Reinforcing the 3-Tier System

Tomorrow (Wednesday, March 4th, 2015) the Kentucky Senate will vote on HB168. House Bill 168 will redefine the requirements for owning an alcohol distributor in the state of Kentucky. The Kentucky house approved it last week. The Senate’s vote is the last step before the Governor signing the bill into law.

3-Tier System?

In brief, a distributor is a company that buys beer from the brewery, stores it and employs sales people to convince retailers to sell the beer. Distributors form a part of the 3-tier system. For a full background on the 3-Tier system please see my series from 2013 beginning with my introduction.

Two extremely different companies are very upset about this legislation. I’d like to help clear the air and share my opinion on the situation. The two companies are AB-InBev and Rhinegeist, the elephant in the room and the mouse the elephant is afraid of.

AB-InBev owns a distributor in Louisville and last year they bought a distributor in Owensboro. The purchase of that distributor in Owensboro is what set all this off.  Currently, any brewery in Kentucky is unable to own a distributor in Kentucky, but out of state breweries can. [footnote] Thanks to Ryan Phillips for clearing that up for me[/footnote]That is exactly what this law is going to change. Anyone who owns a brewery will be unable to own a distributor in Kentucky, which is where Rhinegeist comes in.

Rhinegeist has used Ohio’s laws that allow a brewery to self-distribute their beer to do exactly that. Yes, self-distribution laws are a relaxing breaking of the 3-tier system, turning it into a 2-tier system. The way people argue for self-distribution is that Rhinegeist can only self-distribute Rhinegeist. When Rhinegeist decided to expand to Kentucky they couldn’t find a distributor “with the right craft-focus and a small enough portfolio to ensure our mindshare.” to quote Rhinegeist owner’s Bryant Goulding and Bob Bonder’s op-ed in The Courier-Journal. As a result, they decided to open Riverghost Distributing to carry Rhinegeist products and other breweries products, in the state of Kentucky. Now we see why Rhinegeist is siding with AB-InBev. Both AB-InBev and Rhinegeist will have to sell, or close, their distributors in the state of Kentucky if this law passes.

Sorry, Rhinegeist but that’s a GOOD thing

The good thing from my point of view. It’s a bad thing for the owners of Rhinegeist because this means someone else gets a cut of their profit. As it stands now Rhinegeist makes more per beer sold than MadTree does[footnote]MadTree is distributed in Ohio by Cavalier & Kentucky by Beer House[/footnote]. Rhinegeist also pays a number of sales people and delivery drivers. Plus they maintain a fleet of vans to enable them to self-distribute. Most breweries have distributors take care of that overhead. So, Rhinegeist losing Riverghost will mean lower profits per beer in Kentucky for the folks at the top. The same on all that goes for the AB-InBev owned distributors as well.

This is a good thing for everyone except these two companies. If Riverghost starts carrying other brands and there comes a day where one store only has one spot available on the shelf, who gets that spot? I have an extremely hard time believing that that spot will be fairly assigned to the product most sought after in that market. That spot will be assigned to Budweiser or Truth.

My biggest problem is that this is a slippery slope that could lead to decreased competition and eventual vertical integration. If a distributor or store is owned by a brewery there is far less reason for that distributor or store to care about other breweries products. Same goes for a distributor owning a store or bar. Why should they push someone else’s product when the folks at the top can make more money pushing the products of the brewery they own?

Part of what has allowed craft beer to explode is the separation of the 3 tiers. Sure, it’s not great but it’s the best we got for now and getting read of, or blurring the lines between, the tiers is not going to help anything. One of the reasons England’s craft beer explosion has been more muted than ours is because of tied houses, where a brewery owns a bar. As I said before, when one tier owns another it lowers the competition. The tied houses in England only serve the beer of the brewery that owns them, unless customer demand for other products reaches an extreme point.

This Will Cost Jobs

Both AB-InBev and Rhinegeist have said that the passage of this bill will cost jobs. That’s only true if AB-InBev and Rhinegeist decide to shut down their distribution companies. They’ve both proven that there is a strong need for these distribution companies to exist. They’re both savvy businesses as well. They’re not just going to dump all the money they’ve invested in this. No jobs will be lost. The only thing that will change is who is at the top of these 3 distributors and that the 3-tier system will be more reinforced in the state of Kentucky.

6 thoughts on “Reinforcing the 3-Tier System”

  1. I am very close to this subject and have read a ton about it. I understand the three tier system better than most, I work in one of the tiers. I whole heartedly support HB168. This blog makes more sense then most that have been written and explains it perfectly, Thanks Tom for getting all points addressed.

    Like

  2. The one important point to remember in this is the impact on KENTUCKY brewers. This is where the original crux of the argument lies. As a brewer in Kentucky you CANNOT set up your own distribution. You MUST use a 3rd party distributor. The loophole allowing OUT OF STATE brewers to control their own distribution is what the bill intends to close. If you are a brewery in Kentucky that MUST use a 3rd party wholesaler, why should an out of state brewery be given the advantage to distribute on their own? It’s unfortunate that RiverGhost is potentially collateral damage in this fight, but the bigger issue to KENTUCKY should be protecting the rights of the brewers in its own state to be at least equal to those from out of state. You could make the argument that this bill is a “negative” way to fix the problem when there are potentially other more “positive” ways to fix it but you have to fight each battle as it arises…

    No matter which way the bill goes it doesn’t completely solve the issues of outdated wholesaler franchise laws which are the REAL problem that must be addressed in the 3-tier system in most states (KY and OH included). Another story for another day perhaps…

    Like

    1. I agree with you about the franchise laws. I think they are the biggest problem with the 3-tier system. I do have about a quarter of a post done on franchise laws. Sadly, other things keep eating at my time preventing me from giving it as much attention as it needs.

      Like

  3. One thing I’ve always wondered about the 3-tier system is how “taprooms” and in brewery bars are permitted to sell their beer directly to customers as well as fill growlers to go. Don’t they go around the distributor tier of the system and effectively serve as a (albeit an limited) break the system?

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s