The nation’s beer wholesalers and beer industry executives will meet in Las Vegas this week for the National Beer Wholesalers Association’s (NBWA) annual convention, and the meeting’s arrival comes amid turbulence.
Large wholesalers continue to consolidate within the middle tier, while at least one New England craft-focused wholesaler has thrown in the towel. The pace of consolidation chugs on even as President Joe Biden has tasked the Treasury with examining competition within the beer industry at large, and that’s led to comments from at least two trade groups calling into question these mergers’ effect on the competitive landscape.
Meanwhile, two of the biggest craft suppliers are duking it out with their wholesalers in court over attempted terminations and compensation.
We’ll find out how much of the NBWA’s main stage program will touch on these issues today and tomorrow, although a couple of educational seminars most definitely will hit on them.
The Big Get Bigger: Heidelberg to Sell to Redwood
Late breaking news hit Friday with billionaire Jim Davis’ private investment firm Redwood Capital reached a deal for Heidelberg Distributing Company in Ohio and parts of Kentucky. Redwood won a bidding war for Heidelberg’s 27 million cases of beer, wine and spirits for a price tag of around $1 billion, according to subscription newsletter Beer Marketer’s Insights, which first reported the story.
In two years, Redwood has created a multi-state mega wholesaler, starting with the $1 billion acquisition of Silver Eagle Distributors in Houston in 2019, and then striking again earlier this year with a deal for Pepin Distributing in Tampa. Beer Business Daily reported today that the deal makes Redwood the largest distributor of A-B products in the system.
Heidelberg operates nine warehouse and office facilities in Cincinnati, Evandale, Cleveland, Columbus, Dayton, Lorain, Toledo, Youngstown and northern Kentucky, according to its website. In some of its territories, the wholesaler offers A-B products, but it also distributes Coors products in others. Other suppliers vary by territory, including Yuengling, Boston Beer, Heineken, Pabst, Constellation Brands, and Mark Anthony Brands, among others.
Even as Redwood grows, Reyes remains the largest beer wholesaler in the nation, distributing more than 260 million cases from its 39 facilities. And it keeps growing. This year, Reyes has struck deals with Brown Distributing (1.1 million cases) in south Florida; Greenco Beverage Company (2.8 million cases) in Greenville, South Carolina, which just closed on September 24; Classic Beverage, for part of its beer portfolio (6.8 million cases) in Southern California; and G & G Distributors (700,000 cases) in Centerville, Maryland.
Reyes wasn’t alone in picking apart Brown, which offloaded 3.5 million cases to Southern Eagle Distributing in Fort Pierce, Florida, just weeks after the Reyes deal, according to Beer Marketer’s Insights. And Brown still has its Virginia A-B house left to go.
As many larger wholesalers get bigger, at least one small New England wholesaler has thrown up the white flag. Night Shift Distributing (NSD) will cease operations after five years following the sale of its most valuable asset — the brand rights to Night Shift Brewing in Everett, Massachusetts — to Sheehan Family Companies, one of the largest craft beer wholesalers in the U.S. with 17 distributors in 12 states and Washington, D.C.
Sheehan’s wholesalers will begin offering Night Shift products on October 18 in Massachusetts and Connecticut.
“We’re at this point now where it’s like, ‘What can we be most successful at focusing on going forward?’ and it just feels like the brewing and the brand side of it just makes the most sense for us, and that’s where we can have the best impact, as a company,” Night Shift co-founder Rob Burns told Brewbound last week.
“There’s a reason why wholesalers are consolidating across the country,” he continued. “It is a game of scale. It is a game of maximizing trucks and dollars per drop and logistics, and we are not going to be able to match that. We’re just not going to be able to get there. There’s too much market pressure. When craft was growing double digits, it was a lot easier to see a pathway to get there, or to at least be a force in the market for a longer time.”
Along with Night Shift’s brand rights, Sheehan is interested in picking up some of the supplier rights to other NSD brands, and possibly buying the company’s refrigerated truck fleet and hiring some of its employees. NSD distributed offerings from fast-growing non-alcoholic craft beer maker Athletic Brewing and Maine craft brewery Mast Landing, among others.
One brand that won’t be in any deal involving NSD is Loverboy following a contentious legal fight over the sparkling hard tea maker’s attempted termination of the wholesaler without paying fair market value. The lawsuit was resolved amicably, both parties said last month.
That fight began playing out just before Massachusetts’ reformed franchise law — something Burns had fought for as then-president of the Massachusetts Brewers Guild — was signed into law in January 2021.
One of the first terminations under that law — the termination of Atlantic Beverage Distributors by Jack’s Abby in Framingham — went to arbitration, with the craft brewery eventually getting out of its distribution deal and signing with Sheehan.
However, the attempts by Jack’s Abby to terminate Atlantic in Rhode Island has proven bumpy, with a judge ruling late last week that the craft brewery must continue to sell its products to Atlantic Importing and Distributing of Rhode Island as the lawsuit between the two moves to trial.
