The following article was posted on Feb. 18, 2015. It has been reviewed and updated as necessary by the ProBrewer editorial staff. Footnotes have been included where updated content has been added.
As brewpubs continue to proliferate across the country, many are opting to sell their products through retail accounts to utilize excess capacity and increase revenue. Off-site sales can also increase your walk-in business by creating exposure and interest in your brewpub. As attractive as this may seem, off-site sales entail a great deal of time, resources and effort to successfully achieve these objectives. And in some states, brewpubs are not allowed to sell their products outside the confines of the licensed premise.
Where allowed by state law, the practice of off-site distribution has been employed successfully along a full spectrum of implementation. Some brewpubs have grown into full size production plants with the majority of their sales sold off-site through a far-reaching distribution network. This, however, is the exception rather than the rule. Most brewpubs sell their products in draft only to a handful of local accounts. Whatever the applicable scale, it is important to understand the basics of off-site distribution.
Considerations before initiating distribution
Distribution of your beer is a service intensive task, even when utilizing a wholesaler. Start small, selling to accounts within your immediate metropolitan area, and expand outward in concentric circles as you saturate the local retail base. It will be much easier to manage your distribution the closer the account base is to your brewery. Don’t be in a hurry to obtain a large number of accounts; devise a plan allowing you time to be methodical and concise. Write out a basic business and marketing plan, if even just for yourself to use as a road map. The number of accounts you wish to attain and in what period of time will depend on whether you are self-distributing, or employing a distributor, and how much time and resources you will put into the project.
Before deciding to commence off-site sales, examine the benefits versus the pitfalls. Keep in mind that you may be perceived as competition to some restaurants, bars and pubs within your local market, therefore making it difficult to make placements in these accounts. Do your homework by partaking in simple market research. Canvass the local restaurants and bars in your target area, and discuss your intentions with the owners. You will generate goodwill by involving them in your decision, and also give you an idea of the number of possible accounts and potential sales volume. If you sense a negative reaction from more than half of the accounts you talk to, you may want to consider distributing outside of your local market to accounts in which your brewpub does not directly compete with.
To a lesser extent you should also consider local breweries that are distributing in your market. It is best to remain as non-competitive as possible with your local comrades by staying away from displacing their existing tap handles.
Next, determine whether distribution will make money or at least breakeven. Some brewpubs do off-site sales on a breakeven basis solely as a marketing tool, but most attempt to achieve a profit. There are many costs associated with off-site sales and writing a simple business plan will help you identify these costs. Purchasing kegs can be quite expensive. Keep in mind that you should own four to five kegs for each draft account if you use a distributor and three to four if you do self-distribution. Point-of-sale material can vary hugely in costs but a basic, low budget POS program for local, draft-only distribution will run about $5,000 a year (and up!). Added labor for brewing, racking, preparing product for pick-up, cleaning and preparing incoming cooperage and repairs of kegs are all added costs on the production side. Additional office staff time to handle invoicing and collections and sales staff time to assist and monitor your distributor should also be factored in. Set up a separate profit/loss section within your bookkeeping system to track your off-site sales success.
Determine if you will be self-distributing or using a distributor, as this will affect your profits. Distributors typically work on a 25% gross margin(1). By self distributing you will retain this margin, but the added costs of self-distribution must be paid for with the margin you are saving. The larger the area you intend to distribute within, the less profitable it will be to self-distribute. Selling to 20-30 accounts within a 50-100 mile radius is logistically reasonable for self-distribution and can be quite profitable. Much more beyond that range, you should almost certainly consider using a distributor.
Off-site sales also take the product out of your direct control. Products that are fresh, stable, and pour well when dispensed from serving tanks (and through your in-house draft system) can respond differently when racked, stored, delivered and dispensed from a system other than your own. If you haven’t already done so, rack a few kegs up, let them sit for a week or two and be sure they will pour through all types of dispensing systems which you are likely to encounter in the retail trade.
Finally, make sure you have the time and energy to divert from your primary business of running a small brewery and restaurant. Even if you hire someone to oversee off-site sales, it will require some amount of your attention.
Self-distributing vs. use of a distributor
Many states allow breweries to self-distribute their products, while others mandate that you adhere to the three-tier system by using an independent distributor licensed to wholesale malt beverages. In those states that do allow self-distribution, the state often requires that you file for an additional license or an amendment to your manufacturer’s license in order to sell directly to retailers. Check with your state alcoholic beverage law agency.
One intangible, yet important aspect of self-distribution, is that it adds a personal, hands-on component to your product. When a sales person from the brewery makes a sales presentation, they are more apt to know the product and take the time required to make the placement. The sales staff of a distributor has many other brands in their portfolio to sell, and they may not give every brand the attention it deserves. Your own sales staff can focus solely on your product, and can better control the number and type of accounts you wish to carry your brand. You also have a direct link to the retailer to monitor problems, feedback, consumer response, etc. Additionally, self-distribution allows you to promote your brewpub as you are out in the trade, delivering and selling your beer. If you have the time, ability, knowledge and resources to self-distribute, this is the ideal way to promote your brand. In most instances, wholesalers operate more as a delivery mechanism, and ultimately, you may be forced to make most of the preliminary placement calls yourself even when using a distributor.
