Channel Conflict: 3 Tier Battles Heat Up – Stinging Defeat in KY Raises Questions

The headlines and press statements around some of the latest beverage alcohol industry channel conflict are extraordinary and gaining attention across the country.

A new craft brewery is opening up every day, adding to the over 3,000 currently operating in the USA (Brewers Association).   There are 100s of new craft distilleries that have opened up over the past few years with many more in the works (American Distilling Institute). There are more than 7,000 wineries as well (Wines & Vines).

This buds for you

All this growth in new entrants is the result of renewed consumer interest in trying new things. The Millennials have driven much of the new growth and vibrancy. It’s an exciting time in the beverage industry. That said, every large-scale established consumer brand across multiple industries is trying to figure out what to do and how to keep their base, grow it and remain relevant.   Anheuser-Busch Inbev was roundly criticized for their “anti-craft” beer advertisement for Budweise

r during the Super Bowl. As I wrote about, this was them playing the hand they hold and making the best for a giant brand in decline.

These issues are a lot more complex than they appear and have interesting and changing industry alliances. I am constantly asked (last night included) why the laws are the way they are, by consumers and business people who are not from the industry. Here is a brief explanation:

The simple answer is the current legal and regulatory framework in the US is the result of two Constitutional Amendments. The first one was to ban all alcohol aka Prohibition (18th Amendment in 1919). The second one was to repeal Prohibition (21st Amendment 1933). To pass a Constitutional Amendment the Congress must pass it with a 2/3 majority vote in both houses and then it goes to the 50 states and must pass ¾ of the statehouses to become ratified.   A very high bar indeed. Prohibition was a national disaster of epic proportions. However, it was created in response to some significant excesses by the industry and public. A lot of the excesses were blamed on what is known as “Tied-Houses”, whereby the brewers owned the taverns. The drunken excess of many in the public was attributed to the brewers have a direct interest in selling as much beer as possible and controlling the point of consumption. The saying “There is no such thing as a free lunch” came from this era. The brewers would give away free sandwiches at the taverns they owned. Sounds good, but they would salt these sandwiches excessively so that the patrons would drink more beer.

Whether you agree or not that “tied houses” were the root of all evil, this was the majority view when in 1933 the nation’s failed experiment in Prohibition came to an end. Even though it was clear to most that this government intrusion into industry was a disaster, there were still large numbers of anti-alcohol constituents throughout the land. The compromise to get the 21st Amendment passed was to allow each state the absolute right to regulate the sale and distribution of alcohol within its boarders. The 21st Amendment does not have an opinion on tied houses or any other aspect of how the industry does business. The Federal Alcohol Administration Act did spell out specifics on regulations of the industry to insure the revenue and to protect consumers. It did not however, spell out any specifics regarding a “3 tier system”, but rather defers to the 21st Amendment that in turn defers to the states.

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Each state proceeded to set up its own set of laws and regulations.   There are 50 states and 50 sets of laws that while some may resemble each other, none are identical. Layered onto the specific statutes and regulations are the interpretations by alcohol boards or chairmen and the courts.  The most common way in which the states addressed the tied house issue was to legislate a middle tier (wholesaler) to be a buffer between the suppliers and the retailers. This is what is commonly referred to as the 3 tier system. There have always been some states that allowed brewers to own wholesalers, though this was the exception.

In the case of Kentucky’s new law, Anheuser-Busch Inbev has owned distributors there for more than 40 years and had attempted to buy a 3rd. That prompted the wholesalers to attempt to stop them and when other means failed, it ended with this new legislation not only not allowing them to buy the new distributor, but also forcing them to sell their existing businesses. I have no idea of how the courts will view this, but from the sound of it, ABI will not go quietly.

