Lessons on Navigating California’s Turbulent Craft Distribution Market with Kevin McGee

[00:00:00] Justin Kendall: Next on the Brewbound Podcast, what does California's distribution shakeup mean for craft brewers? Kevin McGee joins us to break it all down. Hello and welcome to the Brewbound Podcast. I'm Justin Kendall.

[00:00:24] Zoe Licata: And I'm Zoe Licata.

[00:00:25] Justin Kendall: And Jess isn't here this week, so it's just the two of us. Zoe, I gotta know, have you made any hard decisions in your fantasy football league yet?

[00:00:39] Zoe Licata: Yes and no. I decided not to kick anybody out this year, which was a difficult decision. But our draft isn't for another week, so I haven't even touched what my ideal roster would look like, and I'm very nervous.

[00:00:53] Justin Kendall: Well, bring everybody up to speed because I think what you're talking about actually caught some attention in the Boston area and has a little bit to do with beer.

[00:01:04] Zoe Licata: Yeah. So I'm the commissioner of our fantasy league that we've been doing for a couple of years now, which is a co-ed league. And the punishment for last year's season was the loser had to go to Sam Adams tap room downtown dressed in a founding father's outfit. And you had to stay from open to close, but for every beer that you drank it, it knocked an hour off. So it evened out to, you'd probably be Another Round like six hours and have five or six beers. So James Kline lost. He claimed he gave up because he forgot there was a punishment. I think he just did really poorly and didn't want to admit it. And he took forever to do his punishment and finally did it recently as of like a week ago. So I had to debate whether if I was going to keep him in this league or, you know, put him on suspension for a year for for taking so long. But he committed. He did it. He made it onto the the Boston Twitter.

[00:01:59] Justin Kendall: Only in Boston, right?

[00:02:00] Zoe Licata: Only in Boston, yep. So he got his moment to shine. If you want to see him in his full outfitted glory, or if you were at the Sam Adams tap room and saw a founding father working from the bar, then that was James. TBD on what our punishment is going to be this year. We're going to mix it up, but I think costumes are now going to be a permanent part of that process.

[00:02:26] Justin Kendall: I'm very happy that you didn't have to do the punishment.

[00:02:30] Zoe Licata: Oh my goodness. I know. Can you imagine? No. Well, first of all, I would have been smarter than James and I would have done it in the winter when the hours are shorter. Probably pick one of the deadest days so no one would have to see me. But I'm very happy that I did not have to do that.

[00:02:49] Justin Kendall: Yeah.

[00:02:49] Zoe Licata: Yeah.

[00:02:50] Justin Kendall: I got some drafts this week. Rookie draft. Fingers crossed, not that anybody will hear this ahead of time, but I'm hoping I've got the number five pick and I'm hoping Travion Henderson.

[00:03:04] Zoe Licata: I hope you get that. I don't even know what pick I have yet. We haven't even done that. We're behind the ball this year. We got to get going. So I'm nervous.

[00:03:12] Justin Kendall: It was a bad year for me last year, thanks to Christian McCaffrey and the lying San Francisco 49ers and their injury reports.

[00:03:20] Zoe Licata: Well, hey, you didn't have to put on a Founding Fathers outfit, so it could have been worse.

[00:03:24] Justin Kendall: I did not. Yeah, it could have been worse. We got something to plug. We've got Brewbound Live coming up December 10th and 11th in Marina Del Rey, California. It's our annual business conference for Bevout professionals. We have networking, we have onstage content, we have parties. Join us in Marina Del Rey, California. It's a nice getaway in the winter, and we can all learn stuff. And we're gonna learn from John Halper at Top Ten Liquors, which is a Minnesota-based liquor store chain that has done really well with THC infused beverages. So Minnesota, as everyone knows, has been ground zero for these drinks. And we're going to get the scoop from a guy who's right in the thick of it.

[00:04:10] Zoe Licata: If you're connected with him on LinkedIn, you might see he's been pretty consistently updating on what's going on with their sales and how hemp beverages have really changed up the dynamics of their stores. And it's been really nice to see such transparency about a segment that we're still trying to figure out. how consumers operate within it, what their buying habits are. I'm not really sure. I can make some guesses, but he has some actual concrete data to back up what's happening at least at top 10. So that's been really fascinating to keep tabs on.

[00:04:46] Justin Kendall: Check it all out at brewboundlive.com. You can pick up your tickets there. Before we get into this week's news, we've got a featured guest this week. It's Kevin McGee, the former owner of Anderson Valley Brewing Company. Kevin's going to be here as I set up at the top to talk about the distribution landscape changes in California and some legal battles that he's had, some other ones that are ongoing. Stay tuned for that after we hit the news and Another Round Tabbing Out. But let's get into the news. And we're just going to focus on one story this week. And that's a big one, which is a middle tier shakeup in New York City. And that is Anheuser-Busch is selling its wholly owned distributor. to Southern Glazer Wine and Spirits. Make no mistake, this is a humongous deal. This partners the world's largest brewer with the largest distributor of Wine and Spirits. And they're doing so in the fourth largest beer drinking market in the United States.

[00:05:47] Zoe Licata: Yeah, the distribution moves just from AB alone, but let alone just what's happening in the past couple months have been insane and so hard to keep up with. But yeah, this is a massive company, a massive market. It also follows AB making a couple moves where it's spirits-based brands earlier this year. That was all happening in California. So it seems like a really high priority for AB right now, kind of shaking up what their distribution landscape is.

