Grlesedick could say:
While our State Directors and their staffs have by
no means been entirely successful in their attempts to
clean up or close up all of the objectionable outlets
. . . much progress has been made. The principle on
which our self-regulation program is founded is
200
basically correct.^
Post World War II Public Relations Activities
There is a strong temptation to append to the above,
the addendum "and approximately eight decades overdue."
The brewers appear to have benefitted from the lessons of
history and they emerged from the World War II period
relatively unscathed, and with record sales. The brewers
appear to be aware, at last, that the price of freedom is
eternal vigilance. In 1949 the Foundation set up an
advertising committee to handle the ever present threat of
prohibition and the need for getting a wider acceptance of
beer and ale. This advertising is of the "institutional"
type and no individual brewer's name appears in connection
with the advertisement. Originally such ads were directed
to the family aspects of American life and the slogan was
"Beer Belongs. Enjoy it'." Such scenes as cook-outs,
musical evenings at home, anniversary parties, et cetera,
were painted by well known (and strictly representational)
artists and the full color reproductions appeared in many
of the national magazines. Some even appeared in the
^Baron, oj>. cit., p.
201
"slicks" as the more expensive high-gloss magazines with
considerable snob appeal, are designated. In recent years
the magazine advertisements have been replaced with
television spectaculars with some of the most expensive
entertainers. Spectaculars avoid controversy and have
widespread appeal, it is felt. The advertising message is
always what is called in the trade "soft sell." The
"correctness" of beer drinking as well as its palatability
is stressed.
Public and customer relations difficult to separate.
From the above it is perhaps difficult to distinguish
between public and customer relations. This is so for
rather obvious reasons. If beer is to escape unscathed
from future attacks by the prohibitionists it must have a
vast number of enthusiastic friends who cover the entire
social spectrum. Just to be admired by one segment or
stratum of society is, as the brewers finally learned,
insufficient. Thus it is not always easy to determine if a
particular piece of institutional advertising is designed
to sell beer to a particular group or social order, or
whether it is designed to counteract possible prohibition
sentiment. Ideally, from the Association's and the
individual brewer's point of view, it would do both.
Ant i-prohibit ion institutional advertising. Two
other types of institutional advertising campaigns are easy
to characterize as being in the anti-prohibition category.
These are the advertisements which appear in the so-called
"country weeklies" and in the grocery trade publications.
The country weeklies are the most thoroughly perused of all
newspapers or magazines, at least so it is claimed by their
publishers, and surveys to which may be attached consider
able credence since they are not conducted by professional
polesters, tend to substantiate this contention. The body
of country editors as a whole can be one of the most stal
wart bulwarks against prohibition. Most country weeklies
are engaged in a constant struggle to obtain enough
advertising revenue to continue operations. The institu
tional advertising in the country weeklies has been
profitable to all concerned.
The advertising in the country weeklies has been of
a low-key order, also. For a good many years it featured
Joe Marsh, a rural philosopher. Great care was taken to
see that Joe never talked down to his audience but simply
expounded good, simple common sense. It was not coinci
dence that the moral to Joe's brief but interesting
anecdotes pointed always to the fact that true wisdom,
203
tolerance, and temperance consisted in making allowances
for differences of opinion between individuals. These
differences might be about religion, politics, beer drink
ing or any of a vast range of subjects. In any case every
man was entitled to his opinion.
Geographical and historical advertising. At the
present time the Association has localized its advertising
in the country weeklies. The current series consists of
emphasizing historical and geographical features of
individual states such as Florida, Mississippi, Nebraska,
Maine, Colorado, Tennessee, Kansas, Arkansas, Iowa, the
Carolines, Alabama, Texas, Missouri, Vermont, New Mexico,
Arizona, and Virginia. It should come as no great surprise
that many of these states have had a long record of prohi
bition activity and in many of them local option elections
are held with regularity and large areas are dry. The
tenor of many of the small two-column advertisements is the
same. After a brief description of the historical event it
is pointed out that even at that early date beer was the
popular beverage of temperate individuals. If the event
which is being commemorated occurred in 1862, as many such
events did in the Southern United States, it is pointed
out that that year also saw the organization of the United
204
States Brewers' Association, "The oldest incorporated trade
association in the country,"
The advertising in grocery magazines is absolutely
forthright. Results of certified surveys are shown which
demonstrate (1) that even in reputedly dry areas a majority
of customers are pleased when beer is stocked and (2) beer
is a high volume, high profit grocery store item. Seventy-
five per cent of all packaged beer is sold in grocery
stores, and the grocer who doesn't handle beer is failing
to avail himself of a high profit item.
Civic. Charitable, and Eleemosynary Activities
Finally, something should be said about the civic
and eleemosynary activities of brewers. It was mentioned
in Chapter II that many brewers had interested themselves
in athletics and had been influential in bringing such
activities to their cities. Far more important, as well
more numerous, are the charitable undertakings of the
brewers. They have been, through all the years leading
contributors to, and organizers of, charitable and civic
enterprises. Matthew Vassar and William Rutgers are only
two of the many brewers who made substantial contributions
to education in America. The Brewers' Almanac quoted a
205
19th century writer:
No other industry is more frequently called upon for
help and none responds more liberally than the brewing
trade. To assist in building schools and churches,
endowing colleges, securing permanent homes for social
organizations, helping deserving students and
struggling scientists and artists, caring for the
physical welfare of their own workers and providing
for their widows and orphans— to do all these things
and many others like them, seem to be regarded by the
average brewers as a commonplace duty brooking no
evasion.^3
Even allowing for some self-glorification, however,
the brewers, it must be conceded, have striven to be good
citizens. The difference between pre- and post-prohibition
brewery efforts is perhaps in the types rather than in the
amounts of these efforts. Whereas pre-prohibition brewers
were frequently ostentatious givers, the brewer today is
more often a worker, leading Heart, Cancer, or United Fund
drives, or heading the local Chamber of Commerce, in the
true sense of the phrase a majority of brewers are civic
leaders.
VI. POST-REPEAL RELATIONS WITH CONSUMERS
With repeal of the Eighteenth Amendment beer sales
^^United States Brewers' Foundation, Brewers1
Almanac for 1963. New York.
206
consisted of 75 per cent draught and 25 per cent bottled
beer. Except for the regulations concerning tied-houses,
brewers expected these proportions to continue to prevail.
They had failed to observe, however, that in the fourteen
year hiatus of the brewing industry there had developed
the chain grocery store and supermarket. These were to
change all established concepts of beer merchandizing,
packaging, size of operation, forms of competition, and
finally, change the whole area of consumer relations.
Shift in Beer Packaging
The shift in beer packaging has progressed steadily
since repeal, away from draught and to packaged, i.e.,
canned and bottled beer until in 1963 draught beer amounted
to less than 20 per cent of the total sold. Even before
the can was pioneered in 1935 by the Krueger Brewing
Company of Newark, bottled beer was replacing draught.
This was true in taverns also. Where, prior to prohibition,
the only beer sold by saloons, in taverns, was "take out"
beer, it soon became evident that a new type.of beer con
sumer was willing to pay an additional amount to have his
beer in a brewery packaged container rather than drink
draught beer.
207
Baron has pointed out another development which
caused the demand for draught beer to continue its decline:
Tavern keepers found it simpler to sell bottled
beer. Draught beer, which is not pasteurized, requires
special handling, and has to be sold fast. The draught
equipment has to be maintained; there is inevitable
leakage and spoilage; it is harder to keep a check on
employees when only draught beer is sold.^
Prior to prohibition the saloon had been the working
man's club, and beer the working man's drink. In 1933 it
appeared that this situation would reappear. However, as
the severity of the great depression began to abate to a
degree in 1934 and 1935 a gradual change made its appear
ance. Some brewers have ascribed this to the increased
ownership of radios and automobiles. Families had enter
tainment and world news coverage, and editorial comment to
fill the social voids at home. Family expeditions were no
longer matters of long preparation subject to the rigorous
timetables of public transportation. Some brewers have
even admitted that the prohibition against tied-houses made
for fewer of the enticements of earlier years and as a
consequence the tavern, as the post-repeal saloon came to
be known, lost much of its attractiveness.
^Baron, oj>. cit., p. 327.
Still another technological innovation of the
prohibition years had made for greater home consumption of
beer. Baron points out that the advent of mechanical
refrigeration in the home had made it possible to keep beer
available at home.^
The chain store and supermarket. With beer only one
item on the grocers1 shelves and with the new supermarket
philosophy of increasing total profit through greater
volume sales at lower profit margins, i.e., taking advan
tage of an elasticity of demand greater than one, beer
could be purchased much more cheaply at grocery stores than
at taverns. The tavern as a rule had greater expenses in
proportion to beer sales, since the license fees for the
former were uniformly higher than for the latter, and the
tavern employed only union labor.
With the advent of the beer can the supersession of
draught by packaged beer became even more pronounced.
Although canned beer constituted only 10 per cent of the
packaged beer total, by the time restrictions on use of
metal for non-essential purposes made the beer can a World
War 11 casualty, it was plain that its use would grow, and
209
with this use the size of the bigger breweries. The can
emphasized one advantage of the bigger brewer— access to
capital. If a brewery had sufficient volume so it could
purchase and operate a can line full time, as all large
brewers could, and all small brewers could not, there was
a reduction in the number of men required for operation
from 13 needed to operate a bottling line to 8 or approxi
mately 40 per cent. Finally freight costs were cut
tremendously again in some cases by more than 40 per cent.
Tavern Loyalty to Individual Brewer Diminished
As a consequence of these two post-prohibition
changes: the demise of the tied-house and the rise of the
grocery store, in particular the chain and supermarket
grocery store, the brewing industry's relations with its
customers underwent another change. Prior to prohibition
the retailer sold the consumer on the particular brand of
beer which the retailer dispensed. After repeal the
retailer no longer did any brand selling. He made a
variety of beers in a hospitable environment available to
the consumer. It was up to the brewer to sell the consumer.
This, of course, as was pointed out in Chapter II, gave
the economies of large scale advertising to the larger and
210
better financed breweries. It also served further to
remove the brewer from personal contact with the consumer.
Whereas the consumer who, prior to prohibition came to
patronize, for whatever reasons, a specific saloon and
became a proponent, on occasion even a vocal and belliger
ent proponent, of the beer handled by the establishment,
today the customer can obtain almost all brands from any
retailer and his loyalties are neither so Intense nor so
permanent1.
Grocery Store Loyalty to Individual Brewers Diminishes
To a somewhat lesser degree, the same result has
occurred In grocery stores. It was mentioned earlier In
this section that during the period of prohibition there
had been a great development In the field of chain stores
and supermarkets. In 1916, for example, the Great Atlantic
and Pacific Tea Company operated only 3,250 stores with a
total of $76.4 million In sales. By 1933 this had grown
to 15,100 stores and $819.6 million In sales.^ The era
of the self-service and supermarket stores was only
^ m . A. Adelman, A & P. A Study in Price-Cost
Behavior and Public Policy (Cambridge, Massachusetts;
Harvard University Press, 1959), pp. 26, 434.
211
beginning. The brewer found he was no longer trying to
persuade an individual store manager to handle his beer.
He must persuade an efficient and cold-blooded purchasing
agent whose interest consisted solely in whether the beer
moved off the stores' shelves. It was up to the brewer to
see that his beer moved. No friendly merchant would help
him.
Conclusion on Customer Relations
In a century and a half the brewing industry has
seen many changes in techniques and methods of production.
Each of these has had a twofold effect. (1) the advantages
of large scale operation have increased, and (2) the
intimacy and familiarity between producer and consumer has
decreased.
From the standpoint of the small brewer this has
been a catastrophe. He no longer has a local clientele
which will remain loyal to him through thick and thin, and
possibly aid him if need be in his battles with the never
relenting prohibitionists. From the point of view of the
industry no such positive conclusions can be drawn. That
the old intimacy between consumer and producer has van
ished from the brewing industry, as indeed, it has in most
industries, is unquestioned. That this is a disadvantage
212
In every way would be more difficult to demonstrate.
Certainly cordial consumer-producer relations proved
inefficacious in thwarting the prohibitionists in 1919.
Also there seems to be the fact, confirmed in many market
studies, that there is far greater acceptance of beer by
women as a household beverage than was the case prior to
prohibition. Thus, although per capita consumption has
decreased, the number of beer drinkers, both absolute and
as a proportion of the population, has increased. Beer,
for the majority of the population seems to have become,
if not swank, at least acceptable.
This attitude on the part of consumers, combined
with such major preoccupations as Civil Rights and the
Cold War, plus governments1 need for excise tax revenue,
would appear to lessen the threat of a serious recurrence
of prohibition sentiment.
VII. THE EFFECT OF COMPETITION
It is interesting to note the effects of competition
in the case of the saloon. Price theory teaches that in
atomistic competition, where each competitor has so small
a section of the market that he can not influence the
market, if total cost exceeds total revenue the number of
producers will be reduced as those sustaining losses with
draw from the field. What the theory does not reveal are
the disruptions both economic and non-economic, that occur
during the process. In theory the individual responsible
for the success of the business perceives that marginal
cost is exceeding marginal revenue. If it is impossible
to reduce marginal costs, or to increase marginal revenue,
he discontinues the operation. In actuality what sometimes
happens is that a determined effort is made to increase
marginal revenue even at the risk of operating in trans
gression of some established legal restrictions. In the
case of over-competition in the saloons, these efforts at
decreasing marginal costs took the form of selling intoxi
cants to minors, encouraging clients to "have one more,"
encouraging women of questionable morals to frequent the
establishment, and the use of "knockout drops" and other
methods to "roll drunks."
Here again, then, there appears to be an area of
activity where government, even at the risk of less effi
ciency than would prevail under perfect competition, must
establish a certain degree of monopoly. Unlike other
situations, such as the case of electric or telephone
public utilities, in such situations as the licensing of
214
liquor outlets or taxicab franchises, too few licensees is
almost as bad as too many. With too much competition the
ills described above will prevail. With too few licensees,
the monopoly profit to each becomes so great that chicanery
and more serious violations of the moral and civil codes
often occur in the effort to obtain one of the scarce and
valuable licenses.
CHAPTER VII
RELATIONS TO TRADE ASSOCIATIONS
Trade associations have become such an important
factor in the conduct of American business that no study
of concentration and competition would be complete without
an analysis of their role.
I. ORIGINS AND HISTORY OF TRADE ASSOCIATIONS
The exact origin of trade associations is impossible
to pinpoint but it is undoubtedly very old. Rome had some
thing similar. The Phoenicians had mutual aid groups.^-
The first trade associations in modern times arose in the
16th century. In England when they represented merchants,
they were called merchants guilds.
The guilds decided on and enforced strict rule*.
Only guild members could produce or sell the product
of the calling and the guild decided who could become
members. Rigid inspections were made to insure quality
and apprentices were trained to furnish recruits but
no more than necessary. [A practice which goes back at
least as far as Hippocrates.] The guilds also set
^Chamber of Commerce of the United States, Institute
Department, Association Management. Washington, D. C.,
1958, p. 2.
216
rates of pay and hours of labor.
Municipal authority and guild power were intertwined.
The local government began to enforce guild rules. The
emergence of privileged corporations and trading
companies fortified by governmental sanctions helped
private monopoly to grow at public expense.
The mercantilism of the 16th to 18th centuries links
historically to the cartel movement in countries out
side the United States; the development of the National
Recovery Administration in the United States, and the
occasional efforts of associations and other groups in
this country to get government approval for special
interests.2
As early as 1800 several associations had been
formed in the United States. The old extant association is
the Chamber of Commerce of the State of New York formed in
1768 with twenty merchants. The next oldest, still alive
today, is the New York Stock Exchange organized in 1792.
By the end of the 19th century over 100 associations, still
active in 1956, had been created.
Associations were also in large part responsible for
anti-trust legislation. According to Association
Management:
In addition to engaging in these and similar benifi-
cent activities [lobbying, statistics gathering, credit
information, et ceteraI some associations restrained
competition by agreements among members to control
production or prices, or to allocate selling areas and
2Ibid., p. 2.
217
distribution channels. Partially as an outcome of
such practices, Congress in 1887 passed an act to
regulate commerce; and in 1890 also enacted a broader
antitrust act called the Sherman Act.3
The publication quickly observed, however, that
less than 5 per cent of all the trade associations have
ever had a charge brought against them by the U. S.
Department of Justice or the Federal Trade Commission.4
II. TRADE ASSOCIATIONS TODAY
By 1956 there were 1700 national trade associations,
7000 local, 3000 state, and 500 regional associations for
a total of 12,200. Of these manufacturing had 950 national
and 1,050 or 2,000 of the total. The rest are service and
distribution associations.
Charles T. Lipscomb, Jr., president, Bureau of
Advertising, American Newspaper Publishers Association,
spoke to the United States Brewers Association and said:
Today there are over three and three-quarter million
business firms, about 80 per cent of all of them [sic]
in the United States, which belong to these trade
associations and professional societies . . . Many of
them establish industry standards. . . . They provide
information services and educational programs
^Ibid., p. 3.
4Ibid., p. 5.
218
benefitting themselves and also the public.
He continued,
The United States Chamber of Commerce Issued a policy
statement about trade associations, which said:
"This we believe:
Trade and professional associations are an essential
part of the American system of private, competitive
enterprise. They promote commerce at all levels by
providing an effective medium through which the small
est as well as the largest members of business may
work together for the common good.
Trade associations are also essential to our high
standard of living. The general public has received
substantial benefits from trade association programs
which have resulted in improved products, increased
efficiency, better marketing and many direct public
services."
Mr. Lipscomb concluded his remarks with the follow
ing statement which emphasizes the magnitude of the
operations of trade associations:
In recent years, trade associations have become much
ijore promotion-minded than they were before the war,
and today are spending about $100,000,000 in consumer
advertising. ... 1 understand that trade associations
are spending for promotion and research about twice as
much as they were spending eleven years ago.5
The functions of trade associations have thus
changed in marked degree from the early 1900's when they
were tried and convicted of attempting to violate the
5proceedings. United States Brewers Association
Convention, 1962, New York, p. 13.
219
anti-trust laws.** The conclusions of this study are that
If It had not been for the trade associations in the
brewing industry, competition would have been substantially
less and concentration considerably greater than is actu
ally the case in the industry today.
In the chapters on public relations and on relations
to government, considerable has been written about the
United States Brewers' Association. At the present time
the U.S.B.A. as it will be referred to hereafter, and the
Brewers' Association of America are the only two national
associations in the industry. Since the functions they
attempt to serve, the methods they use to achieve their
ends, and their clientele are all so different they will
be treated separately.
III. HISTORY OF THE UNITED STATES BREWERS' ASSOCIATION
The U.S.B.A. was founded, as has been noted, in 1862.
Association literature and letterheads stress the fact that
it is "the oldest incorporated trade association in
America." As pointed out in Chapter IV, one of the
^Chamber of Commerce of the United States, Associa
tion Management. Washington, D. C., 1958, p. 362, passim.
220
original purposes of the Association was to try to bring
to the attention of the taxing authorities in Washington
some of the problems of the brewing industry, and to pre
vent taxation from causing a diminishing elasticity of
demand for beer. At a later date the U.S.B.A. attempted
to handle labor negotiations for its membership.
Today the activities of the U.S.B.A. are much more
numerous. The advertising and public relations programs
have been discussed at length. In addition there is the
Barley and Malt, and Hop Research Committee which, working
in conjunction with agronomists at agricultural schools,
attempts to develop new and better ingredients for beer. A
Washington Counsel is maintained, whose task it is to keep
a watchful eye out for unfavorable legislation, to advise
the membership of such legislation, and to try to prevent
its passage. There is a Transportation and Rates Committee.
There is a Technical Advisory Committee. There is an
Advertising Committee, and finally an Employee Relations
Committee. Until the last few years this last committee
had served only in getting information to members. It
mailed out data on contract provisions in different brew
eries and it kept the membership posted on the ever-changing
interpretations of the law as the political composition of
221
the N.L.R.B. has shifted back and forth. Now, however,
this committee has expanded its field of operations and in
recent years has actually participated and sat in with
brewers on contract negotiations. Some years ago the
practice was begun of making awards to those members whose
plants had the best safety records. Since this program
was inaugurated the accident rate in the entire industry
has declined by more than 50 per cent.
In reporting the Association's activities for 1961,
secretary Datus Proper told the 1962 Convention:
The Association home office distributed eighteen
different types of bulletins or newsletters, falling
into several categories. One grouping consisted of
regular Newsletters, Labor, Safety and Personnel
Letters. Then there is another broad category of
communication such as Statistical Memoranda, Export-
Import Bulletins, State Consumption mailings. Another
important classification is that of Law Digests,
Legislative Bulletins and action sheets, Legal Depart
ment Bulletins, as well as Field Services Department
mailings such as Local Option and Inter-Office Bul
letins and 'Dry Areas' books. . . . The total of all
above mailings during the past twelve months was
1,228,000 copies transmitted.?
There is obviously considerable overlapping in some
of the functions and committees of the Association. This
is not surprising since the general objective is the same:
sell more beer. Thus the Field Services Committee has task
^Proceedings. United States Brewers' Association
1962 Convention, New York, p. 15.
222
forces in twenty-five states. Its activities consist of
trying to get restrictive and discriminatory legislation
rescinded and prevent the passage of any more such legisla
tion. It also works on local option elections and attempts
to keep wet areas from going dry, and to persuade people in
dry areas to vote wet. In this latter area it has been
somewhat successful and at present only 8 per cent of the
population of the United States lives in dry areas. To
accomplish these aims, it is obviously necessary for the
Field Services Committee to cooperate with the Public
Relations and Advertising Committees of the Association.
Some idea of the variety of harassing legislation
that is constantly being promulgated by the prohibitionists
can be gained from Harris Perlstein's Field Services
Committee report to the 1962 Convention.
Bills to increase taxes; to prohibit, restrict, or
tax the use of non-returnable containers; to restrict
or prohibit grocery store licensing, and bills relating
to minors were the most numerous during last year's
sessions of the state legislatures . . . last October
the Michigan Liquor Commission adopted a regulation
banning the use of non-returnable glass containers,:. . .
at a hearing, Mr. Francis Hurley [U.S.B.A.] recommended
[that] the sale of beer in non-returnable bottles be
continued for the present. . . . The recommendations
presented by the bottle and can manufacturers, repre
sentatives of other industry in Michigan, 'Keep
America Beautiful,' and the U.S.B.A., resulted in the
governor's request that a broad-based committee be
223
appointed to study all aspects of the litter problem.®
IV. THE ADVERTISING PUZZLE AGAIN
Before leaving the U.S.B.A. and its activities a
further word on the activities of the Advertising Committee
is in order. It was said in Chapter II of this study that
advertising is most perplexing, asjregards its effective
ness, to the advertiser. This applies to a collection of
advertisers grouped together as an association to the same
extent as it applies to the single firm advertiser. The
objectives are clear as Joseph Griesedick, Chairman of the
Advertising Committee set them forth.
Certain general misconceptions about beer and ale
had to be faced and erased . . . that beer was a warn
weather drink, that it is strictly a man's beverage,
that it just did not belong on certain occasions, and
that it lacked certain social status.
He continued:
New several of these stumbling blocks to greater
industry sales were deemed likely targets that could be
attacked more effectively by product advertising than
by competitive brand advertising efforts.9
Two TV spectaculars were run and six of nine
®Ibid., p. 84.
9Ibid., p. 149.
224
scheduled four-color full-page advertisements in two
national magazines, LIFE and SATURDAY EVENING POST. Then
at a mid-year meeting of the Board of Directors of the
U.S.B.A. it was decided that the results had not been up
to expectations, largely because of insufficient coverage.
