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.

Big Change Possible in Massachusetts Wholesale Laws

You may recall that last year Boston-area distributors were caught giving kickbacks to retailers. The repercussions of that incident seem to be rippling through the Massachusetts state house in a serious way:

Massachusetts brewers unveiled a last-minute legislative proposal that would dramatically reorder the state’s beer industry, making it far easier for breweries to switch among distributors that bring their brews to bars and package stores.

The measure, filed Wednesday by state Senator Barbara L’Italien, would effectively repeal the state’s decades-old beer-franchise law, which makes it difficult and expensive for breweries to fire their distributors.... Instead, the legislation specifies that distribution deals would be governed by the same type of private business contracts common in other industries.... Under current law, a brewery is effectively locked into its distributor after six months unless it can prove to state regulators the wholesaler has met one of several conditions — such as violating the law or failing to “exercise best efforts” in selling the beer.

The distributors were incensed, and it's not clear that the bill is going anywhere. Still, it's a sign that the beer market is in flux and there could be seismic changes coming. Indeed:

Treasurer Deborah Goldberg, whose office oversees the Massachusetts Alcoholic Beverages Control Commission, is also threatening to shake up the industry by launching a task force that will conduct a top-to-bottom review of the state’s liquor laws and regulations. 

It's not actually clear that this would 1) solve the very real problem in which distributors currently act as a gateway for small breweries getting to the market, without 2) damaging them in the process. Distribution is always a weird part of the brewing industry, one nearly invisible to consumers. In states like Oregon, legislators have relaxed the law on self-distribution, so wholesalers have to compete on service if they want to lure little breweries, and that seems to be an effective solution. But each state has slightly different rules, and those rules affect little breweries in different ways. If Massachusetts does pass this bill, it will certainly be something the rest of the US will be watching closely.

The Coming Distribution Wars

Late last week, the Massachusetts liquor regulatory agency issued an extremely important ruling about one of the state's distributors.

[The distributor] Craft Brewers Guild spent “approximately $120,000 to pay kickbacks to 12 retail licensees throughout the Boston area, and went to great lengths to hide its knowingly unlawful conduct,” the commission wrote in a written ruling. 

The practice of paying pubs for tap handles is as old as the distribution system*, and if you scratch the surface in any market, you'll hear rumors of this happening. The Massachusetts case was precipitated by public complaints of Pretty Things--the beloved and now defunct little Boston gypsy brewery--who accused the distributor of taking bribes to supply beer at certain pubs. (More here on that story if you're interested.)


Every system has points vulnerable to corruption, and in beer, its at the distributor level. About 18 months ago, I did some (gasp!) actual reporting on this. A brewery sales rep confirmed it happens here in the Northwest: "Pay to play absolutely exists in mature markets like the northwest but it's not typically found in bars except for high volume accounts with few beer choices." The really insidious thing is that there are so many ways to for a distributor to offer inducements to a retailer. You can follow the link if you want to read about all the work-arounds, but I'll quote one just to illustrate how subtle kickbacks can be. It comes from a former brewery rep who watched a kickback happen.

A brewery was willing to pay $500 to the distributor's representative if he could move ten kegs of the brewery's beer.  This is legal.  As the promotion was about to end, the distributor had sold only eight kegs.  At the last account, he swung a deal so that he essentially dipped into the promo money and sold the two kegs to the pub for the price of one.  (The pub paid for the two up front, and the distributor shared the cost of the keg later.)  

That's the kind of corruption that's impossible to police. The Massachusetts distributor was nabbed because they were blatantly buying taps--an easier crime to identify. But given the resources of state regulatory agencies (the OLCC in Oregon's case), there's no way to be out there in pubs policing these transactions as they happen.

While none of this is new, it is especially salient at this moment in the life of the beer industry. At the top of the market, we have extreme consolidation. There are only two big players left, and they would like to merge their international activities (claiming to spin off the weaker business in the US to get past the feds' anti-monopoly concerns). At the bottom end of the market, you have intense competition for retail space.

As I've mentioned in the past, the vast majority of recent growth in craft brewing has been small production breweries, not brewpubs. Those little guys may have tasting rooms, but they need to put their bottles on shelves and their kegs in pubs to thrive. There are so many players now that distributors become the gatekeepers for which beers make it to the retail space. This is what Pretty Things' Dan Paquette was complaining about: his beer wasn't making it to market. There are a lot of ways for distributors to exploit this brand oversupply by manipulating both what breweries and retailers pay.

Large companies like ABI are already making a big play to control distribution. Smaller companies are going to become desperate to get their beer to market. As more and more breweries come online and more and more consolidation happens at the top, the opportunities to cheat will grow. This is not a story that's going to dominate the blogs or newspapers, but it will be one of the most important dynamics driving what happens in beer in the coming years.

