Distribution in America

An inside look at craft beer and the middle tier

November 1, 2012 By Ken Weaver

If you were to ask fellow beer drinkers to describe their favorite brewery, where would they start? They’d probably mention things like stainless-steel tanks, certain flagship and seasonal offerings, pot-bellied growlers, the smell of steeped barley, intermittent beardedness, the tall rubber boots… What about their favorite retailer? Perhaps they’d start with the beer aisle or the line of bar stools, the chalkboard menu, the pub fare, the secret beer selection they keep in the back, their favorite bartenders…

But what if you asked about their favorite distributor?

A good number of people will be confused by this question. A few might reasonably presume you’ve had one too many. The slightly more adventurous ones will make an honest attempt, at least. Trucks with brewery logos. Folks wielding handcarts… A warehouse?

Of the individual components of the three-tier system that governs how beer travels to the consumer in the U.S.—from producers (breweries), to distributors and wholesalers, to retailers—the middle tier is generally the least visible by a wide margin. Distributors function as the go-between: charged with transporting beer efficiently and safely while (exceptions are plentiful and will be discussed below) operating independently of the other two tiers.

It’s also arguably the most politically charged tier, with the exact details legislated on a state-by-state basis. Those details can skew in favor of a state’s larger or smaller breweries, depending on whether things like self-distribution are allowed (permitting a brewery to serve as both producer and distributor) and whether such allowances have a size limit. Arguments can be made that the three-tier system inhibits the growth of the U.S. craft beer scene, while similarly convincing arguments can be made that it’s the reason we have one at all (especially when looking at distribution laws in other countries). The truth is, almost always, somewhere in-between, and often dependent on where one’s positioned in relation to things. To solidify the point: this is the only tier you’ll hear beer drinkers arguing about getting rid of entirely.

For avid argument seekers, it’s the perfect topic to add to one’s repertoire.

Politics aside, the three-tier system and its variations thereof ultimately serve to shape the selection of craft beer available at one’s local retailer. Breweries both large and small have to negotiate the resultant constraints and opportunities afforded by the ever-changing details of the middle tier. And craft beer’s continued success hinges on its ability to do so effectively.

The Maddening Middle

The three-tier distribution system was established after Prohibition ended in 1933 and stands in significant contrast to the failed nationwide policy it followed. States were left to decide their own particulars in regulating things like brewpubs (in which a brewery serves as both producer and retailer), self-distribution, franchise laws (which govern contracting agreements between breweries and distributors), distributors’ abilities to incentivize retailers, etc. While messy, it ideally allows states to better serve and represent their local constituencies.

The Oxford Companion to Beer refers to it as “an incredibly complicated mosaic” (which is a much more professional-sounding way of saying messy).

In nearly all cases in which they play a role, distributors serve a significant number of functions in addition to simply moving beer from one place to another. The distribution tier collects taxes and serves as a highly regulated, accountable midpoint in preventing things like adulteration of alcohol and underage drinking. (Again, looking to the distribution systems of other countries that don’t have these same checks and balances in place can serve as a useful counterpoint.) Distributors also serve as liaisons between the breweries and the retail side of things, often offering detailed market knowledge while managing diverse brand portfolios. In ideal circumstances, they serve as vital points of communication between the other two tiers, ensuring that breweries are well represented and that retailers get the brands that best fit.

If there’s a clear narrative anywhere in that messy mosaic of things, particularly over the past ten or twenty years, it’s been the challenge for distributors and wholesalers to adapt to and accommodate the rapidly growing craft-beer industry. Transitioning a fourth- or fifth-generation, family-owned distribution business from representing the marketing approaches of nationally recognized brands to supporting up-and-coming craft breweries that most folks have never heard of… that’s not the sort of transition that happens overnight. But craft beer continues to gain market share, and with sustained success comes more open doors.

In the words of the outspoken distribution pundit John Conlin of Conlin Beverage Consulting, Inc., “right now, craft beer is the prettiest girl at the dance.”

Like getting into a really good argument about three-tier distribution politics, there’s a learning curve involved in distributors understanding craft beer and vice versa. There’s the reasonably warranted fear that distributors will overlook or fail to adequately represent small brewers, in much the same way that a small-time author or actor worries about their agent or publicist’s motives, especially when they’ve got bigger clients to worry about as well. There’s an issue of trust inherent to the process. On the flip side, many new craft brewers don’t fully understand how distributors work and the constraints they have to deal with internally. One of the major initiatives in recent years to attempt to bridge this gap, the Independent Council on 3-tier Dynamics (initiated by Tamarron Consulting around 2008), presented a list of roles and responsibilities at the Craft Brewers Conference in San Francisco last year. 54 points for distributors. 59 points for breweries. It represents plenty of work remaining to be done (that will, in a sense, probably always be true), but initiatives like the Independent Council and the Craft Beer Wholesalers Conference (see below) have served to help narrow these gaps.

