Forbes: Pushback Against Tasting Rooms

Yeah, so there's still not much incentive to be a Brewpub in NJ, which is what I was getting at.

 

Years ago I thought that might be true, and it was something of a commonly accepted truth. Now though, with more mobility among a more informed consumer base, I'm not so sure. Mostly gone are the days of "This is my neighborhood bar, it's the only one in the area, so I just drink whatever they offer." Consumers know what's available in the marketplace, they have greater expectations of certain variety, and wouldn't stand for a "Bud bar" when they can walk down the block to a different option. Short of ABI owning every bar in town, it would just create a market vacuum which some entrepreneur would inevitably fill.

 

Correct. For fear of a brewery market monopoly, we instead created one for distributors.

 

Don't think you can call an industry composed for 3,000 businesses a "monopoly". In almost all regions, there are several distributors in any given area ( AB & MC houses, and usually several indies as well as, where legal, self-distributing breweries).

Those distributors do typically have exclusive rights to a brand within their territory but, whether that is also a state law or not, it's probably what every brewer and wholesaler wants as well. Get rid on the mandatory Three Tier laws and I'd bet every brewer-wholesaler contract would still contain such a stipulation.

 

Indeed, there are other business arenas where such stipulations exist in contracts between two businesses.

 

Perhaps "monopoly" was a poor choice of words. What I should have said is, in trying to make sure that a handful of monolithic beer producers wouldn't control a market, we've instead created markets that are controlled by a handful of distributors.

 

That was the handiwork of Harvest Restaurants (Trap Rock). They wanted and got the right to sell the beer they brew at Trap Rock in the other 7 or so restaurants they own.

 

Since @JackHorzempa was agreeing with something I said it seems appropriate for me to add a clarification.

Perhaps it was not explicit enough in my comment. Part of what he was agreeing with was the idea that the Craft beer movement would not have gotten off the ground and thrived in the first place were it not for the three tier system. That shift in consumer preferences you mention would simply have focused on the options of Wine or Spirits. Part of this idea is illustrated by the data that show two large segments of the current alcoholic beverage market, the Boomers and the Millenials are switching to flavorful beverages other than relatively flavorless beverages such as those offered by major breweries for years in an attempt to satisfy public tastes.

Effectively the Craft beer movement was flying for years below the radar settings of the big beer companies that were focused on their major competitors, each other. Indeed the current long time owner of the family owned Yuengling Brewing has publicly stated that if it had not been for the version of the three tier system that existed in PA they, Yuengling, would not have grown to become a regional player. This is supported by some data that @jesskidden helped me to find some years ago. That data showed that the only state in the Union that sold less AB produced beers than PA was, at that time, Alaska.

 

On this we agree. For a time three tier primarily benefited breweries; now it primarily to exclusively benefits distributors.

 

Well Greg Koch of Stone Brewing might have a disagreement with that idea that it primarily benefits distributors.

See some of what he has to say here:

http://www.marketwatch.com/story/beer-and-industry-loathing-with-stone-brewings-greg-koch-2016-06-16


Also, in this context I'm reminded of something Winston Churchill once said, "Democracy is the worst form of Government, except for all the others."

 

Or you can go the way of Night Shift Brewing and start your own distributor to help yourselves and other breweries: http://www.nightshiftdistributing.com/about/#story

One of their founders Rob Burns is also president of the MA brewers guild and is in parallel to creating their own distributor is lobbying to improve the state laws on distribution. It will be interesting to see what happens. Unlike a lot of other brewers they seem to be more interested in shaking things up than tweeting and blogging about it.

 

@JackHorzempa

Actually, I have no problem commenting on it.

I think elements of the 3-tier system are good, and certain elements are woefully outdated. I do believe that franchise laws should protect wholesalers from breweries up and leaving their distributors without penalty. So while I believe that a brewery should be able to terminate a wholesaler at any time for any reason (or no reason at all), they should only be able to do so by paying the wholesaler the fair market value of the distribution rights. And that fair market value should be pre-determined or arbitrated by the court system so the termination process does not get bogged down for years.