[00:06:13] Justin Kendall: Yeah, we should note too that Anheuser-Busch also operates wholly owned distributor in California. So if you're reading tea leaves, I don't know if that's out of the realm of possibility as the next step here, because there seems to be a lot of consolidation going on in the Anheuser-Busch network. We've seen a lot of distributor deals. in the last year or so after sort of that freeze period that we had with the Bud Light boycott. But now we're starting to see that pick up. And we just saw a deal in Ohio where Ohio Eagle sold to Redwood Capital, which has also been an acquirer of Anheuser-Busch distributorships, independent and such. One of the moves coming out of that too will be Devin Duggar, who was running Ohio Eagle, is going to be moving over to take over operations in New York for Southern Glazer with their new beverage division there. And this deal comes also at a time where our friends at Beer Marketers Insights and Beer Business Daily have been tracking something going on with Anheuser-Busch and its distributors, or some of them. ABS reportedly put around 100 distributors on notice that they're out of compliance, and they're forcing at least six of them, at least six, to sell. And the reason behind this is they're citing, out of code, Bush Light Peach that was still in market. At least some of these distributors feel like they were set up on this, where they were encouraged to order an excessive amount of Bush Light Peach, and they were promised that there would be Do I want to say deals or discounts or whatever to help them move product if it wasn't moving and those never materialized? Well, I've got some fun facts while we're at it. I've looked at some circana data on Bush Light Peach because I was curious. I just wanted to know, what's Bush Light Peach doing these days? And I went back to 2023, figured might as well go back a couple of years because this kind of hits into that area of when things weren't going great for Anheuser-Busch with the boycott of Bud Light and its other products. But in 2023, Sirkana off-premise sales of Bush Light Peach reached $41.4 million. Next year ticked down just a little bit to $35.85 million in 2024. That's down 13.6% in dollars and 15.1% in volume. And then I looked at this year. If they're red on this page, this would be like the darkest red color because Bushlight Peach this year has sold $421,100 in off-premise sales. That's down 98.3% in dollars. That's down 98.4% in volume. That amounts to minus $23.75 million in sales and minus 1.1 million case equivalents. And I don't know if bush light peach is even supposed to be in the market at this point. I would imagine after, you know, selling 35 million the previous year, it might come back, but maybe they phased it out. I don't know, but, or maybe that just shows some of that old beer still moving.

[00:09:50] Zoe Licata: Yeah, the sales are a bit higher in NIQ too. So it's really interesting too to see Bushlite peach compared to Bushlite apple, which I think is where a lot of the consumers who are probably getting peach are going to because we know Bushlite apple has been mega for Anheuser-Busch since they brought it back this year after a couple of years. And just the size or the amount of sales happening for that brand compared to peach is Quite significant. We can't share the actual numbers for those, but it's significantly larger.

[00:10:23] Justin Kendall: Bapple was a thing, right?

[00:10:25] Zoe Licata: Oh, yeah. I still see ads sometimes for like bootleg Bapple merch because people are really into it. And folks were getting just hauls of clearing out stores and calling to make sure they had Bushlight Apple. But Bushlight Peach has just kind of been forgotten.

[00:10:42] Justin Kendall: Yeah. Well, I've got my tinfoil hat on, Zoe. I think, and this is just my thoughts, I think that there's more at foot here with Anheuser-Busch and Southern Glazer coming down the pipe. I wouldn't rule any of it out. I expect more activity. Clearly, there's unrest within Anheuser-Busch's network, and I should mention that There were distributors who came out and said, no, this isn't the case. I will say that also sounded a little bit coordinated to sort of say, you know, hey, no, things aren't all bad here. So that's just the conspiracy theorist in me, but I don't know, man. I expect more activity. Clearly, we're seeing a lot of consolidation. With this amount of unrest and at least six wholesalers reportedly being forced to sell, it will be interesting to see who emerges as buyers there. And I would look to California as possibly a next step here because we've already seen neutral and hot water move.

[00:11:50] Zoe Licata: I'm curious, you brought up that AB was kind of on a freeze of doing too many things like this because of all the stuff going down with Bud Light. I'm wondering if they had planned to do some of these big moves beforehand and they really had to cater to a lot of their distributors for a moment after all that Bud Light stuff because they distributors were pissed off. They seemed to think that all this controversy was because of Bud Light's actions and that distributors were hurt the most by it. And so then AB had to kind of give some things back to distributors. And now that those relationships have settled out a bit more than from before, now they're like, all right, now maybe we can take a risk and kind of piss you guys off again.

[00:12:34] Justin Kendall: Absolutely, because at one time, AB was paying its distributors a little payback to offset costs because things were going so poorly. And now we're seeing McAulter pick up and Bush Light pick up and some of that volume come back, but it's not all back. But you can totally see Anheuser-Busch is flexing again here and trying to throw its weight around. I don't know, like for distributors who went through the ringer with them on this one, it's got a really weird feel to me. And I feel very much like a conspiracy theorist, but I also feel like this is just the past repeating itself over and over again with them.

[00:13:17] Zoe Licata: Yeah, we'll see what happens. Just the whole distribution market in general, just not just including AP, is in a huge period of consolidation. So we're not done with all these various reports that are coming out.

[00:13:35] Justin Kendall: Let's move on to Another Round of Tabbing Out. And last week, we found out that Spindrift is spiking. Spindrift spiked its hard seltzer brand. It lived, but not very long. And like many others, it has died. And our old buddy, Dave Berwick, who is CEO of Boston Beer, is over there now. And he's the one that I think pulled the final trigger on this. And, you know, I think he's got enough experience having been at Boston Beer and having been through it with Truly to understand that Maybe this isn't a thing that we should be involving ourselves in at this point, even though we continue to see some crossover beverages. But how do you feel about Spindrift pulling the plug on Spiked?