Since to obtain what was felt to be minimal coverage for
achievement of the stated purposes would have required
expenditures vastly in excess of those available, the
advertising campaign was drastically curtailed in the
second half of 1961, resulting in an expenditure of
$500,000 less than originally budgeted.
Restrictions on Beer Advertising
In addition to trying to find the type of advertis
ing presentation which will best accomplish its aims, and
to trying to finance such a program, the brewing industry
is plagued by specific and stringent prohibitions as to
what may be said in advertisements. Among other statements
which are not permitted in the advertising of any specific
brand are those which state that beer has therapeutic
values or conversely that beer does not have inimical or
harmful effects. The Alcohol and Tobacco Tax Division
refused to render a decision as to whether these
225
prohibitions applied to product advertising or only to
brand advertising. The U.S.B.A. began running a series of
advertisements modeled on a campaign "Good For You." The
A.T.T.D. Legal Division then promptly ruled that the
advertising prohibitions would apply to such industry or
product advertising so the campaign was discontinued.^
The result has been a severe cutback in advertising
by the U.S.B.A. This has been emphasized even more by
Henry B. King who took over as president of the U.S.B.A. in
1963. Mr. King was for many years connected with the
advertising business and he has advised the Board of
Directors of the U.S.B.A. to hold their funds in reserve
until an idea or an opportunity presents itself whose
effectiveness seems reasonably assured.
Such activities cost money and of course are paid
for by the membership. Brewer members of the U.S.B.A. pay
4 cents per barrel dues with a minimum of $50 per month.
In addition each brewery pays one cent per barrel to the
Malt Beverage Industry Welfare Fund. With the cancellation
of television spectaculars, a rebate was given proportional
to past payments. As was mentioned, there is also a charge
^U.S.B.A. Proceedings. 1964 Convention.
226
to suppliers proportionate to the amount of business done
with brewers.
V. THE BREWERS' ASSOCIATION OF AMERICA
This organization was founded single-handedly by
William M. O'Shea, a one-time New York attorney whose
acquaintance with the brewing business came through his
efforts to sell labels made by a small company he headed
at the time. The organization is unique, so far as this
study has been able to determine, among trade and industry
associations. It offers an opportunity to study possibili
ties of increasing the number of aggressive competitors and
the degree of competition in many industries. As stated
earlier, Cochran makes only one reference, and that for
obvious reasons a slighting one, and Baron and the various
writings of the U.S.B.A. none at all to O'Shea or to his
organization. Yet, it is undoubtedly due to O'Shea's
efforts that the degree of concentration in the brewing
industry is so low, and the number of small brewers who
have survived, so large.
History
The original association was called the Small
227
Brewers Committee. It was formed during World War II.
The avowed intent was simple and direct: to do something
about the ever increasing size of the "giants," and to cut
the mortality rate of the small brewers. O'Shea and many
small brewers felt that the U.S.B.A., although it repre
sented more than 80 per cent of the beer barrelage in the
country, was only interested in the big brewers. It was
contended that the problems of the small brewers were never
given any attention and that only lip service was accorded
their demands.
The war-time period with its restriction on supplies
and materials offered O'Shea a splendid opportunity for
special pleading. It was due exclusively to his efforts
that the minimum allotment of malt, referred to in Chapter
IV, was obtained. Despite the fact that his efforts pulled
many small brewers, who would not otherwise have survived,
through a trying period, O'Shea realized that something
would have to be done about the management of the small
brewers. The steps that were taken are of sufficient
interest so that they should be recounted in detail.
Management of Small Breweries
O'Shea's first decision was that the management of
228
the majority of small breweries was at the worst incompe
tent, at the best uninformed. To eliminate the incompe
tence he could only hope to gain the confidence of the
owner and persuade him to get rid of the manager. Where
the two were combined in one individual O'Shea's task was
more difficult but he was never disinclined to coofoat (he
had played professional football). His frequently expressed
opinion was that if the firm pursued its present course it
would fail anyhow. The possible antagonism with which his
advice might be received could not hasten the firm's
demise, and the advice if taken, even though resented,
could only benefit the recipient.
To inform and educate the management of the small
breweries he early adopted two techniques, the bulletins
and the conventions. These will be discussed in inverse
order here.
The Small Brewers' Conventions
Many, if not the majority of all conventions of
trade associations are informal get togethers with a
leavening of speech making. The most worthwhile informa
tion is acquired from contacts and informal conversations
with suppliers and affiliates from other and non-competitive
229
areas of the country. Small brewers' conventions were
much more purposeful. Very few of the members of the
Small Brewers' Committee were direct or close competitors,
and where they were it was constantly emphasized that the
real competition was the giant national brewer who was
intent on putting all of the small competitors out of
business. Conviviality was permitted, even encouraged,
but it was frowned upon and brought stern warnings if over-
indulgence caused a failure to show up for meetings. The
conventions were school sessions and the work to be done
was hard and ample. Breakfast and luncheon meetings
featured talks that would have been considered difficult to
digest at the business sessions of other industry
conventions.
Salesmen of all supplies, especially advertising and
sales aids, were encouraged, even urged and pressured to
set up displays. Prior to the convention, by two or three
months, announcements of 27 contests had gone out. The
menfoers had sent in samples of their labels, their bottles,
their cans, for a jury of experts to choose a winner.
Letterheads, calling cards, every type of display and
advertising had a contest. The winners naturally were
featured in large displays at the convention. Frequently
230
one of the convention sessions would be devoted to a
lecture by one of the judges, generally a prominent figure
in the world of design, pointing out the strengths and
weaknesses of designs. As the small brewers browsed
through the convention halls, they looked, compared, and
learned. In all, there were at the 1963 convention twenty-
seven contests including such disparate and unlikely con
testants as coasters, house organs, TV commercials, and
mass floor displays.
At the 1963 convention talks were given by members
of the legal, sales, and merchandising staffs, and brewers
were urged to use these staffs to help them in solving
their problems. Convention talks were given on inducements
for better employee performance; the results of studies of
beer sales in supermarkets by major glass companies were
shown; and finally talks on point of purchase displays by
’’ Allied" members [dues paying suppliers]. The conventions
have always run like clockwork. The presence of an effi
cient organizing hand, like O'Shea himself, is omni-present.
At these conventions there is much that is inelegant and
uninspired, much that is banal, but there is much that is
new, much that is helpful. Those brewers, and there are
many, who belong to both the U.S.B.A. and the Brewers'
231
Association of America— the present name of the former
Small Brewers' Committee— are quick to state that the
Information acquired at the conventions of the latter Is
vastly greater and more helpful than at those of the
former.
Bulletins of the Brewers Association of America
The bulletins of the B.A.A. cover every phase of the
brewing Industry and many that seem almost Irrelevant.
These bulletins give Information on taxes and legislation,
particularly from Washington, where an office Is maintained
by John O'Neill, who like O'Shea, was an attorney. Such
new developments as the pop top cans are discussed pro and
con. The activities of the big brewers are under constant
and critical surveillance. The monthly data on brewing
production and beer consumption are given.
A review of several Issues of the 1963 bulletins
shows, among other Items discussed, the following;
Inspirational or fight talks. These are perhaps not
literary masterpieces but they serve their purpose and are
not overdone; Successful sales efforts by member, or big
brewers (If they can be successfully copied) are recounted.
Business forecasts as to general business are reprinted
232
from Business Week and the Wall Street Journal. There is
paternal advice on advertising, e.g., small brewers are
warned that with limited budgets for advertising, they
cannot cover every area and must concentrate on the medium
that they can get the best results from. They are told to
participate In extra curricular activities but not at the
risk of being Inattentive to business.
The range of coverage of the bulletins, In view of
the small staff of the B.A.A. Is astonishing and Is due In
large part to the indefatigable O'Shea. It does show what
can be done, however, with a small-budget well-managed
organization. The bulletins keep abreast of advertising
developments which may have applicability for small brewers
through the study of Printers Ink. Advertizing Age, and
numerous other publications. Beer news is gleamed from the
numerous United States publications of the brewing industry,
and in addition those of Canada, Great Britain, and
Australia. Tax and business matters are gleaned from Tax
Research Institute, U. S. News, and Barron's, as well as
those already mentioned. Information from suppliers is
passed on; e.g., a possible shortage of malt. Advice on
inventory is given, e.g., "I would commit for one half of
my hop requirements at the present time." The bulletins
233
tell of new developments such as the effect of neon lights
on metal foil labels and also on beer. There is advice
freely given on labor contracts and Information on the
N.L.R.B. actions both Inter- and Intra-state. With the
advent of the new Federal Income tax provisions, small
brewers were told how to adjust their depreciation sched
ules. It Is In the area of special bulletins, however,
that the B.A.A. supplies Its greatest service.
Special Bulletins
In 1963 B.A.A. sent out three sets of special bulle
tins once a month. Some of these ran to as much as 32
pages. In each of three areas of brewery operation they
provided the equivalent of a first class operational text
book. To show the coverage that is possible, the highlights
of each of the three courses of instruction will be listed.
Sales bulletins. The sales bulletins differentiate
between different classes of salesmen and their duties.
Among items covered are the problems of routing salesmen,
the problem of closing sales, of increasing actual selling
time, cutting down on over-visiting, classification of
accounts, proper use of reports, the planning of sales
calls which includes proper greeting, servicing and closing.
234
The list goes on and on. Every item on every page is
referred to beer selling. Examples are given. Small plays
are acted out with the sales manager in the role of unhappy
customer, then the right answer is given. No facet of
selling is minute enough to be ignored. Any sales manager
who works his way through this series of bulletins should
be able to organize and train a capable sales force. Any
owner who reads them should have an idea as to whether or
not his sales manager is competent.
Merchandising bulletins. Here again a top special
ist, Martin Rafal, has been retained to write a step by
step manual for beer deliverymen. Rafal describes selling
as getting a product into an account, while merchandizing
is getting it out. Here again the series is worked out
with utmost care, and in great detail. Once again it is an
effort to inform and educate both owner and employees.
Brewing bulletins. Ostensibly the brewing and
production bulletins are designed for the sales force. They
are couched in non-technical language and most of the
information would be considered rudimentary by any brew-
master or any graduate of a brewing academy. The primary
purpose is to enable the salesman to speak intelligently
about his product and to offer helpful suggestions for its
235
care and preservation to the retailer. The bulletins have
the further purpose of keeping the production department
alert. In the majority of the plants of B.A.A. members,
salesmen are taken on a tour of the particular plant area
following receipt and distribution of a production
bulletin. If proceedures in the plant differ from the
description in the bulletins, an explanation must be
forthcoming. Management too, can find out why certain
processes have been retained instead of being replaced by
improved techniques.
That the techniques of combined efforts can be
used by even the largest firms is shown in the following
quotation from an article to that effect in the Wall Street
Journal.
Falstaff Brewing Corp. last year entered into an
agreement with prominent brewers in England, Canada,
and Holland to exchange technical information at
twice-yearly meetings, and to start coordinated studies
of beer stability concentrates, and pasteurization.
The agreement "immediately quadrupled our research
force, with larger and more diverse backgrounds
brought into play" says Kurt Ladenburg, Falstaff
director of research.H
H-Wall Street Journal. June 18, 1964, p. 4.
236
Comparison With Large Firms
What the B.A.A. attempts to do, then, is what is
done in all the large breweries. In effect, the large
breweries have a vertical Integration of the selling
function because of their size. There is considerable
reason to believe, however, that the cost of information
and training of the small brewer who pays the B.A.A. dues
and a fee for attending the conventions is less than the
cost incurred by the large brewer for the same purposes.
O'Shea's scale of dues is also interesting since it
is based on the benefit principle. Dues are paid monthly
and amount to 5$ per barrel on the first 500 barrels. From
500 to 10,000 barrels the rate decreases to 2$ per barrel,
and on all barrels over 10,000 the rate is only 1$. This
also follows Adam Smith's third maxim of taxation, con
venience, since the months of larger sales are those when
it is easiest to pay. Most brewers feel that the $40 to
$50 fee for attending the annual B.A.A. convention is the
"best money they spend."
Certainly the B.A.A. makes available to the small
brewer talent which is unexcelled in any large plant. It
would appear that the only area in which the large brewer
can achieve a substantial per barrel cost differential in
237
selling and merchandising is in the mass purchase of
advertising, which was discussed in Chapter II. It is even
possible that the inflexibility which is almost Invariably
a greater or lesser concomitant of large scale operation,
will give the small firm, properly informed and educated
through its trade association, an advantage.
B.A.A. Regional Sales Meetings
In addition to the conventions, O'Shea has for many
years held regional sales meetings for the benefit of the
member brewers who can not afford to bring large numbers of
personnel to the annual conventions. At these regional
meetings all sales personnel from sales manager to the
drivers delivering beer and the distributors and their
sales and delivery people attend. These are generally
weekend meetings and are imttnsive two-day school sessions.
OfShea and perhaps two or three specialists, such as a
display expert, a draft beer expert, et cetera, will make
a tour of a large area of the country holding three or four
such meetings en route. If the mountain won't come to
Mohamet, Mohamet will come to the mountain.
Crusades of the B.A.A.
The B.A.A. never forgets the reason for its founding
238
and being— the unfair advantages that the big brewers have.
O'Shea lists among others these four: (1) The advertising
budgets of the big brewers; (2) the illegal furnishing of
equipment to retailers by the big brewers; (3) the fact
that the can weighs less than a bottle and lower freight
costs have widened the area in which the big brewer can
profitably operate; (4) multiple plants give the big brewer
an unfair and almost insuperable advantage over the small
brewer.
Occasionally anomalies develop. O'Shea has for some
years contended that the local and small brewers have an
advantage over the large shipping brewers in the sale of
draft beer. Draft beer is unpasteurized and hence highly
susceptible to mistreatment such as excessive age, warming,
agitation, and the like. It is difficult for a shipping
brewer to find a distributor with adequate facilities such
as refrigerated warehouse and trucks. It is also expensive
to ship draft beer via refrigerated truck or rail car.
Even though the market for draft beer was dwindling, it was
an area where the small brewer might profitably expend time
and effort.
The trouble was that the small brewer did not know
very much about the technicalities of serving draft beer
239
properly.
O'Shea solved this by employing a man who did know;
an expert on draft beer. With O'Shea, this expert toured a
great part of the country and conducted draft beer schools.
Then help came from an unexpected source. Anheuser-Busch,
in order to insure the proper serving of its premium all
malt Michelob draft beer, had set up a draft beer school in
St. Louis. Augustus Busch graciously offered the use of
these facilities to O'Shea and the B.A.A. who immediately
accepted. The offer and its acceptance caused some eyebrow
raising among members of the industry who felt that some of
O'Shea's more acerbate allusions had been directed at
Anheuser-Busch. O'Shea, however, will take help from
whatever source. He feels the small brewers are in a
battle for survival. In accepting Busch' offer he feels
he has no more compromised his position than Karl Marx felt
he had compromised himself by accepting alms from
Friederich Engel.
Beer Concentrate
At present a new threat has developed. Union
Carbide Company has invented a process by which most of the
water can be frozen and removed from beer. The resulting
240
high alcoholic content concentrate can be shipped to small
plants at low freight costs and there reconstituted. In
the September 1963 B.A.A. bulletin it was announced that
the Federal Beer Regulations had been amended to permit the
concentration of beer and its reconstruction at plants
owned by the brewer-shipper— these plants to be called
breweries. The fact that the reconstituted beer must be
labelled "Beer produced from beer concentrate," does not
diminish the threat in O'Shea's eyes. He is confident
this will spell the doom of the small brewers.
Due solely to O'Shea's efforts Congressman Byrnes
of Wisconsin persuaded Wilbur Mills, Chairman of the Ways
and Means Committee, to hold a special one-day hearing to
consider the question of what O'Shea calls imitation beer.
Not surprisingly the secretary of the International Union
of Brewery Workers testified against the legality of recon
stituted beer. In addition there was unexpected support
for the B.A.A. from Harris Perlstein, director of the
U.S.B.A. and head of the Field Services Committee of that
organization. Perlstein argued that beer concentrate would
wreck the beer business by rendering invested capital
worthless, and in addition would add to unemployment in the
nation. Another witness was Dwight E. Avis, Director of
241
the Alcohol and Tobacco Tax Division of the Department of
Internal Revenue. Avis testified that beer concentrate
was legal. Not unexpectedly Union Carbide's representative,
Mr. Browning, testified in favor of his company's Invention.
As a result of the hearing, Congressman King said he
doubted the legality of reconstituted beer and that a
decision would be deferred until a meeting of the full
committee.
O'Shea has stated that he plans to file suit against
the government, in the event beer concentrate is declared
legal, in the name of B.A.A., or perhaps in the name of a
brewer member. In somewhat flamboyant terms O'Shea has
promised to fight this battle "to the death," in behalf of
his beloved small brewers.
The extensive coverage given to the detailed opera
tion of the Brewers' Association of America has been
considered necessary in order to demonstrate the soundness
of a contention held by this study. Every big business
was once a small business. Even those which first appeared
as full blown giants, such as U. S. Steel, were the combin
ation of large organizations which had begun small. This
much is generally conceded by economists and business alike.
What is not so generally conceded, in many cases not even
242
appreciated, is that the small business has inherent and
great advantages over large businesses. Large business
is really an attempt to offset the real advantages of
small business. Large business is a constant effort to
build a fortress, to build an impenetrable suit of armor
without completely losing mobility. The large businessman
is aware of this, He knows that in single combat David
will always destroy Goliath. Only when the catafract is
massed and moving on a wide front can David's speed of
attack and mobility be offset. Where the small business
is properly organized and managed, the large firm has no
more chance of occupying the entire field of battle than
the Roman legions had against the Parthians.
The failures of small businesses are over
dramatized and exaggerated. They are attributed to
inherent weaknesses of small businesses in economies of
scale in production, in distribution, in advertising,
in financing, et cetera. Practically every study that
is made of the reasons for failures of small businesses
reveals, however, that the principle cause of failure
is bad. management. Calder in his study of family business
listed the ten major problems of the small
243
12
family-controlled business. The first four classifica
tions listed by him are (1) Securing management, (2)
Training management, (3) Providing management succession,
(4) Motivating management. Donham^ said:
The only significant analyses of the causes of business
failures are prepared by Dun and Bradstreet. A 1953
survey reaffirmed previous surveys in its findings
that 89.4 per cent of the failures were attributable
to managerial inadequacies or deficiencies.
Donham, who is quite frank in his dislike of federal aid
to small business makes the following suggestions as to
courses of action which the small business man may follow.
(1) He can avail himself of the educational oppor
tunities which now exist.
(2) If these do not fit his requirements, he can urge
his trade or industry association, or whatever
business organization he belongs to, to promote
the establishment of an educational program which
will fit his requirements.
(3) He may as an individual or through his business
association try to persuade the most available
school of business or commerce to undertake an
educational program for small businessmen.
l^Grant Calder, Problems of the Small Family
Controlled Business, mimeograph U. of U., 1959.
^Paul Donham, "Whither Small Business" Harvard
Business Review. Cambridge, Massachusetts: March-April,
1957, p. 75.
14Ibid., pp. 77-78.
244
What O'Shea has done, then Is to supply management
with the tools needed to keep the small brewer in business.
The factors that make the B.A.A. unusual among similar
trade organizations are the scope of Its activities and
the caliber of talent It has enlisted In bringing the
various phases of business operation to management. The
men In charge of preparing the special bulletins on
selling, merchandising, and brewing are as able as any In
their specialized areas. In fact, by selling their ser
vices on this basis, they can command higher Incomes In
many cases than If they were to devote their efforts
exclusively to one company.
As an attorney, O'Shea Is of course well aware of
the type of action that can bring an association afoul of
the Department of Justice and the Federal Trade Commission.
He does not need the advice given by Association Management.
In conducting such programs [statistical programs,
price reporting, cost accounting, and product standard
ization] ... a trade association should confine
Itself to collecting and distributing information for
individual members use. [As for sales promotion,
advertising, product research, and lobbying.] In con
ducting these programs the association need not limit
itself to acting as a conduit for the exchange of
information. It may act for the entire group of the
members and the members may cooperate in carrying out
245
a fixed program.^
In short, O'Shea's statements and opinions fit in
very well with a statement which Association Management
attributes to Herbert Hoover when he was Secretary of
Commerce. He said:
Trade associations are the safeguards of small
business and thus prevent the extinction of competition.
With wisdom and devotion their voluntary forces can
accomplish more for our country than any spread of the
hand of government.16
The only element of surprise is furnished by O'Shea
himself. His salary has always been modest— far less than
those of the men who have employed him. He has put in long
hours and at times his thanks have been castigation and
ingratitude. He has supplied entrepreneurship to a loosely
knit group of disparate individuals so that each may suc
ceed under different geographical and competitive conditions.
The essence of entrepreneurship is to recognize a need and
to select men with the requisite talents to fill the need.
As Thomas Fuller said of Sir Francis Drake, "Should those
that speak against him fast till they fetch their bread
^Chamber of Commerce, o£. cit.. p. 372.
16Ibld.. p. 5.
246
17
where he did his, they would have a good Stomach to eat it.
VI. CONCLUSION
This chapter has been concerned with the functions
of trade organizations because it is felt that these
organizations can have considerable influence on the degree
of concentration and competition in an industry. In the
course of assembling data for this study calls were made
upon numerous successful small manufacturers and business
men. These included a rock bit manufacturer, a rubber
glove manufacturer, some small paint manufacturers, small
furniture manufacturers, et cetera. Although all belonged
to trade associations, none had heard of a trade associa
tion which performed the variety of services of the B.A.A.
It is interesting to note also that all felt that they were
not greatly at a disadvantage vis-a-vis the large firms in
either manufacturing knowledge or sales efficiency.
Between the trade associations and the scientific help
available in one area or another they were pretty much able
^Thomas Fuller, The Holy State and the Profane
State (New York: Columbia University Press, 1938) Vol. II,
p. 141.
247
to hold their own. The two trade associations in the
brewing industry offer a contrast in aims and methods of
operation. The United States Brewers Association devotes
the majority of its efforts and energies to keeping the
industry in business by counteracting the efforts of the
prohibitionists. The efforts made by the U.S.B.A. to
expand the industry's total sales are definitely secondary
to those of self-preservation.
The outstandingly different feature of the Brewers'
Association of America is its overt opposition to another
segment of the industry. In other industries trade organ
izations, as part of their efforts, attempt some
educational effort for the benefit of the smaller members
of the industry. Practically none has this as its single-
minded objective, however. Furthermore, the B.A.A. is
unique in its candid criticism of the tactics and ethics of
the larger members of its industry. As has been stated, it
is also unique in the extent to which it attempts to
educate the managers of the smaller members. In great part
the survival of large numbers of small brewers can be
attributed directly to the successful efforts of the B.A.A.
CHAPTER VIII
RELATIONS WITH MIDDLEMEN
Relations between brewers and middlemen are divided
into three groups. There are relations between brewers
and distributors, between brewers and off-sale retailers,
and between brewers and on-sale retailers.
I. BREWERS AND DISTRIBUTORS
The problem of relations between brewers and
distributors is an ancient one and, indeed, is dependent
on whether the brewer feels there are advantages in
vertical integration or not.
In the early days of the brewing industry there was
no question in the brewers1 minds. They owned their
agencies or branches. (The terms were used indiscriminate
ly.) As early as 1879 Pabst owned its Kansas City branch.*
The earlier practice appears to have been to own the
distributing branch in larger cities or sales areas and
*Thomas C. Cochran, The Pabst Brewing Company (New
York: New York University Press, 1948), p. 140.
