Beer Business Unplugged

Looking back on the beer industry over the past decades, it is difficult to grasp the number of changes that have taken place. Changes which have affected all three tiers. One change that has become an almost daily function is the importance that lawyers play in navigating the business. While it is quite common for large, multi-state wholesalers to have in-house counsel, many smaller wholesalers and craft brewers must employ outside legal help. This has created an added expense since many lawyers are unfamiliar with the federal and state laws, coupled with a lack of knowledge of the inner workings of the beer industry.

I met Steve Goldrainer in 2006, when starting as President of Warsteiner Importers Agency. At that time, Steve was the compliance attorney for the agency.  Even then, Steve was part of a vanishing breed in the beer industry. He had begun his professional career on the docks at Hudepohl-Schoenling Brewery in Cincinnati. He started working at the brewery loading trucks, sweeping, and washing the brewery floors. Over time Steve was able to work his way up thru the ranks to become the Import/Export Operations Manager. As the brewery grew and expanded, Steve became more involved in the legal requirements of each state and realized that there was a true need for in-house counsel. He applied for and was accepted into law school and after graduation and started the legal department at Schoenling. Because he had worked in many facets of the brewery, Steve had an increased understanding of the industry’s inner workings. This was obviously created a win-win for both parties.

When Schoenling Brewery closed, Steve set out on his own and in 1998, founded, Keldon Consulting where he specialized in compliance law for importers, brewers, craft start-ups, spirits, and wineries. With his background in the beer industry, coupled with his law degree, Steve established strong relationships with the TTB office and was frequently able to expedite or even hand-walk label approvals, as necessary. His guidance proved invaluable to his clients. Steve’s business expanded quickly, and today Keldon employs 11 professionals who handle the legal requirements for states now including states that have legalized marijuana.

Unfortunately, Steve’s life took a dramatic turn while driving home one day. At an intersection, he was hit by a car speeding from a Dollar store robbery. Though he survived the car crash, Steve’s injuries were catastrophic and resulted in severe bodily injuries. While eventually able to return to work, the crash injuries have taken a toll on Steve’s overall health and he has decided to begin the retirement stage in January of 21.

Outside of the beer industry, Steve and his family have a long history of military service and his family has work tirelessly in supporting veterans. Beer and veterans are Steve’s passions.

Steve’s understanding of the beer industry and its inner workings were the key not only to Warsteiner success, but that of many other beer companies in the industry.  Though he is retiring, Steve will keep his finger in the industry. This is a good thing. It is rare to have someone with Steve’s experience helping the many beer companies in need.

Steve Goldrainer, the legal eagle!

2020 – Steve Goldrainer – Hudepohl-Schoenling Brewery/Lawyer

2019 = Jim Cline – Rogue Ales

2018 – Ray Teutsch – AB Distributor

2017 – Charles M. Duke, Jr. – Coors Distributor

2016 – Carter S. Huber – Schlitz/Miller

2015 – Albert Jaenicke – Hops

2014 – R.D. Hubbard – Coors Distributor

2013 – George Henricksen – Royal Imports

2012 – Diane Fall – Warsteiner

THIS IS THE LAST POST OF 2020.  I WISH EACH OF YOU A HAPPY HOLIDAY SEASON AND A MERRY CHRISTMAS.  NEXT POST WILL BE IN 2020.  

This month, the Coca-Cola Company announced that it will eliminate almost half of its 500 brands to ensure room for future offerings. This includes the elimination of Tab, the industry’s first diet cola which now occupies less than a one percent share of the soft drink market. Why has it taken Coke so long to make this move considering the successes of Diet Coke and Coke Zero?

The irony of Coke’s decision to trim its portfolio is the opposite of what is currently happening within the beer industry. Not a day goes by without an announcement of a joint venture between a major beer supplier and another non-beer beverage company. It seems there is a rush-to-market by many suppliers within the beer industry to expand and develop new products. Even more unique about these deals is that the JVs are frequently with a major vendor, where in the past, many non-ALCs simply worked a deal with the beer network. Typically, many of those arrangements ended poorly with the vendor leaving the beer network hanging. Now that arrangements are executed directly with the breweries, the wholesalers have an added sense of security and contract protection tied to the breweries. Such arrangements are a game-changer for wholesalers.

In addition to the various JVs, the industry should take a step back and look at what more the breweries are doing. The breweries themselves are creating teams of professionals who are executing the expansion of new products, many, though not all of which are line extensions. Something will have to give in the middle tier. How will wholesalers structure their companies to handle this volume expansion? Can, or will, wholesalers create departments, divisions, or teams to market and develop all the new products? Will it hurt their core business?