[00:14:26] Zoe Licata: Honestly, I didn't even know it was still in the market. which no shade to spindrift spikes at all. I am a fan of regular spindrift and it is a staple in my parents' household but it just never really had a significant impact in that segment. I know there were a couple times where it had some like nice numbers but for the most part it kind of got forgotten in the White Claw truly space. And then as soon as High Noon and all these spirit space stuff started coming on the scene, it got totally lost in the dust. So I'm buying Another Round, even though you can't because it's gone, on them getting rid of it. I think it makes a lot of sense. I was a fan of it at the beginning of just the idea of it, the concept of it, because I think Spindrift is a pretty good product and it could translate well as an alcoholic beverage. My mom would have been the perfect consumer for that. She loves Spindrift. She likes the kind of fruity beverage. You would think that maybe she would buy this type of product, and then she never did. And I think it shows that just because someone likes the non-alcoholic version or the regular version, it doesn't mean that they also want that as an alcoholic beverage.

[00:15:41] Justin Kendall: It's another example of these crossover beverages kind of going a little too far. Yes, I could see the use case, like where you would think that it would translate, but it's just such a hard market to come into and carve out space. And for anybody who thought that these products were going to be long lived, as far as like crossover beverages, like coming into Bev-Al, I just don't see it unless there was some type of history or you have sort of that right to play in the area. I don't know, I saw the Dole Malibu RTD that's coming out that our friends at PubMed wrote about. And I'm just like, bananas are getting in really like big banana. Sit this out. Haven't you seen the lessons of hard seltzer?

[00:16:32] Zoe Licata: Yeah, what Spindrift struggled with too is I don't think there was a large consumer base that was creating their own alcoholic versions of Spindrift either. It wasn't super well known as being used as a mixer. And so it wasn't like consumers were pining for this or they saw it as an easier option than compared to things that they were already doing. So it wasn't providing a solution, it wasn't really giving too much to consumers other than just another choice among a lot of very other similar products.

[00:17:06] Justin Kendall: It did have the hue, like the color, but I mean, that's... If you're drinking out of a can, you're not going to see that.

[00:17:13] Zoe Licata: Yeah, you would have no idea because it wasn't really a part of the marketing and the cans were just the typical white cans. It also was in a weird space where it was called Spiked Spindrift, but it wasn't spirits-based, right?

[00:17:27] Justin Kendall: I don't believe it was.

[00:17:28] Zoe Licata: So then are consumers confused on what it is? It didn't have a clear enough point of view for consumers to really want to choose it over anything else. Not everything can be a seltzer.

[00:17:40] Justin Kendall: We're out of the gold rush phase, obviously. It's still a $3 billion segment, but it's a $3 billion segment that's dominated by one player. And then you have a strong but declining number two, strong being like in comparison to number three.

[00:17:58] Zoe Licata: Yeah. Yeah. And it's just, it comes back to what we talked to you all the time about the consumer that was really buying those products has moved on and has found something they enjoy better, which is spirits based offerings. whether that's a spirits-based seltzer or a tea or whatnot, the malt-based or sugar-based seltzer space is really only, it can really only be a couple people now.

[00:18:23] Justin Kendall: Well, I think that we've hashed out all the world's issues with hard seltzer. So I think we should move on to other issues like distribution in California and go to our interview with Kevin McGee.

[00:18:38] Kevin McGee: Our guest today is Kevin McGee, who you will likely remember from past Brewbound Podcast appearances as the president and CEO of California's Anderson Valley Brewing, which his family has since sold, and we'll get into all of that. But Kevin, you've successfully helped Anderson Valley through a few legal disputes in which distributors were claiming millions of dollars in termination fees. Before we get into all of that, how are you doing? Jumping right in. I wasn't even going to like do the pleasantries.

[00:19:06] Anderson Valley: I'm doing good. We, uh, we sold the brewery in March, took a couple of weeks, a couple of months just to kind of finish up, you know, helping transition the stuff over. Ended up hanging a shingle. So after 29 years of being licensed as a lawyer, I'm finally doing a solo thing and it's been going well. I'm kind of back to doing the guy in a dog office sort of. situation, which is something really familiar to me over the years. And it's nice to get kind of back to that and also reach out and talk to a lot of people I hadn't had a chance to connect with over the years because I was trying to sell beer. So it's it's actually it's been it's been really good. It's been a nice summer.

[00:19:42] Kevin McGee: Good. I mean, selling beer is very time consuming. But how is Gordy?

[00:19:46] Anderson Valley: Gordy is in doggy heaven. He passed two months before we bought the brewery. Oh, I'm so sorry. Loki is, I named it Irish Wolfhound after the Viking god of mischief. And I don't know if that was a really good idea or not. So Loki's been the one who is going back and forth to the brewery with me. But the fun thing about Gordy is that We use pictures of Gordy as the basis for the artwork on the new logo for Anderson Brewing. So actually, if you see the pictures of Gordy side by side with the antlered bear that's all over the branding, you're like, oh my gosh, there's Gordy.

[00:20:26] Kevin McGee: Gordy. And Gordy was on Twitter. It was very active on Twitter.

[00:20:30] Anderson Valley: Oh yeah, I know. Gordy was my moral compass. And he also pretty much was the driving force behind Healdsburg Beer Company. So he was more popular than I was back when I started the brewery back in my garage, 2007. So he was very much part of the nascent nano-brewing community in Sonoma County here.

[00:20:48] Kevin McGee: A very good boy. Well, Loki, I'm sure he's carrying the torch and probably causing a little bit more mischief.

[00:20:55] Anderson Valley: Oh, yeah. Loki is like raising a wolfhound. It's like fostering a small bear rather than actually raising a puppy. So he's interesting. So he's hanging out in my office right now.

