Tough Love For Craft Brewers
Since I have a knack for stating the obvious, let me state that craft beers/brewers are the prettiest girl at the dance… and they know it. My blog has recently been discovered by a number of craft beer and craft brewer web sites… places like the Craft Brewers Association (http://brewersassociation.org )... And BeerNews (http://beernews.org) ... And Guys Drinking Beer (www.guysdrinkingbeer.com), got to love that name, says it all… and then there is Aleheads (http://aleheads.com )...
After my Who’s Your Buddy post, which can be found here, I noted a lot of visits from this place called Aleheads. If you recall my Who’s Your Buddy post suggested that MillerCoors fully embrace the craft beer world, using their strength and “their” distributors to help this market flourish.
I must admit I hadn’t heard of Aleheads before but I don’t generally visit beer geek websites (and I truly say beer geek as a compliment). But please do go to these sites and you’ll find many more great craft beer sites to visit …. I went to Aleheads to see what was up and lo and behold there was an article with my lovely picture under the headline “All Hail the Conlin” It was a pretty good article – with a title like that how could it be anything but? ;-) Here is the link to the Alehead post, http://aleheads.com/2012/01/06/all-hail-the-conlin/#more-13546
And for beer distributors it is rather insightful on what even dedicated beer fans know (or don’t know) about beer distributors and this industry… I have to admit I sent the link to that article to a few friends and most thought I had written the thing! It’s the title-thing… my friends know me and my ego. I have henceforth requested all who communicate with me begin their speech with a hearty “All Hail the Conlin” but have found compliance is very poor, to say the least.
Well back to these craft beer drinkers and brewers. I communicated with a few of these folks and thought I’d directed a post more to them… to give them at least my take on the history of the beer business and why they have the opportunity to exist. That last part might have more than a few thinking what does that mean? Opportunity to exist? Some probably believe this market opportunity just popped up, like most do, and not the result of an industry structure set up long ago.
Well Sherman, let’s take the Way Back Machine and see what things were like about 100 years ago in this country regarding beer and alcohol. In a word, things were bad ;-) Not from a consumption viewpoint, consumption was rocking and rolling. That was the problem… there were many excesses prior to Prohibition… many. Ken Burns in his three part piece on Prohibition called this a Nation of Drunkards... you can watch his film on your computer at this link http://www.pbs.org/kenburns/prohibition/watch-video/#id=2082675582 Pretty good stuff if you can ignore his liberal worldview… I know, I can’t keep off my political soapbox ;-)
Anyhow, prior to Prohibition most bars/taverns were what are called “tied houses”… a tied house was a tavern or bar that was partially or totally owned by the local brewer (pretty much all brewers were local then, and there were A LOT of them). In a tied house you could only purchase that specific brewer’s products. Tough luck if you and your buddy liked different beers, you wouldn’t be drinking together at the same tavern… it wasn’t possible.
Competition for customers was fierce and the brewers found owning the individual taverns helped them in their search for customers. Showing the law of unintended consequences cannot be fought, some cities raised the cost of a liquor license in the hope of stamping out what they considered were too many bars. This move just pushed the retailers even further in the tied house direction. This took many forms…they sold to “their” taverns on extended credit terms, provided the equipment and supplies, sometimes charging low or no interest, often paying rebates for pushing their brand or carrying it exclusively. Or they took the whole enchilada and owned the place outright. The focus being on maximizing sales… period. Things like gambling and whore houses on the second floor were initially introduced as draws to sell more product.
Now these tied houses weren’t the only reason for “A Nation of Drunkards”, but they certainly did contribute to the problems… and these problems contributed to that failed experiment call Prohibition. As it became quite evident that Prohibition was a pretty bad idea, many ideas were considered… the people had clearly spoken and they prefer legal alcohol… but what to do to ensure the pre-prohibition excesses don’t again raise their ugly head?
As a political solution the 21st Amendment to the Constitution was passed. This amendment repealed Prohibition and also gave states the authority to regulate the production, importation, distribution, sale and consumption of alcohol beverages within their own borders. Yeah for state’s rights!!
Another facet of this solution was the introduction of a regulatory system known as the three-tier system. It takes its name from the regulatory feature it implemented, three separate and independent “tiers” which would be responsible for the production, distribution, and retail sale of alcohol. Thus one tier is the brewer who manufactures the product. Another tier is the independent distributors who warehouse and sell the product to retailers. And the last tier those licensed retailers who sell the product to the consumer… both on-premise (where the product is consumed on site) and off-premise (where the product is taken home for consumption).
