All it took was a pandemic to break the decade-long gridlock between Massachusetts’ craft brewery owners and wholesalers in their efforts to reform the state’s contentious franchise laws.
On Saturday, the Massachusetts Brewers Guild and the Beer Distributors of Massachusetts announced an agreement that would cover all but two of the state’s craft breweries, the State House News Service reported (read it here).
As part of the deal, breweries that produce fewer than 250,000 barrels (3,445,000 cases) of beer over a 12-month period would be allowed to terminate their wholesaler contracts at any time by giving 30 days’ notice and paying “fair market value” for their brand rights. The legislation would benefit around 200 craft breweries in the state, with Boston Beer Company and Craft Brew Alliance-owned Cisco Brewers being the notable exceptions.
Massachusetts’ existing franchise laws lock breweries into contracts with their wholesalers after six months of working together, unless the brewery can show cause for termination.
The compromise bill, which is being sponsored by Sen. Joseph Boncore (D-Winthrop), reported favorably out of the Senate Ways and Means Committee on Sunday and is expected to be taken up by the full Senate later this week and then advance to the House of Representatives next week.
With both sides finally aligned — and Boston Beer, which initiated the debate a decade ago, giving its blessing — the legislation is expected to pass the Legislature and land on Gov. Charlie Baker’s desk for a signature before the end of the legislative session on July 31.
“The pressure being put on small breweries right now is off the charts, and they really need all the flexibility they can possibly get to ensure that they can survive this madness,” said Massachusetts Brewers Guild’s president Sam Hendler, who is one of the founders of Jack’s Abby and Springdale Beer Company in Framingham.
Atlas Distributing owner and president Joe Salois told Brewbound that the COVID-19 time has given Massachusetts’ wholesalers and brewers time to reflect on their respective businesses and relationships. Salois said Hendler were the catalysts to getting a deal finalized.
“It was transparent, honest, open, and let’s find a way to agree at the end of the day,” Salois said. “Ultimately, that’s what we ended up doing. And we’re just thrilled to be in this position.”
“The context for a long time has been how do we ‘win’ this, and I think like any hard fought negotiation, neither side ‘won’ what we were looking for,” Hendler added. “But both sides ended up in a place that is workable for the large majority of people affected.”
Salois credited the work of Senate president Karen E. Spilka (D-Ashland), House speaker Robert A. DeLeo (D-Suffolk) and their legislative teams. Both had encouraged the two sides to reach a compromise.
“They pressed on over the years, encouraged us to stay at the table, and continue discussions,” Salois said. “The good news is, here we are today.”
Past attempts to include Boston Beer, the second largest craft brewery in the U.S. as defined by national trade group the Brewers Association (BA), in any reform bill met resistance from the state’s wholesalers. The Massachusetts Brewers Guild had sought a 6 million barrel cap, in line with the BA’s definition of a small and independent craft brewery.
In 2019, the Boston Beer Company reported shipments of 5.3 million barrels of alcoholic beverages, including its Samuel Adams Beer, Angry Orchard cider, Truly Hard Seltzer and Twisted Tea brands. However, Boston Beer shipped 1.75 million barrels of beer that year, an 8% decline, according to data collected by the BA. Those shipments also excluded offerings from Dogfish Head Craft Brewery, which closed its merger with Boston Beer in July 2019. The addition of Dogfish Head, the nation’s 13th largest BA-defined craft brewery, would have added 277,727 barrels of beer to Boston Beer’s business in 2019.
In a statement shared with Brewbound, Boston Beer founder Jim Koch acknowledged that the COVID-19 pandemic had presented some of the state’s craft breweries with an existential crisis and left many “especially vulnerable to wholesalers that may focus on other priorities.” This led Boston Beer to remove itself from the equation, a concession that the Massachusetts Brewers Guild had long resisted.
“Without the ability to move their beer business to another wholesaler, there are several brewers that are in immediate danger of closing permanently,” Koch said in the statement. “From Lawrence to the Berkshires, craft brewers serve as economic engines, employers and draw tourism to their communities. If brewers have to wait another two years for a bill to be considered, some will not survive. “
Hendler credited Boston Beer with “stepping up” and advocating for the agreement.
“I think the gravity of the current moment really resonated with Jim and his team, and they stepped up,” Hendler said.