[00:21:06] Kevin McGee: Well, I'm glad he's here for this pod. We've got a bunch of different things to talk about today, but top of mind, which you have reached out to share the news about, and I figured the best way to talk about this was to just have you here to talk about it yourself rather than talk to one of us and have us write a story, because I think it's a super interesting topic, but very complex. And you are great at making really complex things sound simple and easy to understand. Thank you. So you have successfully helped Anderson Valley out of a few legal disputes in which distributors were claiming like millions of dollars in termination fees. Just give our listeners like a high level view of what went down both with Bay Area Distributing more recently Shauna Golden Brands a few years ago because I'm sure this is something that other craft brewers will find themselves in or adjacent to in the near future if they haven't already.

[00:21:53] Anderson Valley: Yeah, these two cases, they were similar, but slightly different. So with the Reyes brand, we ended up saying we want to go in a different direction and work with a different distributor. And they asked us basically for, I think at the end of the day, they were calculating like three and a half million dollars or something like that. that they wanted as a termination fee and we pointed out that we don't have a contract with you and California is not a franchise state so you don't have a statutory or contractual right to any kind of termination payment so we're not paying you anything. And they thought that that was unfair, and so they sued us. And that has to do with something I can talk about a little bit more in depth later, but just this kind of thesis that has been presented in California in particular, that beer distributors are just entitled to some sort of termination fee because the beer distribution industry is different. And it's not true, but it's been a narrative that's been repeated for so long that it's almost like legislative gaslighting at this point. It manifested slightly differently with Bay Area Distributing, who was Anderson's distributor for the East Bay. And what happened there was they were winding up their business, and they were trying to sell different brands to another distributor, and they asked us to consent. And we asked them all kinds of questions like, I'm not aware of a contract. Are you aware of one or anything else? And there wasn't an agreement or anything like that. we were going to go in a different direction and try and consolidate our distribution for Another Round. So we said, thanks for pointing that out, but we're going to go with a different distributor, not the one that you picked. And they came back to us and said, well, then we want all of this money that we would have been paid if we had sold it to this other distributor. And we said, well, wait a second. You didn't tell us that you had some sort of a deal. you know, in place, and so there's a statute in California that's about as close as you get to franchise relating to transitioning and selling between distributors. And the way that the statute's written is that if a seller—or if a brewery, rather, doesn't consent, then they can be liable for the amount of money that the distributor would have sold the business to the other distributor with. And in our case, I learned that he actually had a dollar value. And I said, well, OK, in that case, then we consent. But I want to make it clear that we don't have a contract, which means that if they pay you something, it doesn't obligate us to do anything. So the day after you transition this and they pay you, we're free to just reassign a different distributor. So that raised the question, what are they paying you for? You actually don't have any durable rights for them to buy. And usually when this happens, there's a contract that's got a termination fee in it that says that if you terminate without cause, then you owe us a certain amount. And so the transition really is just distributors assigning those contracts back and forth to each other. They're just buying the contracts back and forth. If there isn't a contract, then there's nothing to buy back and forth. So that's why it was kind of surprising. So we ended up in litigation with them where they just decided that they felt that they were entitled to it anyway. And we said, well, no, we don't have a contract. We don't have an agreement. So what ended up happening is that the new distributor decided they didn't want to pay the money because they realized that they didn't have a durable contractual right. So the distributor that we used to work with still wanted to get the money from us and basically said that, well, there's just an implied agreement between distributors and breweries in California that the distributors are just always entitled to this. So that's kind of what the case was about. So we just got the arbitration ruling from the arbitrator, the final ruling that said that the million dollars that they were basically saying we could be viable for was not owed. They are not entitled to this. and that they need to pay us for the open invoices that they decided not to pay us for. So between the two cases, I mean, we kind of had demands for like four and a half million dollars. After two bench trials, no money was awarded to either of the distributors. And we were awarded something like 85 grand worth of like court costs and open invoices or something. So go figure. But the real challenge with a lot of this is that there has just been this narrative that distributors are entitled to a payment that's been repeated over and over again, and it's just not true. And I've talked to attorneys, I've talked to legislators, I've even talked to lobbyists that for some reason just have absorbed this. And think that's case and we're ending up going in these repeated contested hearings and actually getting legal determination that points out that no, this is fiction. So hopefully there'll be frankly less of this to deal with now that that we've gotten some results out of it, but it's a big deal in California.

[00:27:11] Kevin McGee: Well, I mean, thanks to your law background, you've never really shied away from legal matters during your time leading Anderson Valley, but not every brewery leader has passed the bar. So what do other people need to know about deciding when something merits legal action?

[00:27:27] Anderson Valley: It's highly situational. And then beyond that, it really depends on who you talk to as an attorney, too. We actually changed legal counsel at one point during some of these cases, because our original legal counsel, which was a large firm, was telling me with the Reyes that maybe you want to settle for one point. And I'm like, no. and there was a learning curve where even they had to kind of understand, you know, what the statutory construction of, you know, the scheme in California was. And so, frankly, it's not that well-developed of an area because it just doesn't end up being litigated, and partly because the distributors tend to have a lot more funding and they've got a lot more access to lawyers than some of the small, mid-sized brewers in particular do. I mean, that's one of the challenges. But really, this stuff can be expensive. It can be unusual. Going through a discovery process can be onerous if you haven't been there and don't know kind of what it looks like and what to expect. A lot of times it's better not to do it. In situations where, like we were in, where we had the largest distributor in the country asking us for over $3 million just because. They didn't really have a choice. So you kind of look at it, and you peel it apart. And it's like, well, I mean, actually, the value here is zero to them. There is no fair market value, because no one would buy this stuff. That's another can of worms, too, about fair market valuations for some of these things. But for breweries that are out there kind of looking at it, you know, getting solid legal advice, there's a few people that really practice in this area. I'm not the only one there, you know, Candace Moon, there's a few other firms that are out there that do this too. But, you know, find somebody, maybe reach out to California Craft Brewers Association if you're in California, start networking and get some advice there. But a lot of it is, unfortunately, the nature of the legal system is that justice equals money. So everything comes down to whether or not you can afford it or what the opportunity cost is and that kind of thing. And so that's not a simple calculation.