Reyes, Columbia, Glazer’s, BEK, L&F, and others have the funding and structure in place to go to market with the new products. Other medium and smaller wholesalers, however, might not, or cannot structure their companies to accommodate the increased volume. Some major brewers, once lagging in new products, are now offering a slew of new or JV products and pundits are asking if it is too much.

Before Covid-19, the industry had started a slow and methodical move from beer to beverage companies. While that transition had been evolving over time, the virus expediated the shift. It is no secret that many wholesalers have reduced or eliminated suppliers, brands, and SKUs during this time, and many crafts have simply gone out of business or been reduced to strictly brew pub status to remain in business.

It is impossible to project how the beer industry will look in the future, but one thing is certain, it will certainly not be your father’s beer business!

We really cannot forecast that well, and yet we pretend that we can.  But we really cannot.

It took several years after Miller Lite rolled out that it would sell as almost everyone doubted that it would. Once it became apparent that Miller Lite was the real deal, all the other breweries jumped on the bandwagon.

The big nationals went all in, first it was Budweiser Light, which as we all know, struggled to gain traction until the name was shortened to Bud Light. Coors Light, in their test markets, also struggled but only because the can color was similar to Coors and confused the consumer. Coors Light went to a silver can and the brand took off. Finally, Schlitz, had numerous issues with a light beer having to reintroduce it over and over. Schlitz could never gain any traction even though this was in the 1970s, years before Schlitz’s QA problems sunk them.  By now all the national breweries and almost all regional breweries brought out their version of a light beer. Almost all of these lights were line extensions of the brewery’s core beer.

By the end of the 1970s, light beer was flying as retail cold boxes all changed to reflect the category.   In the 1980s, as the imports became a factor, most of those brought out light beers starting with Corona Light. These imported lights had a struggle in getting traction, but it did happen. Even Heineken, years later, finally had a hit with Heineken Light. Many imported lights disappeared as their brewers and imports did not have the resources to compete.

The success of Michelob Ultra also has created a market for low carb beers and with the possible exception of Corona Premier, most low carb beers died. This is especially true with those breweries who choose not to line extension their low carb beer with their core brand but to create a new label. This is true with Coors’s effort along with Heineken. Seltzers, this decade’s light beer, is now going through the same steps as it took several years to see that seltzers were not a fad but here to stay. A recent Labor Day visit to a local Total Wine, showed that seltzers owned all the end caps however unlike last year, the number of different and new seltzers was incredible.

Around 5 years ago, one could shop a Total Wine and be not only amazed at the number of crafts, one could never guess who most of the breweries were or where they came from. Today is the same with the seltzers. Every week there seems to be more and more new seltzers hit the market.

AB, MillerCoors, Constellation, Boston, and Mike’s along with some other large brewers and regionals will survive. As with all the light beers, soon many of the new seltzers will die as their resources are limited and they are not able to separate themselves from the masses. How are these seltzers being able to get through the clutter and to the consumer?

Crafts might take a step back and look at the big picture. If seltzers eventually hit a market share of 15% and as big as that is, that means that 85% of the business is still beer!

In this business you can’t make any plans!

Over the years, many of the articles posted on this site have been designed to illustrate that history does, in fact, repeat itself. Much of what has just taken place in the beer industry has roots in the past. In other words, the industry has “been there and done that!” Recent articles within the industry have interviewed beer veterans, and many have had similar comments: “In all my years, I have never seen the industry in this situation.” This is true based on the fact that most of these individuals were not around in the late 1960s or early 1970s. The Covid-19 crisis has created shortages of brands and packages. Imports, especially Mexican imports, have had shortages created by the shutting down of breweries. The pandemic ramped up so quickly that wholesalers and importers did not have time to build their inventories.

In the summer of 1969, AB brewery workers decided to go on strike, and in just a matter of days, the market was out of Budweiser products, both packages, and draft. Remember, there was no Bud Light at this time. While in college that summer, I worked for a Coors distributorship. Coors, which was not on strike, dominated the market share in the 10 other states where they were selling. Because Budweiser had been depleted of their inventory, and the demand for Coors became greatly heightened, they, too, were running low on inventory and had to allocate beer.   Employees would arrive at the warehouse each morning to find the place empty; similar to what is occurring in today’s warehouses. Trucks filled with Coors, having been loaded the previous night as the train cars were spotted and then unloaded, were ready for delivery. Each retailer received only 10% of their previous year’s order. The amount of product was noted on a computer printout obtained by the driver/salesman. Needless to say, many retailers were upset that they could not get the supply of Coors that they had requested. In protest, some retailers covered their windows with butcher paper while others simply told the D/S to leave, thus making things easier on Coors as that allotment of beer could then be sold to the next retailer.

