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Wednesday, June 04, 2008

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.

1 comment:

  1. It's nothing more than legalized monopoly.

    If you had two distributors vying for your Bud (or Ninkasi, or whatever) sales, they'd have to compete. But since they don't, they can set the prices to whatever they feel like.