The Hidden Element: Beer Distribution
Source: National Beer Wholesales Assoc
Every time you pick up a six-pack from the store, it has already been sold twice before. That's because in the US, we have a system that includes a mostly-hidden middleman who neither makes the beer nor sells it to customers. Knowing what that middleman does is essential to understanding the American beer biz.
Earlier this week, a large Portland beer distributor announced it was buying a smaller one. I suspect the "news," such as it was, reached almost no beer drinkers in the city--none of the city's papers (Willamette Week, The Oregonian, Portland Mercury, Portland Tribune) even bothered to cover it at all. Nevertheless, it will easily be one of the most important developments in Oregon beer this year, but is just so opaque and so far behind the scenes most people won't be able to follow why it matters. Let's see if we can do something about that. In this two-part series, I'm going to look at how distribution works, and then what the sale of General Distributors to Columbia means. Today, an overview of distribution.
The Wholesaler Tier
Most beer drinkers know that there's a middleman between the brewer and their pint of IPA, but just don't understand the relationship very well. Following Prohibition, the US mandated that beer be sold through three steps to reduce the power of breweries to control the market: the brewer makes the beer and sells it to the distributor (also called a wholesaler) who then sells it again to the retailer (both draft sales to pubs and packaged sales to retailers). Each state has their own rules about how this plays out, and in some cases breweries are allowed to self-distribute their own beer, while in others breweries may own distributors. Let's leave all that aside for now and focus on the broad strokes.
What seems like a straightforward process actually has fantastic complexity. The three players in this chain of beer sales are each independent, and each buys the beer from the former. What this means in practice is that it's the distributor, not the brewer, who's responsible for that beer once it leaves the brewery (unless the beer itself has quality issues). In structure, the distributor is the one who will set the price of the beer and make sales to retailers. It's one of the trippiest parts of this relationship, but once the beer leaves the brewery, the distributor becomes the sole agent speaking for and selling that beer to retailers. When breweries promote their beer to customers, they're drumming up interest so when the distributor walks into a bar, the barkeep already wants it. But it's an indirect way of having the market pull a beer along. The distributor is the one who actually pushes it out to retailers.
The structure isn't ironclad. Larger breweries have ways of exerting their own pressure. In terms of affecting retail pricing, they can raise the wholesale price distributors pay, limit promotional pricing, or tuck in extra fees along the way. Larger breweries can also negotiate prices with retail chains, who then exert pressure on distributors to honor that price. The tripartite sales structure invites bigger entities to exert pressure where they can--in different circumstances, the brewer, the distributor, or the retailer may have the upper hand.
Beyond that, distributors are also responsible for the care and freshness of the beer in the marketplace. If you see old beer on a grocery or convenience-store shelf, that is actually the fault of the distributor, not the brewer or the retailer. It is the distributor who is responsible for returning to stores and picking up out-of-code (old) beer. Stores are culpable, too, in that they are pawning stale beer off onto their customers, but it's really the distributor's job to monitor freshness. Not every distributor handles the beer well nor monitors it in the marketplace. When breweries sign up with a distributor, they need to do their homework and check out the warehouses where their beer will be stored and the trucks that will deliver them, and go into stores to see how fresh the stock is.
Relationships Between Breweries and Distributors
The relationship between breweries and distributors is the most important in beer. By far. Distributors need good beer to offer retailers, and breweries need good distributors to get their beer to market--and to get it there quickly and in good condition. To raise the stakes even higher, these relationships are basically permanent. When a brewery signs with a distributor, there's no easy way to switch to a different one. They're far more permanent than marriages, and to get a divorce--in the states that even allow it--a brewery has to pay tens or hundreds of thousands of dollars to get out of the contract (often it is a successor distributor who ends up paying, not the brewery). Each contract is individual and unique, so the agreements a distributor has with one brewery may look different than the contract it signs with a different one. (If you want to get deeply into the weeds, here's a good primer on "franchise laws"--the state-by-state rules that govern these relationships.)
But here's the key fact about this relationship: it's inherently compromised. Distributors are responsible for selling a brewery's product to retailers, but they also sell competing brands. This wasn't always the case. Decades ago, each major brewer would have had a distributor for their beer in each market. Speaking with Paul Romain, the powerful, longtime lobbyist for beer distributors in Oregon, he recounted this history. “When I started, we had over a hundred distributors [in Oregon] and we’re down to like 15. The landscape was very different. There was a lot more profit to be made in the sale of beer, so you had four or five distributors in every town. Pretty much one brewery plus their assorted brands.” Consolidation among distributors started happening when brewers consolidated, and now there are always two big distributors in each town--an AB InBev and Miller/Coors house. There may be smaller distributors as well--Portland has a few others--but that one-distributor-per-brewery rule of the 1970s is long gone.