Tied houses would no longer exist in this new world. And right there is the reason EVERY craft brewer and craft beer drinker should on a daily basis salute the three-tier system. For without the three tier system, those brewers would not exist and therefore neither would their succulent craft beers. Read this paragraph three times… if not for the three tier system, you folks would never have had the opportunity to exist.
Think of an alternative world where the three tier system never took hold and tied houses ruled the marketplace… assuming retail establishments matched market share, AB (now ABI) would own and operate about 50% of all bars, taverns, and restaurants in the country. Is that freaking scary or what?!
Other major brewers would own the rest (there probably never would have been a MillerCoors organization). In this world of tied houses, where would the vibrant, exciting craft beer business be? It wouldn’t. Sure a small local brewery might open and operate a bar or tavern here or there but there is no way they could get beyond that… state-wide coverage? Not going to happen. Broader distribution than that? Dream on.
It is very important that one understands and appreciates that the laws and regulations introduced to further separate the tiers were all to your advantage. In many states credit sales are not allowed… nor are consignment sales (pay me once you sell it)… brewers or distributors owning retail accounts is not allowed… the brewer or distributor can’t give “anything of value” to the retailer.
Assuming a small brewer could overcome the weight of the tied houses (and they couldn’t have), what of the impact of these other laws. Hey Mr. Retailer, you need a draft system? I’ll give you one if you only sell my product. Hey Mr. Retailer, you want generous credit terms, no problemo… but of course we’d want you to focus solely on our products. Need a new coat of paint or a new bar or free advertising on the radio or TV or Internet (or glassware or signs or lighting or…), again no problemo… but there’s that thing about those competitive beers you sell.
How would you like to be an undercapitalized small brewer (and all small businesses are undercapitalized) trying to compete against this. It wouldn’t be a problem because you couldn’t compete against it. The existence of almost every one of these laws is the reason you have the opportunity to exist. That is a cold, hard fact.
Now anyone who reads my posts knows that my political beliefs lean towards conservative/libertarian. When I first started working in this industry I somewhat scoffed at this system… I’m a small government, individual freedom type guy. But even in my libertarian heart I have found that it works pretty darn well… I might mess with it around the edges but in general I can’t think of a better system to accomplish the goals of society in preventing pre-prohibition excesses. In addition it is a great method to ensure taxes are paid (in the real world this was one of the factors which pushed some reluctant politicians towards supporting the 21st amendment) and to ensure product quality and consumer safety.
And from the craft brewers and craft drinkers perspective, it prepared the soil so you could flourish. Not to beat a dead horse, but without all this the odds of you all existing today is next to nothing. The major brewers would control everything and you would never have had the opportunity to be anything more than a brew pub… and even that would have been tough.
So what do craft brewers attempt to do the minute they enter this industry? They attempt to seek exemptions from the laws which made their existence possible.
- Waaahh… I don’t want to pay the same tax rate as everyone else! Let me ask you, who does? I want special tax treatment since I’m small… and of course if I grow and exceed the volume threshold, I’ll want to change it again in my favor… that’s just human nature. I’ve been involved in start-ups and small businesses for well over 30 years… guess what, they all would like to pay a lower tax rate than their larger competitors. I think this industry is making a profound mistake in granting special tax privileges to ANY group, especially just because today they happen to be the prettiest girl at the dance.
- Waaahh… I don’t want to operate under these “silly” and “arcane” three-tier laws. Like far too many, once they are where they want to be, they want to change the rules to now favor themselves.
- If you don’t want to operate in a regulated environment, then brew root beer. You knew this was a regulated product (as it should be… even in my libertarian heart) when you entered the industry, don’t cry about that fact after you enter it.
- I want to self-distribute because I can’t find someone willing to distribute my product. Bullshit! That might have been true years back but not today… distributors have teams out looking for craft brewers to represent. In the annuals of consumer products I doubt if any small manufacturer has EVER had such a favorable distribution and sales environment. Here’s some tough love… go out and start a cookie company or a chip company or any consumer product and you will find getting distribution is a bitch… that’s just the way it is. You are facing nothing special; in fact you’re not facing this at all. No, if you really listen to what many craft brewers are truly saying, they simply don’t want to pay the margins to their distributor partners. Money is tight, etc. As I noted above, in ALL small business start-ups money is tight… get over it.
