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« Tough Love For Craft Brewers | Main | Conlin... the trouble-maker »

Are you a franchisee or do you have a franchise?

The answer to this question will shape the future of the beer distribution industry… so ask yourself, are you a franchise or do you have a franchise? 

Perhaps a little clarity is in order…

As we all know, words quite often have multiple meanings and serious confusion can occur when one applies one meaning to another situation.  I think the beer distribution industry is facing a similar situation with the meaning of this franchise-thing… and the course it takes will forever shape this industry.

From the online Free Dictionary, a commercial meaning of the word franchise is…

*          Authorization granted to someone to sell or distribute a company's goods or services in a certain area…

*          A business or group of businesses established or operated under such authorization…

*          Commerce authorization granted by a manufacturing enterprise to a distributor to market the manufacturer's products

I believe the first and third meanings fit into what is generally meant in the beer distribution business when we discuss franchise… as in franchise rights.  The second starts to head in another direction.  The first and third meanings imply you have a franchise, the authorization to distribute and sell a company’s goods in a certain area.

The second starts down the road that you are a franchise.  What’s the difference?  Well to quote Mark Twain…

“The difference between the almost right word & the right word is really a large matter--it's the difference between the lightning bug and the lightning.”

If you have a franchise to distribute ABI or MillerCoors or Sam Adams or Flying Dog… then you are an independent business which simply has a franchise right(s) to “sell or distribute a company’s goods or services in a certain area”.  It might be for one supplier, it might be for hundreds, but you remain an independent business.  And you can operate your business as you see fit (as long as certain standards are met) and can buy or sell these rights under certain conditions defined by both law and supplier contract… but you are an independent business.

If you are a franchise then a whole other reality takes shape.  Let’s use fast food franchises as the perfect example… if you own a McDonald’s franchise, you are called the franchisee and McDonald’s corporate is the franchisor.  But you are not remotely an independent business.  When you purchase the McDonald’s franchise on the corner of here and there you are in effect purchasing the use of a brand name and trademark.  In addition, the franchisor provides a detailed formula and proven method of operating the business along with a significant amount of assistance in starting and managing the business.  You agree to operate only within this formula.  ALL operational decisions are made for you, your job is to simply follow them.  All materials come from your franchisor… EVERYTHING.  You do nothing that is not part of this formula, down to the frequency of cleaning the restrooms.  In effect you are simply an extension of the franchisor.  Let’s repeat that point again since it becomes extremely important… in effect you are simply an extension of the franchisor.   This business structure is used by a manufacturer as an efficient means to come to market… while retaining 100% control over all aspects of bringing the product to the end consumer.

Those companies which have a franchise are sometimes called product distribution franchises.  Those which are a franchise are called business format franchises.

Now let’s look at the beer distribution industry through this prism… are you or have you?  Are you a franchisee or do you have a franchise?  Historically distributors have had franchises from many suppliers.  With the dominance of Anheuser Busch over the past few decades, Three Sticks started to steer “their” distributors way from a having a franchise and towards being a franchisee… from a product distribution franchise to a business format franchise.  With the new owners of ABI, we see this process accelerate.  These “foreign corporate raiders” clearly plan to implement a world where ABI distributors ARE franchisees… with all the associated control that a franchisor has over the franchisee… in effect they are transforming ABI distributors from independent businesses to franchisees.  Look at everything ABI corporate already “provides” for their distributors.  They have already lulled many ABI distributors into accepting this evolution from having a franchise towards being a franchisee… smiling all the way to the Slaughterhouse. 

And of course by definition the power a franchisor has over the sale of a franchisee is FAR MORE than that which a manufacturer has over the holder of a franchise distribution right.  I’d guess pretty much all franchisors have the first right of refusal on any sale of their franchisee.  In a franchisee world, does it really matter if the specific location/territory is owned by a third party or the franchisor?  From any type of operational perspective, there is no difference; the specific business entity will operate exactly the same regardless.

But if one has a franchise, by what right does the primary supplier get first right of refusal on the sale of the company?  Of course they retain some control over the sale of their specific distribution rights, but of the entire company?  Trucks?  Warehouse?  Land?  Other suppliers?  That is a franchisee world.   

This brings up two points… first all you ABI distributors, do you REALLY want to become a franchisee of ABI?  Do you really understand the implications of this?  If you did, you’d be gathering the pitch forks and torches.  You are handing over your independence to your now and forever daddy.  And once done, it’s done… this is a one-way street… and you are already pretty far down the road. 