[00:29:41] Zoe Licata: It seems like what makes California so complicated is there is, as you said, a lot of implied agreements and not actually things down, you know, pen and paper. Do you anticipate seeing, I mean, now we have this precedent from what you've all been through, but do you also see there being more pushes for actual concrete changes or rulings of what is going to be happening in the state so it's not as muddy of an area?

[00:30:09] Anderson Valley: Yeah, it's it's already kind of changing, but there's there's already been a move to try and amend a statute in California based on the case that we had against Reyes. And they looked at it as kind of like, oh, we need to close this loophole. So it wasn't well, it wasn't a loophole. And I can talk about that reason to why the statute kind of did what the statute was intended to do, but not what they wanted to do. So there is a move to try and chip away at the, I mean, frankly, it's the freedom to contract in California compared to franchise rights. I mean, franchise rights really are a substitution for contractual rights based on historic disparity of bargaining power. That disparity bargaining power doesn't exist anymore, but that's another longer conversation. There is going to be an attempt to shore some of this stuff up. The distributor lobbying efforts are very well funded, very well established. There has been this long kind of narrative that's been seeding some of these larger conversations and eventually will be pointed towards legislating them. So, I think that will probably happen. In the meantime, you know, the unfortunate thing is that the realities of the power disparity is the converse of, frankly, the need for franchise protections for the wholesalers. There's a lot that has changed since the 21st Amendment. The three-tier system and protections for wholesalers has worked so well. that it has now turned it on its head and you've got massive consolidation and other kind of power disparities that are still benefiting from the original three-tier structure and franchise protections and things that do not need those protections at this point.

[00:31:59] Kevin McGee: Are there any other industries that have a convention like this?

[00:32:03] Anderson Valley: Nope. That was when they were talking to some of like lobbyists and other folks in California. They're asking hypotheticals like, well, you know, you're telling me that this beer distributor that took on these brands and bought trucks and got warehousing and hired staff that if this brand, you know, leaves it, that they're entitled to compensation for that. And the response is, well, replace the word beer with literally any Another Round in commerce. And there is no expectation for that. The protection for a distributor that sets up that kind of infrastructure is that you sign a distribution agreement. And in California, most of them do. I mean, a lot of this stuff in California is governed by contracts that have been developed now. It's probably over the last 10 years or so, which are a lot more sophisticated than kind of the handshake relationships that used to happen with legacy breweries like Anderson, for example. So much of this is kind of handled by the contracts that the distributors and the breweries put together. And that's frankly kind of the most efficient way and the most kind of capitalistic way to go about doing it. If you can agree to something, then you kind of agree to it. The idea of having these franchise or statutory protections in place for the wholesalers really kind of upends that bargaining leverage. And now you have these franchise protections in place where you also have the bargaining leverage on, you know, really on the side of the wholesaler through, you know, a number of different dynamics, the biggest one being that there just aren't a lot of options for suppliers to go to other distributors. And so the market dynamics and free market economy principles of the wholesaler and supplier relationships are broken. But right now in California in particular, I mean, a lot of this stuff probably isn't going to be necessary because most of the relationships have distribution contracts, which include these termination provisions for payments or whatever. The main difference being that when a supplier and distributor enter into those contracts, The distributor typically is paying the supplier a fee for entering into an agreement that has limitations on that supplier's ability to then terminate or move the contract. So the distributors investing in The brewery and part of the protections that that distributor has is that if the brewery leaves without good cause, then the distributor gets to get their money back or some of their money back. And part of that also is that, you know, if. the Brandt Gehrs in value while that distributor has it at the exit because it's a multiple of sales, then that distributor would be able to participate in the upside of that growth. And that was the protection for doing the brand building and development. And, you know, some of that's justified, you know, on the narrative that, you know, as wholesalers, we're brand builders, we tell the story, we do all this other kinds of things. And again, just the changing dynamics of the marketplace and the way those kinds of things work, particularly in post COVID, those kind of behaviors that were justifying some of that just aren't happening anymore. The level of service and other things that used to happen with a lot of wholesalers, particularly in you know, 20 years ago or so, just kind of aren't happening. And a lot of them, not all, but a lot of them are really just kind of like large frame delivery companies that are doing their best to drop pallets at Walmart, Whole Foods and Costco and trying to not spend money to do the higher cost and, you know, higher complications, things of like going and visit independent, you know, on-premise bars, restaurants and things. I mean, that's the lowest margin that they can they can realize from their sales. So they're trying to do the other stuff. And during the pandemic, they very reasonably gutted those functions because those accounts weren't open anymore. But in the years since they opened up, they haven't backfilled them. And they've really just been kind of absorbing cash and absorbing the profitability and the margin from doing all this stuff without having to spend for or provide those services.

[00:36:33] Zoe Licata: So Kevin, you brought up the consolidation that is also a factor here. We've seen so much distributor consolidation in the past years, particularly in California, just in the past few months alone. And that, along with all the other factors you've just been talking about when it comes to supplier and distributor relationships, That's also cutting down on just the amount of options that craft breweries have. And you also have a million products out there. So your access to market is also significantly lower. So what else are you seeing in just the impact of that consolidation on craft breweries right now?

