Specialty Beer Distributors meeting a first
by Tom McCormick
In a small windowless hotel conference room amongst sweating carafes of water and large steamy coffee urns, more than 40 individuals from the specialty beer business gathered for a roundtable discussion on the business of distribution. The first-ever Specialty Beer Distributors Conference had convened, and although the setting was classic drab hotel conference room, the spirit and enthusiasm was radiant, and conversation flowed steadily for the two-day meeting.
Taking place just prior to the 21st annual Association of Brewers Craft Brewers Conference and BrewExpo in mid-April, the SBDC was the brainchild of Greg Koch, co-founder and president of Stone Brewing Company, a brewery and distributorship in San Marcos, just north of San Diego. The purpose of the forum was to gather together small, independent specialty beer distributors to fuel the exchange of ideas and information in this growing new category of wholesalers. Attending were a wide variety of distributors, from medium sized operations with a sales force of over 20 reps to companies of only two people and one truck. The common thread was that each company specialized exclusively, or at least primarily in wholesaling specialty beer. It was an opportunity, as Eric Wallace, president of Tabernash/Lefthand Brewing Company and Indian Peaks Distributing said "to learn from each of our various experiences and learn how to survive."
Anheuser-Busch, Miller, Coors and many large import brands provide various levels of support and training to their distribution network - not to mention high volume sales that support the infrastructure of a distribution company - but specialty beer distributors have few resources from which to draw. There were discussions among a group of small distributors at the 1997 Craft Brewers Conference in Seattle to form a trade organization and market the various companies with a web site, but that effort never materialized. This year's gathering was the first of its kind, and it had a hint of resemblance to the first craft brewers conferences.
Both the AOB and the Brewers Association of America helped in the implementation of the conference. The AOB provided advance registration and room space at the Town and Country Resort Hotel where the CBC was being held, and the BAA provided lunch for the attendees and arraigned for guest speakers to attend. Daniel Bradford, president of the BAA and various AOB staff were also in attendance.
Distributor consolidation has been rampant in the beer business for over three decades. The number of wholesalers has declined from more than 5,000 nationwide in 1970 to fewer than 2,500 today. Unquestionably, bigger distributors are less craft friendly than smaller distributors. A-B continues to push their distributors to carry only A-B products, migrating more and more to an exclusive network, and Miller/Coors houses continue to consolidate. Many medium-sized "all-other" distributors have been purchased by the larger wholesalers and countless wine/liquor distributors have either gotten out of the beer business or struggle with the very different dynamics of selling - and delivering - beer as opposed to slower velocity wine and spirits. All of this has conspired, particularly over the last ten years, to create an increasingly more difficult environment for craft brewers to gain access to market, with little relief in sight. There will no doubt continue to be more consolidation within both the traditional beer distribution network and among liquor/wine distributors in the near and medium future. With this in mind, access to market has become a crucial issue facing small brewers. One of the stated goals of the BAA mission statement is to "protect and improve small brewers' access to market." But in the highly regulated beer distribution industry, there are few alternative courses to the marketplace shelf.
The Evolution of Specialty Distributors
This deteriorating access to market environment has created a new window of opportunity for small, independent specialty beer distributors that hasn't existed since the 80's. But the start-up dynamics have changed significantly, and the cost of entry is now far greater than it was when the first specialty beer distributors emerged 20 years ago. Like the first microbreweries, that opened on a shoestring budget and some homebrewing experience, a few small independent distributors were able to enter the market with limited resources and experience. Expectations from craft brewers were minimal, and the retail environment was much more forgiving than it is today. The cost of doing business was also less for any new business venture, particularly a low margin wholesale model.
Those few specialty beer distributorships that were operating by the early 1990's suffered a setback of sorts, ironically, as the craft beer category exploded in popularity. With the huge demand for specialty beers at the retail level, major brand distributors, who had practically ignored craft beer for ten years, suddenly developed a keen interest in carrying as many as they could gobble up. During this time, the intoxicating allure of being distributed by a Bud, Miller or Coors house was too strong to ignore for many craft breweries, and some shifted from small, specialty distributors to larger houses during this era. It was a time when smaller distributors had to ramp up service levels or otherwise adjust. Some of the first specialty distributors sold to larger distributors, maintaining their original philosophy and brand portfolios under the umbrella of a major brand house. Some simply went out of business and a fortunate few were able to adjust.
The recent wave of specialty distributor start-ups began as early as 1997, when the huge growth rate of the craft beer category began to slow down. Interest in craft beer at the retail level began to wane, and as a consequence, major brand distributors began to drop many, if not most of their lower volume specialty beers. At the same time, A-B began putting pressure on their distribution network to go "exclusive" - and many did, discontinuing all but their A-B products. This convergence of marketplace dynamics left a significant number of craft brands without a distribution home, and spawned a new generation of specialty distributors.
