Wholesale Wars: The Battle for the Future of Beer Distribution

Feature by | Mar 2016 | Issue #110
Stone Distributing trucks lined up for delivery. | Photo courtesy of Stone Brewing

When Anheuser-Busch purchased the distributor responsible for getting Ninkasi Brewing’s beer to most of southern Oregon in 2011, CEO Nikos Ridge didn’t consider switching wholesalers. After all, Ninkasi’s relationship and sales trends with Western Beverage were solid when it was an independent distributor, so he had no reason to think anything would change.

Even after Anheuser-Busch purchased another one of Ninkasi’s distributors the following year—this one responsible for hundreds of accounts in Seattle—Ridge didn’t jump to the conclusion that there would definitely be problems (Oregon Liquor Control Commission reports show Ninkasi sales more than tripled between 2009 and 2013).

But slowly, over the next few years, Ridge says he began to feel deprioritized by his Anheuser-Busch-owned distributors, and he noted a slowing growth rate that increased further after AB’s purchase of nearby 10 Barrel Brewery in November 2014 (Oregon reports show declines in sales for 2014). So, in January 2015, Ridge asked to move Ninkasi from both of his Anheuser-Busch wholly owned distributors and transfer them to two craft-focused independent wholesalers. “We had a strong brand and they continued to deliver our beer but we weren’t their priority,” says Ridge. “When you start seeing 10 Barrel handles in place of Ninkasi handles, you start to get the hint.”

A few weeks after Ninkasi released its statement about switching wholesalers, Anheuser-Busch announced the acquisition of Seattle’s Elysian Brewing, a significant regional brewery in a territory where it already owns a large wholesaler. Over the course of the year, Anheuser-Busch purchased four more craft breweries and seven more distributors, all in major metropolitan markets, as part of a multipronged assault aimed at regaining the company’s well-reported sagging sales.

While the spending spree on new breweries has dominated media coverage, Anheuser-Busch’s wholesaler purchases are not an insignificant development. In fact, the battles being waged at the distribution level could prove to be the most important fight that craft brewing has had to face yet.

By the end of 2015, Anheuser-Busch owned and operated 21 out of the more than 500 AB distributors in the US, representing, according to Senate testimony from Anheuser-Busch Inbev CEO Carlos Brito, “between 7 percent and 8 percent” of its total volume (in 2012, it owned 14). AB says that both its independent and wholly owned distributors are free to carry craft brands, and “the vast majority of them” choose to do so, although it would not release specific numbers to support this claim. It’s too early to tell whether some of the distributors purchased last year will be maintaining their craft portfolios, but at one Colorado business that Anheuser-Busch acquired last year, all of the craft brands have voluntarily found other distributors.

By comparison, SABMiller has historically owned just one distributor and has publicly stated it has no intention of buying more. This wholesaler also operates almost as an independent one would, carrying 625 brands from 29 suppliers with more than two-thirds qualifying as craft brands.

Couple all of Anheuser-Busch’s acquisitions with the company’s new, more lenient incentive program for independent wholesalers—which opens rewards to a wider range of non-exclusive distributors, and allows for sales of independent beer brands as long as they are small or are only sold in one state—and it becomes clear that Anheuser-Busch doesn’t want to eliminate craft breweries as much as it wants to own and distribute a significant chunk of their products.

“I think [Anheuser-Busch] has been asleep at the wheel for the last 20 years,” says Tom McCormick, executive director of the California Craft Brewers Association, whose state is home to the highest number of craft breweries in the country and also a significant number of Anheuser-Busch-owned distributors. “They didn’t perceive the craft beer market to be that important and instead dedicated focus on protecting their core brands. But there’s been an obvious and tremendous shift in consumer habits and the high end is the future and they finally know that. The high end will continue to grow. It’s just a question at this point of who will own it and who will distribute it.”

A landscape where the world’s largest beer maker is also the second-largest beer distributor in the US was probably not what politicians had in mind when they set up the three-tier system after the repeal of Prohibition.

In an effort to curb the excess and abuses that were rampant before the temperance movement had its way, a three-tier system was established as a sort of checks and balances where the brewers, distributors and retailers all remained independent of one another. In this model, the distributors are all but invisible to the consumer, and yet are critically important to which products are available to buy at which retailers and for how much. Ideally, independent distributors act as a buffer between brewery’s interest (to sell more beer than their competitors) and the consumer’s interest (to have as many options as possible) by partnering with successful breweries and investing marketing and sales dollars to help grow those brands.

Making things messier is the fact that each state was given the freedom to implement this idealistic three-tier system however they saw fit, meaning some states allow for tier-blurring in the form of brewpubs (which are both brewers and retailers) and self-distribution (in which breweries own distributorships).

This three-tier system, though maligned for its creation of what some say is an unnecessary regulatory middle man, has actually facilitated craft brewing’s rise over the last few decades by preserving self-distribution for smaller operations and giving independent wholesalers the power to distribute what sells, not just what the big brewers want them to buy. Unlike the soda aisle, which only features Coke and Pepsi products, beer aisles today are more diverse than ever, with local, regional and national beer brands alongside macro-beer products.

“Our side is on the consumer side,” says Paul Pisano, senior vice president of industry affairs and general counsel for the National Beer Wholesalers Association, which represents the country’s more than 3,300 independent wholesalers. “Obviously each brewery has its own interest, but that’s not the way the system is set up. Independent distributors sell your Miller or Heineken but they’ll also sell Russian River or Sierra Nevada —whatever the consumer wants.”

Despite enabling diversity on the shelves, the second tier remains, on the high-volume end, a duopoly. In every market, distribution is inevitably dominated by two major wholesalers: one affiliated with Anheuser-Busch InBev and another affiliated with SABMilller. According to the National Beer Wholesaler Association, the vast majority of all beer moves through these kinds of large-scale, velocity-driven distributors—including lots and lots of craft brands.