248
to use wholesale agencies in the smaller towns. There
were exceptions, however. New York and Philadelphia were
served by wholesale agents for many years, while Houghton,
Michigan and Stevens Point, Wisconsin had branch offices.
The determining factor was the caliber of management
obtainable. To sell draught beer In saloons, Inducements
were necessary. "These Inducements generally took three
forms: money spent at the bar by the salesman treating
the bar'8 customers; discounts on the per-barrel price of
beer; easy credit terms."
Obviously judicious spending required judgment and
diplomacy. Niggardliness, or even the reputation for It,
would mean no sales. Conversely, It was a simple matter to
squander far more than the profit realized on the sale of
beer to an account. This curious departure from conven
tional sales practice Is almost unique to the alcoholic
beverage Industries and will be described In greater detail
In the chapter on competition.
Branches vs. Agencies and Distributors
Volume of business was, of course, the determining
250
factor as to whether the brewery employed an agent,
established a branch, or in very small areas solicited
through brewery "travelers" and shipped directly to the
retailer, pabst, according to Cochran, preferred branches
to agencies, "even though it was not always done, it was
advisable, when the sales through a certain city became
large, to supersede an agency with a branch presided over
by a salaried manager."3
The decision to "go national," indeed, depended in
large part on whether or not a brewer could develop a
satisfactory distribution system of agencies. By 1893:
The St. Louis firm of William J. Lemp, for instance,
maintained branch offices in Birmingham, Los Angeles,
San Francisco, Leadville and Pueblo in Colorado,
Atlanta, Wichita, Atchison, Joplin, Memphis, El Paso,
Galveston, Salt Lake City, and many more towns and
cities in all parts of the country.4
Some of these could hardly be dignified by the appellation
"office," let alone "branch" or "agency," but many repre
sented a large capital investment employing numerous
individuals with ice storage and facilities for storing
large quantities of both draught and bottled beer.
3Ibid., p. 170.
^Stanley Baron, Brewed in America (Boston: Little,
Brown and Company, 1962), p. 258.
251
Agencies of this kind had been maintained by a
number of brewers even before the era of national
distribution. In New Orleans there existed in 1864 an
agency for the Lowell Ale Brewery of St. Louis. The
Vassar Company in Poughkeepsie had maintained repre
sentatives in New York City and along the Hudson River
even before 1850. The leading Albany firm, John Taylor
and Sons, established important depots in New York
City and Boston in 1851. In 1876 Anheuser's "St. Louis
Lager Beer" was advertised as being sold by first-
class grocers and liquor dealers in Denver. But these
were barely comparable to the elaborate network of
distributing agencies set up in the 'eighties and
nineties' by Anheuser-Busch, Pabst, Schlitz, Lemp and
a few others. Between 1878 and 1893, Pabst estab
lished forty branches throughout the country. By 1884
Anheuser-Busch had thirteen agencies in Texas alone.
The Christian Moerlein Brewing Company of Cincinnati
had agencies for its beer in New Orleans and Americus,
Georgia, thus competing with firms that were larger
than itself.5
Even today there is no unanimity among brewers as to
the advantages of vertical integration via direct ownership
of distribution as opposed to sales at a lower price to a
distributor or agency who maintains a warehouse and fleet
of trucks, and handles the distribution independently of
the brewery. While it will be discussed in greater detail
in the chapter on competition, the fact should be noted
here that often distributors, particularly those operating
in towns and cities where breweries are not located,
frequently, perhaps in the majority of cases, handle more
5Ibid., p. 259.
252
than one beer. In general. If two beers are sold by one
distributor one will be a 'national' or 'premium'beer in a
high price range, and the other will be a 'local' or
'regional' beer which is priced lower. In smaller communi
ties it not infrequently occurs that a distributor will
handle as many as four beers, two in each price range;
becoming a jobber rather than an agent for any one of them.
There are even situations where a small local brewer
handling his own distribution to retailers has become,
additionally, the distributor for a large national brewer.
Relations with Distributors
The relations between the brewer and the non-brewery
owned distributor varies with the area and brewery. In the
majority of cases the brewery sells its beer to the distri
butor for a sum from 25 cents to 60 cents a case below that
charged the retailer. In addition the brewer furnishes
display materials, point of purchase advertising materials,
and neon signs where they are permitted. Finally, the
brewer sends salesmen into the distributor's territory to
work with him and help him in the sale of the brewer's beer.
In the distributor'8 case, he supplies the delivery
transportation and the warehouse, including refrigeration.
253
He delivers the beer and is responsible for the debts of
the retailer. This last is not always the case since one
of O'Shea's most frequent complaints, alluded to in
Chapter VI, is that the large brewers encourage their dis
tributors to extend excessive credit, thereby tieing the
retailer to the distributor. An equal amount of credit is
then extended the distributor by the brewer, so that the
large brewer in fact extends excessive credit which his
superior financial position and readier access to funds
enables him to do, while the small brewer can only sit by
and protest.^
The Snail Brewer and the Distributor
The distributor system has largely supplanted the
brewery-owned branch system, especially in the case of the
national shipping brewers. Many smaller and local brewers
still handle their own distribution in their home towns.
This is logical since the warehouse and refrigeration
facilities are already available at no extra cost. Also,
if there is sufficient volume of business to justify one or
^It must be noted here that while this allegation
was made about many brewers, never in 25 years did the
author hear it made about the two largest brewers, Anheuser-
Busch and Schlitz.
254
more delivery trucks, the brewer does not have to worry
about the possibility of fighting for his share of a
distributor's divided loyalty, .lit does, indeed, place the
brewer in the position of operating two businesses, a
manufacturing and a selling business. This can be disad
vantageous if, as was pointed out, the situation is likely
to be one where the company already suffers from insuffi
ciently competent management. Offsetting this is the fact
that there are some economies of physical plant, undivided
loyalty, and finally the fact that any distributor who
would take the small amount of business offered him in
most cases, by the local brewer, is unlikely to have
appreciably greater entrepreneurial ability than the
brewer himself, if indeed, as much.
The Large Brewer and the Distributor
At the 1964 U.S.B.A. annual Convention no less than
three of the talks given at the business sessions discussed
the plight of beer distributors. John T. Morris, Vice
President-Marketing of the F. and M. Schaefer Brewing
Company recognized this explicitly when he said, "There
are very few of us, I'm sure, who have not heard the lament
of many wholesales, [distributors] that their margins are
255
shrinking-*-and in some cases to the danger point.
Mr. Morris pointed out that the consequent demands or at
least expectations of distributors had led to an untenable
situation.
In some areas .... very often a wholesaler will
expect the brewer to do the canvassing, the merchandis
ing, and the selling (as opposed to order taking).
Most brewers, I believe, cannot afford to supply sales
help, advertising, and a 60$ a case gross profit.8
It was Morris' opinion that the brewers must help
their distributors if both are not to suffer. He made an
oblique reference to the fact that such help could possibly
be in the nature of most fundamental and rudimentary
business practices. "You'd be surprised how many good
9
wholesalers do not operate with a budget." This is
unlikely to be enough, however, and if distributors and
brewers are to continue to prosper there may need to be
modifications of time honored practices. He believed, for
example, that it might be necessary for distributors to
handle three or four brands of beer instead of the
^"Removing the Roadblocks to Distribution," Proceed
ings of the United States Brewers Association 1964 Annual
Convention. Bal Harbour, Florida, February 3-4-5, p. 71.
8Ibid.. p. 72.
9Ibid., p. 73.
256
customary two. It may be necessary for several rival
distributors to coufoine bookkeeping facilities under a
system of computerization. Finally, he believed that a
great deal of waste could be eliminated if several distri
butors were to combine their warehouse facilities. He
concluded:
Let's think about that sales area with the driver
salesmen, the 69$ mark-up, and the brewer's extra
selling costs. If this condition can't go on too
long, I'm wondering if this isn't a solution: Instead
of two or maybe three brands that the wholesaler is
handling now, perhaps he should handle 5 or 6, take
less margin, stick to the delivery, and let the brewer
use his additional income for selling.10
The suggestion that wholesalers be allowed to
handle more beers than is the case at present brought forth
a number of questions in the open discussion period which
followed the prepared speeches. Mr. Morris was questioned
as to how this could be accomplished when brewers would not
permit their wholesalers to take on additional brands, even
additional non-competitive brands. Mr. Morris was not
intimidated, however, and insisted that a new concept be
looked for, "because it may [be] that the wholesalers will
pull out from under us by sheer attrition if we are not
*®U.S.B.A. Proceedings. 1964 Convention.
257
careful f alcl
Mr. Morris' remarks were seconded, by Robert H. Hogg
a prominent Georgia wholesaler who also addressed the
convention.
The Need for Greater Distributor Volume
What both Messrs. Morris and Hogg overlook is the
economic relationship of marginal cost and marginal revenue.
As long as the number of units delivered to each customer
remains small, and union wages are high and keep increasing,
the answer will not be found in handling a greater number
of beers. The answer will not be found, either, in an
increased payment per case. What will have to be done is
so to plan deliveries and store inventories as to permit
sales of a greater number of units to each customer. Only
in this way can there be an approximation of economic
efficiency, i.e., marginal revenue equal to marginal cost
with the marginal cost curve cutting the marginal revenue
curve from below.
As an example of this, the following can be cited:
many small breweries in towns such as Ogden, Utah or Grand
11Ibid., p. 76.
258
Junction, Colorado, are operating at considerably less than
maximum possible capacity. A so-called agent in another
state who is actually an individual with a beer importer's
license, will request delivery of a carload of beer. The
railroad-carload, or truckload of beer, however, does not
go to the importer, but instead is delivered to the ware
house of a supermarket. The price is generally low, since
the brewer has no sales or advertising expense and no credit
worries. The importer exacts a small commission, often as
little as five cents per case for his role as intermediator.
The chain store has a low-priced beer and everyone has
shown a profit, although in many cases a more modest one
than would have resulted had the transaction followed the
more customary trade channels.
II. RELATIONS BETWEEN BREWERS AND "OFF PREMISE" RETAILERS
Off-premise beer licensees are those stores, road
side stands, or other establishments which sell beer to
consumers but who do not permit the purchasers to consume
the beer on the vendor's premises. Naturally the vast
majority are grocery stores. It was mentioned earlier that
supermarkets and chain stores account for the bulk of
grocery store sales. This is emphatically demonstrated in
259
Table V.
TABLE V.
SHARE OF U. S. GROCERY SALES
1952 1962
Small Stores 39% 18%
Superettes 22% 14%
Supermarkets 39% 68%
Robert W. Mueller, "Beer and Supermarkets,"
Proceedings United States Brewers Association, 1964
Annual Convention, p. 61.
As was also pointed out earlier, this has made a
great difference in the relations of the brewer to both
the retail seller and the consumer. The quondam relation
still exists in the case of the "Ma and Pa" store. These
are the smaller, generally neighborhood stores whose
services frequently include delivery, credit extension,
Sunday and off-hour openings, et cetera. The number of
employees is small; in many cases only the owner and his
wife (hence the name) and the brewery salesman is able to
a
persuade the owner of the merits of his brewery's product.
This means that the brewery has an ally, and the sale of
the beer will be promoted by a loyal store owner. As was
pointed out, this results in a personalized relationship
extending from brewer through retailer to consumer.
Relations with Supermarkets
The situation with regard to number of items and
profits in supermarkets is described by Mr. Mueller in
Tables VI and VII.
TABLE VI
NUMBER OF ITEMS HANDLED PER SUPERMARKET
1950-3750 . . , . . . 7600 added
4750 dropped
1960-6600 . .
FOOD CHAIN
TABLE VII
NET PROFITS [% OF SALES]
1957 . . , . 1.41%
1958 . . . 1.40%
1959 . . , . 1.38%
1960 . . , . 1.32%
1961 . . , . 1.26%
1962 . . , . 1.20%
In addition Mr. Mueller pointed out that although
beer sales are greater and sales per shelf foot are
261
greater than for the average grocery item, because of the
lower margin on sales, beer does not return quite the
margin per shelf foot that other grocery Items do.
It Is here that the brewer's sales force all too
often, breaks down. Obviously with a net profit of 1.2 per
cent of sales, the purchasing agent of a supermarket Is not
too Interested In friendship or personalities. Nor Is he
Interested In supporting home grown Industry. He Is
Interested exclusively In what the margin per shelf foot
will be, and In what the product will do for him.
Salesmanship and the Supermarket
This Is not to say, however, that salesmanship is
of no avail to the brewery salesman confronting the super
market buyer. The latter is not omniscient and if the
brewery salesman can point out to him proven methods of
Improving profits, he will have a receptive audience. In
addition, more and more chain stores and supermarkets have
discovered that the most important single factor in attract
ing and holding customers is store personnel. This means,
of course, that there must be,
. . . more emphasis . . . placed on personnel
recruitment, training, with continued decentralization
and greater responsibility for division and supervisory
262
staffs— increased authority and responsibility for
store managers and.41arsonnel.i2
Mr. Mueller then makes a statement that again high
lights in simple terms the fact that there is no such
animal as the economic man and most certainly not an
economic woman.
A startling correlation runs all through this part
of customer research ["why was this store selected for
shopping"]— and answers to other questions— namely—
that when customers think highly of personnel, a halo
is created that spreads throughout the store— prices
become lower, stamps more valuable, meats more tender,
produce fresher. and aisles wider than in other stores
they patronize.13
It is interesting, and indeed, somewhat amusing to
observe such lessons in selling and marketing at meetings
of the U.S.B.A. For years the small brewers' meetings
under the aegis of O'Shea have been expounding the identical
principles.
Costs of Distribution
One of the difficulties in putting into effect a
system of merchandizing capable of producing appreciable
results is the matter of costs. Brewery drivers, and
distributors drivers have long espoused through their
l2Ibid., p. 67.
13Ibid.
263
unions the "limit on a day's work" method of featherbedding.
In California, for example, contracts with the Teamsters'
Union specify how many cases, and/or kegs, and/or customer
calls may be made before the limit of a day's work is
reached. Ten cases count one point and one delivery stop
counts one point. Twenty-six points, i.e., 110 cases and
15 delivery stops, or any other combination totaling 26
points constitutes a day's work, regardless of the number
of hours required. Every two points in excess of 26 calls
for one hour in over-time pay. In addition there is a time
limitation of an eight hour day. All efforts to get beer
delivery drivers to go on a straight commission or piece
work basis have been rebuffed in California, although in
some states, e.g., Utah, this latter method is successful.
In addition, in many stores the Retail Grocery
Clerks' Union will not permit anyone not belonging to this
union to place goods on grocery shelves. This sorely
handicaps efforts at display and results in salaried, non
union brewery personnel following the delivery men to each
8top and there checking to see that the beer is properly
rotated and displayed. In addition these "display" men
will set up signs, or aisle or table displays.
264
Private Brands and Warehouse Delivery
The average load of beer delivered by a driver in
14
California will not exceed 110 cases per diem. For this
the driver will be paid $26 to $32 per diem. This means a
cost of from 23$ to approximately 30$ for each case of beer
delivered to an account. If, however, the beer is
delivered in large transport trucks to chain store ware
houses no such limitation on case delivery obtains, and
several thousand cases may be delivered in one day by the
use of pallets, pallet-loaders and automatic loading and
unloading equipment. The brewery is thus able to cut the
price by 20$ or more per case. This has brought the so-
called "private brand" into prominence. These brands are
put up exclusively by a brewer for one account. One brewer
packages his beer under more than 40 different labels.
Generally these "private brands" are used as price leaders
and the grocer's markup is sufficiently lower than that on
the "regular" brands so that his total profit is not
increased. That the trend is toward by-passing distribu
tors and making large "drops" to chain stores is shown by
the following convention statement by Alvin Griesedick, Jr.,
^Information given the author by California brewers
and distributors.
265
Vice President and Director of Marketing of Falstaff
Brewing Corporation, fourth largest in the United States:
I think the day will come when probably all of us
will be forced to make drop shipments to some of these
large supermarkets.
1 pointed out 1 did not think we could by-pass our
distributors because I feel the volume they buy is such
that it would be rather foolish for them to be buying
off of a truck that is making many stops [sic]. A
chain or large market can buy in carload lots.
1 feel this is coming. Somehow we must work it out
to where the distributor gets something to do the
merchandising. ... It certainly has to be done.
The brewer referred to above who has over forty
private labels has stated that he, of course, does no
merchandizing of the private label beers, and of course,
could and would not pay a distributor for merchandizing.
He also has been able to negotiate with the union so that
large drops can be made at chain store and supermarket
warehouses. Thus far he has been able to keep the chain
stores, the union, and the several dozen distributors in
the area serviced by his brewery, if not completely satis
fied, at least'operating with a reasonable degree of
harmoniousness.^
*^Alvin Griesedick, Jr., 1964 Convention, loc. cit.
^^Like much of the other information in this study,
the above was imparted in confidence, and that confidence
will be respected.
266
This brewer, too, has given up any attempt to handle
his distribution. In reply to a question he stated that at
one time he had operated over one hundred delivery trucks
and drivers. He had decided that the delivery operation
could be handled better and more cheaply by a number of
distributors each operating in a smaller territory and
handling at least two different beers in different price
categories. Closer surveillance and supervision would be
possible and these would make for greater efficiency. He
felt the results had justified this estimate.
III. RELATIONS WITH ON-PREMISE CUSTOMERS
The keeper of an inn or tavern, who is never master
of his own house, and who is exposed to the brutality
of every drunkard, exercises neither a very agreeable,
nor a very creditable business. But there is scarce
any common trade in which a small stock yields so
great a p r o fit.1 7
Like so many of the statements of Adam Smith, the
above is today almost as difficult to improve on in either
content or expression as it was when it was written. The
troubles that the brewers were never able to overcome in
the era of the tied-house have been described in some
^Adam Smith, The Wealth of Nations. Edwin Cannan,ed.
Modern Library, (New York: 1937), p. 101.
detail. The great emphasis at the time of repeal was on
the evils of the saloon and there was a universal sentiment
to the effect that the old-time saloon must not return. So
fearful were the lawmakers of the saloon's power for sub
version of the innocent, unsuspecting, and weak, that in
eleven states which permitted the sale of liquor, such sale
could only occur at state stores which dispensed spiritous
liquor by the heavily taxed bottle. In such states only
beer and in some of these only 3.2 per cent beer could be
served for consumption on the premises, either on draught
or in bottles. In the states of Washington and Oregon beer
of any strength and wine could be consumed on the premises
if properly licensed.
Erosion of the Tied-House Laws
Any hope that the new laws would change the situa
tion materially from what it was in pre-prohibition days
were quickly dissipated subsequent to repeal. The brewers
found themselves being importuned to furnish equipment with
which to draw draught beer. Those who attempted to demur
were confronted with the frequently valid threat that
refusal would lead to such an installation by a competitor
and the use of the competitor's beer. All too often
268
brewers succumbed to these pressures and discovered ways
to circumvent the laws. This is the practise O'Shea
denounces so vehemently.
In other cases beer was served in a condition which
reflected small credit on the brewer. When he remon
strated with the customer and explained the proper and
necessary procedures for the serving of draught beer, he
was told that if any such elaborate and troublesome
procedure was to be followed, the expensive equipment would
be installed and maintained by the brewer. In their
anxiety to sell, few brewers had the fortitude of the
brewmaster-president-owner of the small brewery in Columbia,
Nebraska. This gentleman, when he received complaints
about his draught beer would hasten to the trouble spot and
order a glass of beer. If, as was usually the case, the
beer had been maltreated, the brewer would berate the pro
prietor in vehement and resounding terms, explaining that
to give such a splendid product to such an unappreciative
and incompetent custodian was truly casting pearls before
swine. Either the proprietor would mend his equipment and
his ways or he would get no more beer.
Such conduct, however, was sufficiently out of the
ordinary as to attract industry-wide attention. Most
269
brewer8 bemoaned the demands upon them, pleaded that if
they didn't accede to them, their competitors would, and
succumbed. Like blackmail, yielding to such pressures has
brought no surcease but rather has intensified the problem.
The Problem in "Beer Only" States
In the states where only beer is permitted to be
consumed on the premises, the more flagrant abuses occur
where draught beer is served. To be served properly
draught beer requires equipment costing several hundred
dollars, the purchase of carbonic acid gas to force the
beer to the taps, refrigeration, and finally cleaning and
sterilizing at least once a week. An economist might be
of the opinion that a rational proprietor would consider
the above as opportunity costs, and weigh them against the
disadvantages of losing customers. Once more this would
show the error in thinking of an economic man. In real
life, the vast majority of draught beer dispensers show the
keenness of Adam Smith's insight. Either the brewer will
furnish the equipment and maintain it, or the proprietor
will sell inferior and unpalatable beer. The brewer, not
to be out-done as a non-economic man, complies with the
request and, in an astonishing number of cases, proceeds to
270
lose money on the account for .as long as he retains It.
So widespread have become the violations of the laws
and regulations forbidding the furnishing of equipment that
In many states the brewers have asked to have the laws
modified so that they may furnish new or replacement equip
ment not exceeding a nominal amount, say $10. They have
also asked for, and In some states received, permission to
clean equipment on the grounds that otherwise their
product will not be presented to Its best advantage.
Tavern Spending
The margin on draught beer has always been narrow,
but that has not prevented the inn-saloon-tavern-keeper
from making, and the brewer from acceding to, their
requests. The brewers have a class of salesmen who in
earlier days were candidly called spenders. Since repeal
they have been referred to by the more euphemistic soubri
quet of "good-will men." That the spending of money with
draught beer customers is an institution of long standing
is shown by the following from Cochran:
When the representative of the company whose beer
was on draught came to get his order, whether he was a
'peddler* (the name given to the salesmen drivers of
trucks) or an executive of the company, he was expected
to spend a considerable sum at the bar treating the
271
regular customers. This was an expensive way of
attracting trade, not only because the products of
other manufacturers had to be purchased, but also
because the need for drinking with the customers in
one establishment after another undermined the consti-
tuion and efficiency of the representative. Pabst's
spendings for the sale of keg beer in Milwaukee between
1883 and 1893 show that this expense ranged from 23
cents to 43 cents per barrel sold [beer sold for
approximately $6 per barrel so this amounted to from
about 4 to 7 per cent]„18
This practice of bar spending and drinking has con
tinued until the present day. It is interesting to note
that in 1879 the Pabst agent in Kansas City made an attempt
to abolish spending by giving the retailer a flat rebate of
50$ on each keg purchased, in lieu of spending. Cochran
observed, "but the 'spendings' system was stronger than the
man; Merritt did not make a success of the Kansas City
branch and soon had to be replaced.^ Seventy years later,
in 1949, the manager of the Fisher Brewing Company in Salt
Lake City attempted the same cure for spending as the
unfortunate Merritt. The results were almost exactly the
same as they had been in Kansas City.
*®Cochran, oj>. cit., p. 140.
19Ibid.. p. 141.
272
Other Sales Inducements
Many other rebates, discounts, and kickbacks have
persisted over the years. Most of those described by
Cochran continue in one form or another today:
When a proprietor took on a new beer, he usually had
to drop some brand previously sold, and therefore was
in a position to ask for a discount from the stated
price, as well as other compensations such as long-term
credit and loans for new furnishings or remodeling.
Similarly, when an agent of a competitor offered such
inducements, the brewer already supplying the saloon
or hotel had at least partially to meet such offers.
