One of my blogging goals, this year has been a breakdown of the 3-tier system focusing on each level. I’ve already covered general info on the 3-tier system and the history of its creation as well as a full post dedicated to breweries (links below). This post, as the title suggests, is all about the distribution industry and their role in the system.
- Introduction and History
- Distributors (you are here)
- My Conclusions
Put very simply distributors are large companies mainly comprised of warehouse space, trucks, delivery guys, and salesmen. Distributors take beer from breweries and move it to stores and bars. More complexly they warehouse a vast inventory of beers from a vast number of breweries and take care of the logistics of picking it up, storing it, and delivering it to a vast network of resellers.
Who really benefits from this?
The benefit to the breweries is that a distributor allows them to focus on making beer and packaging beer then calling their distributor to come pick it up. This means not having to worry about a network of trucks and delivery men, not having to employ a team of salespeople, and not fighting everyone else for shelf space.
The benefit to stores comes in from having 1 point of contact for a large number of brands. So instead of calling 4 breweries a store can just call their Stagnaro rep and place one order. 1 person to call, 1 order to place, 1 person to yell at when something goes wrong. No ordering from a Stone rep who is in California with a 3-hour time difference to worry about.
All the distributors I spoke with said the main benefit for them is helping spread the word of beer – craft or otherwise – and, of course, a nice 27% profit margin!*
What does all this mean to consumers?
This distribution network means that it’s easier for us to get more, better, beer. The beer is moved about faster and so kept fresher on the store shelves, despite a law where product has to be in the warehouse for 24 hours. More importantly though it makes it far easier for a new local brewery to get up and running and have their product around town as well as for an established distant brewery to enter new areas.
If New Belgium (which is coming to Ohio in December!!) wanted to come to Ohio without a distributor they’d have to build a warehouse here, find a staff, and meet all the local bar and store owners to pitch their product to. Instead they pick a distributor, say here’s the brands we’re going to sell there, maybe do a few events, then wait for the money to roll in.
Or more relevantly a small brewery like Jackie O’s who wants to expand in their own state, which allows self-distribution, they’d have to drive 3 hours across the state to the bar/stores, or have the bar/store owners drive all the way or meet them halfway. As they were doing with Jay Ashmore from Dutch’s. Now that Jackie O’s signed with Cavalier it’s gotten much simpler for everyone involved and more importantly us craft beer lovers can find it all over the state.
Basically, without distributors our craft beer selection would be far more limited.
Can’t the big guys push the little guys around?
That question is really the whole point of the 3-tier system and the reason distributors exist. Distributors create a middle-man so that Budweiser can’t directly buy up all the taps at a bar creating what is known as a tied house, where the bar is tied to the brewery. Tied houses were standard before prohibition and one of the main reasons for the creation of the 3-tier system.. Now that’s not to say that this type of crap doesn’t happen at all.
The Bengal’s stadium is a prime example of a craft dead zone. But that’s not because Budweiser or MillerCoors went in there and bought it out. The truth is the folks who order beer at the stadium know their fans don’t want to drink 90 minute IPA for $10 a pint for 3 quarters of football (remember it goes dry in the 4th). Craft beer is still only about 10% of the market, and seriously any large number of people should not be consuming large quantities of 9% beer!
However, the 3-tier system means that you can choose from Bud or Miller anywhere in the stadium AND if you hunt long enough you can find some Moerlein and only $6.25 for 12 ounces is kinda a deal!
The flip side to this is that distributors who represent bigger breweries – craft or otherwise – can have sales incentives for selling X amount of Y beer. So then the big guys are able to push their weight around a bit by rewarding a distributor sales rep for getting more of their product out on a store shelf.
From all the distributors I talked to this seems to rotate around 2 things:
- Does this distributor represent a major national brewery? If so then the sales rep could lose some independence under the influence, and sales incentives, of those major brands.
- How does the management split up the brand representation? If all reps sell all beer then independence will be lost and preference could get pushed to the big guys. Most places seem to have the big reps and the craft reps, so the craft reps can do what they want and not care about sales of _____ light.
Do sales incentives equal buying tap handles?
A few brewers and many consumers worry about a payola system of a distributor handing out cash to a bar in order to get the newest “crafty” beer from the big boys on a tap handle in place of the same style from a craft brewer. From the folks, I talked to it seems that this does happen on occasion though it’s very hard to prove. It’s just as possible that the distributor could be clearing inventory at a cheap price or that the bar could’ve gotten lots of requests from customers for that product.
The most likely thing seems to be that a place – for whatever reason – sells a lot of product from that distributor and that a distributor is then grateful to the store. As appreciation for selling lots of Founder’s all year long the distributor may make sure the store gets a case of KBS or maybe says, hey you’re a great customer lets go to a Red’s game!
If a store can’t be tied to a brewery can a brewery be tied to a distributor?
Yes and this is what’s known as Franchise Law and is a sticky thorn in the situation. In the state of Ohio – and many other states – a small brewery can
never find it extremely difficult and costly to leave a distributor unless the separation is mutual. A distributor can stop pushing product from a brewery or just straight stop buying it and the brewery could get hosed. They can try and sue the distributor but for a very small brewery they may not have the capital to fight a large distributor. Now that really doesn’t happen very often and the majority of brewer/distributor relationships seem to be very good. That said this is a major point of concern for all the new breweries who I’ve spoken to.
This isn’t just there to hurt breweries but also to protect distributors. Distributors have to invest a lot of money into buying and marketing the beer. Almost all breweries that I’ve talked to have had some signage or events created and funded by the distributors. So if another distributor poached a brewery then the first distributor would be out a significant amount of capital investment.
Too long; didn’t read. What’d I miss?
Distributors are the magic behind the curtain that keeps the mad explosion of craft beer on the tracks. The beer world would be a much smaller, and likely costlier, place without them. Brewers may be the rock stars but distributors are the stage techs who make sure they can perform for the sell out crowds.
That’s what I got on distributors, got any questions feel free to drop them in the comments. A few distributors read the blog regularly and may chime in and respond, if not I’ll contact them and try to get all your questions answered. A big thank you to all those distributors and reps who took time out of their schedules to answer my questions!
Now hold tight for a month or two while I talk to retailers for the next post in the series! If you’ve got any questions you want me to ask store or bar owners leave a comment here, on our Facebook page, or send us a tweet.
*Per Jim Schembre, National General Manager of World Class Beer distributors, 27% is the avg profit margin of distributors nationwide
6 thoughts on “3 Tier System: Distributors”
The 27% gross profit figure is the $$ that pays all the bills at a distributorship, that’s not net profit at the end of the year. That 27% pays for the trucks, fuel, warehouse staff, sales staff, merchandisers, IT, utilities, backoffice personnel, etc. Most distributorships operate on a 1-5% net income rate once all the bills are paid. In other words for selling a keg for $100 the distributor probably makes between $1 and $5 net. Most small distributors are closer to the $1, the bigger ones are closer to the $5.
You are right that distributors are essential for the spread of craft beer. That’s why we should make the 3TS voluntary and toss out franchise laws. As it stands now the number of distributors is dwindling fast–less than 1500 now which is half of what we had in the 1980s. If the 3TS was tossed you’re right that the big brewers would buy their distributors. But so what? If franchise laws were also scrubbed we would likely see a surge in new distributors entering the market to meet the demand from brewers (just like after prohibition before franchise laws were enacted). The increase in competition among distributors would mean greater efficiency and likely lower prices for drinkers.