Craft Brewers Talk Franchise Law Reform at Beer Insights Seminar

Jim Koch presents at the Brewbound Session in May, 2013

Start with a topic as polarizing as franchise law reform, add a couple hundred brewers, distributors and beer executives, and, inevitably, you’ll end up with plenty of engaging (and sometimes emotional) conversation.

That was the case this week in Chicago at the Beer Marketer’s Insights Spring Conference, an event focused on the market for high-end beer.

The conference itself featured discussions with a number of craft brewers, including Boston Beer Co. founder Jim Koch, Lagunitas founder Tony Magee, Allagash Brewing’s Rob Tod, Ninkasi Brewing co-founder Nikos Ridge, Odell Brewing co-founder Wynne Odell and Devils Backbone co-founder Steve Crandall.

The recurring theme throughout all of the craft-centric presentations and panel discussions, however, was an overwhelming barrage of questions regarding franchise law reform initiatives supported by the Brewers Association (BA) and state craft brewer guilds.

Franchise laws were originally enacted to protect independent wholesalers from losing the rights to sell brands marketed by large suppliers like Anheuser-Busch and MillerCoors, which would otherwise be able to terminate a contract for arbitrary reasons. However, franchise laws have recently fallen out of favor with some small brewers who want to switch distributors, but, because of the laws, are prevented from doing so.

The BA, which supports a three-tier system for distribution, believes that applying those laws to small brewers is “unfair and against free market principles.” On its website, the trade group states that, where franchise laws exist, reform is necessary.

“The BA believes that any brewer contributing a small percentage of a wholesaler’s volume should be exempted from those laws and free to establish a mutually beneficial contract with that wholesaler,” a statement reads.

Koch, who joined Constellation Beer’s Bill Hackett during an early morning question-and-answer session, served up the day’s first dose of dialogue.

“There is a lot of rhetoric around it,” he said of the franchise law discussions playing out in the pages of various trade publications. “Rather than repeat that rhetoric, I would try to sit back and observe some of the facts and realities that are going to drive this.”

Koch, who attempted to remain as neutral as possible on the issue, laid out a few talking points that he believes will guide discussions going forward.

“We should all chill, step back and realize that we all need each other,” he said. “We (Boston Beer) have built our business with our wholesalers and I have been adamant about saying ‘no three-tier, no craft beer.’”

That mantra would serve as somewhat of a framework for additional conversations throughout the day.

“This is not a holy war,” Koch continued. “This is reasonable business people, pursuing what they view as reasonable and legitimate business interests that are in opposition. We can recognize that. Nobody is being unreasonable in their points of view here.”

But no matter how unreasonable the carve-out requests may be, Koch feels the issues are here to stay.

“Franchise law carve outs will be a front burner issue until it gets resolved, so its not going away,” he said.

In his case, Koch and other craft brewers are pushing hard for reform in Massachusetts. Suppliers are seeking a change in the law which would allow beer companies that sell less than 6 million barrels globally and account for less than 20 percent of a distributor’s business, to leave a wholesaler, without cause, in exchange for “fair market value.”

That’s a far cry from recent legislative reform in New York, which has enabled craft breweries that produce less than 300,000 barrels annually and make up less than 3 percent of a wholesaler’s sales to terminate contracts without cause. The brewery would be required to compensate a distributor for the fair market value of the business.

But Koch’s vision of the future is one in which carve outs will protect brewers of “about the size of the largest brewer in each state,” which helps to explain why he — as the chairman of the Bay State-based company — is pursuing a 6 million barrel threshold in Massachusetts.

“The balance of power in the industry is shifting and craft brewers are getting more and more political power,” he said. “Ultimately, they will probably prevail just like the wholesalers prevailed against the big brewers. Most states are going to have franchise law carve outs.”

It’s a bold prediction, but Koch appeared confident as he repeatedly stated that eventually, most states would, like New York, evolve alongside a beer landscape where domestic brewers continue to lose barrels to craft. He added that wholesalers and craft brewers are natural allies and should be working together to find an amenable solution.

“If wholesalers and craft brewers are together, you have the majority of the political power in the country,” he said, suggesting that even large domestic players like Anheuser-Busch InBev and MillerCoors wouldn’t have the support of most lawmakers.

Nevertheless, the end result — at least for Koch — is pretty clear.

“Craft brewers will get enough political power to make it happen,” he said.

Later in the day, a panel of craft brewers echoed some of Koch’s words.

“It would be nice if there were, I guess, a more amicable dialogue,” said Allagash’s Tod. “I am a huge believer in a strong distributor tier, and so is the Brewers Association. To ignore the fact that there hasn’t been monumental change in the industry is foolish. The landscape has changed, and there is going to be pressure for the system to change.”

Tod pointed to what he termed the “New York Compromise” as a “win-win,” explaining that distributors still “got protection from the big brands.”

“I am an advocate of carve-outs in the right situations,” he said. “It needs to get worked out on a state-by-state basis.”

Nikos Ridge and Wynne Odell, who also joined the panel discussion, made similar remarks. But it was Devils Backbone’s Steve Crandall who expressed more of a cautionary tone, worrying about the “unintended consequences” of creating carve outs.

“I am not against it, but I am more neutral on it,” he said, explaining that he knows how to operate a profitable business under the current system but is unsure how that would change with reform.

Crandall said he “loves” the three-tier system and credits it with his company’s early success. Devils Backbone, which launched commercial production and distribution of its products just two years ago, projects it will brew upwards of 45,000 barrels in 2014.

“We wouldn’t be where we are today without it,” he said. “There is no way we would have access to the market without it. It’s been a great exercise for us to be involved with all of these distributors.”

Photo Credit: Jay Brooks, Brookston Beer Bulletin

Tony Magee, the founder of the country’s fastest-growing craft brewery, Lagunitas, also expressed a similar dislike for what he believes are “unknowables.”

“Fooling around with something so fundamental to the landscape is just reckless and dangerous,” he said, characterizing the BA’s push to reform franchise laws as “stupid.”

For Magee, simply having gratitude for wholesalers and becoming their “friends” is paramount to the success of a small brewery business. He referred to his distributors not as partners, but as customers.

“The person at the beer fest is not the customer, it is a consumer,” he said. “They are not within arms reach of you in the market.”

Magee admitted to making plenty of “problematic” choices as a smaller company, but believes business owners have to live with mistakes, find solutions and “chew your own food.”

So where does Magee stand on the issue?

“I am an outsider on most stuff,” he said. “I really don’t understand why the BA pursues the crazy stuff it sees as so important.”

Editor’s note: Longtime beer industry, Mike Mazzoni, also discussed franchise law issues. Stay tuned for additional coverage of his talk, and others, from yesterday’s Beer Insights Spring Conference tomorrow.

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