Independent brewers are fighting distributors in an outdated system
Many of the current laws concerning beer distribution have been untouched since the post-Prohibition era (most notably the three tier system). These laws can give distributors enormous power over smaller, independent breweries. There are also limits on the ability to self-distribute which, in some cases, hinders growth of the entire beer industry. States can often make these problems worse by setting ridiculously low barrel production caps that stifle brewery development.
Dealing with distributors/wholesalers can be very difficult and in most states they are overly protected by the outdated three tier system. This system is over 70 years old. The wholesalers have too much power in this system and make it very costly for a brewery to get out of a contract even if they are being treated unfairly. For example, The Brooklyn Brewery entered into a contact with an upstate New York distributor and saw strong growth in sales for the first couple of years. However, their sales began to decline as the wholesaler added more craft beers to its portfolio. They tried to terminate their contract but the wholesaler was protected under a law that bound brewers to one distributor within a particular region once an agreement was in place. The brewery ended up paying $200,000 in legal fees and were required to pay the wholesaler an undisclosed amount as well (costs that would sink most start-up breweries).
The NY law was originally put in place in 1996 to protect wholesalers and smaller breweries by not letting large beer companies (such an Anheuser-Busch) purposely terminate their contracts with wholesalers (and putting them out of business) if they distributed competitive products. A bill in NY has recently passed that allows small brewers to terminate their contracts as long as they account for less than 3% of the distributor’s sales (a step in the right direction).
Since 1996 the number of wholesalers has dropped from more than 100 to less than 60 in NY. This means that the distribution industry is dominated by large conglomerates who have a lot of control and argue that any revamped laws would destroy businesses and cost hundreds of jobs.
Seventeen states still prohibit self-distribution by breweries whereas others allow it on a limited basis. New York, for example, allows self distribution only by breweries who produce less than 60,000 barrels* of beer annually. Illinois caps self-distribution at 7,500 barrels per year which is a number protested by the president of the Illinois Craft Brewers Guild, Pete Crowley. Mr. Crowley argues that this number is far too low and doesn’t allow independent brewers room for growth. The new Illinois law also doesn’t allow self-distribution by brewpubs, another large limitation.
No distributor will be able to express what your company stands for as well as you can. Self-distribution is a fantastic tool to have and can provide great marketing as well. If you are working with a smaller community, you can show your loyalty to and respect for the customer by getting your face seen in local bars and restaurants. You become less of a business owner and more of a neighbor. Being able to saturate a market yourself early will also make it harder for distributors to take advantage of you later.
There may be some drawbacks to self-distribution but those should be left up to brewery management to decide for themselves. States shouldn’t be in the position to outlaw self-distribution altogether or to put ridiculously low caps on it. I agree that there should be some kind of limit in place but 7,500 barrels is far too low to encourage growth in the industry. The beer industry has greatly evolved over the last 10 years and should not be held back by an outdated three tier system.
*1 barrel = 31 US gallons = 2 kegs (15.5 gallons/keg)
Aden
July 24, 2011 at 3:36 pm
As a distributor with a “big 2″ brewer, I find this article to be a tad one sighted, and devoid of historical knowledge. The three tier system was put in place to separate the brewers and the retailers, due to the influx of cheap booze and drunken debauchery that led the US to prohibition. The UK, who still has tied houses, is still fighting rampant alcoholism, underage drinking and crime due to this model. Therefore, the three tier system serves its purpose for which it has been designed.
However, I’m certainly not opposed to changes in franchise laws. Small brewers have had a recent explosion in options of distributors since the majority of AB-Inbev houses have become non-exclusive and are actively looking to partner with new brewers. In Virginia, breaking franchise laws are next to impossible, and if they are changed, they can be done without the consent, permission, or even knowledge of the brewers. This is obviously not an ideal, and in addition, medium sized craft brewers who locked in with state-wide distributors would love to gain better attention in more markets. I fully support the reform to allow brewers of an agreed upon size to move distributors, as long as the brewer does not comprise more than 10% of the distributors volume, and as long as the losing distributor is paid fair market value for their effort in building the brand they are selling. As a whole, distributors provide logistical support and market knowledge that would cost the small brewer tens of thousands of dollars to gain. We provide a valuable service that brewers of all sizes can enjoy so that they may stick to brewing amazing beer. I certainly support reasonable changes in franchise laws to allow craft breweries what they would like, but one small issue with one state’s laws does not mean throw the whole three tier system out with the bathwater!
Zach Goldstein
July 24, 2011 at 8:45 pm
Aden,
Thank you for your comments. I do not argue that the three tier system should be thrown out completely. It has functioned fairly well up until recently and is a big reason why craft beer even exists in America.
Despite Brooklyn Brewery’s problems with distribution, Steve Hindy (the president) states that self-distribution only helps to gain a foothold in a market but at a certain scale distributors are absolutely necessary. I agree with this statement 100%.
And I agree that the three tier system has served a purpose for a very long time. It just needs to be updated, on a state-by-state basis. Franchise laws should be fair and balanced as you pointed out. Self-distribution is more of a stepping-stone to entering into contracts with distributors but it should still be available to every brewery. However, reasonable production caps should be established to protect the general market.
Distributors have the ability to make craft breweries very successful but I believe there must be more options and flexibility if brewers are bullied. I agree that brewers should have the ability to switch distributors if they account for less than a specified percentage of the distributors’ volume (as you pointed out).
A free and fair marketplace is the end goal; how we get there is the conversation.
Thank you for your insights.