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Dealing with distributors/wholesalers can be very difficult and in most states they are overly protected by the outdated three tier system.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)