Thursday, April 7, 2016

National Beer Day and Big Beer Problems

I was surprised to read this morning that April 7 is National Beer Day.  First I learned of it.

Turns out the holiday dates to 1933 and the end of Prohibition.  People were probably thirsty at that point.

But the post-Prohibition structuring of beer marketing now seems to be posing problems.

Here's the market structure in just about every state.
              1) Brewers make beer.
              2) Distributing companies, aka "middle men," buy beer from the brewers.
              3) Restaurants, bars, liquor stores and groceries buy beer from the distributors.

The key point is that beer companies cannot sell directly to their customers.  My impression is that the idea of adding distributors to the marketing chain was to protect small retailers from coercive tactics that might be employed by larger brewers.  (In fact, before Prohibition, some brewers owned saloons, a vertical integration that certainly wouldn't be allowed today.)

It was acknowledged at its adoption that the three-tier structure would add cost to the product, but that was seen as a feature, not a bug:  Beer wasn't all that good for anyone anyway, and making it a little more expensive would tend to limit overconsumption.

Things have changed since 1933, however.  Many brewers are smaller.  Many retailers are larger.  The brewer-distributorship-retailer model is coming under strain, particularly the middle-man piece of it.

The Bodega Problem

Recently a New York newspaper noted that several owners of city bodega stores -- little neighborhood groceries, essentially mom-and-pop operations -- had been busted for buying beer at Costco and then reselling it in their own stores.

The complaint was filed by a beer distributor who noticed his company's sales were going down.  He deployed private investigators who caught one or more bodega owners misbehaving -- buying a few cases of beer at  Costco and then putting them in the coolers at their own small stores.

“We found that these big-box stores weren’t even bothering to check, and simply allowed retailers to use their business membership to purchase beer,” the distributor said. “Every single illegal sale that they made to a retailer hurt an independent beer distributor licensed to wholesale beer to retailers.”

It's hard to pity the poor distributor in this situation.

The bodega owners' actions were illegal, but they certainly were not irrational.  Distributors offer lower prices to high-volume buyers like Costco and Walmart and sell at higher prices to small customers like bodega owners.  In turn, the bodega owners find it is cheaper to pay retail at a big box store than to order beer from a distributor.

The point here is that the distributorships were set up to protect small retailers and now are gouging them and favoring big retailers instead.

The Big Beer Problem 

Consolidation over time has created two Big Beer groups: AB InBev (Annheuser-Busch) brands and Miller/Molson brands.  Most beer distributorships are affiliated with one of these two groups.  Stores stocking various beer brands typically deal with at least two distributorships to get a range of products.

In some cases, large beer companies have acquired distributorships.  In other cases, Big Beer has offered financial incentives to independent distributors to push its products.

Recently, it was revealed that AB InBev had offered a new incentive program.  Under it, distributors could earn as much as $1.5 million more each year if 98 percent of the products they sold were AB InBev brews.  The AB InBev team also agreed to pay as much as half the marketing and promotion costs of distributorships whose sales volume was at least 95 percent AB InBev.

It appears that the folks who dreamed up the original brewer-distributor-retailer model didn't specify arms-length transactions.

Programs like the Ab InBev one are overt efforts to increase or at least maintain Big Beer's market share, currently between 85 and 90 percent of U.S. consumption and reportedly declining.

There are two elements to this. The first is a battle of the superbrewers between Budweiser and Miller.  The second is a pretty obvious attempt to suppress the number and market share of craft breweries.

As of last December, a small brewers' association reported there were 4,144 little breweries, microbreweries, brewpubs and regional craft breweries in the U.S., 15 percent more than in 2014.

Small breweries face many challenges.  One is that retailers and bars have limited shelf space and cannot maintain inventories of all the new products being released.

Another is that beer distributorships -- the only middle marketers that can sell beer legally to retailers -- are not willing to take on unlimited numbers of new products, mostly because they make more money, easily, by selling the products of Big Beer.  There is no incentive to broaden the market to new entrants.

A third problem is the AB InBev incentive program, mentioned above. One part was a stipulation that participating distributors could rep only craft brewers that produced fewer than 15,000 barrels or sold beer only in one state.

In an efficient  economy, this behavior would be squelched.  Here, not so much.

Effectively, the three-tier beer distribution model protects major brewers against small brewers and cuts prices to large beer retailers while raising them for smaller shops.  Systemically, the whole thing smells like an anti-trust cartel.

Beer distributorships are licensed by the states and by the federal government.  It's disappointing that regulators have sat by while brewers and distributorships have turned the market on its head to benefit the big guys and stick it to the little ones.

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