The Reasons We Self-Distribute

Ben Parsons is the co-founder/brewer, along with Rik Hall, of Portland’s Baerlic Brewing. Ben recently gave a presentation on the benefits of self-distribution for smaller breweries like Baerlic, and allowed me to post his thoughts here. Although Ben describes his situation in Oregon, it is broadly applicable to states that allow self-distribution and have franchise laws.


Guest Post by Ben Parsons


Distribution is and continues to be the most pressing issue facing the industry at this time. As you’ve seen a lot of consolidation/M&A/Buyouts etc, in the brewing tier, you’ve seen similar actions play out in the distribution tier—albeit much more quietly.

Ben Parsons. Photo: Mark Graves/Oregonian

On top of that we see an incredible amount of newer, smaller breweries—with an ever increasing amount of SKUs—potentially bottle-necking through fewer distribution channels. So access to market is becoming more and more difficult, especially for smaller breweries who lack the financial means to support their distributors through sales staff, bonus structures and overall sales/marketing budgets.

And although you see a fair amount of startup or specialty distributors, it isn’t nearly enough to keep up with these trends in the market.

So for some perspective (according to the Oregon Liquor Control Commission):

  • In 2010 - 394k BBLs were produced and sold by 94 Oregon breweries: ~ 4200 BBL avg

  • In 2014 - 581k BBLs were produced and sold by 203 Oregon breweries: ~ 2900 BBL avg

  • In 2018 - 666k BBLs were produced and sold by 256 Oregon breweries: ~ 2600 BBL avg

 To break that down, in 2018:

  • 66 (or 26%) of Oregon Breweries produced under 100 BBLs

  • 173 (or 68%) of Oregon Breweries produced under  1,000 BBLs

  • 82 (or 32%) of Oregon breweries produced between 1,000 and 66,000 BBLs

 
So again you have an insane increase in the number of breweries having to rely on fewer, larger distributors for access to market. And if you are continuing to rely on antiquated franchise laws—wherein breweries don’t have the ownership to their own distribution rights—then how can you have a fair and equal access to market?

 

Franchise Laws and Small Breweries

The way Oregon franchise laws currently sit, breweries have little to no room to renegotiate or walk away from their distributor relationship without taking on an insane and unrealistic financial burden. Under Oregon statute, a distributor is entitled to be compensated at “fair market value” in the event that a brewery/supplier wishes to jump ship. Typically this number is understood as a multiplier of a percentage of gross revenue over the last 12 months. This multiplier usually sits in the 3-6 times (or higher) of 30% of the distributor's gross revenue, but due to the ambiguity of the language in the statute, it is wide open for interpretation. And as it is in a distributor's best interest to keep brands that they have built in particular markets, they will leverage this ambiguous language to their advantage.

So let's say that a 1,500 barrel a year brewery is signed with a distributor and sells 90% of that beer to their wholesale partner in draft form. With these numbers, the brewery sells ~1,350 barrels at roughly $230 per barrel to the distributor and the distributor sells that beer for around $350 per barrel in the market. So at this time the brewery's distribution rights are worth around 30% of the Distributor's Gross revenue then multiplied by 3-6 depending on brand good will/intrinsic value.

Distribution Rights Value = $350 x 1,350 BBLs x 30%(~distributor's profit) x multiplier (3-6) = $425k - $850k

So for a 1,500-barrel brewery that makes a gross revenue from their distributor of $310k, they need to pony up $425-850k to get out of their contract. Which is highly unlikely for a brewery business of that size. And this is not to say that distributors are bad, but rather it just doesn't make sense to be locked in with a distributor if you're a small brewery (and remember 68% of Oregon breweries make under 1,000 barrels a year).

As we’ve seen numerous breweries close recently, the question is always why:

  • Market Saturation?

  • Wine, spirits, Marijuana industries taking market share?

  • Breweries having more passion than business acumen resulting in running bad businesses?

  • Lack of succession planning?

  • Growing too fast too soon?

  • The sky is falling?

 
It’s likely a combination of all of those things and more. But, I would posit that if and when a brewery business does get into some troubled water—albeit from market conditions, saturation, losing chain grocery, etc—not owning their own distribution rights could easily be the last nail in the coffin. And although distributors are a very necessary part of the industry, their foothold on this particular part of the conversation is risky business and needs modernization so that it better fits with the current state of the industry.

 

The Value of Self Distribution

Breweries are insanely capital intensive startups—lots of stainless steel, real estate ain’t getting any cheaper, expensive build-outs that can take years, etc. So the break-even point for a brewery is an uphill battle and can take years. And seeing as most breweries today are started by brewers, the choice is often made to focus on what they're good at and sign with a distributor. But some simple math will tell you that it just doesn't pencil out for small breweries to sign with distributors. Compare these scenarios:

  • Self Distribution: Brewery makes 1,500 BBLs and sells 1,000 draft BBLs in the market and 500 BBLs over their own bar in their tasting room. So gross revenue = (1,000 x $350) + (500 x 248 (pints in a BBL)  - Waste (typically 10%) x $6 (over the bar pint price) = ~$1,000,000 in gross revenue annually.