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*Tiny backgrounder: in the US, we have a three-tiered system of beer sales, where a producer (the brewery) sells kegs to a middle-man, the distributor or wholesaler. The distributor then sells to retailers like pubs and grocery stores. This system was designed to protect retailers from the influence of breweries, which have outsized influence in markets like those in the UK. In the craft brewing era, many states have passed laws to allow breweries under a certain size to self-distribute.

Tricks Wholesalers Use, a Pay-to-Play Follow-up

Earlier this week, Dann Paquette made some pretty incendiary claims about how breweries got tap handles in certain Boston pubs: by paying for them.  After I posted on it, a few people emailed to give some insight into their experiences here.  I know all these people and can vouch they are who they say they are--but for obvious reasons they did not want their names associated with their comments.  I think you'll find it interesting, though.

This first comment, from a brewery sales rep working in OR, WA, ID, and AK, summarizes a lot of what I heard:

Pay to play absolutely exists in mature markets like the northwest but it's not typically found in bars except for high volume accounts with few beer choices. You can imagine even if you could convince a buyer at a bar with a great beer selection to put beer on in exchange for money or gifts it would not make the consumer try your beers. The accounts that do this seem to be closer to stadiums and event centers that have huge crowds that pack a place but are not known for beer selection. If you are one of a few beer handles you will pick up some sales. 

But unlike some markets, where it seems corruption is rampant (the source above added "I went on a trip to Chicago a year ago and could not believe what was being asked of me. Buyers asked to buy two kegs get one free. Bartenders asked for money to push our beer"), it's more nuanced in the Northwest.  This comes from a wholesaler:

We do see some of this in Portland, where if distributors don’t give accounts free T-shirts, glassware, kegs etc. then your beer isn’t on.   I know of one distributor that’ll give an out of date keg to an account for free to sell in another tap handle.  Overall it’s not too bad in Portland (& Oregon in general) but it does happen with certain accounts.  My impression is it’s driven by the accounts asking for free stuff vs. distributors pushing free stuff.

We compete pretty hard in Portland but I’m pretty pleased to say it’s mostly above board.  All the OR distributors sit in the room together at OBWDA meetings and get along for the most part.

There seems to be a fuzzy line where breweries are asked to offer inducements of freebies.  (You can see how that would be good for pub business.) A former rep for a NW brewery added a bit of texture.  (The source asked me to paraphrase his comments.)

Wholesalers aren't allowed to give "items of value" to pubs in OR and WA.  You can give things like information sheets or beer mats, but not leather jackets, neon signs or free kegs.  Interestingly, it is legal to give items to customers--things like glassware, given to pubgoers directly, rather than through the pub.  

He went on to describe a practice that is probably not legal, but would be nearly impossible to police.  He actually witnessed this happen first hand.

A brewery was willing to pay $500 to the distributor's representative if he could move ten kegs of the brewery's beer.  This is legal.  As the promotion was about to end, the distributor had sold only eight kegs.  At the last account, he swung a deal so that he essentially dipped into the promo money and sold the two kegs to the pub for the price of one.  (The pub paid for the two up front, and the distributor shared the cost of the keg later.) 

Writing in comments, The Common's Josh Grgas echoed the same thing:

There is a backward pay to play approach some larger craft breweries have taken. In this case, a brewery will provide a cash incentive to distributor's sales reps for each competitors tap handle they acquire. This type of head hunting has happened in Portland, unfortunately. 

Josh added a comment that illustrates how hard it would be to separate pubs who are corruptible from those who just have random preferences:

Committed lines do happen, but it’s not nefarious like in other areas. A bar manager might stock a certain brewery or distributor based on personal preference, superior service or other intangibles. For example, there’s a bar in NE that almost exclusively stocks a certain distributor because the distributor’s warehouse is located nearby and the staff all drink at the bar after work. 

The upshot: Portland and Oregon are probably pretty clean, but every market is different.  We often talk about the ways in which the three-tiered system is so good at preventing market domination--and it is.  But having an invisible layer in between the producer and retailer also offers an opportunity for hard-to-stop corruption.

Regulating Liquor: Axing the Government Liquor Store

Part three in The Oregonian's series on Oregon's liquor laws comes just at the moment we learn a little more about what's happening in Washington state, which ended the practice of government-run liquor stores.  The effect?

Liquor sales in Washington are up – way up. That’s according to new figures out Monday on the period after the state’s new privatization law took effect. They show July’s retail sales increased 21 percent over the previous year. And that’s despite higher prices on spirits.

Graphic: Wall Street Journal.

What has been surprising is that, along with the spike in consumption (not surprising--the old "control" model was engineered to suppress availability) Washington has also seen a spike in prices.  That's because, along with privatizing liquor stores, the state also jacked up taxes:

Even before privatization, Washington had some of the nation's highest liquor taxes and fees, at $26.70 a gallon. The national average is $7.02 a gallon, said the Tax Foundation, a research group. Washington state's levies included government stores' 52% markup, a 21% liquor sales tax and a $3.77-per-liter excise tax.

