Craft Brewers Take on Distributors, Our Take

FILED APRIL 2, 2014

April 2, 2014

Dear Client:

The craft brewers have stepped up their rhetoric against beer distributors this week, as Brooklyn Brewery co-founder Steve Hindy writes an op-ed in the New York Times and an appearance on CNBC characterizing state franchise laws as empowering "distributors to select brands and manage them however they want -- selling those they choose to sell, while letting other brands sit in their warehouses. The only recourse is to sue, and many small breweries lack even a fraction of the resources needed to take on a big distributor in court. As a result, they're stuck with the bad distributor, which severely hampers their ability to perform and grow as a business."

The NBWA, meanwhile, countered that "franchise laws are important because they ensure that beer distributors can act independently, meaning they aren't tied exclusively to one particular supplier and can partner with a wide range of brewers. This independence allows distributors to invest in new brands and get them to market. Brands like Dogfish Head, Deschutes, Sam Adams, Brooklyn, Sierra Nevada, Fat Tire and countless others are great examples of craft brewers expanding because of - not in spite of--an independent national distribution network."

So, who is right? Well, they both make valid points. We have covered both sides of this issue extensively. Distributors maintain that franchise laws have likely accelerated small craft brewers' growth rather than hindered it. As one distributor put it: "We as distributors bleed a little every time we have to give up a brand. Now take a real world example my company has with a new craft entry in our market and apply the carve out to this brewer's success..... We were carrying his brand with an agreed upon goal of 15 to 20 handles and 2,000 case equivalents a year. We gained damn near 60 handles and 5,000 ce's a year. Fast forward to today and he is building a 10k square foot facility and he is in 5 markets using a distributor network we introduced him to. If there was a chance from day one that we could lose his brands, would any distributor have exceeded his volume and handle goals? I certainly would not have."

The point is that nobody will invest heavily behind a new small craft brand if there is a chance they will lose it on a whim. On the flip side, the fact that there are franchise laws gives distributors the leverage against their huge suppliers which allows them to take on craft brands in the first place. Remember A-B's exclusivity ? The very first jailbreaks in the red system were in states with strong franchise laws. And I would submit that the A-B jailbreak has accelerated craft's growth and created competition among distributors to get (and sometimes pay) for craft brands.

So if this is true -- and it is, and the smart craft brewers know it's true -- then why all this caterwauling in the public arena? The answer to me is simple: the craft beer industry is starting to mature, and the owners of craft brewers are also starting to mature. Maturing is a euphemism for getting old. And when people get old they start casting an eye for fishing and rocking chairs, ie retirement, ie selling out.

Remember that craft brewer valuation issue we put out on Monday? One banker called us and told us those valuations were inflated because we didn't take into effect the dampening effect that mismatched distributor footprints have on craft brewer valuations. In other words, bankers and craft brewers who are interested in buying up craft brewers apply a discount to their value if the distributor footprints don't match up, because it's very difficult to change distributors to get aligned due to state franchise laws. Nobody wants to buy two craft brewers if one is in the red system and one is in the blue system and they're competing against each other. That's the opposite of synergy. It's anergy. I just made up a new word. You're welcome.

So as usual, it's all about the money. That's not a value judgment. We all work at our jobs and part of that is satisfaction of honing our crafts and part of that is feeding our families. That second part may not gain us the respect of the Dalai Lama but it's damn important, so you can't blame the craft brewers for following their interests. But at the same time it seems like airing our differences in the popular press can only serve to weaken the entire system which, for the most part, works well for everybody. As Jim Koch once said, we don't all get want we want out of this three-tier system, but we get most of what we need.

What do you think? hs@beernet.com

MORE ON MIKE'S: TV OUT, DIGITAL IN

Yesterday we reported on Mike's 15th anniversary, where president Phil Rosse mentioned "some great digital social activity." Ad Age had another report detailing more on their campaign: Mike's has actually decided to move from TV to an all-digital approach. And though the company spent roughly $18.9 million on TV ads from 2012-2013, according to Kantar Media, they'll spend even more without it, with plans to double last year's paid media investment. It's the latest in a series of big producers doubling down on their digital strategies.

Like TV, Mike's has also left WPP's Grey New York and will "now dole out work to agencies on a project basis." Their latest ad, a digital video from Chicago agency Tri3ect, highlights the brand's 15th anniversary and tags Mike's as a brand that "fuels fun times."

Their overall digital campaign will involve ads on the likes of Woven, Vevo, Buzzfeed, Discovery, the Weather Company, Onion and Complex Media. (Mike's measured media spend last year was about half the $13.5 million from 2012.) That reminds us of MillerCoors' multifaceted approach to digital, with deals on AOL, Comedy Central, Complex, Spotify, the Weather Company and others, also via Ad Age [see BBD 03-19-2014].

As for innovations, Mike's director of marketing activation Sanjiv Gajiwala, said they would introduce fewer but bigger planned innovations, but "be nimble enough that we can respond to consumer tastes." The "Harder line" has seasonal plays, and its year-old frozen pouches will see more flavors, like the latest, Mango Lemonade.

Until tomorrow, Harry

"Concentration is my motto. First honesty, then industry, then concentration."
-Andrew Carnegie


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