State laws regarding beer distribution and impact on small breweries

An article in the New York Times (March 30, 2014) titled “Free Craft Beer!” describes the franchise rule in many US states that requires beer manufacturers to choose one distributor in a state to distribute their product. The absence of distributor level competition means that the more than 2,700 beer manufacturers have to use the 1,000 distributors, with a few distributors controlling large territories. The cost for small breweries to drop a distributor if suggested to be significant even if the distributor does not distribute inventory and leaves it sitting in a warehouse. Given that the historical origin of the law was to protect distributors when there were 50 brewers and 5,000 distributors, should the rules be changed under the current conditions ? Should small breweries be dropped from the rule or should the rule be scrapped altogether ? Will changes result in higher or lower costs for distribution ? Should small breweries be allowed to distribute themselves and, if so, what should the minimum volume be set at to ensure fairness ?

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19 Responses to State laws regarding beer distribution and impact on small breweries

  1. Well-intentioned government laws originally designed to protect a weak down-stream member of the supply chain that is now abusive and bad for consumers…sounds like auto dealerships! Take a look at what Tesla’s distribution model is revealing in that industry, then apply that learning to beer distribution and I think we have the same conclusion: decrease regulation to benefit consumers.

  2. Christine Rasquinha says:

    When this law was developed, it had a specific purpose – to reduce the power of brewers/sellers in this case to the buyers/distributors. Now that the economy in the brewing industry has changed and there is more competition amongst beer manufacturers, the law has become outdated. The current law inhibits smaller beer manufacturers from competing because they lack well established brands compared to the larger companies. As a result, their selling power to the distributors is lower. On the distributor side, selling a less well-known brand costs them more than selling an established brand; hence, it is cheaper for the less known brands to be kept in the warehouse. The rule should be removed for small distributors because they are currently not able to compete against larger companies. In order to facilitate equality, the less established brands should be allowed the option to seek multiple distributors to compensate for larger brands partnering with distributors that have large territories. For the smaller breweries, this may increase their costs; however, it would most likely still cost them less than if they distribute their product themselves and provide them higher profits since their distributor partners would have less leverage and have a greater desire to place their product on shelves.

  3. Bryan Gissal says:

    The costs for beer are higher than they should be because of the laws that require distribution of the product to flow through a three-tiered system (i.e. the middleman distributors). Eliminating this three-tiered system is problematic because the distribution is governed by the states via alcohol control boards. The states ultimately control who can distribute beer, and when it comes to protecting the interests of in-state breweries, many alcohol boards may be pressured to shelter the interests of the in-state breweries at the expense of out-of-state ones. But this favoritism would violate U.S. Interstate Commercial laws. So on what basis would small craft breweries be able to market their product directly to consumers otherwise if they need a state’s blessing to do so? I think the answer may lie in allowing craft breweries to partner with multiple distributors which span states and geographic markets. Breaking up a distributor’s territory is one option. The distributor law is what I think indirectly controls how big breweries may get so that they do not compete with the modern majors (Anheuser-Busch InBev, SABMiller, Heineken, Carlsberg, etc.) Breaking this distribution scheme up will shore up a lot of resistance amongst those very big brewers. But it can be done. Perhaps if the craft distributors found a way to collectively unionize their distribution, it would allow the middleman to be eliminated.

  4. Sarinah says:

    To answer the question on whether small breweries be allowed to distribute themselves would mean to review the current state laws. Taking data from http://www.brewerassociation.org, self-distribution or the ability of a manufacturer to do direct sales and deliveries to retailers is not allowed in the following states: Alabama, Delaware, Florida, Georgia, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, Nevada, South Carolina, and South Dakota.

    The next question of what should be the minimum volume to ensure fairness still needs to be addressed because some states that do allow self-distribution have different “barrel caps” as seen below:

    Arizona (A.R.S. § 4-205.08) – 1,240,000 gallons
    Arkansas (A.C.A. § 3-5-1405) – 60,000 barrels
    Idaho (Idaho Code § 23-1003) – 30,000 barrels
    Illinois (235 ILCS 5/5-1; 235 ILCS 5/3-12) – 65,000 gallons
    Indiana (Burns Ind. Code Ann. § 7.1-3-2-7) – 30,000 barrels
    Maryland (Md. Ann. Code art. 2B, § 2-208) – 4,000 barrels
    Michigan (MCLS § 436.1401) – 1,000 barrels
    Minnesota (Minn. Stat. § 340A.301) – 20,000 barrels
    Montana (Mont. Code Anno., § 16-3-214) – 10,000 barrels
    New Hampshire ( RSA 178:12; RSA 178:12-a; RSA 178:13) – 5,000 barrels
    New Jersey (N.J. Stat. § 33:1-10) – 300,000 barrels
    North Carolina (N.C. Gen. Stat. § 18B-1104) – 25,000 barrels
    Utah (Utah Code Ann. § 32B-11-503) – 60,000 barrels
    Wisconsin (Wis. Stat. § 125.29; Wis. Stat. § 125.295) – 1,000 barrels
    Wyoming (Wyo. Stat. § 12-2-201; Wyo. Stat. § 12-4-412; Wyo. Stat. § 12-5-401) – 15,000 barrels

  5. David Page says:

    Requiring microbreweries to pick one distributor and stick with them is ludicrous. If smaller breweries do choose to begin distributing their products, this law seems to allow distributors to lure them in with the illusion of competitive pricing only to take advantage of the power they have over the brewers once they have been selected. Additionally, with 2700 breweries competing for their services, I’m sure the 1000 distributors would have no shortage of customers if the law was done away with. I agree with Kyle Harshbarger. Deregulate this industry and let laissez faire economics do what they do best.

  6. Bishal M Ojah says:

    Beer is a restricted commodity .i.e. there are various compliances such as legal drinking age, retail licences, etc which must be followed by all consumers and retailers. Because of this franchise rule, it is easy for law enforcing agencies to keep a check on retailers and prevent unauthorised sale of beer to underage and uphold other laws regarding alcohol. Also because of single supplier, products in the market are easily traceable and hence brewers can be made accountable for any quality issue. Thus it prevents quality compromise of the products.
    As far as competition and prices are concerned, multiple distributorship has the potential of reducing prices but beer is commodity which has very high turnaround and so it the quality of beer which defines its sale and not price, competition or size of the brewery.

  7. Murilo Siqueira says:

    If the idea of the law was to protect the distributors, it doesn’t seen to be very efficient, since the number of distributors fell from 5,000 to just 1,000. However, in my own country experience, if you still want to protect distributors, it must be enforced that a brewery has to use this channel, otherwise they will just try to integrate their distribution systems. AB InBev has one of the most efficient sales/distribution operations in Brazil, and they were able to increase overall profit by increasing sales and improving transportation efficiency by almost 25% in the past years, by vertically integrating distribution.
    For big companies, it may be easier to integrate, because they have a broader view of the entire market, and by integrating, it doesn’t mean hurting the distribution market. In most of the cases on integration, the company usually acquire the distribution channel and its expertise, then modifying it to fit its purposes.
    I think the smaller breweries would benefit the most of having a outsourced distribution channel, since the distributor would have much more knowledge on this segment, being able to provide useful insights on the small brewery opportunities of expansion etc., leaving it to the brewery to focus on its core business.
    Said that, it is not expected that small/local breweries would compete against huge players like those quoted by Bryan (which already have the advantages of economics of scale and its own channels), but to focus on niche and local markets.

  8. Nikhil says:

    When we take a decision of abolishing a law or making a change in law we look at its impact on each and every stakeholder.As per the data from America’s Beer Distributor [https://www.nbwa.org/about/what-beer-distributor] the beer distribution industry provides the employment to 135,000 solid jobs with good benefits to people who live in their communities .These distributors sometimes fund the brewery to scale the business and also ensures the infrastructure, capital and personnel small brewers need to reach a wide network of retailers.So the law needs some tweaking instead.It should give more freedom to small breweries to seek alternate distribution solutions.In Indian beer industry context the craft beer industry is emerging and many of the breweries are distributing the beer through their own restaurant chains and by partnering with other restaurants.The problem in USA is large number of breweries and limited distributors.One of the solution small breweries should adopt is to make alliances and make a distribution channel of their own.Single small breweries lack capability to scale the business to different geographies.So the law should actually be tweaked in terms making this process easy.Also small breweries should have certain relaxations(ensuring fair trade practices) on off boarding and on boarding distributor channel.