And while those sales and excise taxes remain under privatization, new fees further raised prices: Liquor distributors must pay an additional 10% levy, and retailers another 17%. Distributors also are on the hook for any shortfall to the state if they don't generate $150 million from the 10% fee by April.  (Wall Street Journal)

Washington knew that increasing the points of sale from 328 to 1500 stores would increase sales.  Both to try to put a cap on how much booze people bought and to raise revenues, the state's new taxes will blunt demand (or, as that Wall Street Journal article documents, drive customers to Oregon).  There were other consequences, some intended, some not.

The interests who forwarded Washington's law were big-box retailers led by Costco.  Distributors were the big losers in Washington's law, which allows Costco and other retailers to buy directly from distillers.  But small retailers, who are barred from selling liquor (Costco wrote the law so only stores of 10,000 square feet could sell liquor) were also losers.  Small distillers and vintners may also be losers--big retailers can now use their might to drive volume discounts, which hurt smaller companies that have less pricing flexibility.  There may be other consequences, too, like a further shift away from bars to home consumption, which would make publicans losers as well.

In one jarring move, Washington dramatically shifted the business of booze in Washington.  Voters had a lot of assumptions about what the law would do: they thought it would make booze more accessible--but not too accessible; they thought it would be good for family wineries and restaurants, that it would lower liquor prices, improve crime prevention, and raise new revenues for public services.  The early record is mixed, but it's clear things aren't playing out exactly the way voters intended.

Oregon leads the nation in artisanal beer, wine, and spirits.  We have an archaic liquor control model that has a contradictory mission--selling booze on the one hand while trying to control it on the other.  And we also have lots of big players who stand to make--or lose--a lot of money based on how the laws are structured.  I'd like to see Oregon tune-up the OLCC and potentially get out of the business of selling booze.  On the other hand, it was from within the current environment that our artisanal culture emerged and flourished.  Looking north to Washington, I wonder how small distilleries and wineries will manage.  The key is balancing the interest of producers with retailers (big and little, grocery store and bar).  No wonder no one has managed a complete overhaul in 78 years--it's complex, confusing business.

Your thoughts?

Regulating Liquor: the Role of Distributor

Part two in the Oregonian's series on Oregon's liquor laws looks at the little-understood middleman in the equation, the distributor.  Most of this article revolves around wine distribution--about which I'm completely clueless--but does touch on the larger system.  Author Harry Esteve rounds up some of the more interesting aspects of the laws:

• Retailers must pay cash when they receive alcohol, which gives distributors a distinct advantage: they "buy big volumes on credit, then sell it for cash, giving them weeks of float with other people's money."
• Beer distributors have exclusive territories (eliminating competition), which they can bequeath to their heirs (remember Cindy McCain?).
•  Retailers can't pick up alcohol from producers--it has to be distributed--and they can't even shift inventory between stores.  That also has to be distributed.
• Vintners have to ship their wines to Salem for storage until they're taxed and "released" for sale.  Even wine sold at a winery must go to Salem and them come back.

Other relevant facts:

• "A few decades ago, the number of distributors hovered around 20,000 nationally, with fewer than 1,000 wineries. Today, the United States boasts some 7,000 wineries, while the number of distributors has dwindled to fewer than 500."
• Distributors have an impressive lobbying infrastructure to protect their status (and their man in Oregon, Paul Romain, is one of Salem's most powerful lobbyists).

Esteve paints a stark portrait, concluding with a quote by grocery lobbyist John LiLorenzo to wrap everything up:  "These are Byzantine rules that have a purpose.  The purpose is to guarantee that a privileged group always makes money, just by being there. That's what this is all about."

I think it's worthwhile to add a caveat or fifteen here.  If we were to start from scratch, would we grant distributors so much power in the alcohol equation?  Probably not.  Some of the laws seem unnecessarily protectionist or baroque--that system of shipping wines to sit in Salem before they can be sold at a winery is astounding.  But there are a few reasons we would keep the distributor in the picture.

Not every country uses distributors.  In England, breweries can own their own pubs and distribute to them.  This has its own unintended consequences.  The business model for breweries pens out if they own their own pubs, but it's much harder if they're selling to pub chains or grocery stores.  Little guys struggle there.  And they have their own tax issues.  In the museum at Burton upon Trent, they show the office of the tax collector that was housed inside the Bass Brewery.  The law was so complex they required a government employee on site at all times.  How do you think that would go down in America?

But beyond that, distributors can help small producers.  It wasn't always the case.  Early in the microbrewing era, small breweries had a hard time getting distributors to carry their product because retailers didn't understand or want it.  But now that equation has flipped.  Even very small breweries find distribution.  There's a reason even little hole-in-the-wall convenience stores have obscure local micros--distributors.  The state of Oregon has also been good to update its rules to adapt to the changing market.  Now breweries can self-distribute if they brew below a certain amount--a figure raised to 5,000 barrels a couple sessions back.  (Hats off to Darron Welch at Pelican who helped shepherd that along.)