[00:37:08] Anderson Valley: I think the biggest thing is exactly what you mentioned, and it manifests in a lot of different ways. I mean, the biggest thing is there are no market forces, really, with regards to distributor-wholesaler relationships, for the most part. I mean, there's some, but they're not nearly as meaningful as they need to be. There's just a lot of suppliers out there, and there's not a lot of distributors, and your recourse as a supplier to be able to go find another distributor that's a better fit for you is just really choked down and very much limited. And we did a lot of distributor realignment at Anderson. And there are some places where we had all kinds of challenges, even when we could find somebody. Florida was a great example. So we were changing distributors in Florida. Florida wanted a fair market value payment from us under Florida statute which is irrational. So I went to the distributor that we were going to go to and said they want a fair market value. And then the distributor we're going to says we're not paying anything for brands right now. So I went back to the initial distributor, said your fair market value is zero. The number that a distributor will pay another distributor for the right to distribute our brands in the state of Florida is zero. And we were doing tens of thousands of cases in Florida, but it was a vibrant, decent market for us, which we've got a lot of history in. So it took nine months but eventually I got able to get the management of our distributor in Florida to agree that if we just paid them $100 and signed a confidentiality agreement to not tell them we were going to pay them $100 that they would release the brand. So I'm like, fine, done, I'll do that. So I reached out, I drew up a one-page confidentiality agreement, said, you sign this and we'll send you the $100. They didn't bother to sign it. They didn't even look at it. They didn't even ask for the $100. And they gave us the release letter. And so we went to this other distributor who then was unable to do kind of what they needed to do. And so we had to go to a different, and so it's like the process of trying to find alternatives is really challenged. And for kind of those mid-level distribution-dependent craft breweries out there, particularly ones that are in multiple states, particularly kind of legacy brands that need a certain level of distribution and wholesale activity in order to make the revenue they need to, to justify the business model. It's an existential issue. And the more consolidation happens, the more it aggravates the lack of ability to fix that. And now changing distributors isn't always kind of the fix. One of the other challenges is that you have growing books in these distributors, too. And so the amount of attention that you get from a limited number of people gets lower and lower. If you have a distribution house that you are stuck in because it's better than all your other alternatives, you have to hope that they're staffing some of those craft heavy sort of on-premise locations and that the people that you have through the distributor that are servicing those accounts are conveying the information you're doing during the ABPs and also the kind of stuff like you have you know an innovation you've got a new product you have your own staff telling people about it, but a lot of times you're going to need that distributor's rep to point out, hey, we have this on special, or we've got a new item, or if, you know, the account says, you know, what's new, what should I know about, they have an answer. With some of the staffing levels and the focus on off-premise and large chain retailers and some of these distributors, You'll get distributor reps that visit the on-premise when it's not open. They check the levels of kegs at certain accounts, and they'll just backfill that. And they might not even see anybody else that works there, never mind the buyer, for extended periods of time. So it's like, well, you're not getting meaningful representation there. You've got to go do it yourself. And when you have a business that requires that your distributor be, you know, a partner in growing and servicing the marketing and presentation of the stuff, then that that's a challenge. And that is, again, getting worse when, you know, you have a long tail of brands.

[00:41:21] Zoe Licata: And it's not just beer brands anymore, too, right? There's so many distributors who are expanding into being more total beverage.

[00:41:28] Anderson Valley: Right. Yeah, exactly. And then you have the focus on C-stores. Well, if your brand is not C-store adjacent or, you know, that kind of thing, then you now have your distributor staff spending a lot of time in accounts that don't have a suitable location for it. And it's also a symptom that there are a lot of brands, there's a lot of items out there. For a long time, the industry of craft was driven by just kind of churning new ideas, churning new skews, and bringing stuff out to market. And some of that had to do with You know, it was very topical and it was very, very much driven by fashion and fast moving shiny object kind of sales. And that was a lot of how the distributor reps would end up presenting stuff to the accounts that the supplier reps couldn't get to. It's like, this is the new thing. This is the next thing. And it got to the point of just kind of, it was the most effective way probably of getting the distributor reps in order to be presenting your stuff is that you just keep bringing new stuff, you know. But it got to the point where it just kind of overloaded the system. And then you had warehousing challenges. I mean, distributors very rationally have got real challenges with the amount of SKUs that they're maintaining, how much cold chain you can really afford to maintain all the time and things. So rationalizing that makes a lot of sense. And there could be room for distributors that do focus on that kind of like cold chain high turn type of things. But economies of scale are really difficult to compete against. And it's a hard business. I mean, being a distributor is, you know, you can live and die by just a small amount per case. And being able to do that as a small boutique distributor is really challenging in beer. We actually focused on trying to find distributors that had significant wine portfolio, because we knew that they had to be going into the on-premise and sort of the higher end accounts that were very sort of craft, you know, adjacent. And, you know, the idea was, it was like, look, we know your manager wants you to sell beer too. And, you know, it's like, we're going to try and make it as easy possible to remember us, you know, and so we would be communicating things using wine language. I've got history in the wine industry too. And so trying to find ways to talk about the beer brands in, you know, using, you know, tactics and vocabulary and like that kind of, that resonated with, the way that, you know, the wine wholesalers would manage their businesses, and we had some success with that. But it was, you know, you really had to go to a different animal of distributor to kind of do that, because the straight-up beer distributors who, you know, are doing different levels of RTDs and energy drinks, and somebody's now got, you know, liquid death, and somebody's now got, you know, all these other kinds of stuff. you're not that shiny object anymore. And, you know, craft as a market and as a category by not declining makes it harder to sell. And that makes you even less shiny. So, you know, it's a real challenge. And ultimately, I mean, distributors are entitled to do the things that make sense for their business. The real disconnect is that when that happens, there need to be alternatives for some of the brands that are in these distributors whose business models have diverted from what originally made it a good idea and made it something where shared financial interest was enough to make sure that everybody was doing well, everybody was doing the right things by each other and things. And when that diverges, there needs to be options for suppliers and distributors for that matter. Some of these other things just prevent that from happening.

