Beer Business Unplugged

During the late 1980s, I was in Distributor Development for Coors Brewing Co. The department had been charged with overseeing a number of special projects.  In addition to owning and managing Coors operations through Ford Street Management, we also helped our wholesalers on special issues when requested by the wholesaler.  On the rare occasion that I was in Golden, I was asked to do other projects, one of which was to assist with the expansion of Coors to new states.

As one can imagine, the applications for any given market could have numbered into the hundreds.  These applications came in all forms and styles, even though the brewery sent a template for the wholesaler to follow.  Some applications came back inches thick and leather-bound.  Some applications were simple and easy to follow.  Regardless, I was amazed that all of the applications were sent in with the understanding of the sizable investment the organization would have to make.   Early in the expansion phase, these were stand-alone Coors operations, meaning the winning group would have to buy land, build a warehouse, purchase equipment and trucks, hire and train staff, etc.   Even in the 1970s, the investment was in the hundreds of thousands of dollars with no guarantee of success.  In fact, of all the South Texas appointees from the mid-seventies, I can only think of one original owner who is still in business.  In many markets, Coors only achieved single digit share, sometimes only a 2%-3% share.

As the brewery expanded east, more established wholesalers were awarded the brand. That still meant a sizable investment in more trucks, refrigeration, people, inventory, etc.   Again, with no guarantee of any success, wholesalers did this to enhance their operations and build for the future.

So the question now is would those potential groups and distributors still apply for a Coors appointment if Coors was charging for distribution rights?  As Yuengling heads west, what would happen if they began charging for their rights to distribute?  Given Yuengling’s great success in Ohio, one might have a new stand-alone Yuengling operation, not unlike the old Coors model.

In the recent legislative session in Texas, while there were many new laws passed to support the growing craft industry, one law not passed was for these new crafts to charge distribution rights for their products.  Recently, when visiting with a successful craft brewery, the brewery indicated that they soon might be charging for their distribution rights.  They were looking at a per case rate, but also offering the wholesaler  a much smaller marketing per case commitment along with better margins.

Would wholesalers focus more on products they paid for then those for which they did not have to pay?  If they had skin in the game would they be more inclined to keep those products then sell them or trade them?  Or will wholesalers attack their state legislatures and get a law passed that prohibits breweries from charging for the brand?  If the later happened, would crafts create a co-op enabling them to get together and start their own operations?  Breweries are now being required by large chains to more frequently come to the table not only to get ad and display activity, but even for distribution rights.  Should the wholesaler help with that or would that be covered in the original costs?

Either way, when charging for distribution rights in states that have strong franchise laws, this could produce an irresistible force meeting an immovable object!

 Some years ago, as Glazer’s stepped up its aggressive expansion into mid-western states, one of their primary targets was Illinois.  Their opportunity to establish a footprint in Chicago came when they were offered a JV with National’s Union Distributors.  Union, had been struggling for sometime and needed help in building a stronger portfolio, which Glazer’s could do for them.  Glazer’s and National became partners, but Glazer’s management ran the operation.  Before the JV, Union had been losing a great deal of money, however, shortly after Glazer’s joined this partnership, Brown Forman and other major suppliers bolted to join Union.  As a result, Union went from losing money to being very profitable.  A JV in a state where there is no franchise for wine and spirits created a profitable company for both Union and Glazer’s.

Recently the WSJ wrote an article entitled “Distillers Fighting to Overturn 1930s Wholesaler Rules.”  The Journal called it “Missouri Liquor Wars” — a raging battle between the world’s largest liquor makers and a family-owned wholesaler. The “liquor war” started when Diageo decided to leave their distributor, Major Brands, and negotiated to move to Glazer’s.  The court ruled against an injunction to stop Diageo from supplying product to Major Brands.  In fact, the judge stated that “Glazer’s got a very sweet deal!”  What is not being reported is that both Pernod Ricard and Constellation Brands terminated their relationship with Glazer’s and moved their brands out, without any compensation to Glazer’s.

You may remember a recent post concerning a situation in Louisiana.  Glazer’s was asking for a declaratory judgement from the state court against Paulaner USA which would enable them to sell Paulaner’s USA brands to the acquiring distributor, Southern Eagle.  Paulaner USA has denied approval because Southern Eagle represents Spaten, Paulaner’s  main competitor in Munich.  Again, what was not explained was the fact that Glazer’s gave Paulaner time to find their wholesaler-of-choice and Glazer’s would sell the brand to that preferred wholesaler of Paulaner’s.  According to Glazer’s, Paulaner could not find a wholesaler that would pay the same rate as Southern Eagle.

Much has been written about these two states, Louisiana and Missouri, and how their respective issues will affect vendors and wholesalers under franchise protection, and to some degree, how the courts interpret these laws.  I do know that more will be written, but before articles are written or opinions given, even by the WSJ, it would be helpful to get all the facts concerning what actually happened on all sides.

Ultimately it is clear, that in any case, whether there is franchise protection or not, wholesalers and vendors will continue to evaluate each other and their respective performance.  The industry can expect more cases like those in Missouri and Louisiana, while domestic sales continue to slip and wholesalers, in an effort to replace volume, will aggressively go after key brands to help them grow horizontally.  While crafts’ growing trends continue, their market share is still small and they cannot replace the loss of domestic volume.

The real point to ponder for vendors and wholesalers is: sometimes change does not mean things are greener on the other side of the fence because “If you don’t know where you’re going, you might end up someplace else.”