Today's 'Modern' Specialty Distributor
The profile of a specialty beer distributor today is as varied as the craft brewing community. Just about every size and shape was represented at the SBDC. Stanislaus Beverage Company of central California, and Specialty Beverage of Virginia were the two largest distributors attending the conference. Both have a sizable and diverse brand portfolio, cover large geographic territories and are well established companies having been in business well over ten years. This type of specialty distributor looks, feels and acts similarly to a major brand distributor in many ways. They often carry non-alcoholic beverages, and have large brand portfolios making it difficult for the smaller brewery to gain mind-share. Often referred to as "all other" houses, these distributors are in a sense a hybrid of the big major brand distributors. Unlike major brand distributors, they are not aligned to any one or two powerhouse brands, but at the same time offer good market penetration and sales and delivery execution.
Also attending the conference were a number of small "new era" distributors, each which exhibited a very passionate and highly knowledgeable understanding of good beer with an intense enthusiasm to hand-sell their brands. They range in size from literally one truck operations where the "owner does everything," such as the aptly named Little Guy Distributing in Arizona to larger multi-truck operations with a sales staff of five or more. An interesting variation that has developed during this era of specialty beer distribution is the self-distributing craft brewer who includes other specialty beers in the portfolio- originally dubbed the "Brooklyn Beer" model after the Brooklyn Brewing Company, the first brewery in the country to do so. This model offers efficiencies in both physical attributes (warehouse space, refrigeration needs, material handling) and staffing (accounting, warehouse and sales). Stone Brewing and Tabernash/Left Hand Brewing in Colorado are two such combination brewer/distributors that are providing welcome access to market to other craft brewers.Conference Covers it All
While the San Diego sun and fun was tempting outside, the topics covered inside ranged greatly in variety and depth, and kept the group attentive. Each predetermined topic encompassed about an hour and half of open dialog in a roundtable format. A moderator and one or two facilitators who were well versed in the topic at hand kept acted to infuse ideas and keep the conversation focused. Topics discussed over the two days covered virtually every aspect of running a small distributorship including operations, sales and marketing, legal issues, portfolio management and cooperative efforts between likeminded distributors. On the second day of the two day conference, two guest presenters were invited to speak to the attendees.
Marc Sorini, Legal Counsel for the Brewers Association of America discussed a variety of legal issues affecting both small brewers and distributors. Franchise laws, the bane of small brewers, can also hinder the ability of specialty distributors to pick up brands that not being adequately represented by a larger distributor. Franchise laws "tend to stifle the development of alternative business models," said Sorini, by "not allowing the free movement" of brands to a distributor that would better suit their needs. There have been discussions among state wholesaler organizations to allow brands that are less than 20 percent of a distributor's revenue to terminate their contract with a minimal buyout. This could substantially help the independent distributors by being able to pick up brands that have some existing market presence at little or no expense. So far, no exemptions of this type have been passed in any state.
Keith Lemcke, Executive Director of the Draught Beer Guild spoke on the many issues of draft dispense. Lemke gave an update on the Retail Certification Program, a cooperative initiative between the DBG and the BAA. Similar to the Cask Mark program in Britain, the program stresses education for the retailer and certifies those retailers who maintain proper dispense guidelines. This program is currently in the discussion phase. Lemeke also stressed the importance of draft quality to the brewer, and therefore by extension to the distributor. Because of the consumer's lack of knowledge, if a person has a bad experience with a poorly dispensed beer they tend to mentally blame the brewery, not the retailer. In some states, the distributor is allowed to clean draft lines, while in other states either the retailer or a third party must clean the lines, passing the burden of monitoring retailer's dispensing and cleaning habits to brewers and distributors.
The "second annual" conference has not been confirmed, but during an informal show of hands, the participants unanimously agreed that the conference was worthwhile and should be held again in the future. Although nothing was formalized, the next likely gathering would probably be at the 22nd annual Craft Brewers Conference in Philadelphia next year. The group agreed that it was premature for a trade organization to be formed specifically to represent small distributors, but as the number of distributors will likely increase in the coming years, the formation of a trade organization may be plausible in the near future.
The distribution of beer is an extremely difficult business. It is a high volume, low margin business, and smaller distributors that carry only specialty beer brands lack a full half of that equation. But like the craft brewing industry, there is room, in the right market, for small companies to carve out a niche. It is not a business that generates a high cash flow, creating cash flow and growth issues. The owners of these start-ups are low paid, at least initially, and it is a business of passion, not immediate monetary reward. But with ongoing consolidation, and a continuing demand for variety by the consumer of specialty beer, specialty distributors just may be the only light of hope on the horizon of access to market for small brewers.