Furthermore, the saloonkeeper who could sell a large
steady volume expected some discount from the stated
price, even if he did not change brands. Such dis
counts might run as high as 10 per cent, although more
often they were 5 or 6 per cent. All brewers seemed to
have been forced to grant them on occasion, although
they did not like the fact to be known.20
It was practices such as these that led to brewery
ownership of saloons, i.e., the tied-house system. While
the value of the real estate acquired in the pursuit of
beer business generally depreciated rather rapidly as Price,
Waterhouse informed Pabst,2* - the loss probably amounted to
less than the business would have cost through the spend-
discount-rebate channels. Cochran says that until 1898
Pabst was considered a modest spender and a small owner,
20Ibid.. p. 141-142.
21Ibid., p. 142.
having only 250 retail outlets in Milwaukee, in an e£fort
to develop a greater share of the profitable "city"
business, Pabst increased its outlets to 400 by 1907. Also
the total of spending, allowances, rebates, and discounts
varied from a low of $339,741 in 1905 to a high of $429,266
22
in 1916 during the 15-year period from 1903 to 1917. It
is evident that the independent saloon Shylock was still
exacting his pound of flesh.
Additional Proscriptions
To a great extent a similar condition exists today
despite the myriads of regulations and laws that have been
legislated to prevent abuses. An outsider is understand
ably perplexed when he finds detailed attention given by
lawmakers in proscribing matches, coasters, calendars, ash
trays, menu covers, napkins, et cetera. et cetera, ad
infinitum. At one time or another, all of these have been
banned in an effort to prevent "commercial bribery" as it
has been termed by many legislators.
That the public as a whole is still inclined to
regard the brewing industry with suspicion is shown by the
274
forthright statements to the brewers at their 1964 conven
tion by Dwight E. Avis, Director, Alcohol and Tobacco
Division, U. S. Treasury Department.
Your 1913 year book noted with considerable concern
the prohibitionists' claim that "the saloon has been
expelled from one-half of the population and from two-
thirds of the geographical area of the country."
The increasing public sentiment for prohibition
stemmed from the disorderly and disreputable conduct
of the saloons— a fact also clearly recognized by
your Association in its 1913 year book. The disgrace
ful conditions accompanying retail sales in saloons
were thought by many to be the result of intensive
competition between brewers to tie up well-located
retail spots, block by block, to handle their products
on an exclusive basis— in much the same way the
gasoline producers in later years controlled service
stations in an effort to freeze out competition and
increase their own sales in each community.^3
Also Avis made the ambiguous statement:
With an outlet for his [the law-abiding honest
brewer] normal product denied, he had no recourse but
to discontinue business or turn his attention to the
production and marketing of near-beer and soft drinks.
But this "Hobson's Choice" proved unrewarding and the
number of qualified plants declined from 1,092 to 164
during the prohibition era.
The production of beer, however, did not cease dur
ing this period. The scandal attendant upon its
illigitimate production reflected upon and besmirched
the legitimate trade. The gangster killings, the dis
tribution of beer through abandoned city pipe lines,
^^U.S.B.A. 1964 Convention Proceedings (New York),
p. 31-32.
275
the hyjacking of trucks, the extortion and bribery
attendant upon gangster activities are still remem
bered. In the public mind, mention of a brewer no
longer brought forth the picture of a dignified and
respected leader in the community, but, instead evoked
the image of a law violator.
One interesting proscription has been that on the
furnishing of outside signs, generally illuminated. Cochran
refers to this in terms of injured innocence:
California, for example, in 1935 suddenly limited
the size of outdoor signs to 720 square inches, outlaw
ing $100,000 worth of Pabst equipment and about half
as much for both Anheuser-Busch and Schlitz.25
Actually with the economies of scale of large advertising
purchases, big brewers were able to furnish signs of a size
and elaborateness that were completely unobtainable by the
smaller brewers. The retailer welcomed these signs which
as a rule contained his name and hence constituted adver
tising for his establishment for which he did not have to
pay. Brewer vied with brewer. Signs went from large to
huge to colossal. The prohibitionists set up a hue and cry.
Public protests grew more frequent and vehement. Still the
large brewers protested against any restriction in size or
expense since this would infringe on their right to
24cochran, oj>. cit., p. 366.
276
"advertise." As Marx said, the businessman will sell the
hangman the rope to hang him with if he can make a profit
on it. Unquestionably, if laws had not been passed limit
ing the size of beer signs, the excesses to which the
brewers were rapidly tending would have evoked a strong
prohibitionist reaction.
Today, because of the strictness of legislation, the
"chiselling" that goes on is more sotto voce than ever.
O'Shea insists that the large brewers are making under the
table handouts in a variety of ways. As stated earlier,
there has been no accusation, implied or direct, of either
Anheuser-Busch or Schlitz breweries. As for the allega
tions and accusations that are made, it is difficult to
ascertain whether they are motivated by suspicion, jealousy,
or knowledge of the facts. Most such allegations and
accusations, indeed, are remarkable for the paucity of
precise data such as date, place and amounts. Those brew
ers in the best position to know, believe that the primary
method of evading the laws today is through excessive
allowances for leakers, i.e., kegs of beer which fail to
draw properly and on which the retailer fails to recover
his original purchase price let alone a profit.
277
Relations with on Sale Premises Customers who Handle
Spirits
Where on sale retailers handle both draught beer
and spirits the abuses of credit, et cetera, are much the
same as has been detailed above. Where only bottled beer
is handled for consumption on the premises the abuses are
far less. The reasons are almost self-evident. Draught
beer requires a considerable investment and seldom are
more than two and almost never more than three brands
handled. Even with the finest of care and equipment there
must be a reasonably short turnover period if the unpas
teurized product is to retain its freshness and palatabil-
ity. Thus, whereas a dozen bottled beers may be available
in a tavern, one or at the most two brewers will share the
tap or draught beer business. Even where the only beer
sold is bottled beer, however, the old rule still applies:
the distiller makes the profit and the brewer pays the
freight. An outsider must certainly be astonished to hear
a tavemkeeper reassure a careless patron who has damaged
some tavern equipment. This reassurance inevitably takes
the form of a statement that the brewery will replace the
broken window, glassware, mirror, chair, or whatever, upon
pain of having the tavemkeeper transfer his beer patronage
278
to a brewer who will make the replacement. It is never
intimated that a distillery might be called upon for such
a financial contribution.
The Influence of Oligopoly
Admittedly, the type and character of saloon or
tavemkeepers, referred to at the start of this section, is
a factor in this type of middleman relation. There is a
further explanation possible, however, which pertains to
economic theory and practice. The distillery business is
a definite oligopoly. Table VIII shows the concentration
in the whisky business.
TABLE VIII
PER CENT OF TOTAL VALUE ADDED
4 Largest 8 Largest 20 Largest
1956 51.4 75.2 91.1
1955 49.6 72.1 88.1
1954 61.9 76.9 89.2
1947 78.2 89.6 94.9
Ralph L. Nelson, Concentration in the Manufacturing
Industries of the United States (New Haven: Yale Universi
ty Press, 1963), p. 156.
279
This concentration is over twice as great as that in
the beer business. Here, then, oligopoly prevents conces
sions which are made by the non-oligopolistic more
competitive supplier, the brewer. Despite the disadvantage
to himself, despite the laws which should aid him in
achieving his ends, despite, indeed, the recriminations of
his own conscience, the brewer, coerced by competition
perpetuates practices inimical to his own and the public's
interest.
One answer to the problem which seems obvious but
which has never been tried in the United States, is to have
compulsory ownership of, and responsibility for taverns by
brewers. This practice has a long and successful history
in Europe, and there is every reason to think it would
operate as well here. Such a system could easily prove to
be the salvation of the small local brewer who once again,
would be in the position he held before 1860: that of
supplying his own beer gardens. As Cochran pointed out,
Pabst and the shipping breweries were hard put to maintain
their draught beer positions in the era of the tied-house.
There is no reason to think that, with the quality gap
between national and local beers so narrowed, thanks to
education and technology, as to be infinitisimal, the small
0
280
brewer could not again hold his own against his larger
adversary. It will be recalled that U.S.B.A. Secretary,
Hugh Fox advocated this in 1908 (Chapter VI of this study).
IV. CONCLUSION
The industry'8 relations with middlemen seem a
curious conglomeration of ancient and modern. In the
relationship with distributors all types of vertical
integration have been attempted and for the most part
abandoned. Only in the brewer's home town where the
advantages of already available warehouse space and refri
geration capacity outweigh the disadvantages of setting up
a second and complicated union operated business, are
breweries found to be acting as their own distributors.
In the area of supermarket selling, brewers are
being compelled to learn marketing and merchandising. To
use a phrase customarily used in a different setting, they
are being dragged screaming and kicking into the twentieth
century.
It is in the area of the "Ma and Pa" grocery store,
which unfortunately for the brewer, sells only 20 per cent
of his packaged product, that the brewer does his best job.
Here he can compete with his larger foe on equal grounds.
281
A reasonable surmise would appear to be that although
shrinking in total volume of grocery store business, the -
smaller store will remain in close approximation to its
present market share. It satisfies certain desires and
needs which cannot be adequately catered to by the less
flexible supermarkets and chain stores.
The relations of the brewer to the draught beer
dispenser have shown little improvement from either the
brewer's or the public's point of view in over a century.
Only a small proportion of this segment of the beer busi
ness (which, itself handles less than 20 per cent of all
beer sold) causes all the difficulties for the brewer.
Even with the aid of national and local legislation; with
his own efforts at self-policing; and with an awareness of
the jeopardy in which he is placing himself, the brewer
has been unable to resist or overcome the forces of compe-
tion. It is the opinion of this study that only compulsory
ownership, management, and responsibility will provide an
answer that is in any way satisfactory to the majority of
people.
CHAPTER IX
RELATIONS WITH SUPPLIERS
Suppliers to brewers can be grouped into three
categories: (1) Suppliers of manufacturing equipment, (2)
Suppliers of processing equipment, (3) Suppliers of raw
materials. Since the relationship is one of a typical
monopsoni8t-monopolist nature it has some economic interest.
It might be mentioned at this point that the Cournot,
Bertrand, Edgeworth hypotheses do not hold: even in a
situation such as beer cans where over 90 per cent of all
cans is supplied by three can manufacturers.
I. RELATIONS WITH SUPPLIERS OF MANUFACTURING EQUIPMENT
The number of suppliers of brewing equipment, like
that of the manufacturers of oxygen steel furnaces, is
small. The equipment is made to last for a great many
years, the physical principles involved are not too complex,
the equipment is of a cost and size such that relatively
few concerns can build it, and finally the market is narrow
and becoming narrower. Indeed, it is frequently surprising
282
283
that the amount of research and development that goes Into
the area of brewhouse equipment innovation is as great as
it is. The basic patents for stirring mechanisms for the
mash and for the metal strainer beds which permit the draw
ing off of the liquid extract, have long since expired, but
improvements keep showing up. Many of these are developed,
to be sure, in Europe where smaller shops and a ready
supply of skilled metal workers permit experiment and trial
and error efforts which would be prohibitively costly in
the United States.
This has proven to be the case with mash filters
which once were produced exclusively in Europe. These are
large and costly, $100,000 each, pieces of equipment which,
as the name implies, speed up the old gravity flow of fil
tration by forcing the mash through a series of cloth
screens. The brewing process can be accelerated by their
use and more and more breweries are turning to this equip
ment in their new installations. Mash filters also permit
grain, particularly malt to be ground finer, thus making
for a quicker conversion of starch into sugar, and a
higher yield of extract from the malt. The Brewers' Digest
Annual Buyers Guide--1964. lists only four firms as sup
pliers of mash filters. This does not include, however,
284
European manufacturers, but only those firms which actually
produce and manufacture mash filters and presses in the
United States.
In addition, of course, the stirring mechanisms used
in different types of food processing do not differ to too
great a degree, and with patents expired, many local
machine shops are capable of turning out a satisfactory
product. An examination of three brewery trade journals
shows that there are only five firms who consider their
products sufficiently competitive to bother advertising
them. Even these are producers of specialty equipment such
as glass lined tanks, special stainless-steel-clad vessels,
or other types of specially lined vessels.
The same is true of mills for grinding grain--
particularly malt. Grain has been ground for centuries.
The market is sufficiently limited so that only a handful
of firms can supply the entire demand. As a result,
almost 100 per cent of all malt mills are supplied by the
seven largest producers. Each adheres to a fixed principle
as a rule, e.g., four rolls or six rolls, and produces
mills of different capacities incorporating these features.
Filtering equipment corresponds even more nearly
to an economist's idea of monopolistic competition since,
until a few years ago, when diatomacious earth filters were
introduced there were only two manufacturers of beer
filters. This should have produced a classic duopoly
situation. It did nothing of the kind. It is possible
that there was just enough merit in the claims of the
rivals, and that neither could claim nor prove a clear cut
advantage in all or even most of the areas where an advan
tage might be claimed such as ease of packing, length of
life of filter material, ease of washing, cost of installa
tion, sharpness of filtration, amount of beer filtered
between filter cleanings, et cetera, so that either could
achieve a complete monopoly. In other words, there was
differentiation in product which was perfectly clear to the
purchaser even though the end product of filtered beer was
identical, i.e., x number of barrels. There was competi
tion just as there is competition between taxicabs and
municipal buses. Each transports customers who rent the
use of four-wheeled vehicles driven by internal combustion
engines.
As Professor Bain* pointed out, there are few
*Joe S. Bain, Barriers to New Competition (Cambridge,
Massachusetts: Harvard University Press, 1956), p. 281.
products where perfect substitutability exists such as
certain agricultural products, cement, and identical steel
shapes. In all other cases product differentiation real,
or induced by advertising, exists and the products are not
complete substitutes. An example of this is the use of
rice or corn as a pure starch adjunct to malting barley.
(It will be recalled that the malting barleys grown in the
United States have a higher albumin to starch ratio than
the European two row barleys, and, in effect, must be
"diluted" with some form of pure, flavorless starch to
produce a pale, light-tasting beer.) Since there is no
detectable difference by chemical or physical analysis, and
since com grits and rice are handled exactly the same in
the brewing process, most brewers consider it a matter of
complete indifference as to which is used. The sole deter
mining factor is cost per pound of extract. Anheuser-Busct}
however, insists that rice makes a better beer and will not
use corn in the manufacture of Budweiser beer. This is
similar to cases in the petroleum industry mentioned by
2
Professor Bain.
287
II. SUPPLIERS OF PROCESSING EQUIPMENT
Here too, as in the case of manufacturing equipment,
there are only a few suppliers of either keg, bottle, or
can handling and filling equipment. The 1964 Brewers1
Digest Annual Buyers1 Guide list of advertisers has only
five keg washing machines, one of keg filling machines,
five pulp filter manufacturers, three makers of can filling
and sealing machinery, four makers of bottle washing, and
bottle and can pasteurizing equipment, eight manufacturers
of labellers, et cetera. It seems scarcely necessary to
point out, however, that the bottle filler manufacturers
are in competition not only with each other, but with the
manufacturers of the can fillers, and to a lesser degree
with the keg fillers. The same is true of nearly all the
other manufacturers such as filter manufacturers,
Can Filling Machines and Monopoly
Prior to 1952 the can manufacturers would not sell
their equipment to can users. They attempted to justify
this leasing and thus monopoly use of the individual
company'8 cans, on the grounds that it had developed as a
rental fee. The can companies, they asserted, in the case
of most small canners, actually financed the canning
operation. Since this was the case the can companies had
used the monopoly leasing arrangement to insure getting a
return on investment or even, in many cases, to get the
investment returned. In anti-trust proceedings in 1952 the
can companies signed a consent decree ending monopolistic
total-use contracts and agreeing to sell can sealing
equipment to users.^
In some industries the breaking up of the can
monopolies produced profound effects. Many large users of
cans such as Campbell Soup Company began to manufacture
their own cans with machines purchased from the can compa
nies. Today, this 1 1 own-manufacture" of cans amounts to
almost 15 per cent of the total can business. Illustrative
of Schumpeter's "gale of innovation," is the fact that,
since it can no longer purchase finished sheets at a price
lower than its competitors, the American Can Company is
spending $32,000,000 on equipment which will produce can
making plate from steel coils. Should such activities
continue it seems only a matter of time until a steel mill
acquires a can company or vice versa.
289
III. RELATIONS WITH SUPPLIERS OF RAW MATERIALS
In his relations with the suppliers of his principle
raw material, barley malt, the brewer is not so limited as
he is in the case of many manufactured products. In the
first place, many brewers malt some or all of their own
barley. On occasions brewers have even sold malt when they
had malted an amount too great for their immediate require
ments. It is estimated that some 44 per cent of the barley
malt used in the United States is manufactured by the
brewers themselves. In addition there are twenty-three
malt suppliers listed in the Brewers Digest Annual Buyers1
Guide— 1964. Of these the four largest supply approximate
ly 63 per cent of the non-brewery supplied malt. The eight
largest supply approximately 93 per cent. There are nine
suppliers of rice, and seventeen of brewers' corn products.
There are fourteen suppliers of domestic hops, many of whom
also import hops from Europe. The four largest dealers
supply 75-85 per cent of American grown hops. The imported
hops today come chiefly from Western Germany and are con
sidered by most brewers to have qualities which make them
superior to those grown in America. Most brewers, too,
lament their inability to obtain the Czechoslavakian Saazer
290
hops of other years. These have been considered always the
ne plus ultra of hops.
It should be mentioned here that hop selection is an
esoteric profession and most brewmasters will entrust the
selection of hops to no one else. Often Brewmasters make
tours of the hop yards during the growing season just as do
wine buyers in the vineyards. From years of sampling they
have developed a knowledge of the type of hops to expect
from different areas. They have also developed pronounced
preferences. It is in selection of hops that the brew-
master depends to a greater extent than in any other
segment of brewing procedure on the empirical skills and
training of his profession rather than on scientific
measurement and analysis.
Barley Procurement
Perhaps here is the place to discuss in more detail
than was done in Chapter 111, the difficulties in obtaining
a satisfactory malting barley. A good malting barley must
have a high diastatic power, i.e., the enzyme diastase
which converts starch to sugar must be present in suffi
cient amount and strength to convert not only the starch in
the barley berry, but also any other starch added as an
291
adjunct, e.g., corn or rice, into fermentable sugar. Many
barleys, particularly the so-called feed barleys do not
have sufficient diastatic power to make good brewing malts.
In addition the type and quantity of protein, particularly
albuminoids, are important for a brewing malt and hence a
malt very high in diastatic power which is satisfactory
for distillers malt may not be so for brewers.
Practically all brewing barley is purchased by
buyer8 at the great commodity markets such as Chicago,
Milwaukee, Minneapolis. This has proved more satisfactory
in the majority of situations for both brewer and malster
purchasers than have attempts at growing sufficient grain
for one's needs, or attempting to contract in advance for
them. The attempt of a major malting concern to supply its
needs for grain could entail the purchase of one-half a
million or more acres of barley cropland. The amounts of
capital invested would be tremendous. The land would have
to be in different areas of the farm belt to preclude the
possibilities of complete catastrophe from drought, flood,
or blight. In addition the brewer or maltster would have
no flexibility. If he needed more grain, he would have
trouble getting it. If he had too much he would dispose
of it only with difficulty and probably at a loss.
292
Contracting for Barley in Advance
This apparently satisfactory method of procuring a
grain supply, often proves to be the most frustrating and
disappointing of any. The method generally adopted is as
follows: seed is given to a farmer free or at a greatly
reduced price by the future buyer, who agrees to buy the
entire crop at a price stipulated in advance. This price,
since the yield per acre of malting barley is less than
that of feed barley, is considerably higher than that of
feed barley. When the crop is harvested and ready for
delivery it is seldom, if indeed ever, the situation that
the price contracted for is precisely the market price and
that the prices of malting and feed barley stand in the
same relationship, one to another, as at the time of the
contract. If the price of feed barley has declined rela
tive to that of malting barley, the farmers uniformly
report bumper crops. If the buyer protests that the grain
lacks uniformity, that is blamed on the weather or the
inferior quality of seed. Should the price of feed barley
rise to, or above that of malting barley, the contractor
fi)r malting barley may well be astonished at the
phenomenally low yields per acre which result.
As a consequence it has proven more satisfactory
293
from practically all points of view to have skilled and
experienced buyers buy on sample at time of delivery in
the major grain markets. Obviously only a brewer with a
large malting operation can afford a specialist of suffi
cient skill to compete in buying with those employed by
the malt house. Small brewers cannot afford such vertical
integration.
Government Influence on Barley Strains
One facet of the agriculture program of the U. S.
Government has been to increase both quality and yield of
farm products. Much experimenting has been done by experi
mental stations to produce a high grade malting barley
which had easier threshing qualities as well as a higher
yield per acre. The first such grain to be developed was
a hybrid named Wisconsin 38. This was succeeded by two
other six-row barleys, Kindred and Traill. $179,500 in
research grants was given by the U.S.B.A. in the 1963-64
fiscal year to eleven state universities and to the U.S.D.A.
National Barley and Malt Laboratory, Madison, Wisconsin.^
^Proceedings of the United States Brewers1 Associa
tion 1964 Annual Convention. Bal Harbour, Florida,
February 3-4-5, 1964, p. 90-91.
Two new varieties of malting barley named Trophy and Larker
have resulted from earlier contributions to this program.
"These newMirieties were classified as acceptable for malt
ing and brewing in the fall of 1962 and were planted on
extensive commercial acreages for the first time in 1963."^
Trophy and Larker performed very well for barley
growers and were distinctly superior to the older
malting varieties Traill and Kindred in kemal plump
ness and yield per acre. . . . An intensive educational
program was conducted . . . to promote separate pure
variety marketing of Trophy and Larker. This program
was successful, and these varieties have been separated
from each other and from Traill and Kindred in commer
cial marketing of the 1963 barley crop. Approximately
96% of the 1963 barley acreage in the midwestem six-
row malting barley area was planted to varieties which
are acceptable for malting and brewing. Trophy and
Larker were grown on 59% of the total barley acreage
while the older varieties Traill, Kindred, and
Parkland occupied 37% of the a c r e a g e .6
Experiments were also conducted to try to develop
more satisfactory types of two-row barleys for growth in
the western states.
[Continued research] is required to meet and overcome
current production problems not yet solved and problems
which may threaten production of malting barley in the
future. The possibility always exists that a new
disease or a formerly unimportant one can become of
major amplitude and threaten production of adequate
295
supplies of malting barley. Further Improved varieties
with superior agronomic characteristics such as higher
yield per acre, increased straw strength, and stand-
ability are also needed to keep malting barley produc
tion competitive with other crops, which are constantly
being improved through supported research.7
On the U.S.B.A. committee, from whose report the
above quotations were taken, were three highly esteemed
brewmasters. This indicates an awareness by the brewing
industry of a dilemma. It is definitely to the brewing
industry's advantage to have numerous farmers supplying a
high grade type of malting barley. One of the best ways to
be assured of this is to increase the per acre yield of
malting barley at least to that of feed barley and
encourage its planting. The report shows that this has
been done. One malster writes:
. . . if we had not developed the new barley strains
that we have this year, namely Larker and Trophy, I
don't think we'd have a crop because the old Kindred
Traill barleys that you knew could not withstand the
heat that we had in North Dakota this year. . . . The
government, in 1962, contributed $200,000 to the barley
states that supply brewers barley . . . this money has
been of great value to us and the brewers.&
There is a small group of brewers and brew masters,
however, which argues that the older types of barley such
7Ibid.. p. 92.
g
Personal correspondence to the writer.
296
as Manchurian and especially Oderbrucker, while yielding
less per acre and being more unpleasant to work with and
consequently costing more, gave a beer with greater palata-
bility and appeal to beer drinkers. The government has
encouraged the farmer to grow the newer types with the
result that there is great uniformity in the six-row barley
crop. As a final consequence any brewer who feels, as some
do, that the improved barleys are less flavorful than those
such as Oderbrucker has nowhere to turn. No premium will
purchase a year's supply of Oderbrucker. There is none.