Selling through a distributor has its advantages as well, and you must consider both sides of the equation to determine which course makes the most sense for you. Using a distributor will free up your time up to concentrate on managing your brewery. Distributing beer has a very high level of service, and you must be prepared to respond to the retailers’ needs. No matter how hard you try, it seems inevitable that on a busy Friday afternoon, a retailer who declined their regular Thursday delivery has run out of beer and needs a delivery “now.” Service calls may also be needed, sometimes in the evening or on weekends, to troubleshoot a keg that may not be pouring properly at a retailer. Retailers often don’t take the time to troubleshoot even the simplest of problems and call you, as the distributor, first. Having a beer distributor handle your product may absorb some of your profit, but on a Friday afternoon when that service call comes in to troubleshoot a keg, it may be well worth it to have that call go to your distributor so you can relax and enjoy a pint.
Choosing a distributor
Because of state franchise laws and contract laws pertaining to brewery/wholesaler relationships in many states, it is often very difficult to terminate a contract with a beer distributor. Choose your distributor carefully! Interview each potential distributor to determine which will best suit your needs and with whom you will be able to establish a trusting, business relationship with. The “comfort factor” is very important when selecting a distributor, as you will need to work very closely together in order to achieve both of your objectives. Most beer distributors are accustomed to high volume sales and often will only carry products that are available in bottles. Discuss your short and long term goals before signing a contract so the distributor can make an accurate assessment as to whether your brand will fit into his portfolio. Small, specialty distributors can be very effective with draft only, local type distribution and may be better suited to serve your needs than a large, major brand house. When talking to potential retailers of your products, ask them which distributors they prefer: who do they like to do business with, who treats craft beers well and can offer them knowledgeably? Some distributors are much stronger on-premise than off-premise, and some service draft accounts more frequently than others. These are the types of issues to investigate in making your final selection.
Tools of the trade
Once you are ready for distribution, there are certain “tools” that you will need. Since your distribution will most likely be limited to less than a few hundred accounts (at most), you will not have a need for sophisticated POS (point of sale) material. In the world of POS, the most effective tends to be the least expensive. Table tents are very efficient in promoting your beer and your brewery. Consumers do read table tents, and the average craft beer consumer is interested in the story of your product.
Other necessary types of POS include coasters. The brewery is also responsible for supplying tap handles to draft accounts. Tap handles are not the primary reason driving a consumer to purchase one product over another, but they do create brand awareness. The higher the visibility, the more likely a customer will order that brand; positioning of a tap handle is more important than actual design. Be sure that your handles are front and center on the row of handles, facing outward, and kept clean.
Other, more sophisticated POS is certainly nice, but really only an expensive luxury. These items include neon, mirrors, light boxes, etc. Metal signs are not excessively expensive, and are fairly permanent. The best way to get ideas on design and effectiveness of POS is to study the profuse amount of point-of-sale in use at retail accounts you visit. What grabs your attention, is the most visible and most interesting? Ask retailers what they prefer to use and why.
Working with your wholesaler
After a distributor is signed up and the beer is loaded on the truck and on its way to the distributor’s warehouse, it is a common misconception by small brewers that they can wave goodbye and forget about the product. An “out of sight, out of mind” attitude commences. Only in the rare situation, with an exceptionally attentive and diligent wholesaler may this be the case. Most distributors are busy folks with a lot of competing brands demanding their attention. If your brand accounts for less than 5% of the wholesalers revenue, chances are you will probably get less than 5% of their attention. Be prepared to spend time with your distributor as well as at the retail level. Conduct a “kick-off” sales meeting with their sales staff (who are now your sales staff, too) and indoctrinate them to your product. They should have at least a basic understanding of craft beer, knowledge about your company and your beer, and an opportunity to taste your products before trying to place them. The more familiar and comfortable they are with you and your beer, the more able they are to sell.
You may also need to spend time making the initial placements and then turning it over to your distributor to service. Know all of the products that your distributor carries, and do not displace those in order to place your product unless absolutely necessary. Otherwise you are simply cannibalizing one product for another in the eyes of your distributor. It will also help promote your brand to spend some amount of time at the retail level making public relation type calls. Stop in accounts occasionally and just see how things are going. This will ensure that your distributor is keeping up with the proper service levels, and the account will appreciate that you take the time to care about them and your product. Your distributor is obligated to provide adequate call frequency, maintain adequate inventory, rotate stock, deliver fresh product, service and maintain draft lines (where allowed by state law) and generally monitor and care for each retailer. Promotion and brand building are a shared responsibility.
State laws and regulations
As a brewery principal or manager you are aware of state and federal regulations pertaining to the manufacturing and on-premise sales of your beer. Those types of regulations also extend themselves into the sales and distribution world as well. There are many complex laws regulating pricing, discounting and what can and can not be given away to the distributor, retailer and consumer. Every state is different, and it is incumbent on you to know the laws of the state you are operating in. Be sure to obtain a handbook of state codes and regulations from the state alcoholic beverage agency and read the relevant sections. Although these laws often seem odd, antiquated, insane or all of the above, they do protect the small brewer and should be supported by abiding by them.
The craft beer segment is becoming a competitive one as more products are introduced, larger micros and craft regionals expand and employ more sophisticated marketing, and the major breweries enter the segment with “craft-alike” products. But the essence of the craft beer industry is rooted in being local, fresh and high quality. And brewpubs have the greatest ability to offer these components to the local market. Be realistic in your expectations, maintain product and personal integrity, and the local retailer and consumer will assuredly embrace, enjoy and appreciate your efforts and products.
(1) this has increased and is now 30-35% gross margin