Mounting Pressure

 

Chris McClellan

6.23.18

 

BEER HAS TO BE DELIVERED IN TRUCKS. THESE TRUCKS ARE, FOR THE MOST PART, OWNED AND MANAGED BY DISTRIBUTORS. DISTRIBUTORS (ALSO CALLED "WHOLESALERS") ARE BIG BUSINESS IN THE UNITED STATES AND MOST OF YOU KNOW NOTHING ABOUT THEM. THIS IS A PROBLEM FOR YOU AND EVEN MORE RELEVANTLY, FOR THEM. HERE'S OUR TL;DR ON WHAT'S GOING ON.

THE BEGINNING

Good Beer Hunting recently covered a nice portion of this information in phenomenal detail (Part 1Part 2Part 3). All About Beer has a great article as well, but let's quickly set the scene. Beer distributors form the "middle tier" of the three tier system, helping to move your beer from the supplier (brewery or importer),  to the retailer (bar, restaurant, grocery store, etc). Simple in theory. This system was federally established around 1933 when the 21st amendment was signed into law, ending the Great and Noble Experiment of Prohibition. Each state was allowed to regulate the details, including legislation around franchise laws, self-distribution, etc. I won't get into the full history here, and you can read about the background in any of the links above and you'll quickly become an expert. I would highly suggest you do if you're at all interested in that sort of thing.

THE BUSINESS MODEL

Most (not all) traditional beer distributors exclusively make money by selling cases of beer to the retailer tier of the industry (bars, restaurants, stores, etc). For the most part, they don't really care what sort of liquid is in the cases. I don't say that to imply that wholesalers don't care about their supplier partners, but a margin is a margin, so if it comes from a case of Bud Light or Brooklyn Lager, it amounts to a chunk of revenue for the wholesaler at the end of the day. The margin might be a little (or noticeably) better on the case of Brooklyn Lager, as it commands craft pricing, but they sell 100x that amount of Bud Light, so in terms of priorities, you can see where they're focused. The suppliers that make them the most money retain the most mindshare, get access to the best distribution channels, and generally command their attention far more effectively than a smaller supplier does. If you want to hear a hilarious and very real anecdote on this topic, listen to this podcast with the famously outspoken founder of Magic Hat Brewing Company Alan Newman...it's really worth listening to the whole thing, as he puts all his cards on the table. 

None of this information is revolutionary. This is called "selling beer", and it's been this way for a long time in the United States. Small breweries have dealt with this reality for a long time, and large breweries (the two or three biggest suppliers anyway) like it this way.

 

Consolidation, expansion, proliferation...

Number of Beer Distributors in:

 

1980

_ 4600 Distributors -logo.png

2018

_ 3000 Distributors -logo.png
 

35% Decrease over 38 years. Source.

 

Number of U.S Breweries in:

 

1980

_ 92 Breweries -logo.png

2018

_6700 Breweries-logo.png
 

6,600% Increase over 38 years. Source.

 

# of SKUs (beers, mostly) sold by a wholesaler in:

 

1980

_ 190 SKUs -logo.png

2018

_ 1,025 SKUs -logo.png
 

540% increase over 20 years. Source.

Defined by change

It's all over the news. Columbia Distributing is gobbling up every distributor in Washington and Oregon. Origlio buys Bella Vista. Manhattan Beer, the country's largest single market wholesaler based here in NYC, buys Phoenix-Beehive (old news at this point). I could rifle off 10 even more recent articles highlighting the increasing pace of wholesaler consolidation across the country.

We're also seeing a growing number of breweries spin off new distribution companies that can more adequately represent their brands in a crowded marketplace. This isn't a new strategy by the way...Brooklyn Brewery did it in the 90's. Nightshift Brewing did it in Massachusetts in 2017. But it's always a factor when you look at the needs of these brands, their level of current representation, and the mindshare they can realistically retain in the traditional, and enormous, red (ABI) and blue (MillerCoors) houses across the country.

Couple this with the exponential growth of the supplier tier (breweries) and you start to see the challenge here. Huge wholesalers are up to their necks in SKUs they aren't capable of selling, so they shed them. They might shed them because of operational issues, supplier issues, brand stagnation, or a host of other reasons. This consolidation of SKUs at the distributor level effectively cordons off a large chunk of the market to a growing number of smaller suppliers (breweries). Most beer is sold on grocery store shelves (in the business we call this "off-premise" because the beer isn't consumed in the same building it's purchased), and distributors have access to these shelves. The wholesaler can focus on the brands/breweries that make them the most money, leaving a lot of the suppliers out in the cold.

Legislative Influence

The National Beer Wholesalers Association (NBWA) is a powerful lobby in D.C, and they fight for the interests of their constituency very effectively. Most wholesalers are family-owned business full of great, hard-working people. I work with wholesalers on a weekly basis and I can tell you that they're some of my favorite folks out there. They know their business and most of them care deeply about doing it the right way.

