The Underside of the Beer Biz
                                                 by Jayson Karl

Craft breweries are a big story in the media these days and deservedly so.  While
sales of main stream brewers continue to decline craft remains an unparalleled
success story with double digit growth per year  for nearly a decade.   Yet despite
such a rosy picture craft breweries face much tougher challenges than most other
small businesses.

Perhaps the most perplexing and worrisome issue concerns the rules governing how
beer is distributed.  These laws were written long ago, many in the days immediately
following Prohibition.  What then seemed fair and logical are however today being
used to limit consumer choice by keeping small and start-up breweries from moving
easily into new markets.

Almost every state franchise law demands that breweries sign a strict contract with a
single distributor in a state — the so-called three-tiered system. The contracts not
only prevent other companies from distributing a company’s beers, but also give the
distributor virtual carte blanche to decide how the beer is sold and placed in stores
and bars — in essence, the distributor owns the brand inside that state.  No other
industry is forced to operate under such constraints.

These laws reached their zenith in the 1970s, when the craft brewing industry was,
comparatively speaking, a speck in the eye of the macro producers.    Case in point
is that there were fewer than 50 brewing companies in all of America and over 5,000
distributors. Many small distributors carried beer only from one large brewer, and
they needed protection in case the brewer they represented wanted to pull its
product.  However as the industry changed, the laws did not.

Today while Big Beer remains big business craft breweries, or micros as they used to
be called, have exploded.  At last count there are more than 2,700 breweries but
fewer than 1,000 viable distributors.  That disparity means that relatively few
distributors control huge sections of national territory, and each one can take on
dozens of large and small breweries’ brands.  And it's precisely that which has
caused a problem.

State laws continue to empower distributors to select brands and manage them
however they want — selling those they choose to sell, while letting other brands sit
in their warehouses.  They unfairly have the power of life and death over many a new
brewery.  The only recourse for the upstart business is to sue which is essentially
impossible since many small breweries lack even a fraction of the resources need to
taken a big distributor in court. As a result, they’re stuck with the bad distributor,
which severely hampers their ability to perform and grow as a business.  Put another
way, it's anti-capitalism at work.

Ask just about any small brewer about this issue and you hear firsthand the war
stories about fights with distributors.  It's the classic David vs. Goliath story but this
time David isn't winning.  

Ever wonder why your area isn't getting beer from that great brewery in the next
county or nearby state? Some small brewers refuse to enter certain markets
because of the local distributors’ reputation for not properly representing small
brewers and pushing bigger profit macro beers instead. That’s bad for new
businesses, bad for the economy,and particularly bad for consumers, who would love
to try the latest popular craft beers but can’t find them locally.

Fortunately some states have remedied the distribution inequities. In 2012 Gov.
Andrew M. Cuomo of New York and the State Legislature created a “carve out” from
the state’s beer franchise law for the smallest brewers: If your brewery represents
less than 3 percent of a distributor’s business, and you produce fewer than 300,000
barrels of beer a year (which covers all but the largest craft breweries), you can
switch distributors by paying for the “fair market value” of the distribution rights, as
negotiated by the brewer and distributor — still an expensive proposition, but easier
than going to court.  

For small brewers, the flexibility to change distributors or distribute their own products
is essential to gain access to markets, increase consumer choice, grow and pour
money back into the economy. The success or failure of a beer should depend on
whether consumers like it — not on whether archaic distribution laws prevent them
from finding it in the first place.

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beernexus.com - SPECIAL REPORT
Distributors v. Brewers