When I first started writing about beer in the late 90s, small breweries had an ambivalent relationship to distributors.  At the time, distribution was a lot harder to get, and little guys like Hair of the Dog were not getting to bigger stores.  Now the opposite is true.  Little guys, who couldn't compete in price wars and quantity discounts--as is now happening in Washington--are happy to have distributors getting their product to market. (I know there are people in the industry who read this blog, and if you'd like to further illuminate the issue, I'd welcome on- or off-the-record comments.)

I doubt many Oregonians think there's nothing to fix in the state's liquor laws.  It's probably time to tinker with the laws governing distribution.  But as with any complex system, the issues aren't black and white.

How Should Oregon Regulate Alcohol?

The Oregonian kicked off an excellent three-part series yesterday on the thicket of regulations that govern the distribution, taxation, and sale of liquor in Oregon.  Every state has its own strange thicket of regulations, all built on certain goals and assumptions, and until very recently, Oregon's seemed to be untouchable.  But then a funny thing happened: the people of Washington state decided to modernize their laws, bringing them more in line with California, and Oregon is now the West Coast's odd man of booze.

The whole series is going to be worth a read, but today I want to tackle some of the issues raised (and not raised) in part one.  Political writer Harry Esteve penned the series, and he used three main informants about how the system works--A to Z Winery in Dundee, Galaxy wine distributor, and the Oregon Liquor Control Commission.  (Esteve has written about the OLCC before, and it's worth noting that A to Z has long been an OLCC foe.)  Esteve does a fantastic job of illuminating why a bottle of wine costs as much as it does.  It's not because the winery (or brewery) is getting rich.  It's because so many people get a piece of the action along the way:

Each time it's handled, the price of a bottle goes up. The storage warehouse gets its cut. The state gets its cut. Distributors tack on anywhere from 15 percent to as much as 40 percent or more. And retailers tack on their margin.  On a recent delivery trip, Galaxy applied its markup to a bottle of A to Z pinot gris and then sold it to Safeway for $8.99. Safeway put it on sale for $11.99, a 33 percent markup. 

This is a theme he address more fully in today's column (which I'll comment on tomorrow).  The paper also published a great infographic that breaks down the cost of a bottle of wine by percentage:

• 2% - Taxes
• 4% - Bottles, corks, and labels
• 5% - Winery profit
• 7% - Grapes
• 9% - Wine production
• 18% - Sales, marketing, administration, shipping
• 25% - Distributor markup
• 30% - Retailer markup

All of this is fantastic info, and info I'm pretty sure is completely lost on the average consumer when she sees a $30 bottle of Oregon pinot noir made just down the road.   Where Esteve falls down a bit on the job, though, is in buying the OLCC's gilded rationale for its own existence:

Yet it's also one of a dwindling number of states where the government exerts near dictatorial control over an alcohol system designed 80 years ago to prevent the likes of Al Capone from horning in on the trade....

"What's interesting is the OLCC has done such a good job of preventing the abuses that came up during Prohibition," [Cassandra SkinnerLopata, OLCC chair] says. Other countries, and even some other states, continue to see health problems from "adulterated" liquor, including blindness and paralysis. Counterfeit brand-name liquor continues to be a problem, she says. 

 Well, yes, in 1933, Oregon was worried about bootlegging.  But that's not what it was principally worried about.  Here's the full rationale from the 1934 Liquor Control Act that established our system of liquor laws:

(1) The Liquor Control Act shall be liberally construed so as:

(a) To prevent the recurrence of abuses associated with saloons or resorts for the consumption of alcoholic beverages.

(b) To eliminate the evils of unlicensed and unlawful manufacture, selling and disposing of such beverages and to promote temperance in the use and consumption of alcoholic beverages.

(c) To protect the safety, welfare, health, peace and morals of the people of the state.

(2) Consistent with subsection (1) of this section, it is the policy of this state to encourage the development of all Oregon industry.

I have bolded the relevant portions to illustrate the point: the state of Oregon may have been compelled by the 19th amendment to allow liquor sales, but they damn sure weren't going to make it easy.  The OLCC may now see their role as one entirely about law enforcement, but the very clear foundation of the statute is to gum up the production and sale of booze.  Oregon passed its own version of Prohibition in 1916--years before the country did it--and we were still in a mood for restricting alcohol.

This is relevant history, because the OLCC defends its existence on the dubious notion that they're preventing criminality.  But as citizens, we have a right to point out that that's not really why the laws were drafted in the first place.  They were drafted to stifle alcohol sales, and for 78 years they've been doing a bang-up job.

Troubling Beer & Wine Distribution Legislation

How does something like this have any support at all?

There is currently a bill in the U.S. House of Representatives that would give states more authority to regulate alcohol, which in turn would block interstate sales of beer and wine... Naturally, putting such a squeeze on the open market would limit competition, raise prices, and economically impair small vintners and brewers.