  9. Nathan Lowe says:

    I feel that the most effective approach would be to eliminate this law entirely because of the increased overall competition in this distribution market. The law was created at a time when the distributors were quite plentiful, and the small handful of brewers had a considerable amount of the bargaining power. However, since the number of brewers exploded and there are only 20% of the original distributors left in this market, the balance of competition has become much more balanced. Without this law, breweries would be able to pair with the distributor that best meets their needs and ability to pay for distribution, as the balance of small to large brewers is most likely similar to the balance of small to large distributors.
    In terms of distribution costs, the costs for smaller brewers will most likely decrease because they are able to pair with the best distributor for them as opposed to being forced to choose from a limited set of options. Additionally, opening up the distributors to competition will allow the breweries to engage in competitive bidding, which will further decrease costs. Despite these decreases in costs, small breweries (in particular those who sell brews over state lines) should have to continue to distribute via warehouses because of the potential lawsuits regarding the sale of beverages across state lines, which could prove just as costly has a poorly matched distributor relationship.

  10. Emily Zhang says:

    This law’s main purpose was to balance beer market’ supply and demand. However, government should let economic market to do this job instead of itself. Considering the current situation, yes the rules should be changed. Local/small brewers should be able to sell their beers directly to customers or to multiple distributors. However, considering what Bryan said, due to some governance issue, maybe they are not allowed to sell directly to customers. Under this assumption, government should allow small brewers sell to multiple distributors in order to compete. Since small brewers have more choices, the cost to distributors will be lower. The negotiation power of distributors becomes smaller.

  11. Man Lu says:

    The rule is absolutely outdated. The smaller breweries should be dropped from the rule.
    The situation is changed. There are more breweries than distributors, which means the competition in the breweries is more intense than before. As for the large breweries, the rule is good to contain them. The rule increases the cost of smaller breweries since they cannot distribute beers by themselves. As for new breweries, it may be difficult to sign a distribution contract, because the distributor is not willing to open up a new brand for market channels, will bring a lot of risks. The inevitable involvement of the distributor will lead to the final product to the consumer when the price rise, the producer’s profits will be reduced. Beer needs to keep fresh, and after the distributor’s hand will undoubtedly increase the time of beer sales. Moreover, Because the breweries cannot easily break the contract with the distributor, they may be trapped in poorly performing or negligent distribution companies that are the only companies that are entitled to sell the brewery beer.

  12. Amitesh Mishra says:

    Although the cost of beer has gone up due to the three tier system, it does provide a couple of advantages.
    1. In a way it benefits small breweries and producers because if direct sales were allowed then large retailers such as Costco and Walmart would purchase very large quantities in order to get the best price. In such cases only big beer companies and breweries would be able to make it to the retail store shelves, whereas in case of distributors they have an incentive to provide a diverse selection of beers.

    2. Benefit to retailer as the distributors reduce the inventory costs for the retailers by managing inventory levels of various beers. And unlike some liquors and wine, beer is a perishable product and having a distributor makes sure that the retail shelves have the fresh beer available.

    So I don’t think the laws should be changed entirely such as removing the 3 tier system but rather reduce/remove the power out of the hands of the states and allow more distributors to operate across the states. This might allow for more competition among the distributors and could reduce the price of the beer by a small margin.
    Allowing direct to customer sales for small breweries might not be a good solution as in the old days producers were monopolizing the market, it could be done by the distributors with restaurants or bars now. A small brewery might not be able to sustain or manage the direct delivery supply chain too.
    What can be done is provide small breweries with tax benefits to provide an opportunity for them to expand. As to what should be the minimum volume to have fairness in any type of consideration is difficult to gauge. A lot of it would depend on what is the niche or market that the breweries are targeting and how quickly are they capturing market share.
    Justice department already took action in one of the biggest mergers when it required Anheuser-Busch InBev to Divest Stake in Miller-Coors and Alter Beer Distributor Practices as Part of SABMiller Acquisition. Actions like these are required to be taken to keep the beer industry diverse and alive.

