Brewers & Wholesalers Clash on Proposed Distribution Law Changes in Massachusetts

Massachusetts craft brewers who want more freedom to switch wholesalers are pushing for legislative change to what they believe are outdated beer distribution laws.

The proposed House Bill 267 seeks to give brewers more power over their distribution rights. If passed, it will allow small brewers to easily opt out of relationships with wholesalers, a process that brewers in the Bay State allege to be an arduous and expensive one under current legislation.

The bill is backed by a number of influential beer executives, including Jim Koch, founder of Boston Beer Co., Dan Kenary, co-founder of Harpoon, as well as a number of other brewers in the state. However, a change to the existing law has been met with opposition by wholesalers.

If the bill passes, distributors will be reluctant to do business with smaller, up-and-coming breweries in the future, according to Bill Kelley, President of Beer Distributors of Massachusetts, who testified in the State House last Wednesday.

“There would be a market disincentive for any distributor to make the financial commitment,” Kelley told Brewbound. “In that scenario, the smaller brands that are trying to emerge into the market with that [rule], it would be a serious problem for any distributor to take that risk.”

He said the current law, which has been in place for 41 years, works fine as it is.

“When something’s not broken, why do you go around and try to tinker with it?” Kelley said. “This takes a good situation and makes it a terrible situation.”

Brian Murphy, director of sales and marketing for Massachusetts Beverage Alliance (MBA) reiterated that any kinks in the status quo could be smoothed out amicably between brewer and wholesaler.

“We have taken the approach that we need to be flexible with small craft brewers, particularly when it comes to terms of the agreement,” Murphy said. “We don’t want them to think it is a marriage they can’t get out of. If the situation ever came to a point where they weren’t happy, we would hope the brewer would feel comfortable sitting down with us, having a conversation and making arrangements for a fair and favorable outcome.”

In order to avoid being pigeonholed, some breweries set contract parameters before entering a new agreement. One of MBA’s suppliers, Baxter Brewing, has established a clause in all of its wholesale contracts that allows the brewery to evaluate a distributors performance every three years.

Luke Livingston, Owner, Baxter Brewing Company

“I have distribution agreements in four states with 10 distributors and I have that clause in every one of my contracts,” said Luke Livingston, the founder of Baxter Brewing. “I would never sign a contract without an ‘out clause.’ It doesn’t mean I would leave any of my distributors, I just need to have the right to do that.”

There’s also an issue of what constitutes “small brewers,” as H.267 is an act relative to them.

The text of the bill itself says that any brewer whose volume does not exceed 20 percent of a distributor’s total sales is covered. In contrast, a similar bill in New York covers small brewers that account for 3 percent or less of a wholesaler’s business.

What makes for a 17 percent disparity?

“I have no clue,” said Kelley. “It seems to have been created by the proponents of the bill out of thin air without any basis in the marketplace reality.”

Rob Martin, President of the Massachusetts Craft Brewers Guild, said the number is anything but arbitrary, and dismisses speculation that 20 percent was chosen in order to protect large craft breweries, such as the aforementioned Boston Beer Co., which markets the Samuel Adams brand.

“I have to look out for all of our breweries and our membership extends to nano-breweries to Sam Adams,” Martin said. “In the New York model, everyone was taken care of. In [the current] model, Sam Adams was taken care of in some cases, but not all.”

Martin added that much smaller brands could still make up 20 percent of a wholesaler’s overall volume, so the detraction itself is a moot point.

“You can have a scenario where you have a smaller wholesaler and a much smaller brand, much less recognized, but [one that] still makes up 20 percent of the volume,” Martin said. “It does include Sam [Adams] in some cases, but I could certainly make the argument that you have smaller brands in smaller wholesalers that would not be eligible in this legislation.”

Joe Salois, president of Atlas Distributing Inc. said that aside from MillerCoors, every supplier the company represents accounts for “well under” 20 percent of the company’s overall volume and in some cases, even the biggest brands don’t scratch the surface of the legal ceiling.

Regardless of what the number is, both sides still see it very differently.

Asked Martin, “At what size does a brewer not deserve fairness?”

Kelley counters that the current law treats all breweries fairly.

“All of the contracts that exist in the industry were freely negotiated between intelligent people,” Kelley said.“This proposal is very clear… it would wipe those existing contracts out.”

 

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