The brewer who wants Oderbrucker can set about trying to
grow his needs, as Coors has done with Moravian, with all
its attendant discomforts, expenses, and inconveniences, or
he can take what the malsters have had no option but to
purchase and malt.
IV. THREAT OF PROHIBITION AND ITS EFFECT ON
RELATIONS WITH SUPPLIERS
The threat of prohibition is ever present with the
brewing industry. As a result those suppliers whose
principle source of livelihood comes from sales to brewers,
such as malsters, hop growers, bottle and can pasteurizers,
and similar manufacturers and salesmen feel a bond not only
297
with their customers but also with one another. It is
perhaps this as much as any other cause that prevents any
thing resembling the duopoly situations o£ Cournot,
Bertrand, and Edgeworth, from developing.
With the decline in the number of breweries,
survival has also become more difficult for many manufac
turers of special equipment such as bottle and can
pasteurizers or carbonic acid gas liquifiers. As a conse
quence, many of these manufacturers and suppliers, who,
like the brewers they served, were second or third genera
tion family owned companies, have been forced to become
part of larger concerns. Thus, the Pfaudler Company is now
a division of Pfaudler Permutit, Inc., Niagara Filters, a
division of Ametek, Inc., and both Heil and Yundt who
formerly manufactured bottle washers and bottled beer
pasteurizers, are now divisions of Pratt Manufacturing
Corporation.
The situation is markedly different with salesmen,
e.g., representing can manufacturers. These men often do
not know one another. Except for division heads, they
often have been selling beer cans for only a short time and
may find themselves transferred in a short while to
another geographical area or company division. It is also
298
possible that competition, e.g., between different sales
areas of different companies may be unequal in intensity.
To take a hypothetical case, it is quite possible that
competition would be keener and sales efforts greater on
the part of General Motors Chevrolet sales personnel vis a
vis Ford than that of the Cadillac personnel vis a vis the
Continental. It is also likely that competition is of a
different nature and intensity between General Motors'
Frigidaire personnel vis a vis Westinghouse and General
Electric refrigerators. It is possible that the
Damoclesian sword of prohibition may in time bring a feel
ing of mutual dependency to the newer and larger suppliers
of the brewing industry.
One area in which relations are clearly understood
is the area of contributing to the support of the brewers'
association. As the brewers themselves contribute a stipu
lated sum for each barrel of beer sold, so the suppliers
contribute on the basis of sales to brewers. .
V. CONCLUSION
A superficial look at the brewing industry and its
suppliers would lead to the conclusion that the relation
ship is one of monopolisticly competitive sellers dealing
299
with monop8oni8ticly competitive buyers. This should
result in a situation which the economist describes as
indeterminate, i.e., in theory, the antagonist in the
stronger bargaining position should be the one who
realizes an economic profit while his adversary does not,
and may even show an economic loss. In many cases this has
been true of suppliers of specialty equipment and supplies.
In the more numerous instances, however, this is
not the case. Neither the supplier nor the brewer insists
on maximizing. Even when one or the other is in a position
of ascendency there is nothing that resembles Shylock's
Insistence on his pound of flesh.
Although the brewing industry has many special cir
cumstances which will be reviewed presently, it is the
opinion of this study that in most industries the same
tendencies can be observed. The economist's concept of
maximization in the sense of maximizing surplus over cost
at every moment of time simply does not occur in real life.
A purchaser of farm products, for example, can be fairly
certain that due to the vagaries of nature, there will be
periods of under- and over-supply. The ruthless purchaser
or supplier who "puts the screws" to his opposite number
may expect retaliation when circumstances and conditions
300
alter. The relationship Is not unlike that of union and
employee in contract negotiations. The negotiator who is
ruthless in exploiting an advantage or who "slips over a
fast one" may expect an unhappy relationship during the
life of the contract, and vehement and certain attempts
at retaliation in later negotiations. It may seem a con-
tradition in terms to consider the holding of grudges and
the urge to vengeance as being the same as Boulding's^
"heroic ethic." That they are is shown in Boulding's
statement:
Nevertheless, one of the great paradoxes of history
is that it is precisely the romantic and heroic ethic
that is responsible for building empires, founding
civilizations, and erecting patterns of culture, in
pursuit of romantic ideals men have also destroyed
empires, civilizations, churches and cultures. .
To the world at large the bearer of a grudge may seem a
mean fellow indeed, obsessed with an urge to "get even."
The would-be avenger, however, pictures himself as a knight
in shining armor righting an injustice.
In addition there are two other factors which affect
q
Kenneth E. Boulding, The Skills of the Economist
(Cleveland: Howard Allen, Inc., 1958), p. 180.
10Ibid.
301
the relations between brewers and suppliers. The first,
which needs no further expansion, is the threat of prohibi
tion. The second is the fact that there is what might be
termed a feeling of kindred entrepreneurship. Many of the
suppliers of specialized equipment, materials and services
are, like the brewers to whom they are selling, owners and
proprietors. They are often entrepreneurs, not employees.
The salesman and purchaser frequently can each look back
one or two generations to the founding of a family enter
prise. Like Schumpeter, this study does not attempt to
venerate or exalt the entrepreneur, but merely makes the
point that he is a different breed of cat from the employee
salesman or purchaser. The last thing that should be
noted about this entrepreneurial relationship is that as
Schumpeter says "entrepreneurs' gains will practically
always bear some relationship to monopolistic pricing.
This is recognized and acknowledged in the brewer-supplier
relationship.
Finally, it should be noted that in the brewing
industry's relations with its suppliers there is as yet no
^Joseph A. Schumpeter, History of Economic Analysia
(New York: Oxford University Press, 1954, Fourth Printing
1961), p. 897.
302
evidence of development of countervailing power. It is not
within the scope of this study to conduct a discussion of
sufficient length to do justice to a subject of a magni
tude as great as that of the theory of countervailing power.
It is sufficient to observe that the theory's author says,
"As noted, there are exceptions and, as between markets,
countervailing power is exercised with varying strength
12
and effectiveness." It has not been necessary for the
brewers to form an organization, formal or informal, to
protect themselves from exploitation by the three can
/
companies which supply over 95 per cent! of all beer cans,
or the one supplier of filtermass material, or the three
manufacturers of bottles and cans. There is no evidence
that there has been monopoly exploitation of the brewers
by these or other suppliers. The explanation for this
fact must be sought elsewhere than in the theory of
countervailing power.
12
John K. Galbraith, American Capitalism: The
Concept of Countervailing Power (Boston: Houghton Mifflin
Company, The Riverside Press, Cambridge, 1956),p. 122.
CHAPTER X
RELATIONS WITH COMPETITORS
According to Brewers* Digest for 1964^ there were
approximately 150 brewing companies operating 200 plants at
the start of the year 1964. As stated in Chapter II, the
concentration in the brewing industry has not been as great
as it has been in many other industries. In size the
breweries run from the giant Anheuser-Busch breweries with
a capacity of nearly 12,000,000 barrels at its four plants
and Schlitz with a capacity of 5,500,000 barrels at its
Milwaukee plant alone, down to the Spoetzl Brewery in
Shiner, Texas with a capacity of 25,000 barrels, Mrs.
Cecelie Spoetzl, owner and general manager. To draw a
comparison with other industries Mrs. Spoetzl's brewery
bears the same relationship to Anheuser-Busch that a
100,000 ton annual output steel company would bear to the
U. S. Steel Corporation. Nor is the Shiner plant unique.
^Brewers Digest Brewery Directory and Buyers1 Guide
1964 (Chicago, Illinois: Siebel Publishing Company),
pp. 14-15.
304
In Frankenmuth, Michigan there is a 600,000 barrel branch
of the great Carling Brewing Company and also the Geyer
Brothers Brewing Company capacity 30,000 barrels. In
Wisconsin, Schlitz, as stated, has a plant with a capacity
of 5,500,000 barrels, Miller's one plant has 4,000,000
barrels capacity, Pabst 3,000,000; there are also 21 com
panies in the state who admit to a capacity of 100,000
barrels per year or less, including the Effinger Brewing
Company of Baraboo, Wisconsin, with 20,000 barrels per year
capacity. The objective of this chapter is to examine the
competitive situation to make a prognosis, and to make
policy recommendations for the future.
I. CLASSIFICATIONS OF BREWERS
Mr. Eugene Selvage, president of the Lucky Lager
Brewing Company referred to "regional breweries as those
that sell in an area." He said, "[We meet] the regional
price rather than the local. Local means one market,
regional means an area. ... I would say the entire State
of Utah would be a region."2 Later when asked if he did
^Deposition of Eugene S. Selvage, Volume 1, p. 82,
pages 1 to 125 inclusive, Wednesday, February 22, 1956 in
the U. S. District Court for the District of Utah. Fisher
Brewery Company v. Lucky Lager Brewing Company.
not consider the entire inter-mountain area a region, he
replied, "Utah is a region; I would call an area a region.
California is a region except that we do break California
3
into Northern and Southern." This rather imprecise
distinction shows the difficulty of delineating the
breweries into exact classifications. Those classifica
tions used in this study may well be considered too broad
or too narrow by other observers.
The National or Shipping Brewers
Originally these terms were used interchangeably.
The only brewers who shipped beer, at least in any volume,
were the national or shipping breweries such as Pabst,
Blatz, Schlitz, and Miller of Milwaukee, Anheuser-Busch
and, prior to prohibition, Lemp in St. Louis. Such large
breweries as Ruppert and Ehret which frequently had greater
sales than the shippers, confined their effort to the
"region" of New York and environs, and were considered true
"regional" brewers. Today, however, the term national or
shipper, used to describe a brewery generally is used to
describe one of the four great breweries whose beer is sold
306
at a premium, Anheuser-Busch, Schlitz, Miller, and occasion
ally Pabst. In almost all markets these beers command a
price higher than that of local beers, even in those
markets where the companies have plants. Thus Budweiser is
a premium beer in St. Louis, Los Angeles, Newark, and Tampa
as well as in nearly all other markets. The same is true
of Schlitz in Milwaukee, Los Angeles, Kansas City, Tampa,
San Francisco, and Honolulu. Miller, of course, has only
one plant and Miller is sold everywhere at a premium.
It is a real tribute to the business ability of the
"Shippers" that they have been able to maintain, for so
many years, this aura of superiority. There seems no
reason today that they should command a premium in excess
of any regional or many local beers. The ingredients they
use are available to, and generally are purchased by all
large brewers. Equipment, as has been pointed out, comes
from a few suppliers and there is no appreciable superiority
that can be gained in this area. New and revolutionary
secret techniques are unlikely in an industry which is
6,000 years old. Quality control procedures have become
standard in all breweries of any size. None the less that
ephemeral "quality" which Cochran, the Pabst amenuensis,^
^Thomas C. Cochran, The Pabst Brewing Company (New
307
emphasized constantly, has come to be associated with the
national or shipping brewers. Furthermore, the public will
pay a premium of up to 20-40 per cent for this "quality."
That there was a long and difficult climb to reach this
height Is shown by the following excerpts from Cochran.
Price maintenance in local markets was from first to
last a major problem of the shipping brewers. . . .
During 1903, for example, the price received by Pabst
for a barrel of beer sold in Milwaukee varied from
$7.19 a barrel to $9.51 and the cost of selling from
49c to $2.26.5
The situation became so bad that the Old Milwaukee
Brewers Association was revived in an attempt to stabilize
prices and saloon ownership in Milwaukee County, There
were price cutters even then, however, and they bothered
the shippers even more then, than today. A Duluth brewer
wrote Captain Pabst.
In December 1893, the price of beer was forced down
by the agents of outside brewers from $8 to $7 per
barrel, and soon after it was agreed in writing by all
agents to hold the price at $7 with a maximum spending
of 40c Per barrel. This agreement was almost immedi
ately thereafter violated, and in many instances a
discount was given of from 50c to 75c an<* even $1 per
York University Press, 1948). See for example pp. 28, 53,
121-22, 142, 145, 181, 217-18.
5Ibid.. p. 228.
308
barrel, such discounts always being made secretly.*’
These abuses led to the formation of a Western
Shipping Brewers' Association in 1898. Illustrating the
contemporaneous attitude toward antitrust Cochran notes.
Eleven brewers in Milwaukee, St. Louis, Minneapolis,
Omaha, Kansas City, Quincy and Cincinnati entered into
an agreement on trade practice?. During the first few
year8 of its existence, the association met once a
month in Chicago; and besides regulating direct
competition for customers, they abolished the furnish
ing of expensive novelties such as matchboxes, trays
and corkscrews, and knives to wholesale and retail
dealers. Such activities were now of questionable
legality, but up to 1902 businessmen neither clearly _
understood nor were much bothered by the Antitrust Law.
What finally brought order out of chaos, as always
happens except in the rare cases of complete monopoly, is
that competition took over. If Lemp stole a one carload
customer from Blatz, Blatz looked around and took a six or
seven carload customer from Lemp. Half a century later,
Winston Churchill immortalized the phrase, "the soft under
belly," to describe this sort of retaliation. The Milwau
kee Journal had this to say about the situation.
**Percy S. Anneki to Pabst, May 9, 1896, quoted by
Cochran, oj>. cit., p. 229.
7Ibid., p. 230.
309
The fear, therefore, that the large shipping brewers
entertain for one another, actually operates more
effectively than an agreement. The large brewers are
today operating on a small margin of profit, in fact
not making more than the large packers which is
approximate 6 per cent. The large packers would not
be in the throes of the law if they had adopted this
theory as a working principle. In other words, the
brewers dont interfere very much with one another's
trade because it is decidedly unprofitable to do so.®
Despite their early troubles, the shipping brewers
were able to inculcate into the thinking of the average
American beer drinker the idea that the national beers were
superior to the local products. In many cases, of course,
they were. In Chapter III it was pointed out that
Budweiser and Pabst were pioneers in pasteurizing and
shipping bottled beer. They also availed themselves of
pure yeast cultures, bottle caps, et cetera, which placed
them ahead of many of their competitors and enhanced their
prestige.
A great advantage of the shipping breweries was the
flexibility of freight rates. Prior to the establishment
of the Interstate Commerce Commission in 1887 rates were
largely a matter of haggling. Indeed, despite the I.C.C.
Act this continued to be the case until 1910, due to the
^Milwaukee Journal. January 4, 1912, quoted by
Cochran, oj>. cit., p. 231.
310
fact that the relatively mild regulatory features of the
act only required that "rates must be 'reasonable and
just,' must be published, and must not be discriminatory
as between parsons, places, or commodities, . . ."9
Cochran said, "As a general rule, the larger the shipper
and the keener the railroad competition in different areas,
the larger the reduction or 'rebate' the railroad would
grant from its published rates."*® Captain Pabst was an
able bargainer, as Cochran proudly proclaimed. Pabst'
freight rates none the less varied with density of traffic.
Whereas in 1884 it cost Pabst only fifteen cents
to send a barrel of beer to St. Paul, and only eighteen
and three-quarter cents to ship to Pittsburgh, it cost
eighty cents to reach Eau Claire or Stevens Point,
Wisconsin, and a dollar to Ashland on Lake Superior.**
Uniformity the Sine Qua Non
Flavor, taste, appeal, quality: whatever the term
used, is to use the language of economics, rather than the
market place, a necessary but not a sufficient condition
for large scale, repeated consumer sales. In addition it
^Anshen and Warmuth, Private Enterprise and Public
Policy (New York: The Macmillan Company, 1954), p. 361.
*®Cochran, o jj. cit., p. 161.
11Ibid., p. 162.
311
18 essential that the customer must never be disappointed
in his expectation that the product he purchases will be
indistinguishable from that he bought yesterday and the day
before. Variation in quality is lethal to sales; far more
so than having a product uniformly inferior in quality.
A simple example from the real world will serve to
demonstrate this. Any acid fluid in contact with an
unllned tin can will react with the metal and produce a
change in flavor. Over the years the vast majority of
Americans have come to recognize and enjoy the flavor of
fresh squeezed orange juice. It has become such a staple
of American diet that milk companies have even come to sell
it along with milk. Some years ago the can companies
thought to invade this market and they tried to sell bulk
orange and grapefruit juice in cans. The result was a
complete disaster for the juice canners. The juice had a
metallic taste. It tasted different. It made no differ
ence whether the taste was an improvement or not; it was
different and no one would buy it.
Simultaneously an antithetical demonstration was
going on. From the time it was first introduced to the
American diet, tomato juice was sold in cans. Tomato juice
is acid and canned tomato juice has a metallic taste. No
312
one seems to mind this flavor because he has never had
tomato juice without it. Some years ago some dairymen
decided that packaging tomato juice in glass would elimi
nate the metallic flavor just as it had with orange juice.
They were right. Tomato juice packed in glass did not have
the metallic taste of canned tomato juice. It tasted like
fresh tomatoes. Unfortunately for the milk and the glass
people, the customers they wanted to woo had become
accustomed to the metallic taste. They liked it and they
wouldn't buy tomato juice in glass.
The smart manufacturer is aware of this Pavlovian
situation and capitalizes on it. Cochran cited an instance
in 1880 when Captain Pabst reprimanded his brewmaster in no
uncertain terms for producing a darker beer than had been
shipped t h e r e t o f o r e .12 And in the 1930's after repeal
Pabst began cross blending so that the slogan, "Thirty-
n
three Fine Brews Blended into One Great Beer," J was
description, not a boast.
Carling, possibly the best merchandizer in the
brewing industry is also aware of the vital need for
1 2
x Cochran, o j>. cit.. p. 116-17.
13Ibid.
313
uniformity. In the new Carling plant at Fort Worth, Texas,
Carling has installed the first continuous brewing system
in America. Henry E. Russell, president of the firm spoke
of it thus:
Essentially continuous brewing does not change the
conventional production process. . . . What it does
do is to accommodate the utilization of more modem,
more reliable equipment. . . . This gives further
assurance of uniform high-quality products.14 [ye
want to be certain] that beer made by the continuous
brewing method would be identical with beer made by
the old batch method.15
Snob Appeal and Premium Price
To ask and continue to obtain a premium price, it
is not enough to keep abreast of innovations and to main
tain uniformity of quality. Captain Pabst, AdolphusBusch,
the Uihlein family of Schlitz and the other premium brewers
also had a keen appreciation of the value to their products
of snob appeal. The Captain used it in entering the
metropolitan New York market.
New York's local brewers had a particular tight grip
on the saloon situation there— Ehret alone, controlling
800 or 1000 such outlets. With exclusive places sell
ing only Pabst, very difficult to acquire, the best way
to impress the Pabst name on the independent dealers
l^The Brewers' Bulletin, Chicago, March 9, 1964,p.3.
15Ibid.
314
and the general public was through two or three outlets
of real distinction. Even if they provided no great
volume of sales, they would give the Pabst name a
leading position, and in addition to the local advan
tages, the importance of New York as a travel center
made this a matter of national importance.
Accordingly the Captain built a hotel at what is
now Times Square, a lavish restaurant and theatre at
Columbus Circle, and Pabst Harlem, an enormous restaurant
at 125th Street near Eighth Avenue. "At the peak of its
property holding, Pabst owned nine large hotels or restau
rants in New York, Chicago, Milwaukee, Minneapolis, and
San Francisco."*7
Although Pabst is no longer so important in the
prestige picture, Anheuser-Busch still retains something
of the regal touch.
Anheuser-Busch, Inc. is building a $1,000,000
restaurant at its world famed Busch Gardens [in Tampa]
.... The four-story structure will be of European
decor and is designed to accommodate 800 people. The
gardens are located adjacent to the brewery's Tampa
plant. Other projects in the expansion [$4,000,000]
include a monorail ... an American Plains scene; an
African veldt scene as well as a 60 foot "mountain,"
a lake and a river. *8
^■^ochran, oj>. cit., p. 211.
17Ibid., p. 199.
*®Brewers' Bulletin, Chicago, 13 January 1964, p. 2.
315
The Beer Can and Freight Rates
The second fortuitous, indeed almost essential,
development needed to keep the national brewers in business,
especially on a premium basis, was the can. A twelve ounce
can is about half the height and 60 per cent the weight of
an old style tall twelve ounce bottle. Freight on empties
was eliminated, and it was estimated that for shipments of
several hundred miles, the freight savings more than offset
the extra cost of the can. While the can was not an over
night success, three years after its introduction by
Krueger Brewing Company in 1935 it accounted for only 10
per cent of packaged beer sales; nevertheless it stimulated
interest in packaged beer and it increased the profitable
radius of the shipping brewer. Cochran put Pabst 1939
shipping costs at $2,750,000 for railroad freight and
$400,000 for trucking, or $1.91 per barrel,^ even using
cans. Such freight costs made premium prices essential.
Retail Price-Demand Relationship
Certainly the national or shipping brewer presents
a situation which is without parallel so far as this study
is able to determine. The two largest selling beers,
1 ^Cochran, oj>. cit., p. 378.
316
Budwiser and Schlitz, are the two most expensive beers.
Two other premium beers are Coors, which In 1963 ranked
tenth In U. S. Sales with just over 3,000,000 barrels, and
Miller which last year sold over 3,000,000 barrels. This
can only be explained by the fact that beer Is a very minor
Item In the average family budget, and as a consequence the
absolute dollar outlay on status symbol premium beer is not
sufficient to deter the average American purchaser. As one
bartender expressed it, "Beer's the only thing I know can
make a young fellow a big shot for a nickel. He orders a
Bud or Schlitz instead of local beer; it shows he's a man
of the world and it only costs him 5 cents extra."
Were such a situation to exist in the automobile
industry, Cadillac would outsell Chevrolet, and Lincoln
Continental, Ford, with Chrysler Imperial and Buick Road-
master pressing the leaders. Were it to hold for all com
modities, demand curves would be upward sloping instead of
downward. This apparent violation of Boulding's "logical
topology" will be discussed at greater length under the
"backward bending demand curve" of the next section.
Chain Breweries
Since repeal, indeed it could be said since the end
317
of World War II, a new type of brewery has sprung up--the
chain brewery. Although ownership of two or more breweries
by one man or corporation is not new, it goes back to
Adolphus Busch, Frank Fehr, and William J. Lemp, all of
whom had multiple interests in the 1880's, today's chain
operation is based on a different principal. Multiple
owner-ship for Busch for example, did not mean that these
plants were established "to produce Budweiser and the other
20
Busch products; they manufactured under labels of their owri'
Today's chain brewery is designed to take advantage of
economies in transportation and management, and economies
of scale in advertising. Carling, the largest of the chain
breweries, now operates plants in Cleveland, Belleville,
111., Baltimore, Natick, Mass., Frankenmuth, Mich., Atlanta,
Ga., Tacoma, Wash., and Fort Worth, Texas. Carling will
begin construction of a plant in the San Francisco Bay area
in 1964. As stated earlier in Chapter II, Carlings' chair
man is confident that chain brewing is going to supplant
other systems in the future. Falstaff now operates seven
plants and International Breweries four. None, of course,
^Stanley gar on, Brewed in America (Boston: Little
Brown and Company), p. 266, 1962.
318
Is In the class with the multi-brewery Canadian chains
where three large chains, Labatt, MoIson, and Canadian
Breweries, Ltd. (the owner of Carlings), produce over 90
per cent of Canada's beer. None of the chain breweries in
the United States is truly a national brewery in the sense
that Schlitz, Anheuser-Busch, Miller, and Pabst are. There
is hardly a town of 25,000 population in the United States
where these four beers cannot be purchased. This is not
the case with Carlings and Falstaff. There are whole areas
where these beers have no representation, although it may
be expected that this situation will change as soon as the
chains see an opportunity for a profit in these areas.
