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« What does Ludwig say? | Main | One more thing… »

Franchise law, carve-outs, and the 3-tier system

Well it seems the pot is really starting to boil.  The Brewers Association and NBWA are getting out the short knives.  Craft brewers and distributors are manning the ramparts.  Bars and restaurants are beginning to rise against the special treatment afforded to craft brewers, just because they brew the stuff.  Some distributors are telling NBWA to stay out of their state’s business.  It seems as if everybody is upset with someone… ah, ain’t spring swell?  ;-)

As some of you know, I was going to get into this fight, earning me my new nickname of Bad News Conlin ;-)  And it seems some may have plagiarized my work (and even my title), eh Steve?  I won’t even begin to discuss the self-serving (and unprofessional) actions of various organizations and individuals… but enough of that ;-) 

I’m heading in other directions and plan to leave this fight for others.  But I thought I’d throw out my 2 cents worth in an attempt to save the most dynamic and entrepreneurial beverage alcohol industry the world has ever seen.

It’s kind of funny how dang near everybody in this industry is making more money than ever before, yet the fighting only escalates as the dollar signs go higher and higher.  I think there is a word for this… but why go down that street?  ;-)

Let’s start at the beginning… December 5th, 1933.  Without that, none of you exist in your present form.  And the wisdom of the 21st Amendment.  I’d have to guess it never would have passed if it had attempted to determine the nation’s alcohol laws.  This side wouldn’t have like that.  That side wouldn’t have like this… and it would have died.

Instead the framers of the amendment made the right (and easiest) choice.  Let the stinken’ states decide.  It was clear the country wanted legal alcohol.  The well intentioned (well, at least somewhat well intentioned) 18th Amendment was a classic example of federal government over-reach.  Rather than following the basic structure of that failed experiment, the 21st Amendment went the other direction.  States-rights.  Alcohol consumption is by definition a local issue… my getting drunk every Saturday in Littleton doesn’t affect anyone in California.  So the 21st Amendment was written to both legalize alcohol AND to let the states decide alcohol regulation.

And part of this wisdom was the creation of the 3-tier system; a mandatory system whereby distinct “tiers” would only be allowed to operate in the production, transportation and sale of beverage alcohol.  THIS system is the reason we have the most dynamic beer, wine, and spirits industries in the entire world.  On this point there really can’t be any debate.  In these fights this point must never be forgotten.  It is the design that holds the entire system in place.

Yes, it in effect does use government to create a protected monopoly, the beverage alcohol distributor.  But the pluses to society FAR outweigh the negatives.

So everybody that’s fussing and feuding right now should pause and consider if their actions and desires help or hurt the 3-tier system.  For without the 3-tier, most of the players in this industry, brewers, distributors and even retail, would find their existence quite tenuous.  Alas, that has as much chance as the proverbial snowball in hell.

The beer industry (and general beverage alcohol) is undergoing a cultural revolution.  Not that long ago, all the players (brewers, distributors, retail) were basically family businesses.  And family businesses see the world and operated quite differently than public companies with their “professional” management.

Family businesses generally think much longer term… they have no need to focus on quarterly results and daily stock price.  Family businesses generally have a much stronger bond to their employees, to their customers and to their local communities.  This isn’t a moral statement, just a factual observation.

With the dominance of retail chain grocery, the family retail business isn’t quite as dead as the dodo but it is close.  Thus the way retail thinks has undergone a transformation.  And during this same time frame the power of these chains has increased exponentially.

It wasn’t that long ago that the major brewers were all family businesses.  Well A-B really wasn’t but Gussie and then the Third ran it as such.  Now all the major brewers are huge, international businesses… and they think as such.  Again this isn’t a moral issue; it’s simply the way it is.

Of course the upstart prettiest girl at the dance craft brewers are family businesses but I’m not certain they have the time frame thinking of the typical family business, perhaps in 20 or so years they might.  They are more creations of a “gold rush” mentality (and reality)… gettin’ some while the gettin’s good.  Is every craft brewer this way?  Of course not, but I’m speaking of in general.  And do they in general have an appreciation of the system design that has allowed them to flourish?  Nope.  And do they care?  Nope.  That’s just the way it is during a gold rush.

Thus the beer distributor is the only remaining player who still truly thinks and acts as a family business.  Again, no moral aspect to this… just the way it is.

But even our lovable beer distributor has undergone a transformation over the past 30 years.  Back in the day when every community had 4 – 6 distributors, each one was a nice family business that provided a nice living for the owners.  Now the typical distributor (of which there are now 2 in every community) is a VERY profitable enterprise – and about as recession-proof as any industry in the country (and as close as is possible to printing money)… most distributors rank in at least the top 0.5% (you’re there if your income is $1M per year).  That means 99.5% of all Americans make less than you do.  And many rank in the top 0.1%.  Thus 99.9% of all Americans make less than you do.

Not what most think of when they think of the “typical” family business, eh?  And for the most part, not a group that is going to get sympathetic treatment by the media.  And you are created by the government and state law.  If a brewer wants to go to market, they MUST use you.  There is no way around it.  It’s that or throw out the 3-tier system. 

