People often ask me what is the biggest problem that craft breweries face today. To call a particular issue the “biggest” is nearly impossible considering the many ailments the craft brewing industry faces at present. But there is one issue that stands out to me based on my experience with this industry as one that needs to change and is not supported by good policy: legislative protections for distributors imbedded in distribution contracts.
Imagine you lovingly and successfully built a craft beer brand. Your brand grew and grew until self-distribution wasn’t really an option anymore because you really never wanted to be a trucking company (complete with dispatch and car crashes and insane insurance). You’d be proud, and if you were lucky, you’d attract the interest of a distributor who wants to take those trucking responsibilities away from you (for roughly 30% off the top). Next imagine that two years have passed. The distributor that you signed with sold your distribution rights to another distributor who you never wanted to do business with. Worse yet, the new distributor has decided that it just doesn’t want to deliver your beer to the accounts that you cultivated over the years or that your brand has “plateaued” and is therefore not worthy of attention or promotion. What can you do? Answer in most states: Nothing.
Most states provide statutorily mandated protections for distributors that make contracts between breweries and distributors heavily weighted in favor of distributors. For example, most states provide distributors with transfer protections meaning that the distributor can sell a brewery’s distribution rights to another distributor with little or no say from the brewery. In addition, most states provide termination protections whereby a brewery can only terminate a contract for statutorily defined “good cause” (something along the lines of fraud, bankruptcy, or other illegal conduct). California, for example, expressly states that a distributor’s failure to meet sales goals is not grounds for termination. See Cal. Bus. & Prof. Code § 25000.7. Further, distributors enjoy territorial exclusivity in most states.
What this boils down to is that distributors have breweries over a barrel. They can buy and sell breweries’ distribution rights on whim; they can decide they don’t want to push a brand anymore for whatever reason; and because of territorial exclusivity, the brewery can’t find alternative means to get its product to shelves and tap handles. Does that seem fair to you?
It is not.
The distributor’s lobby is powerful. At the time many of these laws were passed, there were very few breweries and many small distributors. So arguably, the small distributors were at the mercy of the few large breweries and were allegedly treated unfairly. So distributors helped pass these laws to protect them from the whims of the few breweries. The situation is precisely flipped today.
There are roughly 8500 breweries in the US, and the distribution tier is becoming more and more consolidated by the day. I am saying that there is no legal or policy justification for providing distributors with legislative protections. Not anymore (if there ever was). Distributors have the power in the market without these legislative freebies. They control whose beer goes where and how much. Breweries have to sit by and hope.
This needs to change yesterday. I have seen too many breweries in this position—where they are stuck in an unhappy marriage with an indifferent distributor. The brewery has to sit by and watch its brand die in those circumstances. It’s not right.
I am starting a new project focused on this very important issue. Stay tuned–I might need your help.
Post Script: Some distributors are amazing and do incredible work.