The Importance of Self-Distribution Laws

My sojourn to South Dakota has not given me too many insights into the nature of the national beer scene. The state is in a nascent phase of building a market for local beer; to date there are only 14 craft breweries, and most of them are tiny (one that I know of, Gandy Dancer, is so small and provisional one could debate whether it actually exists). Collectively, the entire output of South Dakota's breweries in 2015 was smaller than Double Mountain's. Locals are coming around to beer and there's palpable excitement, but palates are at the porter-and-stout stage* and typical barroom tap ranges include a lot of the old American industrial brands. South Dakota is a farming state, though, and there's already a fair amount of interest/excitement about the prospect of a local hop industry, and breweries are talking about making beer with all state-grown ingredients. That could be one of those local tie-ins that really helps power local growth.

Source

But one massive barrier to breweries is the lack of a self-distribution law. Living in Oregon, I forget how fundamental these are to the incubation of viable small breweries. This may seem like boring arcana for most people, so let me break it down as a way of illustrating how a new Oregon brewery has a big leg up over their counterpart in South Dakota.

In Oregon, breweries are allowed to self-distribute 7,500 barrels of beer from each brewing facility they operate. (Of the 200+ breweries in the state, fewer than twenty will bump up against that limit.) That means that they can sell directly to retailers rather than using a distributor--which offers two big advantages. In the typical arrangement, a brewery sells a keg to a distributor for a wholesale price, and the distributor adds a mark-up when he sells it to the retailer. In self-distribution, the producer is able to sell the keg at the wholesaler's price directly to a retailer.

Second, a self-distributing brewery can sell their products directly to retailers rather than have to depend on a proxy (the distributor) who will necessarily have less commitment to one of their many brands than the brewery. Further, self-distribution allows breweries to develop relationships with retailers, who become valuable outposts for the product, even when a brewery is very new.

Compare that to Wooden Legs brewing, where I sat and talked with assistant general manager Angela Yahne over beers last night. South Dakota has no self-distribution laws. Wooden Legs has signed up with a distributor, but they're basically a nano and can barely keep up with production for the brewpub. In order to grow, they're going to need a new system, which means capital. Trying to push volume so they can send beer out into the market is tough, though, because they're selling kegs wholesale.

Even worse, Wooden Legs is stuck with their distributor,thanks to beer franchise laws, which make these relationships like a marriage--but harder to break. Angela gave me no reason to think Wooden Legs' distributor is anything but a great partner, but if they weren't, the brewery would be out of luck. Stories of sour relationships are legion:

For example, I once tried to terminate a contract with an underperforming distributor in New York for not only selling my products outside of his territory, but selling out-of-date beer. I thought it would be straightforward, since my contract said I could leave “with or without cause.”

But the distributor took us to court, saying the state’s franchise law, which sets a high standard for showing cause, trumped whatever my contract said. Two State Supreme Court rulings upheld my position, but, fearing a further appeal, I settled out of court. I was freed from the contract, but the legal fees and settlement cost Brooklyn Brewery more than $300,000.

I'm just guessing here--but Wooden Legs probably doesn't have a quarter million laying around for legal fees. 

The way good beer expands is by availability. Self-distribution laws, directly and indirectly facilitate this. States without them struggle to build the kind of rich tapestry Oregon has (which, counter-intuitively, has been great for distributors because many breweries ultimately do choose to go with one). We even have data on the matter:

"The contrast is stark. States with self-distribution have 1.41 craft breweries per 100,000 21+ adults. States without self-distribution have 0.77.... The same pattern emerges when we look at production. With the exception of one outlier state, the states with no ability to self-distribute are clustered at the bottom of per-capita production by craft breweries (average = 1.05 gallons produced per 21+ adult) whereas states with the ability to self-distribute average higher levels of production (average = 2.51 gallons produced per 21+ adult). Once again this difference is statistically significant with a p < 0.05 (two-tailed test).

This is in no way to demean distributors. There are a number of reasons they're a valuable asset for a brewery. In fact, having both well-regulated distributors and self-distribution laws give breweries the broadest freedom to implement their business plan. But for states without them, the downsides multiply. 

Angela told me that an incipient collection of the state's breweries met a few months back, and it may one day form into a guild. Here's hoping it does, and that they move quickly to pushing for a self-distribution law. That, way more than local hop fields, will jump-start the brewing scene here.

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*This is in no way to denigrate porters and stouts, which are among my favorite styles. It's just that I've noticed that they seem to be popular styles for people getting into beer in the US, and are then sadly left behind. Since I've been in South Dakota, I've encountered probably a dozen people who tell me they're just getting into good beer, an their faves so far are porters and stouts. The South Dakota beer geeks, meanwhile, are into the same thing beer geeks everywhere are--which is to say not porters and stouts.