- I even want to go further… I want to brew it, distribute it, and sell it to consumers too! Forget the three tier system!! I want to be all three tiers at once! Why? Because I want too. It would be soooo much easier and I could make more money. And if I get lucky and really take off? Then damn the three tier system and let me race across the country. Of course the competitive response this might drive might just take us back to the tied house days but what do I care? I’ll have cashed out and be on the beach. My focus is solely on MY business… not the regulatory environment which got me here… not on what my exceptions might bring about… not on anything but what I see in the mirror… and that’s me.
- How about this all you craft brewers… why does size matter? Why don’t we offer ABI, MillerCoors and all the big boys the same rules and regulations which you hope to operate under. That would only seem to be fair. What would the world look like? What would your prospects be? Very poor indeed is what your prospects would be.
- Waaahh, I give my distributors great margins but they simply don’t focus enough on my brands. First this is a complaint from every supplier in any distributorship with more than one supplier. Every single one. Again, this is nothing special to do with you. Is it the supplier’s job to get more than their fair share of mind from the distributor’s sales and distribution staff. That’s your job… quit whining about it and go do your damn job.
- And speaking of that, what exactly do you bring to the table? You’ve gone out and got approval for a label (I bet that whole process surprised you) but what else? In chain driven markets do you go out and get chain approvals? Nothing is sold through a chain unless it has been approved… what do you bring to the table here or is this something you expect your “overpaid” distributor to accomplish for you?
- Or do you expect your distributor to basically build your brand for you? Really?! Tell me where else on the planet in any industry this occurs? Oh, but you’re the prettiest girl at the dance so nothing applies to you.
- What of your production processes? How do you perform here? If your distributor goes out and gets a few handles for your brew, can you get it to them when they need it? The distributor is the retailer’s beer consultant… YOUR failures become the distributor’s failures… and each one erodes their standing as a high-quality, believable beer consultant. Retailers might put a cup on a tap handle for a day or two waiting for the product, but not much more than that. Can you do your job and get the product there or did the distributor’s sales rep waste all that time and energy (and credibility) getting the handle in the first place when you can’t get them the product for a repeat? Guess what, those sales reps are only going to put up with that a few times before they quit bothering with your product. Again, that’s just the way it is. Is that their problem or yours?
- What of advertising? Is your distributor’s sign shop your primary advertising medium? What do you bring to the table? As a freebie (something I am loath to do) let me give you some advertising advice… table tents sell beer. Especially new beer but they are good for all. You can take that to the bank. If you take nothing else from this rant, take that.
In a roundabout way let me help you understand the industry you have entered. Long ago, in the mid-80’s a milestone was reached in the grocery business. As an industry they made more money renting real estate than they did on the actual sale of groceries. Here’s how the retail world thinks about things… those eyes and ears that walk into my stores each and every day are mine. Got that? Those folks who walk in are “mine” and if you want an opportunity to reach them, you must pay me for that opportunity. I don’t care if your product sells or not, but you will pay me in an attempt to reach them. The more eyes and ears I provide, the greater exposure I provide to your product, the more $$ you provide… that’s before a single product has been sold.
Now because we are a regulated industry with the three tier separation, nothing of value can be given to retailers thus we do not operate with these same rules… something which bothers the chain stores and which they’d like to change. What would the world be like for you craft brewers if you had to pay slotting fees for every product you were lucky enough to place? Think you are cash strapped now?! Again, you couldn’t compete in this world if it were to be allowed to occur… your distribution would be seriously damaged as a result. As a side note, you should all thank the National Beer Wholesalers Association (www.nbwa.org) for fighting this fight for you… in the mid-90’s there was a concerted effort by retail to allow slotting fees for this industry… and you don’t see no stinken’ slotting fees today, do you? How many retail outlets would you not be in if there were? How about an end-cap… those cost money my friend, for everyone but beverage alcohol folks.
Now let’s take this thinking about eyes and ears to a distributor. What does a distributor provide to you? First, a beer distributor will service every single licensed retail account in their territory… every single one. In a small market this might be “only” a few hundred… in a major market this might be in the thousands. Thousands of retailers become available to you in one single move. How many eyes and ears go into these retailers each and every day? But there is much more. Not only does the distributor provide weekly (if not more) service to these accounts, they know the accounts intimately. You don’t need (or want) to be in every one of these retailers… you want to be in the right retailers. The distributor provides this knowledge and the sales execution for every one of these retailers. That alone is not a little thing… in fact in is an incredible thing.