  • Signs with a Distributor: Brewery makes 1,500 BBLs per year and sell 1,000 draft BBLs through their wholesaler and 500 BBLs over their own bar. So gross revenue = (1,000 x $230) (500 x 248 (pints in a BBL) x - Waste (typically 10%) x $6 (over the bar pint price) OR ~$880k in Gross Revenue. So you're giving away ~ $120k in potential revenue per year.

So obviously the margins just aren't as good through distribution, but here's where it gets really interesting.

Keg Float
How many physical keg shells you need to own as compared to how many barrels you produce and sell. In other words, for every keg you sell, there’s an empty dirty shell at an account, there’s an empty clean one ready to be filled in your brewery and a full one in your cooler ready to be sold and delivered.

  • Self-distributed breweries can get away with as few as 2.5 keg shells owned for every keg they sell per month. 1,000 BBLs per year/12=83 BBLs per month=166 1/2 BBL kegs sold per month. So this brewery needs to own ~415 keg shells to self-distribute 1,000 BBLs per year. And at a cost of around $95 to purchase a 1/2 BBL, that's a whopping $40k in keg costs alone.

  • Keg float for breweries working through distributors can be as high as 6:1. There’s an empty at the account, an empty at the distributor’s warehouse, an empty in your brewery waiting to be filled, a full one in your cooler waiting to go to the distributor, and a full one at your distributor waiting to go to a customer. So this brewery needs to own ~1,000 kegs. That additional 580 kegs’ll cost you $55k.


Sales Support

Sales is everything to a brewery. A common misconception is that if you sign with a distributor, you don’t need to hire sales or event staff. But, unfortunately it’s pretty easy to get lost in a distributor’s book, which can have as many as 200 other brands that they represent. Also, those other brands might be incentivizing the distributor reps to sell their beer over anyone else’s. So, a successful brewery with this business model needs a sales rep in the market to cut through the other brands’ noise, maintain relationships and manage promotional events, and that labor costs money. That gross revenue just keeps on getting trimmed.


Purchase of Distribution Rights
If a brewery signs with a distributor, the distributor purchases that brewery’s distribution rights in similar fashion as stated above. If you have just opened, then your rights are worth damn near nothing. If you’ve done some groundwork and self-distributed say 1,000 draft barrels, then your distribution rights are worth about $300k ($600k if you’re on fire in the market).

This could be a great infusion of capital, but you immediately lose revenue potential: What was once $350k in revenue is now $230k in revenue as you give your margins to the distributor. $300k in distribution rights value just plummeted to $180k with that revenue loss.

But, you still need to make that original $350k to keep the lights on and maintain the profits. So for a brewery to still make $350k in wholesale sales through a distributor, you need to increase production from 1,000-1,500 barrelss (500 BBLs x $230 = that $115k you just gave away). So you’ll need to buy some new tanks, hire another brewer, buy a bunch of new cooperage (an additional 580 shells to cover the original 1,000 barrels now through a distributor and an additional 250 shells to handle your newly increased capacity), and still hire a salesperson to manage and maintenance accounts.

  • +$300-600k from selling your distribution rights.

  • -$30k for those new tanks

  • -$30-40k for the new brewery hire

  • -$25k for your new cooperage

  • -$40-65 for the new or additional sales rep

  • -$10-25k for infrastructural upgrades (plumbing, rigging, glycol, cold storage, etc and could be much higher depending)

  • -$42k for COGS (for that new 500bbls of capacity at ~$85/bbl)

  • =$73-373k

So in this instance, this brewery just ‘permanently’ sold their distribution rights for as little as $73k-$373k and are back to where they started in terms of Gross Revenue and now have to manage the production and sales of an additional 500 barrels of beer. They’ve increased capacity by 50% but have flatlined on revenue. So what to do with that extra $73-373k of cash? You’ve got to spend it before the tax collectors get it, so you re-invest those funds in capacity…and here we go again. More tanks, more labor, more cooperage, and on and on.

Those are just some of the reasons that small breweries would benefit from self-distribution. And I must emphasize, this is not a knock on distributors. They have and continue to play a very important role in the industry. But, as things have evolved immensely in recent years toward many smaller breweries and fewer larger ones, it is paramount that the industry shifts a bit toward these realities. And concerning distribution rights, once they’re gone, they’re gone and with all the unknowns out there, your destiny could be in someone else’s hands.