The National Beer Wholesalers Association is lobbying heavily in favor of the bill and has already contributed to the coffers of bill cosponsors. The NBWA claims they’re only trying to ensure states have better control in defending their alcohol laws, but bill critics claim that the NBWA is only trying to limit competition. Jonathan Yarowsky, lobbyist for the Beer Institute, states that brewers believe the bill “would lead to a protectionist and anti-competitive system that would hurt consumers.”

The bill is currently stuck in committee--thankfully--but has lots of beer distributor cash behind it. (The acronym, CARE, and supporters' rhetoric about how it will save the kids is all a little hard to swallow when follow the money.) The legislation is a response to the 2005 Supreme Court decision that "states cannot discriminate between in-state and out-of-state wineries in direct shipping to consumers."

I hope Peter DeFazio is on the case.

English Tied-House Rules Loosened

Fascinating:

Nik Antona, the Burton-based national director of the Campaign For Real Ale, said the Government’s ‘12-point plan’ to help the pub industry would help stem the flow of an alarming trend which sees 40 pubs close across the UK each week.

The measures, announced by pubs minister John Healey, include plans to pump cash into allowing communities to buy out struggling pubs.

Meanwhile, councils will be given new powers enabling them to intervene before pubs are demolished while pub companies will be stopped from imposing ‘restrictive covenants’ when they sell off premises, preventing competitors from continuing to run them as pubs.

Alcohol laws are very often byzantine, and I'll confess that from this great distance, I don't always grasp the subtleties. But this pub crisis has been ongoing for years, and I've been following it with interest/alarm. (For a visceral sense of loss, have a look at these photos.) Hope this is a viable solution.
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The Upside of Three Tiers

Nothing kills traffic as effectively as posts about beer distribution, but there's a case in Chicago I can't avoid. Before your eyes glaze over, read on--it's fascinating stuff!

At issue was an effort by Anheuser-Busch Inbev (ABI) to buy a local distributor in Chicago. Following Prohibition, beer companies were required to sell to distributors who in turn sell to retailers--a "three-tiered" system designed to limit brewery dominance (backgrounder here). Things were humming along on the Chicago deal until it reached the Illinois Liquor Control Commission.

The seven-member Illinois board ruled that Anheuser, as a company based outside the state, can't control a distributor in Illinois.... The commission said Anheuser—which is based in Leuven, Belgium—couldn't buy the 70% of City Beverage that it doesn't currently own, or it would revoke City Beverage's license to distribute beer in Chicago. City Beverage, which distributes the bulk of Anheuser's products in the Chicago metropolitan area, is part of Detroit-based Soave Enterprises. Anheuser and Soave were close to wrapping up the deal last month before the commission expressed concerns.

ABI is fighting back, of course. They are already allowed to own distributors in other states, and given that sales are flat or falling for macro beer, the only way to increase share is to strong-arm it from the competition. And here's where things get interesting. ABI doesn't really have a credible argument; the Illinois LCC ruled to limit this sale because it would effectively undermine the effectiveness of the three-tier system. ABI's response? Pretty much to agree:

Anheuser, the largest in the U.S. by sales, wants to own the Chicago distributor outright so it can improve its performance and make the brewer more competitive in the Windy City with MillerCoors LLC. MillerCoors, a joint venture of Molson Coors Brewing Co. and SABMiller PLC, is the nation's No. 2 brewer, but it has long led the Chicago market.

I have lots of problems with the three-tier system, which generally hurts small breweries. But where it is clearly needed is in protecting competition among players in the market. I've written about how the tied-house system in England may be one of the reasons pubs are dying off in such stark numbers. Control of the American beer market is now down to just three major players (craft breweries, in total, command just a micro 4.3% of the market), and ABI wants to take an even larger piece of the pie. Congratulations to the Illinois Liquor Control Commission--rulings like theirs will make it harder for the Belgian giant to consolidate power.
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Why Bud Has Many Plants

Back in April, I reviewed Dogfish Head Festina Peche. I had purchased a bottle, intent on identifying a Dogfish product I could unconflictedly praise. The beer that poured out of that bottle was not good. My description:

The trouble began right away--it was nearly flat, even when I tried to rouse it with a tall pour. A stray bubble or two--to call them a proper bead would be overstating the point--rose languidly to the surface. The nose was faintly sour, but tinny and hollow like canned fruit, which more or less describes the beer.... [T]he final sentence of my notes: "Like a flat soda that has been sitting out in the sun for a few hours."

Over the weekend I had this same beer on tap at the Green Dragon and it was a revelation. An excellent rendition of style, light-bodied, sprightly, and more that a tad tart. Putting peach in a Berliner Weisse is an inspired move: the fruit's sugars had mostly been gobbled by yeasts; what remained was a gentle essence joined perfectly with the beer's sour. The style can be a little aggressive naked; that's why it is often dressed with a bit of sugary syrup. The peach is a better solution; it keeps the nature of the tart beer intact, but adds a summery, fresh note that softens it just enough. Dogfish Head can definitely take a bow--this is a hell of a beer.