One thing that has to go is "mandatory" participation in 3-tiers for breweries. Due to changes in technology, it is no longer necessary for some breweries to use a wholesaler to get their products to market. Some breweries in today's world have the option of going direct-to-consumer, so the wholesaler in this instance is an unnecessary middleman who ultimately extracts money from the end-user (beer customer) by charging higher prices.

If you zoom out and think about this intelligently for a second - the current distribution laws are a result of changes in technology as well, except those changes occurred from 1919-1933, during Prohibition. When Prohibition was repealed, they put in place the foundation of what we call the 3-tier system.

These laws were based upon the rapid changes in technology of the proliferation of the automobile, which enabled "local" breweries to distribution nationally, and use technologies in mass media (radio and eventually television) to tell their story to their customers.

Nowadays, social media and other logistical fulfillment services no longer make it necessary for certain brewers to use a wholesaler. They can sell their beer directly to customers, which results in certain instances better operating margins for the brewery, fresher beer for the customer, and better prices.

 

Nice summary.

So a follow on question.

If brewers were able to sell by, say, via electronic ordering and physial package shipping to people in other states than their own, how many brewers would be prepared or able to hire the additional staff or to navigate through the multiple sets of state laws that basically in sure that each of those states collects their taxes on an alcoholic beverage? In other words, how many would be willing or able to deal with multiple tax bills from states other than their own so that each state involved in the transaction would be allocated what they consider their fair share of taxes?

 

We already deal with this, so it would not be any additional work we deal with right now. The excise tax is levied at the point of consumption, so if there is electronic fulfillment, that could easily be ascertained online.

 

Ahhh, do you have a sense of how many other, smaller breweries, are or could be doing that?

 

I cannot give you an exact answer on that. But let's put forth a real-life example here. Let's say you are a west-coast brewery, and you'd like to send your beer to a limited number of customers on the east coast. You are extremely niche and you have small production - but there is some considerable demand for the product, because you make great beer, even if its not at a large scale.

Under the current laws, you would have to sign with a wholesaler, and to ship all the way to the west coast to the east coast is cost-prohibitive unless you can fill entire truckload (which is 20 pallet spots, or about 2,000 cases). The wholesaler then has to sell to a retailer, so by the time the beer gets in your hand, the price is double as to what it was when it left your brewery.

Now let's consider an alternative scenario. Let's say your customers on the east coast want to order direct from you. So they buy the beer online, and the beer gets sent directly from the brewery to your doorstep. Two middlemen are cut out of the equation, and the brewery actually makes a larger operating margin and the customer gets the beer fresh directly from the source (expedited overnight shipping would even be available, at a premium of course).

All of the tools/technology are in place to make this a reality, and the only reason it has not happened yet is because of our antiquated beer laws.

 

Gotcha! But you've cut out one middle man and introduced one new one, the shipping company.

Living in PA I fully grok your point about antiquated laws, but that is changing here, so maybe there is hope for the rest of the 51 other sets of laws.

 

Shane, that truck is a reefer, right?

And that UPS/FedEx Ground/USPS truck is not a reefer, right?

Cheers!

 

In the case of Sixpoint, it is a reefer. We pay the extra premium to ensure our beer stays cold throughout the entire supply chain en route to our wholesaler. I cannot comment on other breweries though.

In your case regarding UPS/FedEx/USPS, while the truck may not be refrigerated, it is quite easy to include a few cold packs in the box while shipping and ship the beer cold from the brewery. It should still be cold by the time it arrives at the customer's house.

But the shipping company would exist with or without breweries using their services. Whereas in the case of a beer wholesaler, their only function is to deliver beer they bought from breweries.

Simple economics would state that its more efficient to make use of existing capacity at scale then to create thousands of individual businesses to deliver beer through multiple points on a supply chain, when breweries can ship direct.