The California distribution shuffle now includes New Belgium.
The Fort Collins, Colorado-headquartered craft brewery notified six primarily Anheuser-Busch wholesalers in Southern California and eight Chicago area Molson Coors wholesalers of plans to terminate their distribution contracts without cause, as first reported last week by subscription-based newsletter Beer Marketer’s Insights.
New Belgium, which sold to Kirin-owned Lion Little World Beverages last November, intends to partner up with the Reyes Beer Division.
Speaking to Brewbound Monday, New Belgium CEO Steve Fechheimer confirmed Friday’s terminations and the intention to “ask Reyes to represent us in those markets.”
“This is something that we’ve been thinking about for a period of time, and this felt like the right opportunity for us just to go forward and begin those changes,” he said.
According to Fechheimer, a consolidated wholesaler network will allow New Belgium’s sales team to better serve its larger mass and grocery retailers, as well as liquor chains. It will also allow the company to partner with Reyes on a managed freight program across its warehouses.
The planned moves come in the middle of a solid year for New Belgium, despite losing 20% of its business due to closures related to the COVID-19 pandemic.
Portfolio-wide dollar sales of New Belgium offerings were up 28.9%, to more than $124 million, in off-premise retailers year-to-date through June 14, according to market research firm IRI. That made New Belgium the 12th largest beer manufacturer in the U.S. so far this year.
Year-to-date through June 14, New Belgium had five of the top 30 best selling craft brands in off-premise retailers, according to market research firm IRI.
Those brands, in order, include:
- Flagship Fat Tire amber ale: dollar sales +3.9%, to $27.9 million.
- Voodoo Ranger IPA: dollar sales +17.2%, to nearly $20.3 million.
- Rampant Imperial IPA: dollar sales +42.7%, to $19.3 million.
- Voodoo Ranger Imperial IPA: dollar sales +243.2%, to nearly $16.8 million.
- Voodoo Ranger Liquid Paradise IPA: dollar sales +100.7%, to $8.4 million.
Fechheimer said New Belgium has been able to maintain the momentum that the company built in the second half of 2019. New Belgium’s depletions are up around 9% year-to-date, he said.
Fechheimer credited the Voodoo Ranger family of brands — IPA, Imperial IPA, Juicy Hazy IPA and its rotator — with growing velocity.
“It’s not a case of the growth of those brands coming because of distribution growth,” he said. “We have distribution growth of those brands, but we also have velocity growth on those brands — even sort of above COVID expectations of velocity growth.”
Even with New Belgium having a solid year, the wholesalers in California and Illinois that are being forced to sell the company’s brand rights aren’t likely to receive initial offers commensurate with those so-called “golden cases,” Andy Christon, president of Ippolito Christon & Co., a firm that specializes in valuations and wholesaler transactions, wrote in a memo to beverage executives on Monday.
In that memo, Christon took on what he called the increasing frequency of “convenience terminations” — terminations without cause. In the case of New Belgium, he called the brand’s “incremental ‘golden cases’ of the highest quality … will contribute significant incremental profit to the distributor who is reassigned the brands.” In this case, Reyes will be the beneficiary.
However, Christon cautioned that distributors forced to sell the brand rights are likely to receive initial offers that are “equal to about half of the full and fair value of the rights.”
So why are the terminated wholesalers likely to receive lower offers? Christon explained:
- There’s only one buyer and the transfer is involuntary, meaning it fails to meet the definition of fair market value for nationally accredited valuation standards.
- California lacks strong franchise laws prohibiting such terminations.
- “The economic balance of power between the parties usually (but not always) is in favors of the supplier.”
- Legal challenges take time and money.
- Finally, there remains a “widespread misunderstanding and disagreement over fair market value.”
The answer, according to Christon, is the terminated wholesalers acting as a group and together negotiating “a fair settlement upfront to recover at least a portion of the discount for lack of marketability.”
The wholesaler shakeup in California started in 2018 with the forced terminations by Constellation Brands of four distributors with the intention of moving its Mexican import brands to Reyes. Over the last two years, Reyes has made a total of 11 moves in California to either acquire brand rights or distribution businesses.
Last month, Diageo consolidated its wholesalers alignment in California, notifying Bottomley Distributing, Classic Distributing and Pacific Beverage that it would move to the Reyes Beer Division, effective July 17.
“This change will bring scale, alongside enhanced capabilities and analytics, powered by a world class sales organization,” a Diageo spokesperson told Brewbound. “We want to thank Bottomley, Classic, and Pacific Beverage for their partnership over the years, and we look forward to working with Reyes in the future.”
California wholesalers had begun the fight at the statehouse for franchise laws to prevent such terminations, but any effort will meet strong resistance from powerful lobbying group the California Craft Brewers Association.