That’s just one subsection of the larger state of things, however, and the reason one’s favorite brewery can often be found at one’s favorite retailer (along with, often, hundreds of other great brews) is because craft beer is getting distributed, on an increasingly large scale: by traditional distributors, by specialty distributors, and by the breweries themselves.

Craig A. Purser, President and CEO of the National Beer Wholesalers Association (NBWA), readily acknowledges that there are wrinkles to be ironed out with the distribution system. “Is it perfect?” Purser asks. “Heavens no. Are there things that can be looked at and ways that we can make the system more effective and better for more people? Absolutely.”

“What I think has been so wonderful about this experience,” Purser continues, “as it relates to the growth of craft [beer], has been the ability of those brewers and distributors to meet the changing needs of the consumer. And, obviously, the retailer plays a real important part in that as well. But it has been tremendous to see the rate of growth and the—really the vast diversity in experience that the consumer’s experiencing.”

Evolution and Acquisitions

The NBWA represents the approximately 3,300 licensed U.S. beer distributors, which carry upwards of 13,000 beer brands and employ 98,000 people. While Purser mentions that there isn’t yet an entirely formalized way of categorizing different types of distributors, particularly in relation to how they handle craft beer, some distinctions emerge pretty readily.

While there are certainly many, many larger distributors that remain focused on one brand (“100% mind share,” or “100% share of mind,” is the typical phrasing), there are also plenty of examples of large distributors making the shift to include craft beer as part of their portfolio. Andrews Distributing Company in Texas started back in 1976 with two brands of Miller, and has since expanded to carrying over 250 brands with 1,110 employees. Their craft brands include the likes of New Belgium, Boulevard, Big Sky, and Ballast Point. They were awarded the Craft Beer Distributor Achievement Award at the Great American Beer Festival in 2010—and more recently received a MillerCoors President’s Award. Well-organized, large distributors can reasonably serve both of those worlds, at least in the best examples.

Other large distributors choose to acquire existing craft-beer-focused distributors. In the case of World Class Beverages Arizona, the organization started as a two-man operation called Little Guy Distributing before being acquired by Crescent Crown Distributing. Little Guy was founded by Bruce McConnell—then of the recently started Papago Brewing out in Scottsdale—and his son C.B. back in 2002. “The way the story goes is, the three owners and Bruce’s son C.B. were sitting around the monk’s table at Papago,” relates Chuck Noll, World Class Beverages Arizona’s National Accounts Manager and Fine Beer Czar. “They basically said, ‘Hey, we’ve got this great place to drink beer, but there’s not really enough great beer in the market to drink.’ So, I think everybody looked at C.B. And it was decided that he would get a distributor’s license, so that you could buy good beer. And they started out by bringing in a pallet of Belgian beer, and the original plan was they were going to sell half that pallet to Papago and keep the other half in cold storage for themselves.” They quickly extended their purchasing up to two pallets, then steadily grew with the expanding local craft-beer market.

Today the organization exists as part of the larger World Class Beer network of craft-beer- and specialty-focused distributors owned by Crescent Crown. Outreach and consumer education remain crucial. “One of the reasons that there was such a great alignment between the original Little Guy Distributing and Crescent Crown,” says Noll, “is because the belief at Little Guy Distributing was that we have to educate the consumer.” The sales and marketing staff are Certified Beer Servers through the Cicerone Certification Program. The distribution company holds regular homebrewing competitions as well as monthly in-house tastings.

“Our belief is that we have to have a strong local beer culture… in order to be able to bring in the Bear Republics, the Bell’s, you know, those types of beers.” Noll mentions that, following Little Guy Distributing’s education-geared model, other distributors have followed suit. But he doesn’t see it as a problem. “Right now we’re nowhere near saturation here. So the more everybody can do for the beer culture here, the better it grows.”

That organizational separation between craft and macro beers is a common trend, as if they’re entirely different products. “The big difference is that craft is still about telling the story: getting the people excited about that particular beer, about each and every little beer.”

The Specialists

Imperial Beverage, owned by the Cekola family in Kalamazoo, MI, was established back in 1933. “We were primarily a Pabst Blue Ribbon house, really from early after Prohibition,” notes President Joe Cekola. When PBR started to dwindle in sales volume back in the early ‘80s, the company started to shift their focus toward imports like Beck’s and Labatt’s. They soon got into distributing Frankenmuth, Arcadia, Samuel Adams, and Sierra Nevada.