There is also a skein of irony which runs through
the national-chain brewery relationship. Unquestionably
the American brewers saw the advantages of the Canadian
chain operations. Before Anheuser-Busch and Schlitz and
Pabst moved to New Jersey there were five operating chains
in Canada. Since then the national breweries in the United
States have become almost chain operations and a Canadian
chain has entered the United States to challenge the
American titans. The story does not end here, however. On
the Pacific Coast, Lucky Lager Brewing Company had three
plants and one in Salt Lake City, making Lucky a type of
319
regional chain. The parent Lucky Lager firm sold out to
Labatt Brewery, or more properly, John Labatt, Ltd. of
London, Ontario. By this maneuver, Labatt, too, had a
chain of American breweries, although not so large a chain
as Canadian Breweries, Ltd. Suddenly In 1964 Schlitz pur
chased control of Labatt for $39,000,000. Since there was
no mention in any of the voluminous news accounts of the
transaction of terms of financing, it may be assumed that
Schlitz just wrote checks for $39,000,000. One interesting
result will be the competitive situation in San Francisco.
Here Schlitz owns and operates Burgermelster Brewing
Company which it purchased in 1961. Schlitz owns Labatt's,
which owns Lucky Lager (now General Brewing Company), which
owns and operates a brewery in San Francisco. This plant
is now making a premium priced Labatt Beer for sale in
San Francisco and of course Schlitz is being sold there.
The Antitrust Division has managed to make many head*
lines as a result of all this activity. At one time it
appeared as if the Antitrust Division might ask Congress to
ask the Canadian Government to stop the sale of Labatt to
Schlitz. That sale of 1,700,000 shares of Labatt stock to
Schlitz at $23 per share, or a little over $39,000,000 has
been consummated. However, both the Los Angeles Times and
320
the Wall Street Journal of February 25, 1964 reported that:
U. S. District Judge George B. Harris has extended
indefinitely the temporary restraining order, that
prohibits Schlitz from exercising control over John
Labatt, and General Brewing Company of California which
is controlled by Labatt.
From the statement of a Schlitz spokesman in San Francisco
it would appear that the 1,700,000 shares of Labatt stock
which Schlitz has purchased will be held by the Bank of
Nova Scotia in Toronto pending the outcome of the litigation
The government alleges that purchase of both General
and Burgermeister will give Schlitz over 30% of the market
in California. To arrive at this figure it is necessary to
go back to 1961 for Lucky Lager figures of 18.4 per cent of
the California market and 12.1 per cent for Schlitz and
Burgermeister combined. Figuresihich are published monthly
by the California State Board of Equalization show that,
for the first three months of 1964, Schlitz sales amounted
to 14.1 per cent and Lucky sales to 12.1 per cent of
California sales, or a total of 26.2 per cent, some 4 per
cent under the 1961 figures. The total is also below the
total per cent sold by Lucky Lager alone in 1955-1958. It
is sometimes difficult to follow the government's reasoning.
Fifty-five per cent of automobile sales by General Motors
apparently does not constitute a monopoly.
321
The San Francisco papers which have given the
Justice Department a great deal of favorable publicity have
not helped establish the facts of the case by saying:
Late in 1961, Schlitz purchased the Burgermeister
Brewing Corporation of San Francisco whose Burgermeister
brand accounted for about 10 per cent of total Calif
ornia sales. Lucky Lager's volume is reportedly triple
that of Burgermeister. Concludes the Chronicle, "The
combined sales of Schlitz, Burgermeister, and Lucky
Lager would dominate West Coast markets. "21
Reporting that is so wide of the mark when the figures are
so readily available gives cause for wonderment. Mr. Robert
Uihlein, president of Schlitz, has not only denied that
Schlitz can, or wishes to, control beer sales in California
but told the stockholders at the annual meeting, "Schlitz
22
would like to see Labatt divest itself of General Brewing.
Antitrust aid for small brewers. It may be a cause
for wonder that the antitrust statutes have not been used
to a greater extent by and for the small brewers. The
reasons are threefold. First cases of price-cutting and
selling below cost are most difficult to prove, especially
when such means as secret rebates or "leakers" are used.
23-The Brewers Bulletin. Chicago, February 20, 1964,
p. 3.
22Ibid., April 30, 1964, p. 3.
322
The Antitrust Division and the Federal Trade Commission
would need vastly greater personnel to investigate all such
complaints. Second, the average brewer, like the average
business man in general, knows practically nothing about
antitrust statutes and their provisions. It is here that
the government might be of real help. A bureau of retired
judges and attorneys could be set up to advise the small
businessman on his rights, and even on his chances of
success if he were to go to court.
The third and final reason, however, is that most
small brewers have been tarred with the same brush. When
they have lost business to "chiselers," they have proceeded
to fight fire with fire. The result has been doubly dis
astrous. They have lost money on the sales they made and
have failed to recover the sales taken from them. Worse
yet, they have barred themselves effectively from legal
redress since the first rule of a court of equity is that a
plaintiff must have clean hands.
Will Premium Beer Sales Decline?
It is the opinion of this study that the days of
large scale premium beer sales are over. Premium beers
will become a smaller and smaller part of the market, and
323
as they do the national and chain breweries will become the
same except for a small percentage of premium priced beers
such as Anheuser Busch "Michelob" and Schlitz "Labatt."
This opinion was confirmed recently by two magazine
articles: one in Newsweek said:
But the fastest-rising companies such as Schlitz in
Milwaukee and Carling Brewing Company in Cleveland [sic]
are combining the new packaging and promotion with a
merchandizing program very like Proctor and Gamble's
approach to soap. Schlitz1s energetic young president,
Robert A. Uihlein, Jr. set up autonomous management for
each of Schlitz's five brands and saw sales jump by
16 per cent last year. [1963]
St. Louis'8 Anheuser-Busch, which dominates the
industry [sic] does not intend to sit still either.
In his private, four bedroom railroad car parked in
Chicago's Union Station last week, President August A.
(Gussle) Busch sipped a Michelob and said gruffly,
"we're studying new packs and experimenting with
aluminum bottles. We're not satisfied with the pop-top
bottle yet, and the pop-top can is far from perfect.
But we think the industry is just beginning to grow."*’
The other story in Business Week was somewhat more
detailed. Anheuser-Busch took the barrelage lead from
Schlitz in 1957 and has never relinquished it. The reason,
which Business Week did not stress, is that Busch Baverian,
a popular priced beer, was introduced. While Schlitz'
conservative management waited to see what would happen,
^^Newsweek. "Who Drinks? The Brewers Dilemma."
August 24, 1964, p. 67.
324
Busch' sales and, more Importantly, profit shot up. It was
not until the younger Robert A Uihlein took over that
Schlitz began to change its tactics in an effort to catch
up.
Since Uihlein took over, Schlitz has (1) begun heavy
promotion for Old Milwaukee, a popular priced brand it
had all but dropped. (2) Introduced the Malt Liquor
label on a new premium product. (3) Acquired Burge-
meister Brewery on the West Coast and a Hawaiian brewery.
(4) Pioneered in using the soft-top (aluminum topped)
can and later the tab-top can. (5) Installed an
entirely new marketing team, with the brand-manager
concept that'8 more familiar in the food and soap
business.
Table IX shows the comparison for the ten largest
breweries in 1963 vs. 1962.
Schlitz intends to place even greater emphasis on
the two products it considers responsible for its surge in
sales, malt liquor and the popular priced Old Milwaukee.
Malt liquor is sweeter than beer and has a higher alcoholic
content than most beers. Except for its paler color it is
not unlike British stout.
Two brands in one plant. This study finds nothing to
cast doubt upon the old brewer's idea that a premium and
24
Business Week. "Selling Suds Like Soap," August 8,
1964, p. 61.
325
TABLE IX
COMPARISON FOR THE TEN LARGEST BREWERIES IN 1963 vs 1962
Brewery
Thousands
1962
of Barrels
1963
Change
Barrels X
Anheuser Busch
Budweiser 9,035 9,397 362,588 4.0
Schlitz 6,880 7,834 953,976 13.9
Pabst 5,845 6,670 827,293 14.2
Carling 5,339 5,681 322,533 6.0
Falstaff 5,300 5,548 248,176 4.7
Ballantlne 4,550 4,495 55,000 1.2
Schaefer 3,778 4,042 264,455 7.0
Ham 3,724 3,826 102,400 2.7
Coors 2,773 3,050 277,000 10.00
Liebman (Rhelngold) 2,992 3,018 26,000 0.9
Industry Total 91,197 93,794 2,596,811 2.8
Business Week, "Selling Suds Like Soap," August 8,
1964, pTTilT
326
popular priced beer could only be made in the same brewery
at the cost of sales to the premium priced product. This
is a sort of Gresham's Law applied to commodities. Busch
sales increased tremendously with the introduction of Busch
Bavarian beginning in 1955, but Budwfeiser sales dropped.
Pabst in California is no longer sold at premium prices
because Eastside and Blatz beers were made by and in the
same brewery and rubbed all the luster off Pabst, making it
»
impossible to command a premium price for it except in
geographically isolated areas. It is the opinion of Paul
Kalmanovitz, Chairman of the Board of Maier Brewing Company
of Los Angeles, corroborated by this study, that no brewery
can make two beers successfully on a large scale basis in
one plant. The physical difficulties are tremendous,
almost as if one were trying to assemble Cadillacs and
Chevrolets on the same assenfoly line. In addition there
develops a growing suspicion on the part of the consumer
that he is paying for a distinction without a difference.
Particularly is this the situation in the case of American
beers which show such marked similarities of flavor and
appearance. It is Kalmanovitz' opinion, echoed here, that
the day of large selling premium beers— the upward sloping
demand curve— is over. Small amounts of Anheuser-Busch'
327
"Michelob," of Schlitz' "Schlitz," of Pabst's "Andeker"
will be sold but the illogical situation of today, where
the largest selling brands are the most expensive, is soon
to disappear. This means, to repeat, that national and
chain brewers will be indistinguishable except that
national brewers will produce a small amount of special
brews.
The Anheuser-Busch Explanation
Busch's explanation for going to a popular priced
beer was that it was necessary to do so in order to meet
the:
. . . needs of distributors. Busch Bavarian "gave
Busch the ability to go to its distributors with a
second brand and put them 100% into its business— many
had been handling regional beers in addition to Bud to
tap the lower-price market, estimated at 70% to 80% of
total beer consumption. One result: new or renewed
exclusive arrangements with the wholesaler.25
This development opens the problem of brewery distri
bution to much conjecture. As was pointed out in Chapter
IX, the question of whether to own one's distribution has
long been debated by brewers. In the days prior to prohi
bition, perhaps due to the presence of tied-houses and the
25Busines8 Week. April 13, 1963, p. 112.
328
absence of strong unions, brewers, almost without exception,
owned their distribution. Since Repeal of the 18th Amend
ment, however, ownership of distribution has dwindled. The
reason is obvious; with outlets handling a much greater
number and variety of beers than was the case prior to
prohibition, it has become increasingly difficult for a
distributor to sell sufficient volume to continue in busi
ness with only one beer. To such an extent has this become
true that several small brewers who handle their own distri
bution in their local areas, have even supplemented the
sales of their own beer with a premium beer. Naturally,
every brewer would prefer to have "his" distributors
maximizing sales efforts on his beer. This is impossible
when the beers of two, or even worse— several, brewers are
handled by one distributor as was discussed in Chapter IX.
Russell Hopkins, executive manager of the National Beer
Wholesalers Association recently said:
Unless some cost-cutting formula such as reduced
services . . . can be worked out soon (by the individual
distributor) breweries will be faced with the task of
taking over their own wholesaling functions. ®
He conceded, however, that major obstacles bar the way to
2^Brewers Bulletin. March 19, 1964, p. 3.
329
such a course at this time. "Some of these are legal,"
Hopkins continued, "while others would be imposed by union
regulation now in effect."^
The opinion held here is that the addition of a
second brand will indeed give the national brewers exclu
sive distribution. It will also increase the sales of the
"second" beer far above 70 to 80 per cent. The national
brewers will learn, like Kipling's hero in "The Man Who
Would Be King," that snob appeal is based on aloofness and
sincere, or feigned, indifference to popular demands. It
will not be only in the area of marketing that the national
brewers come to resemble the soap manufacturers. Lever
Brothers and Colgate Palmolive Peet do not make premium
priced perfumed or cosmetic soaps.
None of the above is intended to disparage the
national brewers nor to criticize their operations. Even
without the aid of economists and demand curves, brewers
such as Busch and Uihlein could see their sales failing to
increase and their profits decreasing. They, too, had their
choice of change or perish. They wisely decided they
should enter the popular priced beer market and accept a
^^Ibid., p. 3.
330
smaller unit profit on larger volume. What is said here is
merely of an admonitory nature; the national brewers should
be aware that they can not eat their cake and have it too.
When they embark on large scale popular priced efforts,
they will lose their large scale premium market.
One brewery which seems to appreciate this fact and
whose activities will be watched with considerable interest
is the Miller Brewing Company of Milwaukee. Miller has
refused to embark on expansion programs such as have been
undertaken by Schlitz and Pabst, and has continued to brew
only in Milwaukee. Miller recently purchased the small
Gettleman Brewery, also in Milwaukee. At present this
smaller plant is used to produce a lower priced beer. A
supermarket in Los Angeles charges 560 for a 32 ounce
bottle of Miller and 39c f°r the same size bottle of
Gettleman. It is a matter of genuine interest to the
industry whether Miller can continue this Cadillac-Chevrolet
relationship.
National Brewers1 Profits and Diversification
Not only are the national brewers extending their
brewery investments, Schlitz is planning a $15,000,000
331
28
plant at Longview, Texas e.g., and Anheuser Busch is
building a similar size plant in Houston, as has been
noted, but the breweries are expanding into other areas.
Robert A. Uihlein, Jr., Schlitz president, and
Gustave Schindler, chief executive of Pan-Alliance,
recently announced organization of the Alliance
Industrial Development Corporation. . . .
The new firm is now operating fish processing plants
in Panama and Chile. Under study are fruit juice
processing plants [a $1,000,000 plant in West Pakistan];
glass container, tube and ampoule facilities; a starch
plant, and participation in the manufacture of pharma
ceuticals. Most of the projects are in the Near East
and Far East.**
Anheuser-Busch is going into the money markets to
sell $40,000,000 of 25 year debentures to the public. The
brewery's only other public financing was the sale of
0
$35,000,000 in 25-year debentures in 1952. In addition to
the Houston plant, the capacity of the Busch Stadium, home
of the National League St. Louis Cardinal baseball team, is
to be expanded from its present 28,000 seats to 50,000.
Also some undetailed expansion is planned. So far Pabst
and Miller have not announced plans for either brewery con
struction or diversification. Table IX shows that all of
^ Brewers Bulletin. April 30, 1964, p. 1.
29
Ibid., January 16, 1964.
332
the first five in U. S. beer sales in 1963 set new records
for barrelage. These five breweries also have sufficient
stock publicly held so that they issue annual earnings
statements, however, Carling, as mentioned previously, does
not separate U. S. from Canadian earnings so in Table X
the Carling earnings are not shown.
Examination of Table X shows that as might be
expected, profits have increased (except for Anheuser-
Busch, 14% of whose income is derived from such non-beer
items as bakers' yeast, frozen and dried eggs, starches,
dextrines, and com syrup. Since the available income
statements are all consolidated, it is difficult to deter
mine profits on beer operations alone. These latter also
include 9 brewery operated sales plants) a greater percent
age than sales, so a condition of over-capacity with
diminishing marginal costs exists. None the less four of
the five breweries are contemplating, or indeed, are actu
ally in the process of constructing additional capacity.
Regional Brewers
In this study regional and local brewers will not be
distinguished. They are breweries whose output is sold in
one general area. Some like Ballantine, Schaefer, Coors,
TABLE X
BREWERS SALES AND PROFITS 1963 vs 1962
Sales in $1,000's Net Profits In $l,000's X Increase X Increase
1962 1963 1962 1963 $ Profits Barrels
Anheuser Busch 327,168 343,582 17,009 15,586
--
4.0
Schlltz 184,433 213,965 9,824 12,918 31 13.9
Pabst 181,014 202,859 6,436 8,026 25 14.2
Carling
--- --- --- ---
6.0
Falstaff 171,800 181,200 6,020 6,271 4.5 4.7
Standard and Poors
u>
C o
CO
334
Haffenraffer, National Brewing of Baltimore, Liebman of
Brooklyn, Olympia of Washington, are very large. Some like
Mrs. Spoetzl's are very small. Several like Liebman,
Schaefer, and National operate more than one plant. Theo.
Hamm Brewing Company, Inc. of St. Paul, Minnesota is a
borderline case. In addition to the St. Paul plant, the
brewery operates plants in San Francisco, Los Angeles and
Houston, Texas. The company may easily grow into a chain,
but at present its operations, except for California, are
each practically isolated and the operations seem suffi
ciently autonomous so that the brewery appears to be rather
three regional breweries under one ownership than one chain
brewery operating in three areas.
The number of these regional brewers dwindles every
year. Some are absorbed, but for the most part they simply
close their doors. It is the opinion of this study that,
in most cases the cause is poor management. Insufficient
capital is, as Mrs. Penrose points out, not a cause of
failure, but a result of incompetent management. Good
management can raise capital. This will be discussed at
considerable length in the conclusion and policy
recommendations.
The well managed regionals would appear to be
335
growing In both volume and financial soundness. The follow
ing citations from the brewing industry publications will
serve to demonstrate this. In April 1964, Stroh Brewery
Company of Detroit paid $1,950,000 for the assets of the
30
Goebel Brewing Company of Detroit. Schaefer purchased
the Theo Hamm Brewing Company's Baltimore plant and as a
consequence was able to sell its Cleveland plant to
C. Schmidt and Sons, Inc. of Philadelphia. A Schmidt
spokesman said the new plant was bought "to meet the ever-
increasing demands for Schmidt products in the western part
Ol
of the company's marketing area." Sales and profits of
the G. Heileman Brewing Company of La Crosse, Wisconsin,
oo
were at an all time high in 1963. President Harry Heuer
of the Peter Hand Brewery Company of Chicago said in his
Christmas message to employees, "For the first time in our
history we have not only reached the half-million barrel
mark but have exceeded it."3^
^Brewers' Bulletin, April 30, 1964, p. 3.
31Ibid., March 9, 1964, p. 3.
32Ibid.
33Ibid., December 1964, p. 3.
336
All reports are not so sanguine of course. In July
General Brewing Company (formerly Lucky Lager) announced It
would omit Its usual quarterly dividend of 25 cents a share
because of the continuing California strike. One sale that
occurred had some unusual facets. Pepsi Cola United
Bottlers purchased the tenth ranking Liebman Breweries of
New York. The Wall Street Journal quoted a Liebman official
as saying that sales and earnings both rose In 1963. A
second oddity Is that the sale price was so low. Busch has
estimated that his Texas plant will cost him as much as
$35,000,000. Schlltz paid 39 million for about 39 per cent
of LaBatt's 4,000,000 capacity. Pepsi-Cola paid the
Llebmann owners approximately $26,000,000 for over 99 per
cent control. The final unusual feature of the sale Is
that In 1963 Pepsi Cola had sales of $28.5 with profits of
$1.4 while Llebmann had sales of approximately
$130,000,000.34
Thus, although the number of regional breweries Is
declining the picture Is not all black or white but, as Is
nearly always the case, different shades of gray. The
letter quoted in the Wall Street Journal amd the follow-up
34Wall Street Journal. June 2, 1964, page 11.
interview with its writer Roy E. Kumm, president and
treasurer of G. Heileman Brewing Company of La Cross, Wise,
are typical. Mr. Kumm'8 five page letter said less than
half the 200 breweries in the United States will survive
the next decade because of "cut throat competition."33 He
also lashed out at taxes, big brewers, and pull-top cans.
He noted that Heileman sales and earnings had risen contin
uously but he stated the company was engaged "in a battle
for our wits against the gigantic brewers.He did make
two other statements which are of considerable significance
as endorsement of the conclusions of this study. He said,
"It is our opinion that powerful regional and giant national
breweries will be the only ones to survive in the next
several decades." But he also said, "bigness won't be the
criteria [sic] of survival." He also said in the letter:
The giant breweries price cutting tactics are bank
rupting their competition. Every year sees another
large brewery dropping their premium-priced brands down
to popular prices in order to maintain volume. If the
trend of the nationals continues to be towards lower
pricing, Heileman's Old Style could be the only premium
beer.3•
33ibid., March 13, 1964, p. 14.
36Ibid.
37Ibid.
338
Eight months later there appeared a notice In the
Wall Street Journal that "6. Heileman Brewing Company of
La Crosse, Wisconsin purchased the 107-year-old Gluek
Brewing Company, Minneapolis.
Heileman will add the Gluek trademark, patents, and
distribution to Its business and will close the Gluek
brewery In Minneapolis. . . .
Charles Gluek II, president of Gluek Brewing, . . .
said the sale was necessary because "it is becoming
impossible for a small brewery to actively compete with
the price cutting by the national breweries."38
Price Cutters
About six per cent of all beer sold is sold under
special labels at greatly reduced prices. The following
prices were noted in a west-coast supermarket:^ for a 32-
ounce bottle of beer, Miller (Milwaukee) 56$, Coors (Denver)
49$, Blatz (Los Angeles) 42$, and Keg (Los Angeles) 32$.
For six 16-ounce cans the prices were Miller $1.72, Falstaff
(San Jose) $1.44, Blatz $1.39, and Keg $1.15. Keg beer is
a special label beer manufactured in the identical manner
as the beer which the brewery sells under its own brand
label. As mentioned earlier the cost of delivery is cut
^®Ibid., November 10, 1964, p. 4.
39
Vons, Olympic and Crenshaw, Los Angeles, August 1,
1964.
because the beer is delivered to the store warehouse at a
saving of several cents a case. No advertising is furnished
to the stores. No salesmen call. There are no brewery
expenses incurred in displaying the beer; the store attends
to that. The store cuts its margin to the limit permitted
by the state laws. In short, the beer is distributed and
sold with the economist^ optimum efficiency, and minimum
waste. The beer is identical with a higher priced, well
advertised neighbor on the shelves. Unless there were far
greater product differentiation than is actually the case,
in a world of rational, economic men it would appear that
such beers would have the lion's share of the beer market
and not just six per cent.
The Backward Bending Demand Curve
This phenomenon is applicable to the firm in
imperfect competition, although conceivably, its effects
could be felt in an entire industry. It is not dissimilar
to the Giffin Effect, but unlike the Giffin Effect it is
demonstrable and numerous examples from real life can be
found easily. The phenomenon is simple. If for no apparent
reason such as a seasonal sale or a price war, a firm in
imperfect competition reduces the price of its good in a
340
conspicuous manner and to a conspicuous degree, sales do
not follow a pattern similar to a Marshallian demand curve.
Sales not only do not increase as price decreases, but they
actually decrease so that the demand curve reverses itself.
In view of the widespread occurrence and economic signifi
cance of this phenomenon, it is remarkable that economists
have neglected its effect. Figure 3 on page 341 illus
trates what happens when people feel that prices have been
reduced to too great a degree. It also shows that the
marginal revenue curve is even more difficult to define
than in the case of Paul Sweezy's kinked demand< curve.^
The cause of this reversal in demand is twofold.
