BCG: Franchise Laws Help Craft Brewers

FILED JUNE 23, 2014

Dear Client:

The Boston Consulting Group, which has been studying direct-store-delivery (DSD) systems in the U.S. for over 20 years, has come to the conclusion that independent beer distributors protected by state franchise laws have been one of the key driving forces behind the success of craft brewers.

"The U.S. beer market is open, freely competitive, and driven by consumer choice..... The success of small brewers making craft beers is proof of these points." So begins an article based on a study of the beer industry by the consultants at BCG (where Jim Koch got his start). "Despite fears that small brewers can't compete against the scale and reach of large, mass-market brewers, the opposite has proved to be true..... Ironically, small brewers' ability to reach more drinkers has been enabled by the open U.S. beer-distribution system--a system that was once thought to lock out smaller players," says BCG.

Here's why: In other consumer goods categories, economies of scale in distribution are a key strategic advantage to larger players. Large companies with dedicated company-owned DSD systems (ice cream, soda, ice, bread, chips, etc) enjoy "significant benefits of local scale. And large players have multiple advantages, such as being able to make more frequent deliveries, reach smaller stores, introduce new products more quickly, and set up in-store displays, to name just a few." But with the state-mandated independence of the DSD system in beer, smaller brewers can "leverage an effective route-to-market distribution system that was built by distributors and larger brewers over the decades. This open distribution system enables small brewers to avoid significant, if not prohibitive, costs to entry, while also gaining deep access to large and small retailers..... Thanks to piggybacking on independent distribution networks supported largely by the economics of large domestic and import brewers, small brewers avoid much higher distribution costs."

While breweries can demand quality standards, they can't demand exclusivity, particularly in strong franchise law states, making distributors "more than independent--they have certain franchise rights in perpetuity, protected by the state, for the brands they distribute. These protections prevent breweries from using their scale to extract advantages from the distribution system the way that DSD suppliers do. At the same time, the independence of the distributors creates the opportunity for smaller brewers to 'get on trucks' and achieve distribution at a much lower cost per unit than they would otherwise have to pay."

BCG calculated the costs of distributing beer to large-format grocery stores, and found that the average cost to deliver to these accounts in the current open DSD system is $1.40 a case. Without the large brewers and importers, delivering craft beer would cost $4.20 a case, not including costs such as warehousing, administration, and distributor margin. "Given the moderate margins of small brewers, this cost disadvantage would likely get passed through to the consumer--making many craft beers far more expensive and small breweries less competitive," says BCG.

Read the source article here:

Their conclusion: The current open DSD system offers a huge benefit to smaller players. "Regulators of the beer industry, which is one of the most highly regulated industries in the U.S., should recognize that the marketplace is working. And they should be skeptical of complaints (legal and otherwise) that the marketplace favors only large players."


Remember when big grocery chains didn't make any money and Wal-Mart was going to destroy them? Rodney McMullen became CEO of the nation's largest supermarket retailer, Kroger, January 1st. He recently reported his first full quarter and saw that sales and profits "exceeded estimates" which "increased the growth forecast" of an establishment already on track to top "annual sales of $100 billion," per report by Retailing Today.

Rodney's predecessor, Dave Dillon, helped Kroger log 41 consecutive quarters of same store sales growth. Rodney's just-announced Q1 4.6% increase extended the streak to 42.

Overall, Kroger's total first quarter sales increased 9.9% (11.4% rate if fuel sales are excluded) to nearly $33 billion. The company now expects its full year identical store sales to increase in a range of 3% to 4%.

Kroger wrapped up its acquisition of the Harris-Teeter chain earlier this year. Harris-Teeter's sales totaled $4.7 billion in 2013. Not only will the procurement add to Kroger's top line growth, it will open the door to expand into new territories. Due to the acquisition, Kroger now has a store in Florida. And even though they boasted a total of 2,640 markets nationwide in 2013, Kroger is non-existent in states like New York, Pennsylvania, Iowa, Minnesota and Wisconsin.

Private brands are another major growth driver. Kroger's private brands accounted for 27% of unit volume and 24% of dollar volume last year, per story. Those numbers are expected to increase.

Recall our feature last week on the Future of Supermarkets, [see BBD 06-18-2014]. Falling in line, Kroger announced earlier this year a multi-year initiative called Project Mercury. Through this project, Kroger hopes to digitize its entire store and "reinvent the gathering of item-level data, while providing the most accurate data in the industry and allowing customers to be engaged on a whole new level," according to the company.


The Michigan Liquor Control Commission recently held its semi-annual public hearing in Southfield. The Mackinac Center for Public Policy requested the Michigan Liquor Control Commission to nullify Michigan's "post and hold" rules, which require "alcohol wholesalers and manufacturers to post price changes for beer and wine and leave them in place for a specified period of time," per report by Heartland.

"This is just one of many examples of Michigan's archaic regulations that stifles competition, harms consumers and enriches wholesalers," said Michael D. LaFaive, director of the Center's Morey Fiscal Policy Initiative. "It effectively imposes a form of government-facilitated price collusion."

Michael argues these rules generate higher prices for consumers. "The research shows that these rules increase the cost for consumers between 6.4% and 30%, depending on the product. One study showed nationwide that post and hold rules add between 93 cents and $2.24 to the cost of a six-pack of beer and between 39 cents and $1.10 to a bottle of wine."

We don't expect this to go anywhere. People have been trying to attack post and hold for years, to no avail.

Until tomorrow, Harry

"If you have a secret, people will sit a little bit closer." - Rob Corddry

THE 2015 BEER SUMMIT - The Beer Industry Summit will be at The Breakers resort in Palm Beach, FL. January 11 - 12, 2015. Register and more info here:

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