  13. Saravana says:

    These laws were established to protect the distributors in 1970’s when the number of distributors and brewing companies were approx. 5000 and 50 respectively. In 1970’s, many small distributors control distribution of beer and scale of distribution was very small. In 2014, number of distributors has reduced to less than 1000, while the number of brewing companies has increased to approx. 2700. During these years, distributors were consolidated due to competitions, mergers and acquisitions resulting in fewer larger distributors controlling wider territories. Companies such as Anheuser InBev, Millers, Heineken USA, etc. have widely recognized brands in their product portfolio and invest largely on their selling expenditures (example: sales target incentives, discounts etc) .
    On the other end, smaller brewing companies cannot invest on selling expenses on par with larger companies. Hence by default, distributors are motivated to sell more of bigger brands while keeping other beers on shelves. This situation results in beers with unique flavor and taste not reaching wider audience. These state laws were made to protect distributors and currently, the survival of smaller breweries is at stake. Hence, I believe that these laws have to be changed such that smaller breweries can establish their own downstream (combined with many smaller breweries or separate), can do direct supplies to the customers (through online orders & e-mails), manage their supply demand gap effectively.

  14. Adam Davis says:

    The issue of breweries having a limited choice of beer distributors is an important one, but perhaps a slightly larger issue is industry consolidation among large brewers. The New York Times reports that about 75% of the beer that Americans drink is sold by InBev and MillerCoors. Smaller brewers comprise only 8% of sales. As with any form of industry consolidation, this trend limits choice and increases prices. It is these large companies that incentivize distributors not to work with craft labels. The rule should be scrapped, but this will not alter the ever-present issue of anti-competitive behavior in the industry.

  15. Xin Wen says:

    As I think, the rule should be changed and also the small brewers should be allowed to be dropped from the rule. Small brewers could sell the beer by themselves and use their own distribution. By doing this, the cost will decrease since there will be a competition among these small brewers. Meanwhile, the shipping lead time might be shorter, because the small brewers can directly sell to customers.

  16. Shashank Chinnolla says:

    The above mentioned article and situation are something similar to what we talked about in our previous lecture with regards to the Jones Act. When these laws were implemented, the current market situation was taken into consideration with a foresight of a few years. But as stated in the article the dynamics of the situation has changed completed with a lot of new breweries entering the market. The amendment to to the law should be in such a way that the smaller breweries are encouraged and also not to endanger the overall growth of the market. Even though the distributors play a crucial role in the actual sales of the beer by prioritizing the preference for the product they final the highest profit from, they should not be in a position to decide what beer lands in the hand of the customer. By amending the law, newer supply chain models would be encouraged effectively seeing to it that a wider base of customer is reached at a more affordable retail price.

  17. Senthil says:

    I agree to the fact that the rules need to be changed to fit current scenario. Back then, the franchise rule was implemented to save distributors. But now, the rule has to be changed to save small and new brewers. Already states like Washington and Michigan are allowing small brewers to distribute themselves and few other states are pondering to change rules for small brewers. This would give equal opportunities for all brewers to capture the market based on the product quality and regardless of size. Since, the customer expecting more choices now a days, the customer will be in a position to choose the brand they want, if the rules are changed, instead of distributors deciding it randomly.
    With the small brewers begin to self-distribute, a player (distributor) in the distribution network is eliminated. Therefore, the distribution cost would go down. The minimum threshold value to set for ensuring fairness will be 15,000 barrels (460,000 gallons) or less. This is the requirement for classifying a brewery as a Micro-Brewery.

  18. Koustuv Pal says:

    Because the number of brewers have grown in number from the erstwhile 50 and probably the number of distributors as well there is no reason to keep the law as it is for a welcome change.
    Small brewers should be dropped from the rule or better instead be given a choice to change distributors or may be the distributor could be asked to share the cost of lost sales with the small brewers in case the inventory is not released on time.
    Obviously with increased number of distributors competition will increase and hence costs of distribution will go down.
    Small or large brewers as a company should be given the right to distribute if they so want and the economies of scale permit them to

  19. Xiaodan Liu says:

    The rule should be changed under current situation. The main purpose of the rule was to regulate the market to avoid mass market. However, in today’s situation, it is better to let the small breweries to distributor product by themselves, or give them the permission to choose the distributor they want. The cost for small breweries to pick the assigned distributor will be much higher compare with them choose the distributor by themselves. The distributor will also prefer large breweries since no matter how many product, the distributor will need to provide the same service,( labor, transportation, inventory cost, etc). Instead of spend time an labor on small amount of beer, the distributor also not willing to serve for small breweries. The distributor keep the beer in the warehouse instead of distribute them. So at current condition, small breweries should have the chance to distribute by them selves or pick the distributor they want.

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