First, people are innately suspicious, and historically
they have good reason to be, of sudden and unexplained
"bargains." Second, there is snob appeal. In no industry
is the effect of snob appeal so great as in the brewing
industry, as was pointed out earlier in this chapter.
The attempt to show this phenomenon in a diagram
results in what is actually two different demand curves.
(This is not unlike the situation in the Sweezy diagram.)
^®Paul M. Sweezy, "Demand Under Conditions of
Oligopoly," The Journal of Political Economy, Vol. XLVII,
(1939), pp. 568-573.
/
/a
I .
■■■ I?
A )c
f difs o1 r ■ < - - / - S ’ ^ * a y - > £}
"V t \ 'i fi. ^ — r t c — ' t o d 5T 3 " c i' * V i c ' .' c - •' c i t 7 co fa,v fyj,t /e ta
Figure 3
The Backward Bending Demand Curve
342
One curve follows Che normal demand curve pattern down to
the price P at which 800,000 barrels are sold. With fur
ther price reductions there is a second demand curve which
slopes down and to the left. This demand curve is drawn
as a continuation of the original demand curve and not as a
separate and new curve, since it is irreversible, i.e. it
can not be considered as sloping upward to the right. Thus,
while a reduction in price will lead to lower sales, a
position of greater sales can not be retrieved by increasing
price. Once idols are shown to have feet of clay there are
no more worshippers. It can be argued that the lower
priced product has become a different product; an inferior
good with the reduction in price, and as a result a new
demand curve below and to the left of the original should
be used. This same argument, however, could be used in any
situation where there was a change in demand with no change
in the physical make up of the product.
The data in Figure 3 are taken from the actual
estimated sales of a regional brewer who was explaining why
he could not cut prices even though his cost would permit
him to do so. The curve has been drawn, like all demand
curves, ex ante, except for the portion which slopes down
ward from 600,000 barrels to the right to point P at 800,000
343
barrels, the point where sales were at the time of the
discussion. The brewer had increased his sales from
600}000 to 800)000 barrels by, among other methods, reducing
price slightly. (For purposes of simpler exposition prices
have been calculated as gross dollars per barrel charged
at retail. The figures were taken some years ago, when
prices and excise taxes were lower than at present.)
The brewer felt positive that, as he put it, he had
"reached the end of the price reduction line:" that if he
reduced price further he would lose sales and his demand
curve would follow the downward and leftward path shown in
Figure 3. He gave examples of two of his former competitors
who, he insisted, had gone'bankrupt because they had cut
prices and had lost sales. He also cited the occasion when
in an unguarded moment he had given a discount to a large
retailer who had cut the price of the beer below that
charged by other retailers. The brewer felt that this had
been a great mistake. In the first place he had been
importuned immediately to give the same discount to all his
customers large and small. In the second place the sales
of the large retailer who cut prices were disappointing
since even here demand proved inelastic. Finally and most
important, however, he felt was the psychological impact on
344
both retailers and consumers. All felt that the beer had
become cheapened and it required time, effort, and expense
to regain the prestige and sales level he had formerly
enj oyed.
The phenomenon brings out another interesting fact.
In this particular case it was impossible to produce 800,000
barrels at the most efficient point of lowest cost. The
plant had been built in a period of rising sales with an
expectation that they would rise to about 1,100,000 or
1,200,000 barrels. Eight hundred thousand barrels could
be produced at a lower cost in this plant than they could
have been had the plant been designed to produce 800,000
barrels. Naturally, had sales increased, the cost per
barrel would have been lower and the lower costs could have
been passed on in lower prices. Since the consumer would
not buy at lower prices it would be necessary to increase
sales effort to get to the low cost production output.
This in turn might bring an increase in costs which would
result in the anomalous situation of lower production costs,
higher total costs, and lower profits at higher volume of
sales. From the economist's point of view it would, however,
permit a more conventional diagram, one where MC would cut
MR from below instead of from above as in Figure 3.
345
The important point, however, and the important
departure from accepted theory, is that sales will not only
not increase when price is lowered, they will decrease.
The reasons, as stated before, are psychological and
twofold. The first reason is that people are suspicious,
and historically this is founded on sound reasons, of
sudden changes in the established prices of goods. If
someone suddenly offers bread, milk, silver, or any other
good at a reduction of 25 to 30 per cent, it is likely that
something is wrong with the product. Only the naive rush
in to take advantage of such supposed bargains, and the
ordinary purchaser, lacking the time and the interest
necessary to investigate and dispel his doubts, simply will
not purchase.
The second reason is, of course, snob appeal. Snob
appeal is frequently spoken of as something peculiarly
American. Actually there is less of it in this country
than in most others. Anyone familiar with Europe knows of
cases of well-dressed clerks whose families suffer from
malnutrition. The caste systems in England and Sweden, for
example, show an intensity of snob appeal in goods and
customs that far exceeds anything in the United States.
Snob appeal, however, produces far different economic
346
effects in a country where expenditures for subsistence,
i.e., food, clothing and shelter comprise less than 50 per
cent of disposable income, than in a country where more
than 90 per cent is spent for subsistence. In a country
such as the United States few people care to purchase the
cheapest goods. To do so is to brand oneself. The oppor
tunity cost of an inflated ego in the United States is such
a small percentage of one's income that almost everyone can
afford it. Ewan Clague, in Geneva at an international
conference sponsored by the American Foundation on Automa
tion and Employment, Inc., said that 80 per cent of the
jobless in the United States have family incomes over $4,000
per year and the rest average over $3,000 a year, thanks to
unemployment insurance and other family income.^ This is
more than the British steel worker, the French auto worker,
and the German metal worker. In a country like this people
will not break down doors to get bargains. It becomes a
stigma to buy "cheap" goods. If there is any doubt on this
score, a look at the American compact car experience should
dispel it. A correlation between the percentage of a
market which is taken by "cutrate" subsistence goods and
^Victor Riesel, Los Angeles Times. August 2, 1964.
347
personal income would make an interesting research. It is
the opinion o£ this study that in times of low unemployment,
say 3.5 per cent, only 5 to 10 per cent of cutrate subsist
ence goods can be sold at any price in the United States.
If this is so, it has much more serious connotations
for economic theory than mere revision of classroom diagrama
Perhaps the emphasis in economic planning must be much
greater than heretofore, on new investment for new and
improved products, and only secondarily on methods of
producing present goods less expensively. Perhaps upgrading
to higher quality products makes better economic sense than
efforts to produce more cheaply.
II. NEW DEVELOPMENTS IN THE BREWING INDUSTRY
From time to time in this study reference has been
made to various changes occurring in the brewing industry.
These changes can be grouped in three categories: (1)
Changes in packages, (2) Changes in products, (3) Changes
in processing.
Changes in Packages
Reference has been made to the introduction of the
can and its effect on the range that shipping brewers could
send beer. A second effect was the stimulation that was
given to new packages in general. One of the first, was
the small nonreturnable bottle. Bottles in general had had
rather a curious history. In the early days of shipping
bottled beer, local breweries were anxious to buy the empty
bottles shipped in by the Nationals. These bottles had
demonstrated their ability to withstand the high pressures
generated in pasteurization. Purchase of these bottles, of
course, relieved the shipping brewer of the need to ship
the bottles back and also to pay the freight on them. As
bottle factories became more plentiful, and new bottles
less likely to break, it became evident to the local brewers
that they were in effect subsidizing the Nationals. Two
things could be done: (1) reduce the price charged for
bottle deposit, which meant the Nationals realized less
than their costs if local breweries took their bottles, and
(2) use a different size bottle. This last was only satis
factory in a partially isolated area such as the Pacific
Coast where it was in vogue for several years. Instead of
12 ounce, 11 ounce, and instead of 24, 22 ouaoe bottles
were used. The theory was that all Nationals would be
forced to pay the return freight on empty bottles, thus
making premium beers even more costly. At best the effort
349
was not too successful. The bother of separating bottles,
of having different tax rates both federal and state, once
the California brewers began to ship Into neighboring states,
made the eleven ounce bottle a nuisance. If the Introduc
tion of the one trip throw-away bottle did little else, it
did help bring some standardization to the industry.
Today it appears changes in packages have got com
pletely out of hand. The article in Newsweek referred to
earlier is headed by a photograph showing twenty different
cans, bottles, and jugs which it calls a "random array.
Many of these, such as the "pop top" can and the "pop top"
bottle crown are convenience packages and may be expected
to have large sales. Others with odd and unusual shapes and
heavy amounts of foil will have only a limited market.
National Can Company has introduced a one-gallon can
for unpasteurized draught beer which can be kept in the
refrigerator at home. The can has a small air pump which
can be used to pump the beer out, or if it is to be used
all at one time, a small plastic spout is used.^ National
Can says it hopes to capture about 3 per cent of the
packaged beer market.
^ Newsweek, August 24, 1964, pp. 66-67.
^Wall Street Journal. June 2, 1964.
350
It is the opinion of this study that new packages
in and of themselves will not do a great deal to increase
total beer consumption. Beer sales did not decline because
of dissatisfaction with the packages in which beer was
available. It would seem certain that new packages,
especially those which offer real convenience advantages,
cannot hurt the consumption of beer, but, to repeat, they
will not help too greatly either.
Changes in Products
To a great extent beer is almost indistinguishable
from what it has been since the end of World War II. If
anything, the 1964 product may be a trifle blander, with
slightly less hop bitter, and slightly less carbonation than
that of eighteen years ago. The sales of ale, a more highly
flavored and bitter product have dropped, so no brewer has
attempted to innovate along these lines.
Halt liquor. Indeed, about the only innovation, if
it may be called that, is that several breweries have begun
to make and sell malt liquor, which was once almost the
exclusive province of the M. K. Goetz brewery of St. Joseph,
Missouri. Gettleman division of Miller Brewing Company is
now making malt liquor as are Schlitz and Pabst. Pabst is
351
pleased with the reception accorded its product which its
executive vice-president Theodore Rosenak describes as
having a higher alcohol content than most beers, running
close to 6% by volume, compared with 4.6% to 4.7% for most
beers. Malt liquor is a darker and heavier-bodied brew
than most beers and has less carbonation.^ Malt liquor is
also being brewed by Atlantic Brewing Company of Chicago
and National Brewing Company.
Other brews. It seems strange at first that there
should be a sudden rush on the part of major brewers to get
into a field where, in the past only about 700,000 barrels
have been sold, considerably less than one per cent of total
output. The answer would seem to be that the brewers are at
last realizing that their product no longer is as popular as
it once was. In a number of contemporary articles mention
is made of "soul searching" and "market research" by brew
ers trying to find out who really drinks beer, and what the
beer drinker prefers. Anheuser-Busch is putting greater
advertising effort behind its all-malt, fuller-bodied, more
expensive Michelob. Pabst is planning to revive an old
name Andeker on a similar product. None of these ventures
^*Wall Street Journal. March 16, 1964, p. 7.
352
into product innovation are earth shaking but they do
indicate that the brewers are beginning to appreciate the
fact that they oust do something different if they are to
regain their old share of the market.
It would appear that more than a few brewers are
beginning to worry about the taste appeal of their product.
This doubt may well have sprung from the report at the
U.S.B.A. 1964 convention, of the results of a survey of the
beer drinking habits of young adults, conducted by Conti
nental Can Company.^ This survey found that 54 per cent
of young adults drink beer. However, many of the beer
drinkers indicated that they did not care particularly for
the taste of beer, even though a minority, 19 per cent, said
they liked it very much. As mentioned in Chapter III on
Technicians, the words used to describe the changes that
should be made were imprecise. Most said beer should taste
"better," or "smoother," with a minority plumping for
"sharper." Of real significance, moreover, is the fact that
of the non-beer drinking young adults, 45 per cent gave as
their reason the fact that they did not like the taste.
^ Continental Can Study ’Young Adults - The Uncertain
Market,1 Donald R. Melville and Thomas V. Carley. Proceed
ings, U.S.B.A. Convention 1964, p. 54 passim.
( i
353
Processing Changes
Two processing changes have made their appearance in
the brewing industry in the past year and have rocked the
industry to its foundations.
First was the announcement by Carling that it had
successfully developed the continuous brewing process
referred to earlier in this chapter. Understandably,
Carling is releasing only scanty details of the process,
but Henry E. Russell, president of Carling, says the
process will be used "in the $10-million, 300,000 barrel a
year plant the company is building at Fort Worth, Texas
It will be remembered from Chapter II that Reuben Schneider,
Lucky Lager's former production man, put the cost of
building a 300,000 barrel brewery considerably higher than
this. Indeed, Anheuser-Busch estimates that its costs to
build its 1,000,000 barrel brewery in Texas will be between
$30 and $35 per barrel.
The biggest savings of the new method, Russell says,
"is in bricks and mortar." A conventional brewhouse
. . needs at least a five-story brew house of heavy
construction to support the big vats. The brew house
at Ft. Worth will be two stories high. . . . [the]
ingredients will flow through a network of pipes, pass
ing through each stage of the brewing process along
^Business Week. 14 March 1964, p. 76.*
354
the way.^
This, of course, may make serious changes in the
& conditions of competition. If the initial cost of equipment
is reduced, then economies of scale are of less importance
and plants of smaller size may survive. However, entry
seldom comes from outside an industry. Almost always it
comes from within, and if entry is easier for the chain
breweries, they may build more plants of smaller size in
more cities where at present regional brewers dominate the
sales picture. This seems more likely than it does that
present regional breweries will take advantage of new
building which is cheaper than replacing that which they
already have. Brewing equipment, as such names as kettle,
cooker, and mash tub suggest, is durable. A half century
is not unusual for brewing vessels to see service. The
advantages of cheaper construction cost would therefore
appear to be with the chain and national brewer, and to
tend toward greater concentration.
Beer concentrate. The second innovation, and
certainly the more serious of the processing developments,
is the concentrating of beer. This process consists of
47Ibid., p. 76.
355
eliminating approximately 75 per cent of the water from
the finished beer. The beer would then be shipped in bulk
to distant plants where it would be reconstituted by the
addition of water and carbonation.
Late in 1963 the alcohol and tobacco tax division
[sic] of the Treasury Department adopted regulations
permitting the manufacture of beer concentrate and its
shipment between breweries of the same ownership,
without tax, for reconstitution into beer. At that
time government authorities had under consideration
passage of laws permitting the shipment and sale of
such concentrate to breweries not of the same
ownership.
No such furor has divided the industry in its long
history. Both associations have gone on record opposing
the new legislation. The U.S.B.A. has gone on record as
recommending that:
. . . equality for all brewers be achieved by limiting
the reconstitution of concentrate within the United
States to the plant where such concentrate is produced,
and limiting the shipment of concentrate to exportation
from the United States.^
Harris Perlstein, president of Pabst, has been the most
voluble of the U.S.B.A. opponents of concentration.
As might be expected, O'Shea speaking for the B.A.A.
ha8 been more violent and vehement in his condemnations.
^ Brewers Bulletin, February 20, 1964.
^Ibid., December 2, 1963, p. 1.
356
He is convinced that beer concentrate means the end of "hid*
small brewers. He has coined the phrase "imitation" beer
to refer to reconstituted beer. O'Neill, counsel for B.A.A.
has appeared before the House Ways and Means Committee to
prove that the Treasury has usurped authority in permitting
reconstitution. He also contends that concentrate is not
legally beer.
The Brewery Workers' Union has joined the fray on
the side of limited shipment of beer concentrate.Wide
spread use would of course cost the jobs of many dues
paying brewery workers.
Quite naturally Norman R. Klug, president of the
Miller Brewing Company, which with Union Carbide Company
developed the freezing process of concentration, is whole
heartedly in favor of beer reconsitution. He sees benefits
to big brewers, little brewers, overseas shippers, brewery
workers and others too numerous to mention.
In this study it has been stressed that the most
important ingredient of a consumer product is uniformity.
If reconstituted beer tastes as Klug contends, just the
same as conventionally brewed and bottled beer, that is
•*®Ibid., December 5, 1963, p. 2.
357
one thing. It may in reality be O'Shea's day of judgment
for the small brewer. If, on the other hand, it has not
proved satisfactory (i.e., it does not taste like conven
tional beer) as Augustus Busch II stated at the annual
meeting of Anheuser-Busch stockholders, then the question
of reconstituted beer's possible effect on the industry is
academic and will remain so as long as the difference exists.
III. CONCLUSION
There is a great deal of competition in the brewing
industry despite the fact that only 150 companies operating
approximately 200 plants are all that remain of the almost
900 breweries which have been operating at one time or
another since repeal in 1934. The rate of attrition is
very slow compared to the steel or automobile industries.
The prognosis is that more breweries will fail and concen
tration will increase in the future. There seems no like
lihood, however, of anything approaching a true monopoly
situation. The regional brewers, wherever there is
competent management, seem to be holding their own; indeed,
in many cases they seem to be gaining on their giant
competitors. It would appear that if the antitrust
358
statutes are reasonably enforced, those regional brewers
with competent management will be In business for some
time to come.
CONCLUSION
The purpose of this study has been to trace the
development of the brewing industry In the United States
and to attempt to locate the industry's position on the
competition spectrum between the hypothetical extremes of
perfect competition and perfect monopoly. The study has
attempted, not only to look at the theories of competition
by which various economists have sought to reconcile
theory and real life, but also to examine the relations
of the industry with other groups such as government,
labor, and consumers. At this point the study will
summarize the findings, attempt a prognosis, and make
policy recommendations.
I. SUMMARY
The brewing industry has shown a steady decrease in
numbers of firms from 4,141 in 1873 to 150 in 1964. The
rate of concentration is still considerably behind that of
the steel, the tobacco, and, curiously, the whiskey
industries. The ten leading firms in 1963 had slightly
over 59 per cent of the sales of the industry. The
359
360
tendency appears to be toward increased percentages of
sales going to the larger breweries. Nevertheless, small
breweries with capable management are prospering.
Two other trends are marked; the first is the
tendency toward chain breweries. This would seem a
natural development in view of the weight and bulk of
beer in proportion to its cost which causes shipping to
increase the cost tremendously percentage-wise. The
second development is the tendency of the "national" or
"shipping" brewer to introduce lower priced beers which
in most cases are replacing the premium priced beers on
which these breweries have built their reputations.
A third tendency has been noted, and that is the
tendency to a lower per capita consumption of the
contemporary milder, lighter beer. However, sales have
increased somewhat in the past two years and government
experts as well as brewers expect sales to reach
100,000,000 barrels worth $2.5 billion F.O.B. the
breweries, in 1964.* These hopes are based on the
demographic facts of low birth rates in the 1930's and
high birth rates since World War II. The result has been
^•Brewers Bulletin, February 6, 1954, p. 1.
361
an abnormally low percentage of 20-60 year-old heavy
beer drinkers for the past several years. Now the post
World War II babies are reaching beer drinking age and
the percentage of population in the heavy beer drinking
age group will continue to increase for some years.*
Two other efforts have been made to combat the
lower per capita consumption tendency. These are:
(1) the rapid growth in convenience packages (tab-top
cans and bottles), and (2) the introduction of new
products such as malt liquor.
It has been noted that prior to prohibition,
80 per cent of all beer was sold in kegs on draught and
the great majority of draught establishments were tied-
houses. This situation was favorable to the small and
the local brewer. Today the percentage is reversed
and the advantage lies with the large scale mass pro
ducer who has the benefits of economies of scale in
production and in advertising, where such economies are
even greater.
This tendency to giant nationwide production and
fyall Street Journal. June 11, 1964, p. 1.
merchandising institutions has, of course, been accompanied
by a decline in the owner operated type of brewery. There
still exist many thriving family operations, including the
two largest: Anheuser-Busch and Schlitz. The great
families in the brewing industry including the two just
mentioned, the Schaefers, the Schmidts, the Coors, the
Haffenraffers, among others, are first rate examples of
Schumpeter'8 great families. They have trained the rising
generations in the business. They reinvested their own
money so that only in periods of maximum growth have they
had need to raise funds from public sources. Finally,
they are the ones, for the most part, who have pioneered
the innovations.
In the past four years 40 breweries have closed
down or have been absorbed. It is expected that this trend
will continue. Despite this trend many, certainly the
majority of, regional breweries are more than holding their
own. Those who are prospering are not only the giants in
the first ten, but Heileman, Stroh, Haffenraffer, et al.,
in the middle sized category, and many in the small sized
category.
II. RESUME AMD COMPARISON OF THEORY AND ACTUALITY
In Chapter I various theories of competition were
discussed briefly. They should now be examined more
closely to see if any has a fairly close approximation to
the reality of the situation in the brewing industry.
Harold Fleming’s Theory of Competition
Harold Fleming was the first writer to b* quoted at
length in Chapter I. Fleming stressed the fact that
competition was not necessarily what the economist consid
ers it to be. Fleming stated that the fact of rivalry,
not differing prices nor share of the market, is what
determines competition. He was frankly critical of the
economist's frequent assumption and the Federal Trade
Commission's assertion that it would treat "conscious
parallelism of action," as a violation of the F. T. C.
Act.^ As Fleming states the case, "apparently everyone
should undersell everyone else."5 He then goes on to ask
^Harold Fleming, Oil Prices and Competition
(American Petroleum Institute, 1953).
4
364
how ther,~ could be different posted prices. If such a
condition were to exist, in a very short while there would
be only one company selling and what economists dread most,
monopoly would result. Indeed, it was chiefly by not
maintaining prices that John D. Rockefeller obtained the
Standard Oil Company monopoly. In answer to the econo
mists' charge that the sameness or uniformity of price
supposedly means collusion or conspiracy, Fleming says of
the petroleum business:
Competition is often of a "behind the pump" or
"under the canopy" concessions nature. Also service,
eourtesy and convenience vary. No two competitors
offer identical products for identical prices (if
inducements are included in the term price).”
With the majority of Fleming's contentions and con
clusions, this study is in accord. It is difficult to see
how, except in cases of atomistic competition, different
prices could be charged for the same product. The situa
tion in the brewing industry confirms this. Premium beer
is not, in the mind of the consumer the same product as
"popular" priced beers. When Pabst, in 1962, reduced the
price of its premium Blue Ribbon beer to that of the
"popular" beer prices Blue Ribbon became a different
6Ibid., p. 52.
365
product than it had been, and became the same product as
Pabst's popular priced 'Eastside1 Brand. The cut-rate
beers, too, are a different product in the consumer's eyes
than the 'popular' priced beer put out by the same company.
Mr. Fleming's contention that 'behind the pump' and
'under the canopy' activities constitute the main competi
tive efforts in the petroleum industry, has its counterpart
in the brewing industry. Sales efforts in the brewing
industry are restricted not only by the state and federal
antitrust and price regulating statutes, but also, in the
majority of states, by rigid pricing and selling regula
tions. As so often happens, the net effect of all these
regulations is not to increase competition but rather to
reduce it by attempting to suspend the operation of the
competitive market. The brewing industry conforms rather
closely to competition in the petroleum industry as
described by Fleming. The principle way in which they
differ is that in the brewing industry an effort to produce
a semblance of competition by non-price methods (it must be
remembered that in many states price-posting and fair
trading are compulsory for beer) will result in violation
of state and federal regulations and laws.
Bain's Theory on Entry
Professor Joe Bain has done a great deal of work
collecting and analyzing data on the petroleum industry.
In addition he has examined 20 industries, including the
petroleum industry in an attempt to discover if theories
about entry and difficulty of entry in oligopolistic
industries are borne out.7 The industries selected include
among others, steel, petroleum, soap, distilling, and
tobacco. It is Professor Bain's belief that economies of
scale in production have been given more importance than
they deserve. In the industries he has examined he believes
that the optimum size plant is not over 5 per cent of the
Q
industry capacity in any industry. This would accord with
the brewing industry's experience where Schlitz 5.5 million
barrel plant in Milwaukee is the industry's largest. It
will be recalled that Ruben Schneider of General Brewing
Company felt that production costs per barrel decreased
very slightly after the first 1,000,000 barrels.