But what then explains the difference between the bottle and the keg?

This is one of the problems with shipping your beer--once it leaves your brewery, you have no idea what happens to it. A distributor may leave it on a pallette in the sun or it may languish on the shelf of a store that rarely sells anything but Hamm's. From time to time I'll read a harshly critical description of a Rogue beer I like on BeerAdvocate--inevitably, the sampler picked up the bottle far from Oregon. Like my Festina Peche bottle, they were tasting the death of a beer, not a beer.

(This can be the brewery's fault, of course. A poor batch or poor packaging can ruin an otherwise tasty beer.)

I don't know whether Dogfish is culpable for the condition of the bottle I tried, but I sympathize with them in any case. Getting beer to Oregon (2850 miles, according to Google Maps) is no easy task. This is why Redhook opened a brewery in New Hampshire back in the 90s, and it's why Bud has them scattered all over the country. The closer a brewery is to the point of sale, the more likely it is that the beer will arrive like it left the bottling line.

I suspect there's a beeronomics post in there somewhere, but for the beer enthusiast, it's a good reminder. And I will be more charitable to Dogfish henceforth.

Politics and Beer Distributorships

I stumbled across a nice article in the libertarian magazine Reason about beer distributorships. It frames the discussion in terms of Cindy McCain's family wealth, but my guess is that there are plenty of Democratic distributors as well. But the three-tiered system, which I've railed against for years, is a politically-protected racket that screws producers and consumers alike. And in this way it is political:

The wholesaling industry has thrived ever since. For decades wholesalers have quietly added 18-25 percent to every bottle of beer, glass of wine, and shot of liquor you pour down your gullet. And there's been little resistance to them, for a few reasons. First, wholesalers don’t interact with consumers. They take their markup between producer and retailer, out of the sight of the people whose money they’re ultimately taking. Second, they’re rather powerful. Alcohol wholesaling is a lucrative, concentrated industry that reaps enormous benefits from policies whose costs are spread out across the general public. Which brings up the third reason distribution laws aren’t frequently challenged: They haven’t had many obvious opponents. Until recently, the only people hurt by the three-tiered system were consumers, and again, the cost per consumer was too negligible, hidden, and entrenched for anyone to notice.

But it gets worse. Many states have placed further restrictions within this already artificial market. Some states, for example, give wholesalers exclusive rights to distribute alcohol in a particular region, effectively creating government-enforced monopolies. Other states (including Arizona) have enacted “franchise termination laws,” which make it more difficult for retailers and/or producers to switch distributors once they’ve started doing business with one. Producers and/or retailers get locked in. If they feel their existing distributor is taking too much of a markup, isn’t offering a wide enough variety, or is otherwise performing poorly, there's little they can do. The effect is to squeeze out the upstarts and the competitors. According to Whitman, the number of alcohol wholesalers nationwide has shrunk by 90 percent since the 1950s.

It's worth quoting one more paragraph by way of illustrating why the Widmers jumped on the A-B bandwagon. It was a way to navigate within a system that prevents competition:

The Hensley company provides a good example of how these laws can hurt consumers. Hensley is the fourth largest beer distributor in the country, one of the largest privately-held companies in Arizona, and holds a 60 percent market share in the parts of Arizona it serves. It also distributes Anheuser-Busch products exclusively. Beer-producing giant Busch began an incentive campaign in the late 1990s aimed at getting distributors to drop the products produced by its competitors. In those parts of the country where a given distributor has a huge, government-abetted market share, such arrangements put the squeeze on the variety of options available to consumers (Anheuser-Bush’s national market share rose five percent during the campaign, to 50 percent nationally).

Interesting and accurate article. Well worth a read.

The Tied House Pub System in England

As a follow-up to the post below about the dying English pubs, it's worth expanding on a point Joe made in comments. English pubs compete in a dramatically different regulatory environment than those in the US. Our system, as you know, ensures that pubs are wholly independent--US law mandates that a distributor act as a middle-man between the brewery and the pub. These rules were created as a protection against the English system, where breweries directly owned pubs--a system known as "tied house."

That system is still in place, and it may be a major reason pubs are in trouble. Beer sales are dropping precipitously in the UK--down 22% since 1979. The largest drop is among the "premium lager" segment. Sound familiar? (Cause and effect are not easy to tease apart here. Some blame the drop-off in pub sales as the cause, and cite a recent smoking ban and the rise in prices. But that isn't convincing, either--sales have been dropping for at least a decade. Long before last year's smoking ban and recent spike in taxes on draft pints.) But what to make of the simultaneous, contrasting trend of the boom in English craft breweries, who saw sales increase 11% last year?

