Tag: 3 tier system

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.

3 Tier System: Conclusions

At the end of 2012 I decided to set a goal for 2013 of digging into the 3 tier system and reporting back on what I learned. I came into this endeavor with a set of preconceived notions about the 3 tier system that are drastically different then what I feel now. Throughout the series of posts, I’ve tried to be as objective as possible and present the views of the people I interviewed. What follows are my thoughts on all those interviews and the 3 tier system as a whole.

  1. Introduction and History
  2. Breweries
  3. Distributors
  4. Retailers
  5. My Conclusions (you are here)

Continue reading “3 Tier System: Conclusions”

3 Tier System: Retailers

The stores and bars where we buy our beer has the most prominent role in our beer drinking lives, even though brewers get all the fame. The following is what I’ve learned from retailers about the 3-tier system and their role in it.

  1. Introduction and History
  2. Breweries
  3. Distributors
  4. Retailers (you are here)
  5. My Conclusions

Continue reading “3 Tier System: Retailers”

3 Tier System: Distributors

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.

  1. Introduction and History
  2. Breweries
  3. Distributors (you are here)
  4. Retailers
  5. 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.

Continue reading “3 Tier System: Distributors”

3-Tier System: Introduction

I feel lucky in that a lot of posts write themselves and I don’t have to try too much, except in researching things and drinking beer. The 3-Tier system, however, has been a 9-month long battle for me of how to talk about this complex, occasional divisive, topic. Initially I planned 1 post, which became 1 massive post, which is now a series of 5 posts in the following order (as posts are published I’ll update these links):

  1. Introduction and history (you are here)
  2. Breweries
  3. Distributors
  4. Retailers
  5. My Conclusions

Throughout all of this I will strive to remain impartial  and address both pros and cons of the system. I’ve made it my goal to publish all these posts this year, as they say there’s no time to start like the present so let’s start in the past.

Continue reading “3-Tier System: Introduction”