“We’ve tried to transition… from the early ‘80s into the next 15 years or so… from the distributor that had the cheapest beer in the marketplace to the distributor that had the best beer in the marketplace.” Currently Imperial has 180 employees and distributes about 205 breweries. Their staff includes 28 Certified Beer Servers and the world’s first Master Cicerone, Andrew Van Til. In 2010, Imperial Beverage was named Craft Beer Distributor of the Year, nominated by Short’s Brewing Company and supported by other clients.

Cekola emphasizes the crucial role of distributors in educating their direct customers: the retailers ultimately responsible for offering the craft and specialty products to consumers. Like the efforts of Andrews Distributing, Imperial Beverage conducts monthly staff trainings and recently implemented a homebrewing competition. “I think 15, you know, 20 years ago, craft brewers had a hard time sometimes getting a distributor to be involved,” Cekola states, reflecting on the shifting market dynamics. “They were so heavily influenced by the big AB/Miller/Coors at the time that some, especially the AB focus with 100% share of mind, that they couldn’t get distribution. I think in today’s world, distributors in general want to sell craft beer—both from an imaging standpoint and a profitability standpoint. It’s good, and I know most distributors are really anxious to get the new, hot, trendy beer out there.”

When asked what he felt consumers frequently didn’t understand about the middle tier, Cekola responds, “I think sometimes they don’t understand that we are a locally owned business, we’re not owned by the brewery. We live in the community: we shop here, we have our house, we have our families here, and we’re clearly independent business people… Most beer wholesalers, they love the community that they live in and they want to support it.”

Double Duty

The Brewers Association maintains a generally up-to-date list regarding state self-distribution laws, suggesting that about two-thirds of the states currently allow breweries this option in at least some form. (There are often production or distribution caps in many states.) California allows self-distribution with no limits as to production size, and many breweries—including Russian River, Moonlight, Devil’s Canyon, Kern River, and Hoppy Brewing, to name a few—self-distribute some of their beer, though usually within a very limited geographic area.

High Water Brewing in Northern California self-distributes their beer throughout the Bay Area and to the Sacramento and Chico/Redding regions. They also distribute AleSmith and Devil’s Canyon beers in the latter two locales. For Southern California distribution, they work with an outside wholesaler. “You really want to pick the right distributor,” emphasizes John Anthony, High Water’s CEO and director of sales, who handles the distribution side of things with his son, Lane. Anthony previously ran a specialty distributor called Craft Brewers Distributing before partnering up with High Water’s Brewmaster, Steve Altimari. “For us, in the craft beer world, you really want to make sure that [your distributors] understand craft and believe in craft and want to sell craft, and that they’re going to sell it properly.”

For High Water, the ability to self-distribute has been particularly valuable, as it has allowed them to reconnect directly with retailers that had supported Altimari and Co. back when he was brewing at Valley Brewing Company. “There’s that personal level there,” says Anthony, “that I think was important for us as a very small brewery.”

Stone Brewing Co. operates a significantly larger self-distribution network, carrying 32 craft and specialty brands in addition to their own to Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties. Outside of that self-distribution area, Stone works with over 100 wholesalers in the 37 states they currently distribute to, including more distant parts of California. They have about 60 employees focused on the distribution side of things.

“We have a pretty firm delineation,” say Greg Koch, Stone’s CEO and Co-Founder. “When all the beer gets packaged, bottled or kegged, it moves immediately from the brewery building to a building about a mile and a half away, where we have a 24,000-square-foot cold box that we keep not only our beer in but all the beer of the brands that we represent.” The operation of course started out much smaller when Stone opened in 1996, and that ability to self-distribute was particularly crucial in the fledgling craft-beer landscape 15 years back.

“Stone would not exist without that, period,” reflects Koch. “No wholesaler wanted to carry our brands, or carry our beers. We were told no by every single wholesaler. In fact, we were told no by every single wholesaler more than once.”

Koch is outspoken in his defense of the three-tier system (particularly California’s version thereof), and, like others, he recognizes that there is still significant work to be done in improving the level of understanding between craft breweries and distributors. Koch and Arlan Arnsten, Stone Brewing’s Vice President of Sales, started the Craft Beer Wholesalers Conference back in 2004, which drew only a few dozen participants the first year.

“Today, at that same conference, we have several hundred wholesalers showing up. And, you know, the number of wholesalers that now are believing in the craft beer segment has continued to grow, just as craft beer has continued to grow.” The 2012 Conference was booked to capacity weeks in advance. “It’s focused in improving the way that wholesalers are able to operate their business,” remarks Koch. “We’re all in the room together to share best practices, to share insights on how to be successful… There’s everything covered from ratios of warehouse size to number of trucks to delivery area.” If there’s any firm conclusion to be drawn from the shifting state of U.S. beer distribution, it’s that there’s still plenty to learn.