25 Sep 2009 @ 9:41 AM 

I’ve often had my share of kinda irksome moments about Sam Adams. I go through wide sweeping moments where I feel like Sam Adams is primed so that someday in the future we’ll be talking about them when we say, “The Big 3.” “You know, InBev, MillerCoors, and Sam Adams.” Sometimes I feel like they choke local craft markets with their ever-increasingly-wide distribution channels. Sometimes I feel like they’re a little too eager to trumpet their role in the “craft beer revolution.”

And then sometimes they prove to me exactly how much they’re worth to craft beer.

This week at the National Beer Wholesaler’s Conference, Jim Koch, Founder and CEO of Boston Beer Company, spoke about the future of distribution. (WSJ article here)

I don’t have many direct quotes from the speech, but the gist of it is this: A lot of people are worried that distributors are going to be falling on some hard times, and so they have to look at changing their models to cut costs and increase efficiency to keep up with the changing economy, even to the point of collaborating with your competitors to share delivery vehicles, personnel, and warehouse space.

Even while distributors are a federally mandated part of the three-tier system, and a good chunk of them maintain regional dominance through less than scrupulous business practices, there’s danger in the future for them. Some retailers, especially big-box retailers like CostCo, are pushing to bypass the middleman and buy directly from the brewery.

But! (I hear you say…) how could that be bad? Well, for big box retailers it’s not bad at all, they essentially have their own built-in distribution networks. For the small retailer and the small brewery, this represents a lot more work in terms of negotiating contracts, deliveries, displays, etc., especially as distributors lose business out of their large accounts and no longer have the capital to be able to support small specialty products that won’t be immediate profit vehicles for them like, for instance, craft beer.

Let’s go back through the short history of distribution companies in the 20th Century to see how much things have changed.

When the three-tier system was implemented after Prohibition, there were something along the lines of 40 – 70 breweries nationwide with a couple of giants in the mix. Regional distributors distributed regional beers and everything worked like it was envisioned and that was fine. The whole point of the three-tier system was to protect the consumer by keeping competition in the retail market. Prior to Prohibition, breweries often outright owned saloons and, thus, could control distribution through retail outlets, price fixing against competitors, or not carrying their products altogether.

As the number of breweries dwindled and the number of distributors increased things started to get a little bit wonky. You start to see megabrewery sponsored distribution who, again, are attempting to control distribution channels in order to attempt to smother their competition – this time in the form of other distributors. It probably wasn’t that bad in the 70’s and 80’s when there were only a handful of breweries in operation, so long as everybody was playing the same game.

The past 30 years, however, have seen the rise of roughly 1500 minuscule (by comparison) new breweries and all of a sudden we’re in an entirely different market again. Now, with scads of these small breweries, distributors are more necessary than ever to get beer to market. Plain and simple, a small startup business (with comparatively expensive startup costs), does not have the resources to compete in a distribution market. Certainly, they can self-distribute in a small geographic area, but at a certain point it is not cost effective and they must rely on a distributor to sell and distribute their beer.

So, if you’ve got mega-retailers that are attempting to bypass distribution networks, all of a sudden things get really difficult for the craft brewer, again. Why? Because distributors will suffer. If distributors suffer, small craft breweries suffer. It’s an easy equation.

Enter, Jim Koch.

Koch recognizes that that future of craft beer (even – and maybe especially – his) lies in efficient distribution and that craft breweries do not have the power to create said distribution on their own. We see more and more pressure from mega-retailers to cut the middleman out, coupled with the ever-increasing cost of fuel, refrigeration, and even warehouse space. Eventually, distribution is going to take a major hit and craft breweries are going to feel it more than most.

It’s going to take a lot of work to get to a more efficient model. We’re stuck in a 20th Century model of sales and delivery distribution networks and change is difficult on a corporate level. Koch suggested it was a 10-year-plan, and he noted that it would require some contract changes with the Big 2 – which may not necessarily be in their immediate interests in terms of distribution.

If distributors can get behind the idea (and they should, even though it seems a little radical up front), it could be a great day for craft beer.

Posted By: erik
Last Edit: 25 Sep 2009 @ 09:41 AM

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