One could make a strong argument that you should pay distributors directly for the opportunity to reach these eyes and ears… that’s not going to happen so let’s look at how you do pay them… by providing good margins to them. But here’s the rub… they only get these margins if your product sells.
Let’s assume you bring a margin of $10 per case to the distributor… what is your sales potential? If they sell 1,000 cases in a year, they earn a whopping $10,000. But that’s gross dollars… what about all the overhead? What about the sales rep’s salary? What about the driver’s salary? What about the merchandiser’s salary? And speaking of merchandisers, again in chain-driven markets, the off-premise retailers don’t refill the shelves, that’s the job of the distributor. If you self-distribute do you think you can be in these accounts 4 – 14 times per week filling the shelves? What about the distributor’s profit after all these costs? The distributor brings a hell of a lot to the table to build your brand for the chance to make a whopping $10,000 before any expenses. And how many of your brands will sell 1,000 cases in a year in an average market? They get the chance to make a few thousand dollars and you get the chance for them to build your brand into a powerhouse (or even a little pony) which you can then sell to ABI or MillerCoors for retirement money. You expect a lot from a distributor.
In on-premise accounts who cleans the draft lines? They don’t magically clean themselves… and when the bartender pulls your tap handle and a chunk of stuff which closely resembles horse snot (yes I know horse snot) comes shooting out, do you think this might affect the person who just ordered your succulent brew? You only get one chance to lose a customer.
Do you have the staff for on-premise nights high-lighting your products? Do you have the staff to hang your merchandise (if you bring any to the table in the first place)?
And what of old beer? Who takes care of that? And when a distributor eats the cost of old beer, they are eating the full cost of it, not just their margin. One case of old beer eats up the profits from at least 4 cases of beer… leveraging but in the wrong direction.
On a side note, speaking of old beer… all you craft brewers had better start paying a little bit more attention to the quality of your product. I was recently in a major liquor store here in Colorado (not a chain market) and was listening to a sales rep talk to the store manager about various craft beers he was trying to sell. The sales rep noted a craft brew on the cold shelf which was a 2009 product! How many old six packs are out there? How many bombers are WAY past their prime? I’ll repeat what I said above; you only get one chance to lose a customer. I realize there is a fine line between pushing distribution and generating a lot of old beer but I see a storm a-coming on this front.
Now some of this is simply the result of the category being so hot… and with soooo many new entrants each fighting for a very limited share of mouth. Many craft beer- focused retailers have far too much space devoted to craft beers… it is simply not possible to keep it all fresh. They don’t really care since they just want the foot traffic… those eyes and ears… and competitive forces drive them to have every craft brew out there. The same liquor store I just discussed has doors and doors and doors of craft beers (that’s great)… more than triple what they have for larger domestic brews… but even just filling the cold shelves probably is more beer than their traffic can keep fresh. Just the pack-out of these cold shelves is around 5 cases. Don’t even get me started about bombers. Do the math… how many brands do you have? In how many packages? What type of turns do you need to keep the product fresh? In many situations it simply doesn’t work. And ultimately the retailer doesn’t care because the distributor will be forced to eat this old product, whether this is legal or not it will happen. That’s the real world.
I strongly recommend craft brewers work more with their distributors to ensure product freshness (one of the many values of beer distributors). The good name of your products depends on it.
How’s that for a long winded rant? Craft brewers and craft beer drinkers… this is an exciting time and one with tremendous opportunities. Don’t try to change the rules which have allowed you to come into existence. Don’t underestimate the value your distributors bring to the table. Definitely don’t underestimate the value of the three-tier system.
Is it sometimes difficult to change distributors? Sure. Remember they are the ones probably building your brands… they aren’t putting in that effort to make a couple extra thousand dollars in a year. They want to reap the short- and long-term rewards of their efforts too. Can you blame them?
The beer industry, all tiers, is a great industry. Rather than working to change the rules for your short-term advantage, instead work to make and help sell the best beer you possibly can.
And lastly a business plug - I don’t do this stuff for free ;-)
My strategic partner, Steve Cook, has extensive business development experience in helping suppliers bring their product to market and addressing all of the issues I discussed above (and many more). If you are a craft brewer and would like or need a business partner to help you take your business to the next level, give me a call or email and let’s talk about how we can use our expertise to help your beers be the ones that survive and prosper. Trust me, it is worth the time and effort… and yes the $$ too.
How’s that… first I piss you off then try to sell you something… such is life until “All Hail the Conlin” ;-)