“The reality of the legislative process is that the vast majority of bills, especially like this, don’t get settled until the end of a session,” he added. “And if this doesn’t happen now, in all likelihood, we’re looking at at least two years til the end of the next session for it to happen. And that might be too late for people.”
Speaking to Brewbound, Koch said this was Massachusetts’ “one and only shot to get a level playing field with our wholesalers.”
“On one hand, it’s difficult and disappointing to have helped lead this effort for over a decade, and knowing that eventually, we would get a franchise law bill that included all of Massachusetts’ brewers,” he said. “But there were a number of our members who felt like they would not be able to make it to that finish line because they weren’t getting the attention they needed from their wholesalers during these COVID times. And so we had to take a bullet for the team.
“It was the right thing to do,” he continued.
According to Koch, the guild’s resistance to excluding Boston Beer and presenting a united front in the past led to virtually all of the state’s craft breweries beyond his company being included in the legislation.
“You could see the craft breweries kept getting strong,” he said. “Eventually, we would have gotten something passed. But it looked like a number of our members might not make it to that finish line that we’d all committed to.
“In order to make sure that as many breweries as possible survived the stresses of COVID and shifting wholesaler priorities, we needed to make a hard decision: Would we give up what we worked for for 10 years?” he said. “But it was the right decision.”
The need was underscored by the composition of Massachusetts’ craft breweries; many have built their businesses on the “taproom model” of selling draft and packaged beer directly to consumers in taprooms and tasting rooms, Hendler said. The COVID-19 pandemic, however, exposed a flaw in the model, as taprooms and tasting rooms were shut down in an effort to stop the spread of the novel coronavirus, taking away those companies’ main revenue streams.
“The taproom model is riddled with uncertainty right now, and brewers are going to need to be able to navigate wholesale to survive, in all likelihood,” Hendler said. “So it’s just that much more important in a 2020 COVID world, and the decision was made that this is critical to happen now.”
Should the governor sign off on the franchise law reform bill, the law would go into effect immediately. However, the legislation does not lay out a formula for calculating fair market value. Instead, a brand’s fair market value would either be negotiated by the brewery or the brewery’s successor wholesaler and the existing wholesaler. If an agreement isn’t reached, a panel of arbitrators would determine the value.
Hendler said he expects some movement to take place, but he’s hopeful that it encourages brewery owners to have a more open dialogue with their wholesalers.
“I think this can help a lot of brewers and distributors have a healthier dialogue, a more open and honest dialogue, and not have brewers feel like they’re walking on eggshells when they’re working with their wholesaler,” he said. “If you can’t have a hard conversation, you’re not going to fix any issues that are there.”
For his part, Salois said he doesn’t expect a lot of movement out of existing distribution agreements.
“Will there be some? Probably,” he said. “To a great level? I don’t think of it all.”
Koch echoed those sentiments, although he said small brewers will have the leverage to move or get prioritized with their wholesalers.
“A craft brewer has a choice now,” he said. He added that Massachusetts brewers’ united front is a lesson for state guilds in other states.
“If you stick together, you will ultimately get a good outcome,” he said. “Ultimately, franchise reform is good for the three-tier system and makes it more resilient, responsive and defensible because it’s not putting small brewers under a lot of strain.”
David Fields, managing partner at Wormtown Brewery in Worcester, said the most important thing the agreement does is end the twice annual fights between craft brewers and their “No. 1 customer, which is our distributor partners.”
“I look forward to putting the same amount of energy, passion and resources into promoting craft beer moving forward,” he said.
Earlier this year, the craft brewers and wholesalers had introduced competing legislation with differing barrelage caps, with the wholesalers allowing for breweries producing fewer than 100,000 barrels to give 90 days’ notice of termination. The brewers had offered a tiered system based on production volume with varying lengths of time needed to notify wholesalers of a brand’s departure. Without alignment though, those efforts had largely stalled out, as in previous years.
The compromise legislation puts Massachusetts nearly on par with the 2014 legislative reform in New York, which enabled craft breweries producing less than 300,000 barrels annually and making up less than 3 percent of a wholesaler’s business to terminate contracts without cause. New York breweries are also required to compensate a distributor for the fair market value of the business.