In 1969, Pearl was the largest selling beer in Texas. It was Schlitz, however, that took advantage of the Budweiser strike and soared to the number one sales position in the state. The subsequent summer, AB brewery workers again went on strike and 1970 became a repeat of the previous year. While the summers of ‘69 and ‘70 were not like today’s pandemic-created environment, both situations created out-of-stocks.  This is especially the case in bars where kegs have virtually disappeared, just as they did 50 years ago when we could sell every case on the truck and not have to rotate stock as the stores were consistently out of beer.

Following the summer of 1970, many regional beers went out of business. The same is happening today in the craft market. Fifty years ago, those breweries that were able to hang on, lost market share to the national brands and when AB’s strike ended, the monster brewery returned aggressively.  In our current environment what is accelerating is the seltzer segment, and like the situation with light beers, which were testing in 1971, once that new segment became a hit, sales skyrocketed. We can see a similar situation in today’s seltzers.

We can make the case that this period in history is not the same as the AB strike in 1969-1970, however, just as happened after 1970, once the virus is conquered, the industry will be changed. Count on it! Maybe we will relive another beer shortage 50 years from now, but I am pretty sure I will miss that one!

Everybody has a plan until they get hit in the mouth.

Decades ago, the term partnership in the beer industry meant something.  There were a number of national exclusive houses that were single brand wholesalers, predominantly AB, Schlitz, and Coors.  The same was true for regional beers. For example, many Pabst-only and Hamm’s-only houses were located in the mid-west and exclusively carried those brands.  Chicago had Old Style distributors and both the east and west coasts had their own key houses.  At one time, a partnership existed between both the brewer and the distributor. This relationship was critical as the success of one was dependent on the success of the other. There was nothing else to fall back on for support.

We all know, however, what happened:  the onslaught of AB, the rise of Miller, and the expansion of Coors, coupled with multiple mistakes by regional breweries caused a massive consolidation, first with the wholesalers, and then later with the brewers. Along came the rise of key imports, and soon crafts started to become a factor. Wholesalers quickly represented 20, 30, or more vendors. The industry had changed.

AB, with close to 50% share of the market, used an incentive to keep its wholesalers exclusive, a move which was successful. By 2008, when InBev took over AB, more than 70% of the AB wholesalers were exclusive in the U.S. This program benefited both tiers of the industry. Many AB distributors’ owners were loyal to Augie Busch III, as he had made them rich; while the brewery also benefited from the fact that these wholesalers were exclusive. Obviously, there were exceptions to this exclusivity, predominantly in rural parts of the country where a wholesaler had to have multiple brands to survive. But this was frequently the exception rather than the rule. Soon after InBev took over ABI, the wholesaler incentive program ended, which basically opened the door for all AB houses to begin adding new beers. This continues even today.

These changes over the decades have altered the meaning of the word partnership and the definition of a partnership between a brewer and a wholesaler in the 1960s is much different than the meaning in the 2020s.  A longtime beer industry executive said many years ago that there is no longer a partnership between wholesalers and brewers, that the relationship now is purely business.

Multi-brand distributors, protected by self-induced state franchised laws, are in the position to squeeze out many of their vendors. The beer wholesalers today are diversified and are not as dependent on only one brewery as they were in the past. If a brewery developed a strategy that conflicted with that of the main supplier, the wholesaler might not execute the breweries’ strategy. This could aptly apply to a supplier’s pricing strategy.

Leegin Creative Leather Products, Inc. v. PSKS, Inc. 551 U.S. 877 (2007), is a U.S. antitrust case in which the United States Supreme Court reversed the 96-year-old doctrine that vertical price restraints were illegal per se under Section 1 of the Sherman Act.  The aforementioned case replaced the older doctrine with the rule of reason. Resale price maintenance (RPM) is the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer’s product at certain prices: at or above a price floor, or, at or below a price ceiling. If a reseller (distributor) refuses to maintain prices, either openly or covertly, the manufacturer may stop doing business with the said wholesaler. This marked a dramatic shift in how attorneys and enforcement agencies addressed the legality of contractual minimum pricing and essentially allowed the reestablishment of resale price maintenance in the U.S. in most commercial situations.

As the economy slowly returns to a new normal, many of the surviving breweries will be aggressively ramping up their marketing and sales efforts. The continued existence of these breweries will depend on the success of the aforementioned efforts, but breweries that put their trust in wholesalers will also put their survival in those wholesalers’ hands.

Partnership is the way. Dictatorial win-lose is so old school.