Introduction

The process of distribution is critically important to craft breweries; but, it is commonly misunderstood in relation to the overall operational success of a brewery. A common misconception by those entering the craft beer industry is that once the beer is brewed, packaged, and shipped to a distributor, the brewery can essentially forget about it, leaving the sales, marketing and promotion to the wholesaler. This is simply not the case.

Some distributors are very engaged with the craft segment and actively support it. Other distributors do very little to promote the craft beer segment and focus only on a handful of brands. It is for this reason that market participants in the craft beer segment truly understand the distribution tier of the beer business to ensure their products are adequately marketed and promoted and not shelved in a warehouse somewhere bumping up on expiration dates.

The Three Tier System

After he repeal of Prohibition, most states in the United States implemented a three tier distribution system. Simply put, a traditional three tier distribution system requires beer manufacturers to sell products directly to wholesale distributors and those wholesale distributors are required to the sell those products to retailers. This general three tier structure is subject to few exceptions; however, about 75% of the states in the United States allow some form of self distribution, meaning that a beer manufacturer can sell its productions directly to retailers. The ability to self distribute for certain craft brewery startups can, literally, be the difference in success or failure and is an appealing method to get product to market as a startup brewery.

Self Distribution

Self distribution gives craft breweries greater control over their products; but again, self distribution is not allowed in some states. If self distribution is allowed in your state, the right to self distribute is usually limited in geographic scope and production quantity. Practically speaking, even if self distribution is allowed in your state, a craft brewery should limit its self distribution to some reasonable distance of the brewery depending on market density in order to maintain cost efficiencies. The local market is generally one of the stronger markets for a craft brewery and widespread self distribution can be costly.

Self distribution is appealing to craft breweries earlier in the business life cycle because of the personal, hands-on selling that beer distributors cannot give to most products. The disadvantages are the time and resources involved in running a distribution company within a craft brewery. Distributing yourself requires a focus from management, additional personnel and equipment, and an investment of time and money. In the long run, the overwhelming majority of craft breweries will outgrow self distribution and eventually find wholesale distribution partners.

Finding the Right Partner

A craft brewery will have a few different options for distribution partners in any given market. Each market will generally offer a few major brand houses, Anheuser-Busch, Miller and/or Coors. These major brand houses are the largest and most dominant beer distributors in any given market and maintain a stronger bargaining position over startup and early stage craft breweries. Generally, the major house distributors have been in the business for decades and have strong relationships with many retailers. While these major brand house distributors can provide some value to a startup or emerging craft brewery, the craft brewery needs to understand that it will make a very small portion of this distributors overall portfolio and may not be a priority for this distributor.

Some markets provide relatively smaller specialty distributors that focus specifically on the craft beer and import segments. These small distributors are typically more knowledgeable about craft products and will take the time to focus more time and attention to craft products. The downside is that these small distributors may be understaffed and not have the retail reach of a major brand house.

Deciding on the right distribution partner is critical, especially in the startup and early stages of the craft brewery. State franchise laws, those laws that dictate the relationship between the brewery and the distributor, make it very difficult, if not impossible, to terminate a distribution agreement. When vetting distribution partners, make sure you choose one that can provide you the service you need not only early in the brewery life cycle, but also years down the road. Commit to spending time in the marketplace for a better understanding of the potential distributors characteristics. Engage retailers to gain insight into their relationships with the various distributors in the market.

After you have gathered enough information about your potential distribution partners in a particular market, meet with each one and present your products. Make sure you are well prepared going into the meeting, having the following information readily available for reference: product cost and pricing, shipping costs and arrangements, advertising and promotion plans and budget, incentive programs, and what support you will offer your distribution partner in selling your brand.

Once you have chosen a distribution partner, be sure to have your attorney draft the distribution agreement. In many states, distributors have been using the same distribution agreements for decades. These dated forms are overwhelmingly and heavily weighted in favor of the distributor; however, as the craft segment has started to grow, some distributors are open to changes to their generally accepted distribution agreement form.

The beer market is becoming increasingly competitive, so it is critical to keep in touch with each of your distributor partners on a regular basis. Many small brewers fail to realize how much time and effort this requires. It is advisable for a brewery sales representative to spend a day with one of the craft beer salespeople from your distribution partner to help present and discuss your products to the retailers. It is also very helpful for a brewery salesperson to spend

State Franchise Laws

The rules and regulations pertaining to the manufacture and distribution of beer products differ from state to state. Each state has its own set of franchise laws, making it incumbent on the brewery to know the specific regulations of each state where products are sold. There are often regulations as to what a brewery may supply to both retailers and distributors, payment terms between the brewery and the distributor, and very specific, often restrictive terms for terminating a distribution agreement.