Daniel C. Hamilton has done considerable work on the
7Joe S. Bain, Barriers to New Competition (Cambridge,
Massachusetts: Harvard University Press, 1956).
367
refineries in the Gulf Coast area and his opinions were much
the same. He believed that refinery costs fall at least up
to a capacity of 200,000 barrels per day, although the cost
curve is almost flat at this capacity. There is certainly
no indication that the curve is starting upwards.^ Hamilton
said, "The economies of scale are not so large relative to
Gulf market demand as to preclude the existence of a con
siderable number of optimum-size plants."1® it m y then
be stated that up to the present, economies of scale are by
no means great enough to establish barriers either to entry
or expansion.
It was Professor Bain's further conclusion that there
are fewer barriers to entry where product innovation is
possible by small scale companies without research and
development laboratories.^ By these standards there are
few barriers to entry in the beer business. However, the
only comparatively small company which has made such an
Innovation successfully in recent years is the Goetz Brewing
^Daniel C. Hamilton, Competition in Oil (Cambridge,
Massachusetts: Harvard University Press, 1958), p. 45.
10Ibid., p. 87.
H-Bain, 0£. cit., p. 287.
368
Company of St. Joseph, Missouri, with its malt liquor. Two
other experiments along the lines of new and different
products introduced by small brewers (no large brewers have
introduced new products) were unsuccessful.
Before turning to his other work on workable
competition professor Bain's reason for product differenti
ation should be quoted. It is "to give the independent
seller some jurisdiction over his p r i c e .
1 q
In an earlier work he set forth four criteria for
determining whether or not competition is effective: (1) do
profits average quasi-perpetually well above an established
normal rate of return; (2) does the scale of many firms
fall seriously outside the optimal range; (3) is excess
capacity considerable and chronic; and (4) is there a
persistent lag in the adoption of product or process
innovation.
By three of these four criteria the brewing industry
could not be considered as having effective competition.
Profits for the industry have been low--$83,000,000 or 2 1 fl
^Ibid., p. 114.
l-3joe S. Bain, "Workable Competition in Oligopoly:
Theoretical Considerations and Some Empirical Evidence,"
American Economic Review, XL (1950), p. 37.
369
per cent of sales In 1959. However, the scale of many
firms, some of them prosperous but many more not, Is far
below the optimal range. There is considerable excess
capacity but again this is in the plants of unsuccessful
and unprosperous firms. As has been shown, nearly all of
the ten largest breweries are expanding their capacities.
Finally, packaging and marketing techniques have begun to
change, but they have been slow. Product and processing
techniques have been even slower to change. Economic theory
teaches that, ceteris paribus. the smaller the number of
firms, the less intense will be competition. The results
of this study show the seemingly anomalous situation of
competition becoming more Intense as the number of firms
decreases. It is possible, of course, that this is only a
transition phenomenon.
J • M. Clark1 a Workable Competition1 1
.14
Professor Clark s article had many statements with
which this study concurs completely. He said, "perfect
competition does not and cannot and has presumably never
^J. M. Clark, "Toward a Concept of Workable Competi
tion," American Economic Review. Vol. XXX (1940), p. 241-
256.
existed."1" * He also stated, as did Fleming, "competition
is rivalry in selling goods."*** In addition, like Profes-
sor Lester, Professor Bain, and this study, Professor Clark
believed cost curves were flatter than did Professor
17
Chamberlain. Finally, he felt that when demand fluctu
ates, an industry must inevitably be operating short of
full capacity much of the time.18
Since all of these statements have been gone over at
some length elsewhere, the discussion here will not be
expanded. Professor Clark has classified markets according
to structural elements. The brewing industry would presum
ably fit best under his second major division, "Modified,
intermediate, or hybrid competition." Under this major
division there are subheads of which subhead B seems to fit
best, i.e., "Unstandardized or quality products: 'monopo
listic competition,' individual demand curves sloping but
more elastic than general demand schedule." To be sure,
this is not an exact description of the brewing industry
371
but it is reasonably accurate. It has been mentioned
frequently in this study that the product differentiation
in the brewing industry has been greater from an advertis
ing than from an actual ingredient and flavor point of
view. This in part accounts for the difference of slope
of elasticity in the firm and industry curves.
Wilcox Definition of Competition
Writing at a time when a good deal of effort was
being directed toward efficient production while retain
ing price control and similar restrictions, Dr. Wilcox'
criteria for competition were considerably different from
Professor Bain's. He feels that workable competition
exists when (1) there are several sellers of similar pro
ducts who possess the capacity to survive and grow, (2)
buyers have available essential information, (3) entry is
free, and (4) there is substantial independence of action.
Aside from the vagueness of expression these criteria
seem to say that when there is competition there is
competition.
l^Dr. Clair Wilcox, Competition and Monopoly in
American Industry. T. N. E. C. Monograph No. 21, p. 9.
372
Reply to Wilcox
20
John Scoville and Noel Sargent writing under the
aegis of the National Association of Manufacturers under
took to rebut the charges brought by Wilcox and others in
the T.N.E.C. Monographs. They plumped for many of the
contentions that have been made in thia study. They felt,
"A businessman rarely knows at what price he will secure
the maximum profit either in the short run or the long
run.”21
He [a manufacturer] finds that neither he nor any
economists he could employ could draw either a demand
or a supply curve for his business. Nor can he deter
mine with any accuracy the price that will give the
volume of sales that will maximize his profits. . . .
In pricing his products, he estimates his costs as well
as he can and adds something for profits. He is more
interested in keeping solvent and staying in business
than in maximizing his profits.22
"A company that made great progress in efficiency might put
its rivals out of business and arrive at a monopoly status
via the efficiency route."23
2®John Scoville and Noel Sargent, Fact and Fancy in
the T.N.E.C. Monographs. New York, 1942, National Associa
tion of Manufacturers of U.S.A.
21Ibid., p. 302.
22Ibid.. p. 320.
23Ibid., p. 305.
»
373
As with so many economic problems, the more intent
the examination, the more baffling the puzzle. Not only is
the question of interpretation of the antitrust statutes
perplexing hut:
Our national ideas about monopolies seem confused.
There seem to be good monopolies and bad monopolies.
If the number of persons engaged in monopolistic
combinations is large and comprises a large number of
voters, the practices are likely to be encouraged by
governments. If the monopolists are few in number and
are therefore weak politically, there will be a tendency
for government to oppose them. ... If monopolists
are numerous their practices will be called "coopera
tive,” "collective,” or "protective." If the monopo
lists are few in number, the practices will be called
"predatory," "monopolistic," or "anti-social." We
eannot condemn politicians for being sensitive to the
opinions of those groups containing a large number of
voters. Politicians who oppose large masses of voters
do not get elected to office.24
Schumpeter1s Theory of Monopoly
This last statement is so similar to the ideas of
Schumpeter on the subject of monopoly that some discussion
of these ideas must be undertaken in any study which
pretends to a degree of analysis of competition.
Schumpeter's theory of the "gale of creative destruc
tion,^ is so well known that only the briefest summary is
24Ibid., p. 303.
2^Joseph A. Schumpeter, Capitalism Socialism and
Democracy (New York: Harper and Brothers, 1947), p. 87.
necessary here. In essence, Schumpeter believed that
progress, i.e., more and better economic goods at lower
real prices, comes only through innovation. This takes one
or more of five forms (1) new or improved goods, (2) new
forms of organization, (3) new markets, (4) new use of raw
26
materials, and (5) new methods of production. These
innovations require investment, and practically any invest
ment includes safeguarding activities such as insurance or
hedging. In Schumpeter's opinion insurance, which is paid
for by the customer's purchases, for such unforeseen con
tingencies as war, differs little from that collected from
the same source to protect against imitation or innovation
by others. Such insurance can take the form of a patent or
"a price policy that will make it possible to write off
27
more quickly than would otherwise be rational.
Schumpeter was such an enthusiastic proponent of
innovation, and such a believer in the idea that it requires
what Marshall called "economic rent" to call it forth that
it is often thought he glossed over the evils of monopoly.
^Joseph a. Schumpeter, The Theory of Economic Devel
opment (New York: Oxford University Press, 1961), p. 66.
^ S c h u m p e t e r t Capitalism. Socialism and Democracy.
p. 88.
375
In order to dispel this opinion, the following lengthy
quotation is necessary:
Even as now extended, however, our argument does not
cover all cases of restrictive or regulating strategy,
many of which no doubt have that injurious effect on
the long run development of output which is uncritically
attributed to them. ... It is certainly . . . con
ceivable that an all pervading cartel system might
sabotage all progress. . . . This is why our argument
does not amount to a case against state regulation. It
does show that there is no general case for indiscrim
inate trust-busting or for the prosecution of
everything that qualifies as a restraint of trade. ®
These feelings are close to the sentiment of this
study about competition in the beer business. Although
there have unquestionably been instances of monopoly and
exploitation of the consumer, by any economic standard of
measure, there has been and is competition in the brewing
industry. By any of the standards of "workable competi
tion," enumerated by the authors quoted, there is
competition in the brewing industry.
Confirmation of Theories of Concentration
In Chapter I also, four leading theorists were quoted
on reasons for and the limits to concentration. All agreed
that economics of scale of plant, while effective as an aid
28Ibid., p. 91.
376
to concentration had a definite limit far short of that
found in most oligopolistic industries. The findings of
this study have confirmed this.
Jack Downie felt that concentration was a built-in
fact of life in an economy with firms of different size.
Costs are almost always larger than profits and this dis
parity in size gives a "leverage" or an accelerated effect
to efficiency which benefits the efficient plant out of all
proportion to its demonstrated differential. Downie called
this the "transfer mechanism." He believed this to be
offset by innovation. The opinion of this study would
confirm the presence of something like the operation of a
transfer mechanism. That it can be offset by innovation
cannot be demonstrated by the results of this study.
The theory of Professor Bain largely concerned the
methods used by oligopolists to prevent entry by outsiders.
The results of this study neither confirm nor refute
Professor Bain's theory. The only new entries into the
brewing industry have been by outsiders who purchased
existing plants or insiders who built new plants.
The results of this study are most nearly In agree
ment with the theory of Professor Baumol. Certainly the
history of the brewing industry shows no record of attempts
377
to maximize profits. Maximization of sales and thereby
satisfying the ego of the owner-manager has time and again
been the paramount objective. Frequently breweries have
undertaken extracurricular activities on which they
expected to lose money, In order to boast of prestige
operations.
Mrs. Penrose' theory that growth, and concomitantly
concentration, are the result of good management has been
confirmed, for the brewing Industry, throughout this study.
III. DISPARITIES BETWEEN THEORY AND REAL LIFE
During the course of this study on frequent occa
sions there has been pointed out the disparities between
economic theory and real life. In each case this study has
stressed the significance of the disagreement and has
attempted to justify the point of view and the reasoning
espoused. -
Maximization Theory Invalid
The first disagreement of this study with economic
theory Is In the theory of maximization. Theory says the
firm seeks to maximize profits. No where is this given the
lie better than in an industry dominated by arrogant aryans
378
who have on innumerable occasions sacrificed profits in
order to make an opponent look bad. The titanic battles
between Pabst, Schlitz, and Busch, beginning in the 1890's,
are the prime examples.
Cost Curves are Flat not U-Shaped
The second area of disagreement of this study with
conventional theory is in the shape of the cost curve.
Professor Bain's and Hamilton's contention that the cost
curve is not U-shaped as Professor Machlup has insisted,
but dish-shaped is echoed here, and its importance is
emphasized even more than in the works of Professor Bain.
The contention here is that the shape of the cost curve is
a vital factor in entry, as Professor Bain pointed out. It
is also, however, responsible for a good deal of the
flexibility in industrial production. If there were any
such steep falling and rising costs curves in real life as
are usually drawn on the blackboards by economics profes
sors, there would be a vastly different system of production
than is now the case. A situation where costs, and of
course with costs, profits, could vary so abruptly with
either a slight decrease or increase in sales would give
pause to most investors and most entrepreneurs.
379
Businesses Don't Use Marginal Pricing
A third area where this study is not in accord with
accepted theory is in the idea that even if he had learned
the concept o£ maximizing profit when marginal cost equaled
marginal revenue, the businessman would not use it. In the
first place it is almost impossible for a businessman to
know precisely what his marginal costs are. In the second
place no businessman will knowingly produce at a loss
unless as Scoville and Sargent have pointed out, the
circumstances are extraordinary. Production at a volume
where marginal cost exceeds marginal revenue means that a
greater productive capacity could avert a loss. Therefore,
since businessmen will not produce beyond the point where
"it costs more than you get out of it," and because of the
flat-dish-shaped cost curve, there is a built-in tendency
to overproduction in American industry. As stated above,
this is fortunate, it is hard to imagine what would happen
to price structures, if with an economy designed to produce
only a certain amount, a sudden spurt in demand came.
Certainly cycles would be more frequent and violent. This
reinforces Professor Clark's contention that over-capacity
is unavoidable if demand fluctuates.
380
Conventional Demand Curve is Unrealistic
The idea that lowering costs will increase the
quantity consumed is assailed in Chapter X of this study.
Empirical examples are given to show that a sufficiently
lower price will repel customers. It is contended that
this backward bending demand curve can only occur in a
society where a minor part of disposable income is spent on
subsistence goods. The causes of such a backward bending
demand curve are innate human suspiciousness, and snob
appeal. Also, it generally, but by no means always, occurs
in cases where expenditures on the good take only a small
percentage of disposable income.
IV. FORECAST
Among the assumptions which are necessary to justify
a forecast about the trend of competition in the brewing
industry are the following: (1) That the public taste in
beer does not change. A shift in taste to a stronger
beverage, either in flavor or alcohol could have unantici
pated and unforeseeable results. (2) No substantial
sentiment for prohibitory or restrictive legislation. In
view of the seriousness of world problems and the need of
governments for revenue, it seems unlikely that a
381
prohibition movement could find wide spread or enthusiastic
support.
With these assumptions, then, the following is
forecast. (1) The important members of the present brewing
industry will continue to dominate it. This means that the
effort by Pepsi-Cola to make a tie-up between beer and soft
drinks will be unsuccessful and will not be Imitated by
other soft drink firms. Also, while chain breweries will
expand their operations, the strong regional brewery will
continue to prosper as long as it retains competent manage
ment. (2) This domination will be encouraged by the use
of continuous brewing methods. Continuous brewing will cut
down on capital outlay per barrel and on production-labor
costs. It will, however, make the minimum capital expendi
ture larger, chain brewers will build more plants and as a
consequence will cause a greater mortality among small
brewers. (3) Brewers will decide to innovate and a greater
variety of beers with different taste characteristics will
be available. (4) The situation in the beer business will
approximate that in the grocery business where it is said
two types of store can survive, the supermarket and the
"ma and pa," store. The small brewer to whom being his
own boss is a primary objective will be able to survive by
382
selling cut-rate private-label beer, and by making special
brews such as the "steam" beer of the Steam Beer Brewing
Company of San Francisco. (5) The cut-rate beers will
continue to take about six per cent of the market. This
forecast is the opposite of that of one of the most suc
cessful, large Southern California brewers who feels the
deterioration of brewing facilities, "failure to maintain
plant," will be the downfall of the price-cutters who will
fade away. (6) With the need to "go public" to raise funds
for expansion, the old one family domination of the largest
breweries will lessen. (7) The day of the volume sales at
a premium price is over. (8) Like other industries whose
volume increases but whose profits decline,^ the brewing
industry will be forced to introduce new products and cost
saving methods of production and distribution. There will
be complaints from Mr. O'Shea and from Mr. Kumm of Heileman,
but beer concentrate will come. That is to say, it will
come if the taste of the end product appeals to the public.
It will come because it will cost the consumer less. In
the lyrical words of Professor Adelman:
The competitive market is a system of coercion. Let
the seller try to charge more than the price set by
29wall Street Journal. March 10, 1964, p. 1.
383
that unfeeling tyrant, the Market, and his wares are
left to rot on his hands. The costs the seller has
Incurred, his heavy labor and risks, his just deserts,
his upright behavior, his place in the community as a
businessman— these all-important facts are less than
sounding brass and tinkling cymbals; meet the price or
you sell nothing. And it is of the greatest import
that economists interested in public policy never
forget the deep human resentment which any competitive
market arouses in those whom it whips and goads to
stay in line and keep moving.30
Some Small Brewers Will Survive
One reason for an optomistic view of the small
brewer's chances for survival is the Coors Brewing Company
of Golden, Colorado, which as has been mentioned, is now
tenth largest in the United States. In 1933, with the
advent of Repeal, Coors was not only a small brewery, it
was smaller than Tivoli, its Denver rival, and other
breweries in the inter-mountain area. Its meteoric rise
has been due exclusively to superior management. A glance
back through the pages of this study will show that in
almost every chapter there is some reference to Coors.
Frequently the reference states that Coors has departed
from conventional practice. In other words, Coors has
^Adelman, A & P: A Study in Price-Cost Behavior
and Public Policy (Cambridge, Massachasetts: Harvard
University Press, 1959), p. 8.
384
innovated. Adolf Coors II has offered to show other
brewers his methods saying, "We have no secrets. We are
scientist8, purely and simply."
Similarly the Olympia Brewing Company of Olympia,
Washington, General Brewing Company of San Francisco, and
Liebman Brewing Company of New York are examples of small
breweries whose able management enabled them to grow so
rapidly that they now dwarf rivals who towered above them
as recently as 1934.
However, the optomistic view of the small brewer's
chances of survival are not exclusively due to the fact that
he can with proper management grow large. There are
inherent advantages in the small plant. Small steel mills
for example are showing a better profit gain than are the
large mills.^ The reasons given are that the small plant
is more flexible, can give better and faster service, and
frequently is closer to the consumer of its product with a
consequence saving in freight. Likewise there has been
talk of "a new breed of independents," cropping up in the
1960's in the oil industry. These men are "just now
^Wall Street Journal. October 30, 1964, p. 1.
385
capitalizing on the built-in overhead of the major oil
companies to snap up properties that majors can't operate
at a profit and turning them into moneymakers with more
flexible operational techniques.,l3^
Small brewers too have these advantages of flexibil
ity, nearness to markets, product differentiation and low
overhead. It was stated earlier in this study that it is
the smaller company that has the advantages and the large
company that attempts to offset these. As proof, there is
the recent statement of the president of Chrysler who told
a group of financial executives that the data processing
revolution makes it possible Mto come close to the kind of
balance between central policy-making and decentralized
execution that managements theorists have always set up
as ideal.”33 Undoubtedly, too, the computer and its won
ders will be able to serve groups of small businesses soon.
This study, then, believes that while mortality will
continue among brewers, particularly among the small
brewers, the end is not in sight. Competition will
•^Business Week. October 10, 1964, p. 92.
33Ibid.. October 31, 1964, p. 122.
386
continue and the well-managed small firm can and will
continue in business. Even the one area where economies
of scale are greatest: advertising will not be sufficient
to overwhelm a smaller rival as the case of Coors
illustrates.
IV. POLICY RECOMMENDATIONS
When this study was undertaken it was felt that an
analysis of an industry by one who had spent a quarter of
a century in it and had then spent six years acquiring at
least the rudiments of formal economic theory might pro
duce policy recommendations of real significance. Like
many before him the writer of this study is perplexed.
Competition turns out to be a most difficult thing to
define. Certainly the definitions of pure and perfect
competition are of little use in trying to describe events
and transactions that transpire in the world we live in.
Is competition the rivalry of two pheasant cocks strutting
before a hen or is it the mortal combat of a cobra and
mongoose? Or is it a part of each? In this chapter
Scoville and Sargent were quoted on monopolies. Also in
this chapter many writers have been quoted on competition.
Not only is there no consensus on what constitutes
387
monopoly or competition, different authors often seem poles
apart. Professor Adelman seemed to have encountered the
same difficulties. After he completed his case history on
the Atlantic and Pacific antitrust suit he attempted to
determine measurements of competition such as business done
by the largest four, eight, twenty firms et cetera. He
concludes regretfully, that he has found none of these
satisfactory.^
When such imprecision surrounds the description and
measurement of the subject of a study, It is not to be
wondered at that policy recommendations are similarly vague.
Three recommendations can be made, however.
Improvement of Management
If small business is to survive it must have
improved management. This is true not only of the brewing
industry but of all small business. A great deal can be
done by the trade organizations in various industries, as
has been shown by the activities of O'Shea and the Brewers'
Association of America. Many industries and many trade
A/
M. A. Adelman, "The Measurement of Industrial
Concentration," Review of Economics and Statistics, Vol.
XXXIII, p. 295.
388
associations are not equipped to handle such matters,
however.
Recently the Small Business Administration has
taken an interest in this sort of activity. This was more
or less forced to the attention of the S.B.A. when the
realization dawned that loans which were too risky for
the banks to consider worthy of loans might very well be
risks too hazardous for the S.B.A. to favor with a loan.
As a result the Administration is attempting to do some
thing about management deficiency. The S.B.A. is setting
up teams of volunteer "management consultants" who
represent a cross section of management skills to advise
o r
small businesses that ask for help. These consultants
are what Business Week calls "retired brass," i.e.,
retired executives chafing under inactivity. Perhaps it
is no more contradictory for the government to use
taxpayer's moneys to teach private enterprise how to be
successful than it is for the government to use taxpayers'
moneys to educate farmers, and then pay them not to use
their education.
^"Where Sick Companies Can Turn for Advice,"
Business Week. August 15, 1964, p. 94.
389
Education in Antitrust
The antitrust laws are in such a muddle at the
present time that few men trained in the law and no laymen
are able to trace all their labyrlnthian paths. Many
laymen are unaware that, if they are damaged by a competi
tor's actions which violate the provisions of the antitrust
laws, they may sue and if successful collect treble damages.
The Small Business Administration could, with a small
outlay of funds, set up a legal advisory board similar to
its present group of management consultants. This board or
staff would consist of retired judges and attorneys who
could advise businesses on the intricacies of antitrust
legislation. They could also advise the small businessman
as to whether his complaint was worthy of further consider
ation. They could stress the importance of a proper
preparation of his case. Finally, they could advise him
that antitrust cases are not won inexpensively, but that if
he intends to stay in business it is frequently Hobson's
Choice.
Tavern Ownership
There is one recommendation which might prove of
benefit to the small brewer, and would certainly aid the
brewing industry as a whole. There should be compulsory
390
ownership of and responsibility for draught beer and
possibly all "on-premise" licensees, along the line of the
British system. This would eliminate most tavern abuses
as well as "chiselling" by both retailer and wholesaler.
It would also restore the situation where the small brewer
would not be at a disadvantage.
V. CONCLUSION
Beyond these three seemingly trivial recommendations
this study can only echo Professor Adelman: "What are the
recommendations for policy? Strictly speaking none!"36
There is a feeling that the mountain has labored and
labored and brought forth a mouse. Total failure will only
be averted if some conception has been gained of the
difficulty of analysis and measurement of that chimera
competition.
A. Adelman, "The Measurement of Industrial
Concentration," Review of Economics and Statistics,
Vol. XXXIII, p> 298.
b i b l i o g r a p h y
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Asset Metadata

Creator Fisher, Horace Hardin (author)

Core Title Competition And Concentration In The Brewing Industry

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, Commerce-Business,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Pollard, Spencer D. (committee chair), Phillips, E. Bryant (committee member), Trefftz, Kenneth L. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-155048

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Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

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