What happens, though, when one of these distributors stops supporting craft? Craft-focused and craft-only distributors are an important and growing contingent in the industry, but rarely do they have the resources to supply high-volume, demanding accounts like grocery stores, sports venues and restaurant chains. If Anheuser-Busch’s wholly owned distributors aren’t helping other craft brands grow and their independent distributors are incentivized not to carry craft brands above a certain size or available in more than one state, how can a local brewery reasonably grow into a multistate brand?

“There’s a huge drop-off in scale when you get under the size of the Anheuser-Busch InBev and SABMilller-affiliated distributors,” Pisano says. “That’s the craft brewer’s fear—that Anheuser-Busch buys distributors or puts these incentive practices into play across the country and one half of the options for large-scale distribution are off the table.”

Ask Anheuser-Busch if they think that their increasing ownership of wholesalers will make it more difficult for non-Anheuser-Busch brands to get market access and they’ll refer you to an October 2015 editorial written by Bob Tallett, the company’s vice president of business and wholesaler development. In it, he cites AB’s longtime ownership of distributors and how that hasn’t prevented craft breweries from prospering.

Although technically true that the company has had a stake in the wholesale space for over a century, for most of that time it’s been small and selective. There remains no precedent for how the brewery’s anticipated 10 to 12 percent ownership of distribution—which Brito has publically stated is the eventual goal—would play out for craft brands.

And what about the voluntary incentive programs for independent distributors? They have always existed in some form or another, but with the new looser qualifications, these programs are expected to increase the participation rate from 40 to 70 percent. “Nothing in the program prevents distribution of other brands,” says Tallett. “Indeed, our contract allows them to distribute other brands. This program simply incentivizes our distributors for focus and performance in today’s already highly competitive market.”

Independent Anheuser-Busch distributors spoken to for this article (wholly owned ones would not return requests for comment) agreed that the new incentive program is more lenient with how it handles the sale of non-AB brands. They also say it’s not always about the beer at all, but the bottom line.

Put another way: If you operate in a place where Anheuser-Busch already has market dominance, the incentives you would receive for selling a certain amount of Anheuser-Busch products might outweigh any money to be made by taking on a new craft brand.

“I don’t have a problem with Anheuser-Busch saying you should be exclusive. They want share of mind and so does Yuengling, so does Boston Beer Company and so does Tröegs,” says Frank Sourbeer, a third generation owner of Wilsbach Distributors, an independent Anheuser-Busch distributor with a robust and diverse craft portfolio in Harrisburg, Penn. “In order for us to be viable, though, we need the flexibility and independence to choose which brands work in our portfolio so we can make good business choices in order to serve our customers.”

As the largest craft brewery in the country, Yuengling has been caught in the middle of these distribution wars with Anheuser-Busch for years. Every time the legacy Pennsylvania brewer wants to enter a new state, it goes through an intensive research and interview process to find wholesalers that would make good business partners, ones with the ability to push a brand as large as Yuengling into a new market.

“We’ve run into circumstances and challenges where Anheuser-Busch owns a branch of distributorship in a new market and we’ve gotten into a situation where they’re not receptive to our brands and it therefore limits our ability to go into that market and make an intelligent choice for distribution,” says Dave Casinelli, Yuengling’s CEO.

Most recently, Yuengling began distributing in Mississippi. Casinelli says that after going through the process and giving an offer letter to an independent Anheuser-Busch distributor that had pursued their business for years, the distributor abruptly pulled out of the deal. Casinelli found the timing interesting as it was just a few weeks after AB’s national wholesaler meeting, at which the new incentive program was revealed (the distributor did not return requests for comment).

“If Anheuser-Busch continues to pressure wholesalers to walk away from other brands, Yuengling and the other 4,000 breweries will really only have access to one side of the distribution network,” Casinelli says. “[The incentive programs] are voluntary, but as big as they are, they have a lot of scale and man power and clout to try to influence what they want.”

The good news in all of this—yes, good news—is that the majority of the second tier still works in defense of consumer choice. Most Anheuser-Busch affiliated wholesalers continue to operate as truly independent, in accordance with the spirit of the three-tier system. Some exercise this by choosing to carry a portfolio of non-AB craft brands, others go steps beyond to encourage and promote craft (see: the Empire Craft Alliance, a mixture of SABMiller and Anheuser-Busch houses collaborating to help craft obtain wider distribution in New York).

And when an Anheuser-Busch distributor chooses not to take on a craft brand, it does take away a choice in the market, but it also opens opportunities for craft-focused independent distributors. According to the National Beer Wholesalers Association, the overwhelming majority of beer distributors are open to any brand, except for the 6 percent of independent AB distributors and the 20 wholly-owned AB distributors that do not carry non-AB brands. From Stone Distributing in Southern California to Bounty Beverage in Nashville, Tenn., there is no better time to be a small, boutique distribution company: there is plenty of worthy product, lots of growth potential and now, more than ever, a need for wholesalers who can partner with craft brands to help them nab new accounts and enter new markets independently.

“I don’t think the large suppliers will ever decimate the high end craft beer market and own it all to themselves, but it will become more competitive as they get more involved,” says McCormick, with the California Craft Brewers Association. “The craft beer segment has grown beyond my wildest dreams and I think if you talk to most people [who’ve been] in the industry [since] the ’80s they’d say the same. We never ever imagined that it would become what it has become today, and a lot of what’s going on is a natural consequence of that. We have revolutionized beer drinking habits and beer culture in the US and it’s spreading around the world and that’s big. Let’s not forget that.”