Pull back and look at it from a non-distributor view-point… you’re a creation of the government AND you’re in the top 0.5% of all incomes.  I can hear the tiny violins playing right now ;-)

There was another transformation which also occurred during the past 30 years.  Beer distributors used their political power to pass franchise laws.  So now not only does a brewer have to use a distributor to reach retail and the end consumer, they in effect are forced to give up ownership of their brands, forever.  That one is kind of hard to swallow.

Beer distributor talk about how they build brands and thus deserve an equity piece of every brand they distribute.  That may or may not be the situation, but does the state really have to be involved?  Why can’t each party simply come to terms with the other and have this agreement captured in a contract.  That’s how every other business works.  Just because this is a regulated product does not mean that government must have their thumbs on the scales.

I firmly believe the entire beer industry is doing themselves and more importantly, society a disservice in the direction this fight is going.  And that direction is carve-outs for the small brewer.  If anyone thinks the definition of “small” will remain the same, I have a bridge to sell you.  Carve-outs are an affront to the 3-tier system.  Ultimately you can have one or the other but not both.

Carve-outs are the small brewer’s response to a clearly unfair situation… namely franchise laws.  And please don’t talk about the ability to terminate “without cause”.  We all know that is a self-serving illusion.

It seems to me that either franchise laws go or the 3-tier system does.  I know and love beer distributors but I vote to get rid of franchise laws.  The attempts to evade these self-serving laws are setting up the destruction of the entire 3-tier system.  The issue of pre-prohibition tied houses will pale in comparison when international brewers team up with incredibly powerful chain retail.

Sure without franchise laws one will see a lot more “churn” with the smaller brewers.  So?  One will also see an explosion of new distributors.  Beer distributors will have to fight to keep every brand they have, every day… again, so?  That’s the way it works in the competitive world the rest of us live in.

Without franchise laws the “need” for small brewer self-distribution goes away.  Here’s my recommendation for the craft brewer who wants to enter distribution.  Go to your local retailers and sell in your product.  That’s something YOU should be doing anyhow.  While at the retailer, ask them who they think is the best performing beer/alcohol distributor that services them.  Go to that distributor and tell them you have already sold in these products/quantities at these retailers and they are awaiting delivery.  Close the sale with the distributor.  The craft brewer can spend their time building the brand and not attempting to become a warehousing and delivery entity.  Sure they have to share the margin with the distributor (So what?  Distributors add real, tangible value) but the craft brewer is not force by law to forever giving up equity in their brands just to get distribution.  If they chose to, fine – that’s part of your negotiations.

Let me repeat, take away franchise laws and the intellectual arguments for self-distribution disappears.  And self-distribution is quite clearly the end of any type of 3-tier system.

Some distributors will say, without franchise laws (or getting equity in the brands) they won’t distribute their products.  No problemo.  The issue isn’t whether you will or won’t, the issue is will anyone.  Again, welcome to a competitive world beer distributors.  You won’t determine any of this, the marketplace will.  And you will do what the marketplace demands or you will pay the consequences.

The real problem beer distributors have with ridding themselves of franchise protection is with the big 2.  They are afraid what ABI and MC would do to them without franchise protection.  First, don’t forget the brands are theirs.  Perhaps the world doesn’t require as many beer distributors as are presently out there.  So?  Do you all have some god-given right to a monopoly which puts you as some of the richest individuals in the country?

I know distributors and their employees quite well.  I believe most (but not all) would fare quite well in a world without franchise protection.  Will some have to go through gut-wrenching changes?  Of course.  Will some cease to exist?  Again, of course.  Welcome to the world the rest of us operate in each and every day.

But most will survive and prosper in this new world.  I have yet to see a huge, multi-location distributor outperform the smaller, local distrib.  Never.  Add value and prosper.   Or if you truly are this century’s buggy whip manufacturer, then you are toast no matter what.  Please don’t destroy the dynamism of this industry as you fight to keep your government-protected rice bowl.

Have the courage to see that franchise laws are sowing the seeds of your ultimate destruction.  Get rid of them and draw a line in the sand… there is now no reason for carve outs from a system that has served society well for over 80 years.  Carve outs are the ultimate enemy and they will destroy the very structure that made the small brewer possible.  They will also destroy the most dynamic beverage alcohol industry the world has ever seen.  Getting rid of franchise laws will cause you some pain.  Allowing carve-outs to take root will cause your demise.  It seems the choice is pretty straightforward.

I know many out there will disagree with me but that intellectual position is based on one assumption… that the volume limits for carve-out exemptions will remain low (and controllable).  I simple do not believe that will happen… and once you give in on the intellectual arguments against carve-outs, the only barrier left in place is the volume cap. 

It is beyond naive to think that the BA, state craft brewers associations, and individual craft brewers are not going to continually push to increase these limits… forever.  Distributors, you are the only players left in the market who think long term.  If you give in, the 3-tier system disappears.  Based on my contrarian analysis, it’s as simple as that.

 

 

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