[00:45:10] Kevin McGee: I'm glad you brought this up because something that's been on my mind basically all summer with the impending departure from California by RNDC and we've seen all the spirits headlines come out week after week about this spirits brand is going to Reyes. How much does this influx of spirits brands crowd out the market for smaller craft players and what can they do in the meantime? What should they be doing?

[00:45:34] Anderson Valley: As a craft brand, what they need to be doing is owning their own location and owning the things that they can touch consistently. I mean, it's a certain amount of survival mechanism where it's like you need to retrench inside your best areas of influence because you're right. I mean, when you have, you know, if you are with a distributor that all of a sudden is picking up like all of these brands, the priority for that distributors management is going to be onboarding a lot of this business. And you're going to have to transition over. There's going to be new routes. There's going to be all kinds of other stuff. Staff need to be trained and everything. And all of the time and energy that's spent doing that is time and energy that can't be supporting a brand that has been in the portfolio for a while. And if it hasn't kind of broken loose with something that is driving shelf pull there's a chance that it's kind of an also ran. And it's like, it's in this bucket of things that we have, which are cool, but are not the most important things right now. And so priorities are challenged too. And then that's, you get back to the same dynamic of having fewer distributors and now even more products. There's only so much attention in the world. So it's like this attention issue with management, with incentives and with the kind of resources that the distributor wants to spend. I mean, most all of that, again, very reasonably is going to go towards onboarding all this new stuff that they've got. So there's going to be a period of time where, you know, the distributors, if they're being just straight up with their longer tail of, you know, craft producers, just going to say, like, we, we're going to have to get back to this a little later. I got a ton of stuff going on. And, you know, if you do, you know, ride alongs with the reps out in the field, you'll probably see it directly. It's going to be a challenge. You've got now even fewer distributors, which means fewer attention span, fewer resources being expended to things that were not RNDC. And obviously, because RNDC didn't have any craft and didn't have any beer, the outfits that are picking that stuff up, all of those resources are going into different categories. So we'll see, but then you also have, you know, Reyes is picking up, you know, non beer items for the first time too. So, you know, I'm sure that's a test market thing and we'll see where they go with that. It's hard to think of. real actionable things to do with your distributor relationships these days, unless you're one of kind of the handful of breweries in the country, frankly, that have the kind of market clout where it just drives itself. And you've been able to maintain that level. I mean, you have things like Sip of Sunshine, you have things like Pliny, you have You know, these these other items. I mean, I think Sierra pale ale is Another Round of those where if you're not in those sort of categories where, you know, consumer poll is driving your distributors attention span and you're trying to develop that or trying to reclaim it after the pandemic. There's a lot of challenges and the best thing to do is focus on the stuff that you immediately control. Own your own premise first and foremost and then have to build from there. And then expectations for things like being in nationally distributed. Does that make sense anymore? Where are you going to put people? Are you going to put salespeople? And those kinds of questions. It's a retrenching thing, and I can't think of any super solid answers. Otherwise, I would have done it, you know, frankly. It's tough out there.

[00:49:01] Kevin McGee: Well, so changing gears, you know, your family acquired Anderson Valley in 2019. I want to say that news broke the same week that Kings and Convicts acquired Palace Point. A big week for beer M&A, right? And that's the first time that you and I met over the phone, but it was just before COVID and COVID obviously really changed absolutely everything that we all thought we knew about craft beer. So it was made for a rough couple of years and you guys made the decision to sell last year. But was there anything in particular that made you think the writing was on the wall and now is the time?

[00:49:34] Anderson Valley: Yeah, we did a lot of work in the consumer marketing side of things. I mean really kind of the thesis when we looked at Anderson. I love Anderson. I still love Anderson. I mean the brand has got so much authenticity and so much depth. It's fantastic. There was a lot to work with and we thought when we were looking at it that there was a lot of material to work with for consumer marketing and just awareness and things and stuff that just hadn't been done. And so that was our focus. And there were a few other things that we wanted to do, but all kind of required meetings and consumer facing activations and things like that. And then two months later, it's like, you cannot do any of that. And so we just tried to do what we could with what we had and then working the markets too. And really what it kind of came down to was, we got through the quarantine periods into a little bit kind of post-quarantine, had a few projects put together, and we really put together and kind of laddered together a number of marketing and consumer-facing tactics, some promotions, some things that we were doing with our distributor partners, new product launches, and kind of lined up everything and scheduled it to be self-reinforcing. So the idea of trying to get it into this kind of a feedback loop to get attention and drive sales. And it was working. And we kind of launched and went into it. And for the first two months, we were up 25%, 26% in the beginning of 2024. And then all of a sudden, everything stopped. And it didn't really have much to do with us. It had more to do with how spring resets were rolling out and a bunch of other things. And so just talking to my dad, I said, look, we're doing everything that we can and we're just not in control of this as much as we could be. And so. the idea of trying to kind of break through and break out and return to a level that we want to be, that was, you know, sort of post COVID, early COVID, it's just, it's a long, flat curve. So, you know, you have kind of a long grind to get back there, you know, or that was kind of the option. And so we just talked about it, you know, as a family and things like that. So decided, he decided that probably best for us to, to look at something else too. But it took about a year really kind of from that decision to actually close the deal. And that had its ups and downs too. But we were finally able to do it. We found a great buyer. One of the main criteria was that we wanted to make sure that the person that took it on was also taking on staff, was also kind of taking on operations and things, and was going to be a steward of the brand. And so we were able to do that. And so we were able to sell it. All the staff traveled over, other than me, basically traveled over to the new business. And they were able to kind of pick up and take off, but it was a journey. And in a market where there aren't a lot of buyers either, that's the other thing. It's stressful.