When a town only has two or three distributors and twenty or thirty (or, in the case of Portland 100+) local breweries, each distributor will represent many different companies. This means a brewery's closest partner is also selling competitors' beers--or from the distributor's side, it means trying to equitably serve a stable of breweries (some of which are excellent, ambitious, and growing, and some of which are mediocre and withering). As a consequence, breweries and distributors have a necessarily close embrace, but also keep each other at a certain distance. It's a very odd arrangement.
As you can imagine, this creates a situation where breweries don't want to talk about distribution for fear of running afoul of their wholesale partners, and distributors don't want to talk for fear of creating havoc among the breweries in their "book" (or portfolio). This is why it's so hard to write about the topic--no one ever goes on the record to talk about these incredibly awkward truths. Or, if they do, you get boilerplate language like Columbia Distributing’s CEO Chris Steffanci gave Ezra at the New School. (In my experience, distributors are better natural politicians than 90% of the actual politicians.) The nature of this weird relationship casts it into the shadows, which is why it's so under-examined.
Distributors and Craft Beer
Lest I make it sound like distributors are purely a redundant creation of bureaucrats to thwart breweries, it's important to recognize that the service they provide is critical. I toured Maletis Beverage with Rob Maletis last summer, and it brought home how challenging their jobs are, particularly now in the age of craft. Breweries routinely make dozens of different kinds of beers a year. That beer has to go to their central warehouse along with all their other breweries' beers. Then, the distributor has to find a home among its thousands of accounts for those myriad beers. Of course, distributors need trucks and warehouses and delivery drivers and software to track it and people to manage the database. Self-distribution is a great option for small breweries where volume and complexity are low, but once they grow large enough, it almost always makes sense to find a distributor to handle all that. And, if you're wondering why more people don't scramble to set up distributorships to pick up some of the smaller breweries, it's because all that complexity and overhead require a lot more scale than is needed to, for example, launch a small brewery. The number of people with the experience and resources to set up new distributorships is few.
Within the book of one distributor, small breweries compete for presence. A new or tiny brewery might not get the attention it needs in a large distributor. They may then choose to go with a smaller distributor like General, which can give them more attention. We'll talk in part two about that situation. But there's one final way the wholesale tier affects craft beer. As breweries grow, they start to push out into new markets--which means locating a new distributor. Because breweries can't sell directly to retailers, their ability to enter a new market successfully depends heavily on the distributor they choose. (Though recall the push-pull nature of beer sales: if breweries devote resources to new markets that create excitement and interest in their brand--the pull from customers--it makes it a lot easier for distributors to push the beer into the market.)
Most larger distributors are affiliated with ABI or MillerCoors. As a brewery grows, it can either cobble together a network of distributors mostly affiliated with one or the other, or a patchwork of both. That distribution network can make or break a possible sale to another brewery which has its own more or less compatible network. Because the brewery/distributor relationship is (mostly) permanent, the purchasing brewery has to buy out all the misaligned contracts, or pull out of a market entirely. That's why larger craft breweries are less often targets of ABI and MillerCoors than smaller ones--the distribution arrangements are so much easier to address.
In fact, whenever a sale happens, consider the wholesaler angle if you're trying to figure out whether it makes sense. For example, Rob Maletis pointed out why Heineken was willing to pay such a premium to get into craft--because it already had a distributor network in the US that was languishing because its own sales were down. “Clearly, someone like Heineken doesn’t even have a one share here [in Portland]. There is no doubt that if you’re at Heineken and you’re looking at a major metro market that’s craft-centric like Seattle and Portland, you’re going, ‘What happened to my business?’ Heineken’s got a network of distributors that are loyal to them, and [so they think], 'Should we get something in our portfolio to take advantage of this high end business?'” Or how about The Commons--might there have been a wholesaler dimension to that brewery's recent failure? You can bet there was, though of course I've had a hard time finding anyone to go on the record to discuss it. Time and again, transactions we read about and brewery successes and failures hinge at least in part on the distributors behind the scenes.
It's just not possible to understand the beer business if you don't account for distribution. (FuIl disclosure: I have only recently begun to grasp some of the complexities, and it has been eye-opening.) Distribution is a big, big deal.
In light of that, we can now think of the sale of General Distributors to Columbia. Was this good for the breweries in General's book? Will it affect the beers you see at your local pub? As you can now probably guess, the answer is as complex as distribution itself. Stay tuned for part 2.