This is one of those times when regulation may be a problem. Since the tied-house system has been in place, it has stymied competition. In the 1980s, a government commission looked into the situation and unanimously concluded "a monopoly exists in favour of those brewers who own tied houses." Furthermore:

"Brewers are protected from competition in supplying their managed and tenanted estates because other brewers do not have access to them. Even in the free trade many brewers prefer to compete by offering low-interest loans, which then tie the outlet to them, rather than by offering beer at lower prices. Wholesale prices are higher than they would be in the absence of the tie. This inevitably feeds through into high retail prices."

In other words, the vicious cycle of high prices and dropping sales is a result of non-competition. The result of the commission was the Supply of Beer law, an apparently successful effort at opening the market. It was subsequently repealed. (Interesting question for follow-up: what effect did the Supply of Beer law have on provoking the rise of small craft-breweries in England, and what has been the result of its repeal on them?)

I am, as you all know, both a foe of the power of US distributors as well as a pinko commie. I am therefore leery of blind boosterism of free markets. In this case, it seems like a no-brainer, however. As long as the UK keeps the tied-house system in place, the market is going to suffer a more violent reckoning as a result of changing consumer tastes that it would if it were more open.

New Oregon Beer Distributor

Following the news of distribution mergers (background here, further coverage here and here), I was pretty anxious about where the smaller companies might land. Consider this very good news:

Beverage distribution companies The Odom Corporation (Bellevue, WA) and Maletis Beverage (Portland, OR) have formed a joint venture called Odom-Maletis Beverage to enable combined expansion of beverage distribution services for suppliers and retailers. Their initial push will be into the Mid-Valley, Central and Southern Oregon areas currently not covered by either distributor.

We'll wait to see how all of this shakes out, but more competition is a good thing.

More on the Distribution Merger

Based on the heavy flow of comments on my distribution pieces, I can tell you're all as hot to trot on this issue as I am. So let's have another!

As expected, John Foyston has a piece in today's Oregonian that's worth a look. It voices the same themes I expressed as assumptions earlier, and also confirms the piece about diesel prices.

Now the companies will consolidate warehouse space, trucks, sales routes and staff for improved customer service and significant savings in the time of $4-plus diesel. "The merger is an opportunity to realize business synergies, and fuel costs are a big part of this," said Lindy Bartell, a spokeswoman for Mt. Hood Beverage Co.

"We're all going to the same places," Hodge said, "and nine times out of 10 there's room on that truck for more product."

But more is at stake here than efficiency because beer distributors are not just warehousemen and truckers: Their salesmen are the boots on the ground in the battle of the beers. They push one brand over another in the escalating struggle for shelf space at the grocery and tap handles at the pub. That battle is especially pitched in Oregon, with its more than 75 breweries, many of which are small enough to get lost in the shuffle as the distributors get bigger.

"This puts the smaller brewers so far down the ladder that they're not going to get any play at all," said Ron Gansberg, head brewer at Raccoon Lodge's Cascade Brewing. The brewery produces about 1,500 barrels -- 46,500 gallons -- annually and sells more than half of that to outside accounts. "This vastly reduces the ability of the small brewer to get to the marketplace."

And it offers the usual talking points from the mergees:

"The craft brewers will not get lost in the portfolio," [Chris Hodge, Columbia's director of sales and marketing] said. "Consumers know what they want, but the missing link has been that army of passionate beer geeks to go out and work with stores and pubs and educate them about the different beers available.

Of course you don't really expect him to say, "Yeah, it'll screw the little brewers, but what can you do? It's all about our bottom line"--even if it were the obvious truth. One more interesting tidbit, though--consolidation has begotten more consolidation:

He notes the wave of consolidation taking place in the beer world, specifically the all-but-complete merger of SABMiller and Molson Coors and the much discussed $46 billion purchase of Anheuser-Busch (Budweiser, Bud Light) by InBev, the world's largest brewer.

The Miller-Coors merger made CoHo possible because Columbia distributes Miller and Mt. Hood and Gold River distribute beers made by Molson Coors Inc., and the twain never meets in the world of beer distribution. "Until the Coors-Miller merger, we were competitors," Hodge said.

Even in Portland, CoHo will be focused a lot more on its clients from Milwaukee and Golden, CO than it will those in town. Further reason to regard the sunny predictions about service to craft breweries with suspicion.b

Rumor Mill: The Distribution Merger

At last night's inadvertently well-timed Brewer's Guild event, I had the opportunity to chat up some folks about the Columbia-Mt. Hood merger. What I have to report doesn't exactly rise to the level of real reporting, but I think it's good enough for blog work. The news was too recent for people to have formed solid opinions about it--and of course, no one knows the actual effects yet--but there were some unexpected observations. No one wanted to go on the record yet (one brewer, adopting a comically glassy-eyed look and robotic smile, said something like, "I am perfectly happy with our distribution and look forward to a long and fruitful relationship with them"--evidence, if any was needed, that these relationships are a bit tetchy), so that's why I'm calling this stuff rumor. Take it for what it's worth.