Bigger and bigger players are beginning to fight those fights.
Attempted Terminations by Boston Beer, Yuengling in NY Lead to Lawsuits
Last month, Boston Beer Company and Manhattan Beer Distributors filed a lawsuit against five Boston Beer wholesalers — Oak Beverages, Boening Brothers, Dana Distributing, Dutchess Beer Distributors, and Gasko & Meyer — in an attempt to terminate distribution deals and move rights to Samuel Adams, Angry Orchard and Twisted Tea.
In court filings, Boston Beer said it has successfully consolidated about 84% of its national volume since its 2019 merger with Dogfish Head, but New York remains unconsolidated. Earlier this year, Boston Beer enacted a “consolidation policy” under New York Alcoholic Beverage Control Law § 55-c/statute that allows suppliers to terminate distribution agreements for “good cause” if it enacts “a national or regional policy of consolidation, which is reasonable, nondiscriminatory and essential” and pays the terminated wholesalers “fair market value.”
Sheehan Family Companies wholesalers Union and Craft recently sold their rights to Dogfish Head to Boston Beer’s preferred wholesaler, Manhattan Beer. However, Oak, Boening, Dana, Dutchess, and Gasko & Meyer have refused to sell the rights. Boston Beer argued in the lawsuit that its unconsolidated network “results in an extremely wasteful competition among Boston Beer’s various products in its portfolio as well as significant shipping and logistical problems.”
Boston and Manhattan argue that the five wholesalers “refused to negotiate in good faith and instead wrongfully sought to prevent and/or impede implementation of the consolidation policy.”
However, the attorney for Boening, Oak, Dana and Dutchess Beer argued that the consolidation policy was “improper and failed to constitute good cause for termination.” Instead, they said if Boston Beer terminates their distribution deals without good cause, they would be entitled to fair market value for their distribution rights, as well as fair market value for their entire business. The attorney argued the fair market value for his client’s distribution rights was $56 million, and if the termination violated the state statute, Boston Beer’s liability could be in excess of $100 million.
The attorney for Gasko & Meyer also told Boston Beer that its consolidation effort didn’t meet the state’s requirements and that Manhattan Beer has made a “low-ball offer” for the brand rights.
Boston Beer and Manhattan countered that the objections to the terminations “were nothing more than a cynical pretext and a ‘money grab’” and “reasonable compensation” was rejected.
Boston is seeking a court ruling affirming it showed good cause in terminating the contracts and the court to rule on the fair market value of the distribution rights.
Boston Beer isn’t the only supplier locked into a legal battle over terminations in New York. D.G. Yuengling & Son is battling a $230 million wrongful termination lawsuit filed against it by Boening Bros and Oak Beverages in Nassau County, Beer Marketer’s Insights first reported. Oak and Boening claim Yuengling didn’t show “good cause” to termination and the company is attempting to skirt New York’s franchise laws; Yuengling offered a litany of grievances for breaking the deal, noting no written contract between the parties and poor sales performance.
Among Oak and Boening’s arguments against the termination was an echoing of President Joe Biden’s executive order calling for increased competition in a number of industries, including beer.
“These actions are the type of exclusionary, discriminatory and anti-competitive distribution practices that New York State and federal government is currently investigating to protect the vibrancy of the beer, wine and spirits market, including small and independent operators therein,” they wrote.
Federal scrutiny is just beginning.
Feds’ Examination of Beer Industry Competition Just Beginning
President Biden’s executive order requires the Department of the Treasury to publish a report by November 3 based on comments received on the state of competition within the industry.
During the Beer Institute’s membership meeting last week, Alcohol and Tobacco Tax and Trade Bureau deputy administrator David Wulf said the federal agency had received more than 800 comment submissions.
Late last week, Brewers Association president and CEO Bob Pease submitted additional comments focused on consolidation and state laws, such as franchise laws, which he called “the most anti-competitive,” bans or limitations on self-distribution, and restrictions on direct-to-consumer sales, among others.
“These structures explain why almost no new beer wholesaler businesses have established themselves as effective competitors to existing wholesaler businesses in the past 50 years” Pease wrote. “Instead, beer wholesaling is a closed industry, with existing businesses protected from many competitive forces.”
Pease argued that wholesaler consolidation threatens to create duopolies in many territories, and pointed to the Reyes Beer Division’s consolidation efforts in California, which has given the company control of about 160 million of the state’s roughly 300 million cases.
Among the asks from the BA’s latest comments: The Department of Justice to reexamine its review process for wholesaler consolidations.
In addition to the BA, the Beer Institute and NBWA have both filed comments. Following the Treasury’s report in early November, the agency must consider regulatory changes by March 3, 2022.
How serious the feds are remains to be seen. During a Monday morning education session at the NBWA conference, Michael Madigan, managing partner of business law firm Madigan, Dahl & Harlan PA, said he believed the focus was more on “big tech” than alcohol.
“I personally don’t think we’re going to see any significant change on the federal level,” he said, in regards to alcohol.