Beer Business Unplugged

Last week it was announced that Scott Metzger, the founder of Freetail Brewing Co. of San Antonio, had, after 10 years, left the company he created.  Despite Freetail’s success, Metzger brought in the Turner family two years ago to provide support in growing the business.  It is hard to know if this was part of Scott’s initial exit plan, but either way, Freetail will benefit from the increased support provided by the Turner family.

Freetail, like other breweries that have sold to a major brewery or capitalist, will grow in the short term. The question is, how do distributors see these somewhat successful, local breweries as continued players in their portfolios?  Which would be of more interest to a distributor: a start-up local craft brewer or an established, successful, imported brand that had never attempted to develop the U.S. beer market?

Even if the local craft has the financial support, experienced team, lab, brewpub, and commitment, the distributor might look at the local brewery with some skepticism.  Will that craft sell or will it fold?  How much time, effort, and money should be invested in this brewery?  If the brewery succeeds and sells out, will it sell out to one of my current suppliers?  Remember what happened to Goose Island, Ballast Point, Lagunitas, Revolver, Karbach, Golden Road, and others who became a key part of their buyers’ companies, a move which made their wholesalers happy.

There are other crafts that employees purchased.  Full Sail was acquired by their employees, who in turn sold the brewery to an investment firm, thereby maintaining their jobs.  New Belgium employees still own their brewery.  These breweries and others continue to do well.  But at what point does the distributor take a risk and at what point are they forced to draw the line?

This summer, after almost 100 years in business, Great Western Brewing Co. of Saskatoon, SK, Canada brought their beer into the U.S.  On the surface, a distributor might look at Great Western as a local craft.  Great Western is the predominate brewery in that part of Canada with outstanding products and a top brewmaster.  Its brewing capacity is well over 300K HL. Unlike a number of crafts, the Great Western strategy is to grow and build their volume while maintaining their long-term ownership.  They know building a U.S. market will take time, and they are committed to doing so with a strategy.

The odds are that Scott Metzger will return to the industry in some capacity and, of course, Freetail will continue to be a viable brand for its wholesalers.  Great Western will expand in the U.S. as planned.  The success of either brewery, like other breweries, will be tied to their commitment.  In the end, that is the distributor’s dilemma.

Get out, stay out, and don’t come back!

During the 60s and 70s, wholesalers represented only one brewery and the future of that wholesaler depended on the success of that one brewery.  Partnering was critical, and if the marketing did not connect with the consumer, both the brewery and the wholesaler felt the negative consequences.  The wholesaler had little choice but to support the breweries’ plans.

As previously discussed, today’s wholesalers spread their exposure across many suppliers and brands.  If one supplier hits a bump, the wholesaler might feel a slight repercussion, but the negative experience will not adversely affect the wholesaler.  Today’s model also allows wholesalers to take a more aggressive stance against a vendor when the vendor’s marketing or programs are questioned by the wholesaler.  Partnerships are strained and tenuous at best.  One really must question whether the relationship between the wholesalers and the brewery could truly even be considered a partnership.

During the summer months, majority of vendors develop their annual budget and marketing plans for the upcoming year.  Once approved internally, the vendor presents the upcoming years’ plans to the wholesaler.   These plans, which are created by the vendor, are based on the goals and strategies of the vendor.  The vendor has built their future around certain platforms and has invested their dollars against that strategy. In the business meetings, the wholesaler has input and many times these plans are modified, but typically the core plan remains.  Only when the strategy totally fails are the business plans changed.

Recently, a major AB distributor notified their beer vendors of a wholesaler–initialed price increase. The increase included price points and margins that the wholesaler was not only taking for themselves but, also what they were allowing their vendors to take!  This even included the date the beer price was to increase.

There was no discussion with any of the vendors as what effect this increase would have on their 2019 market planning, goals, or strategies.  The increases, which were deemed final, were focused on all keg sizes.  One wonders if ALL their vendors were affected or just a targeted few?  When a vendor has questioned the wholesaler in the past, the wholesaler’s continued response is “this is the policy.”

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 for most commercial situations in the U.S.

Simply put, if the wholesalers’ pricing has a negative effect on the vendors’ products, the vendor may have the ability to take legal action against the wholesaler.  If that happens, then who wins?

Alliances and partnerships produce stability when they reflect realities and interests.