On a larger front and more importantly for the entire industry… (if foolish ABI distributors want to willingly walk into the Slaughterhouse, so be it)…

But on a larger front I ask how can an industry with a mandated three tier system be compatible with a world where distributors ARE a franchisee?  If the distribution tier is simply a 100% extension of the supplier, doesn’t the second tier in effect simply disappear? 

If the distribution tier is simply an extension of the supplier, doesn’t the second tier in effect simply disappear?

Doesn’t this completely destroy the entire reason for the design and implementation of a three tier system?  Doesn’t it simply mean there is a two tier system (at least for the ABI network).  What are the legal implications of this?  How is it legal?  Where does it lead?  And all you MillerCoors folks, don’t be too happy… success drives competitive response… so if this is very successful for ABI, MillerCoors is certain to follow.  That’s just the way it is.

Perhaps one might want to change the law to ensure it is illegal.  Do we really want to use this back-door method to dismantle the present three tier system?  How does it work where ABI distributors ARE a franchisee and all others HAVE a franchise?  What are the implications of this?  How can the “McDonald’s model” of a franchisee be compatible with a three tier system?!  I certainly don’t see it.  It destroys the entire reasoning behind a mandated three tier system.

For my simple mind, if beer distributors cease being independent businesses which have certain franchise rights, then the three tier system has no meaning. 

And what about branches?  How are supplier-owned branches compatible with a three tier system?  There is a natural conflict of interest!  Why is it considered acceptable for ABI to own branches?  If they can “become” the second tier through branches or franchisees, why can’t they “become” the retail tier and open and operate their own retail establishments?   The only reason it is “acceptable” is because this erosion was allowed in the past and it is now considered “normal”.  The distribution tier has been treated like a red-headed step-child for too long… do we really want to voluntarily continue to play this role? 

It may already be too late to change this but that doesn’t mean distributors should just meekly accept their position as the least important of the three-tier system (in fact distributors are sometimes seen as an impediment which brings no value; just protection of their own entrenched, self-serving businesses)… come-on, why don’t we just accept a two tier system and be done with it?  And if so, what makes a two tier system so desirable?  Let’s just get rid of the entire separation of tiers.  Why not?  I know of many who would like this and who could take serious advantage of it.

Or perhaps these past mistakes need to be revisited.  I ask again, if branches are OK, then why aren’t ABI package stores?  Or ABI convenience stores?  Or ABI Pub and Grub?  Or better yet… a national chain of supplier-owned “gentleman’s clubs”.  Those places sell A LOT of beer… yes, I’ve been in more than a couple ;-)  What a great way to build a brand! 

Why don’t they simply create franchisees to own and operate these businesses, thereby becoming a seamless extension of the supplier?  I don’t claim to be an attorney - one of my few bright spots ;-) but I sure can’t see why franchising retail locations (both on- and off-premise) wouldn’t be acceptable with the present thinking… tied houses here we come!    

Can you imagine the uproar if they attempted this?  Yet both are just as serious an erosion of the three tier system as the other.  Why do we allow one when not the other?  Are there reasons for a mandated three tier system or does it belong in the dustbin of history?  That’s a rather simple question… yes or no?  My future doesn’t depend on the answer to this question… does yours?

As a side note, I recently spoke to a pretty smart fella and he pointed out we all need to use the proper language in this process… we need to emphasize not just a three tier system, but an independent three tier system.  Now he’s an attorney so he is used to playing word games but this one is important.  He noted that many may claim to support the three tier system but in reality they don’t support an independent three tier system.  Remember that Mark Twain quote at the beginning of this post… the right word being the difference between the lightning and the lightning bug.  Supporting an independent three tier system is what most of us mean when we discuss the issue… three tiers all with separate, independent ownership.  But some support a three tier system and they simply mean different companies in each tier, but no necessarily different ownership, i.e. branches.  Under this thinking, one could be a loud and vocal supporter of the three tier system while at the same time owning separate businesses in all three tiers. 

This somewhat bastardizes the entire reasoning for the three tier system but logically I guess one could make the case (especially if you want to use words to hide and confuse rather than to disclose and clarify).  Therefore we need to expand our language to always include an independent three tier system.  Without that word, branches are not a violation of the three tier system.  Without that word, brewery owned retail establishments don’t violate it either.  I appreciate this insight… that word is DANG important as we fight these fights.  You might want to ask your suppliers whether they support the three tier system or an independent three tier system… ahh, that difference between the lightning and the lightning bug.

There you are distributors… go your state associations (and of course NBWA) and get in gear on ending these abominations… it’s only your and your children’s future you will be fighting for.  Or walk quietly towards the Slaughterhouse… it’s your call.

 

 

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