Assumptions
Based on my previous post, you can imagine that I went in thinking this merger was going to be bad--at least for small breweries. I figured that a broader distribution network would streamline systems, create efficiencies, and further homogenize the market. I could imagine some benefit for mid-sized breweries that had already gotten some city market-share, like Caldera and Terminal Gravity, but it seemed that breweries like Roots--which is about to install a bottling line--might be screwed.

Craft Glamor
Well, it turns out that there are some currents in this distribution game I didn't anticipate. Craft breweries are hot right now, whilst the macros are dull property, flatlining or contracting (especially in Oregon). Distributors looking to increase their business have nowhere to go but craft beer. This has led to an interesting phenomenon where Maletis, erstwhile A-B distribution behemouth into whose wide channels Widmer once bought, now represents such wee players (and I mean that only in terms of volume, not quality) as Ninkasi and Old Lompoc. So it's possible that a shakeout won't cause breweries to fail so much as realign.

CoHo Was Already Big
In the old prescription, Mount Hood was the little guy, Columbia the "mainstream craft" distributor, and Maletis the big dog. But Mount Hood now has contracts with Sierra Nevada, BridgePort, and Full Sail. It also has macros Coors, Miller, Pabst, and Henry's. Columbia has Pyramid/Portland, Anchor, and a bunch of imports and smaller players. It also has Miller's line. In other words, these two were already big business.

Gas Prices?
Someone pointed out that diesel prices may be a factor here. Diesel is currently selling at just south of five bucks a gallon, which means higher costs which likely disproportionately affect the smaller distributors. (If I'm wrong on this, I suspect the good professor will clear up my misunderstanding.) In any case (I think my econ is on solid-er footing here, any efficiencies that can be gained in the system will reduce miles and costs. This merger will create a two-state network, and must surely reduce the overall miles beer travels.

That's the scuttlebutt for today. I've included my email above, so if you're reading this and you have any inside info and want to talk on or off the record, drop me a line. I'm keeping my ears open, and I suspect the real reporters will be giving us some news soon.

Distribution Backgrounder

I suspect that a great many Beervanians don't give a flying fig about how their beer ends up in their bottle or pint glass, but it's actually quite important stuff. I am about to post a bit more information I've gleaned from yesterday's Mount Hood-Columbia distribution merger (well, rumors more like) , but before I do, this here's a bit on what distribution is and why it's important.

The brewery brews the beer. If it's a brewpub, they sell it on-site or ship it to a limited number of other self-owned pubs (one? two?). If it's a brewpub selling it more broadly or a brewing company selling bottles, it must be sold next to a distributor who in turn sells it to a retailer--a bar or grocer.

The system was put into place because back in the old world, breweries owned pubs, mucking up the free flow of beer to the market (a Guinness-owned pub wasn't going to be selling a whole lot of Beamish, or worse, the new micro from Paddy O'Malley over in Dún Laoghaire, who might find it very difficult to get his Oyster Stout to the public). The American system is called "three-tiered," as opposed to the one it replaced, known as "tied house." It resolved one real-world problem, the power of breweries, but created another.

Beer distributors now exercise enormous control, particularly with regard to smaller brewers. Since breweries can't sell directly to retailers, they have to negotiate with these intermediaries, the distributors. Problem is, the distributors have no particular loyalty to a brewery--so long as they can sell a truckful of beer, good enough. They don't care what's selling at the grocery store or pub, so long as it's one of their beers. The selling is for retailers. Therefore, if a retailer shifts an order, say upping its Full Sail order and dropping down its Deschutes, the distributor doesn't really care, so long as he has both breweries under contract. The bigger breweries with bigger volumes therefore appeal to distributors the most--because they know their retail accounts will reliably buy their beer.

In the case of the very big breweries, like Anheuser-Busch, this means lots of power. A-B annoints distributors like the Queen annoints knights--to receive a contract from Bud is to have a printing press for cash. (In the annals of American history, more than one story of political corruption includes a lackey and a beer distributorship.) In many cities, A-B has a proprietary distributor that will carry no other non-sanctioned breweries. This is why Redhook and Widmer did a "strategic alliance" with A-B, or whatever it was called, because it gave the companies access to the superhighway of Bud distribution.

Historically, it's been hard for smaller breweries to find reliable distributors because there's not necessarily anything in it for the distributor, which isn't going to aggressively promote the beer. If there's a market, okay. But if the retailer doesn't know about the beer or care, the distributor has no particular interest in promoting it.

There have been smaller distributors who pick up the little guys, and in a town like Portland, there was money to be made at each level. But that bucks the trend. Since 1970, the number of beer distributors has been cut in half--despite the number of breweries increasing by 1,400. It's only in towns like Portland where the volume of a bunch of smaller breweries can make it possible for a smaller distributor to make a profit. And in any case, the three-tier system collects power in the bottleneck of the distributor. That's not necessarily a bad thing, but certainly something to keep an eye on. And with the merger of Columbia and Mount Hood, something even more important to keep an eye on.