But taken out of context, it seems altogether more nefarious. Distributors make money because of a certain set of rules and regulations currently in place, and lot of these rules seem antiquated and unnecessary in 2018. They don't like the laws changing too quickly, and they'll fight to keep the status quo in place. A very recent example of this was the nonsense with the new Guinness Brewery happening in Maryland. Naptown Pint covered it perfectly

 

The Big Picture

 
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Let's take a minute to unpack the pressures that are outlined above.

  • Legislative Change - More and more states are coming to terms with the simple fact that the beer laws on their books are part of a bygone age of post-prohibition law making. They were put into place for very good reasons, and these laws have aged relatively gracefully, given how fast the overall structure of the industry has changed. But...some of them don't make sense any more, regardless of how you choose to frame up the issue. State by state, these beer laws will change, and the distributors will start to see volume moving away from their warehouse floors and toward the direct-to-consumer tapoom model. It's a death by a thousand cuts, and it might take 2 years or 10 years, but it's going to happen.
  • Large Supplier Pressure - There are basically three main enormous beer suppliers (breweries) in the country that sell almost all of the beer out there, at least on a statistical basis. Anheuser-Busch (Budweiser, Bud Light, Mich Ultra, etc) sells more than half, MillerCoors (Miller Lite, Coors Light, etc) sells another large chunk, and Constellation (Corona, Modello, etc) sells a growing chunk as well. Each of these suppliers have hundreds of distributors that get their beer to market, and most of them are tied to a specific distributor. If you're a "Budweiser Distributor", you might be referred to as a "Red House" or "Red Network" in the business...Coors is "Blue House", and Constellation is "Gold House". They really like selling a lot of beer, and their shareholders really like seeing nice quarterly statements as well. But this whole "local craft brewery" thing, along with the fact that the younger generation of beer drinkers simply don't drink nearly as much beer as we all did, is putting a worryingly large dent into their shipment numbers. This causes their main distributors to feel the pressure as well as these large suppliers start to hammer on them, asking more of them, often times when there isn't more to be had. And here's a stiff claim that I will 100% defend - Large, domestic breweries will never get their volume numbers back. Not ever. They will never sell as much Bud Light as they used to. No amount of "dilly dilly" will crack that nut. Not in the foreseeable future. The distributors are put in a place where they're either not able to sell more beer in the market, or their teams don't have the capability to market to the modern beer consumer. I've seen both of these happen many times, and it's not pretty. 
  • Shrinking Demand - I alluded to it above, but folks just ain't drinking beer like they used to. I will confidently tell that interest in great beer is at an all-time high in this country, hence the number of local breweries opening. This is just great. But...in terms of how we measure the health of the category, it's not so great. The pie hasn't gotten any bigger in recent years, and drinkers just getting into their early 20's don't see beer as a great option for some reason (we could write 10 posts about this topic lone). This is everyone's problem, but certainly adds a lot of financial stress to the middle tier of our supply chain. 
  • Lack of Education - I'm not one to make broad statements, so I'll keep this short. I work with a lot of wholesalers on a weekly basis, and I can tell you that most of them are pretty darn good at their jobs. But the formula is clear in the modern industry - People who know more about beer will sell more beer. Wholesalers that take the time to broaden their workforce's perspective on the changing beer industry sell more beer. Their customers will respect them more and they will inevitably be more successful at competing in a very crowded marketplace in the long-term. Distributors need to prioritize this with their staff. 
  • No Consumer Visibility - This is going to sound a little weird, but this might just be the most critical piece in the puzzle. Most beer consumers don't know, or care to know, anything about their local wholesalers. I bet you can't tell me anything about them, and it's not your fault. These wholesalers are local businesses that provide a lot of jobs, and financial backbone, for their communities, and you just don't have any clue who they are. It was, to be honest, in the wholesaler's best interest to stay under the radar until the past 10 years, but now it's a burden to be invisible. This is a public relations issue, plain and simple. As laws change, and the business of beer continues to change, these wholesalers will need advocates. They'll need fans. They need transparency and insight into their business, and they need people to know who they are and why they do what they do. 

Let's put a bow on it

It's not all doom and gloom out there. I'm not taking a hard stance either. We don't know what we don't know, and we just don't know what's going to happen in the next 10 years...but we can make some pretty good guesses. Beer will continue to localize, and drinkers will continue to be more and more picky on where they spend their booze money. The laws will change, and the current generation of distributors will see some major disruptions to their business. This is all going to happen, but the question on the pace of change is still up in the air. I'm a believer, to be honest. I believe great distributors have the ability to make the U.S beer business competitive and fair...but I also believe in change. I love great local beer, and I know that we're building a modern generation of beer drinkers who are raised on such an idea. We'll just have to see how our nation's wholesalers adapt, how they embrace education and professional development, and most importantly, how they support growth in the beer business.

 

Chris McClellan