[00:52:33] Zoe Licata: Right. And there's also a lot of folks who are questioning if they should be exiting from craft beer or reevaluating their relationships with their companies. And I'm curious if you have the perspective of someone who was an acquirer and someone who maybe could take a step back emotionally from some of these decisions, even though we know you care a lot about the brands you're involved with. But do you have any advice for some of these brewery founders and owners who have really invested their whole lives in some of these brands of like, what goes into making a decision if you're feeling conflicted about what happens next for your brand?

[00:53:12] Anderson Valley: Yeah, that's so situational too. I mean, there's so much, like I started Healdsburg Beer Company in my garage in 2007. And some of the intellectual property involves pictures of my daughter helping me clean kegs when she was like four and stuff like that. So like, we didn't sell that. I mean, that was not on the table. And then you have, you know, the things like Anderson where I thought we were stewards of it, but it was not, you know, that level of kind of personal things. I mean, really, a lot of it depends on how objective you can be about the business and what you want to do. I mean, there's an opportunity cost kind of evaluation. It's like, yes, you can do this, but should you do this? I've done a lot of mergers and acquisitions. A lot of what I had done before was buy side advisory and working with private equity firms and other folks, too. And so buying and selling businesses is a process I'm really familiar with and done a lot of. So I kind of knew what to expect from the process and you really need someone like that that you can trust to bounce ideas off of. That would be the first step in doing it is like talk to someone and just, you know, the first thing is just to kind of understand what it looks like to get from where you are today to what it looks like as a transaction, not just in terms of, you know, how much time it's going to take, But how much it's going to require of you producing information, sitting down and talking about this stuff, negotiating with someone who is going to convince you that, who's looking to convince you rather, that what you've spent your life working on isn't as valuable as you think it is. That can be hard. So there's there's a lot that kind of goes in there, but ultimately there needs to be an objective evaluation of is like, you know, is this financially and emotionally where I should be spending my time. The first step to that is understanding what the mechanics of it is doing, and then the next step is just talking to the stakeholders in your family life. Talk to friends, family, spouse. I talk to the dogs a lot, and see what their feedback is. It can be the last six years has been absolutely brutal, and it's taken a tear out of everybody. And there's really good arguments to be made that we're through. We've got something that isn't what it used to be, but at least it's kind of stable and more predictable than it was for the last five years. And we can manage this. We can do this. And then there's another perspective, which is like, I'm tireless. This isn't what I want to do. This isn't where I want to be. It's not as fun as it was before. This isn't the craft beer industry I grew up in. And then for that person, it's something to move on from. But I mean, I probably, you know, as much as I've done work with private equity firms and everything, I think the decision really is one of those holistic emotional things where it's like, are you happy? And if you're not, change it. And that's one of the ways to do it. I mean, right now it's a challenging time to do it. There's a lot of, you know, there's a lot of places that are either for sale or would be for sale. There's not a lot of buyers. There's three categories. There's basically, there's the strategic capital, which is, you know, other breweries, other people in the industry. Most of them are just building giant moats around their core business and looking to steal something if, you know, it comes up, you know, and it's super cheap. And then there's the professional capital, which are the private equity firms and they can't, they can't calculate their costs of capital beyond 30 minutes from now. So most of them are sitting it out and waiting for like the macro trends to go through. And then you have a whole different category of, you know, everything from crypto and tech bros to, you know, other folks that have a line on a sovereign wealth fund kind of disbursement and, you know, blah, blah, blah. And so those are the outliers. You never know who those people are. But there's not a lot of buyers right now. There's always buyers for something really good. There's usually buyers for something that's priced very aggressively, but not always. And, you know, honestly, right now in this market, while you have people from the outside looking at some of the macro trends and the headlines and things, this is probably the time to sit down, talk to someone who is a trustworthy financial advisor or M&A specialist or investment banker, and start figuring out what are the things to do now so that if you want to bring your business to market in six months, nine months, 12 months, that you have track record of your P&L and you have track records of your business performance in order to support the kind of valuation that you're going to want to present. This is the time to clean up and tee up a business for something down the road because there just isn't that much going on. Some of that can change. you know, some of the dialogue around, you know, the Fed interest rates starts changing what, you know, the rates are, then, you know, you might start getting different amount of, you know, cost of capital calculations, which then can unlock some other stuff. There's other macro issues with why, you know, the giant private equity investments are all stuck, you know, without an IPO and without another thing. And there's another conversation about why that affects downstream stuff. But right now, it's probably the best time to figure out what you want to do in half a year to a year rather than all of a sudden say, I need to do something urgent. And if you need to do something urgent right now, that's a problem. That requires, you know, kind of urgent acts. And maybe, you know, this may be the rip the Band-Aid off kind of moment. The, you know, we're no longer in 30 states, we're in four kind of movements. And, you know, it's gonna change. It always changes. Beer is 10,000 years older than Jesus. It's seen everything. Beer will always be around and there's always gonna be a market for good beer. Just depends on how it gets to the people. So it'll change, it'll turn around. But when, you know, is the big question.

[00:59:20] Kevin McGee: Great advice. And a good thing to remember, beer is indeed very much older than Jesus. You've always been super on the level with us and always so generous with your time, which we really appreciate. So thanks for joining us. We know you're busy and this was a great chat. Lots of good stuff to consider for really like people in California, but people beyond for sure.

[00:59:40] Anderson Valley: Thanks. It's been great. And go Bills.

[00:59:43] Kevin McGee: Go Bills. God damn it. That's our show for this week. Thank you so much for listening. If you enjoy the Brewbound Podcast, please rate it five stars and leave a review on your podcast platform of choice so more people can find the show. As always, a big, big thank you to Joe, Joshua, Ryan, the whole Brewbound BevNET technical team, and to Justin and Zoe for being great co-hosts, and to Kevin for joining us and sharing all his wisdom this week. We will see you back here next week with a fresh episode.