The Coming Distribution Wars

Late last week, the Massachusetts liquor regulatory agency issued an extremely important ruling about one of the state’s distributors.

[The distributor] Craft Brewers Guild spent “approximately $120,000 to pay kickbacks to 12 retail licensees throughout the Boston area, and went to great lengths to hide its knowingly unlawful conduct,” the commission wrote in a written ruling. 

The practice of paying pubs for tap handles is as old as the distribution system*, and if you scratch the surface in any market, you’ll hear rumors of this happening. The Massachusetts case was precipitated by public complaints of Pretty Things–the beloved and now defunct little Boston gypsy brewery–who accused the distributor of taking bribes to supply beer at certain pubs. (More here on that story if you’re interested.)

Every system has points vulnerable to corruption, and in beer, its at the distributor level. About 18 months ago, I did some (gasp!) actual reporting on this. A brewery sales rep confirmed it happens here in the Northwest: “Pay to play absolutely exists in mature markets like the northwest but it’s not typically found in bars except for high volume accounts with few beer choices.” The really insidious thing is that there are so many ways to for a distributor to offer inducements to a retailer. You can follow the link if you want to read about all the work-arounds, but I’ll quote one just to illustrate how subtle kickbacks can be. It comes from a former brewery rep who watched a kickback happen.

A brewery was willing to pay $500 to the distributor’s representative if he could move ten kegs of the brewery’s beer.  This is legal.  As the promotion was about to end, the distributor had sold only eight kegs.  At the last account, he swung a deal so that he essentially dipped into the promo money and sold the two kegs to the pub for the price of one.  (The pub paid for the two up front, and the distributor shared the cost of the keg later.)  

That’s the kind of corruption that’s impossible to police. The Massachusetts distributor was nabbed because they were blatantly buying taps–an easier crime to identify. But given the resources of state regulatory agencies (the OLCC in Oregon’s case), there’s no way to be out there in pubs policing these transactions as they happen.

While none of this is new, it is especially salient at this moment in the life of the beer industry. At the top of the market, we have extreme consolidation. There are only two big players left, and they would like to merge their international activities (claiming to spin off the weaker business in the US to get past the feds’ anti-monopoly concerns). At the bottom end of the market, you have intense competition for retail space.

As I’ve mentioned in the past, the vast majority of recent growth in craft brewing has been small production breweries, not brewpubs. Those little guys may have tasting rooms, but they need to put their bottles on shelves and their kegs in pubs to thrive. There are so many players now that distributors become the gatekeepers for which beers make it to the retail space. This is what Pretty Things’ Dan Paquette was complaining about: his beer wasn’t making it to market. There are a lot of ways for distributors to exploit this brand oversupply by manipulating both what breweries and retailers pay.

Large companies like ABI are already making a big play to control distribution. Smaller companies are going to become desperate to get their beer to market. As more and more breweries come online and more and more consolidation happens at the top, the opportunities to cheat will grow. This is not a story that’s going to dominate the blogs or newspapers, but it will be one of the most important dynamics driving what happens in beer in the coming years.

________________
*Tiny backgrounder: in the US, we have a three-tiered system of beer sales, where a producer (the brewery) sells kegs to a middle-man, the distributor or wholesaler. The distributor then sells to retailers like pubs and grocery stores. This system was designed to protect retailers from the influence of breweries, which have outsized influence in markets like those in the UK. In the craft brewing era, many states have passed laws to allow breweries under a certain size to self-distribute.

from Beervana http://beervana.blogspot.com/2016/02/the-coming-distribution-wars.html

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