I can’t help but think the latest turn in the 3 tier beverage alcohol industry channel conflict is an example of overreaction that will do nothing but cause further escalation. When one considers all the new brands that have launched and keep launching in beer, spirits and wine and the need for each to find ways to market, it is clear that broad based full line distributors provide a viable route to market for many. All of the main distributors have giant books of brands now, and they serve some very large suppliers and many smaller ones well. In many cases they serve these needs of smaller brands by creating specialty sales divisions. They do not serve every brand well, nor can they. This has created market conditions in most states where a new crop of smaller start up distributors have emerged, primarily handling specialty or craft brands. Where specialty/craft distributors have emerged, they have become a necessary escape valve for small and new brands getting distribution to retail. In markets that allow it, and many states have provisions up to a certain size, craft breweries can self distribute. This is expensive but a necessary option in cases where there are no viable distributors to carry a new brand. Stone Brewery in San Diego and Sun King in Indiana seem to be examples of self-distribution that has been successful. I wonder if this will become more prevalent with spirits as the number of craft distilleries grows.

2015-01-21 11.18.45  IMG_6561The current approach, though ugly at times, has worked to provide a route to market for a thriving craft community.   The pressure to get new brands to market is only going to increase. It is unclear to me where the craft community will end up better off – with strict laws that don’t allow suppliers to own distribution (of any size) or with looser laws that give options. I tend to think most small/new brand will end up supporting a more flexible system, but the bigger brands, that are doing well in the traditional 3 tier system, will support the stricter system.

It may be that there are simply too many competing interests to work out viable solutions to everyone’s satisfaction on these issues. It would certainly be better for the industry if there were agreement as opposed to legal or legislative fights. ABI is a powerful entity as are all the major suppliers. Poking them in the eye with a local legislative win, may end up being a case of winning the battle but losing the war in some ways. It is unclear to me that the KY law actually helps craft brewers or simply hurts ABI or it it even does that. ABI can still control largely the activities of an independent distributor, as they have been able to do, in many other states. What is clear is that this KY battle is not the end to this fight.

It will be interesting to see how this continues to play out. Love to hear your comments or questions. Cheers! Smoke

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Smoke has worked in all 3 tiers of the industry, built beer wine and spirits distributors, owned a craft brewery, a winery, and multiple craft spirits brands.  He built the leading technology for pricing between suppliers, distributors and retailers. He also represented the WSWA as Chairman & President and the Brewers Association on the Government Affairs Committee.

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SUGAR SKULL RUM INVITES YOU TO LIVE… LOVE… AND CELEBRATE!

Hi I wanted to share that Sugar Skull Rum is now available in select markets through my company Taliera. Here is the Sugar Skull announcement..

 

SSR bottle lineup

FOR IMMEDIATE RELEASE

SUGAR SKULL RUM INVITES YOU TO LIVE… LOVE… AND CELEBRATE!
Brand new Rum sets sights on super-premium segment

Scottsdale, Arizona (October 6, 2014) … Cocktail lovers, it’s time to raise a glass! Sugar Skull Rum, a meticulously-crafted super-premium Rum made from fine Caribbean sugar cane molasses, is coming to a celebration near you.

“The premium and super-premium spirits categories have been growing consistently for most of the past two decades, outpacing the spirits market in general,” said J. Smoke Wallin, CEO, Taliera, LLC, exclusive global sales, marketing and distribution agent for Sugar Skull Rum. “Despite its size, the Rum category has yet to produce a break-out brand in the $25-30 price category. Sugar Skull Rum will be that brand.”

Sugar Skull Rum (SRP $27.99, 750ml) is an artisan Rum, made from the very best sugar cane molasses carefully sourced from growers’ farms throughout the Caribbean and South America. Our Rum is produced at partner distilleries in the Caribbean Islands, who use four-column stills to produce a clean and crisp base Rum, before it is brought into the U.S., where it is filtered, blended and flavored with natural ingredients to produce Sugar Skull’s unique taste.

Simply delicious and endlessly versatile, Sugar Skull Rum cuts across traditional product categories and will appeal to anyone who loves a great cocktail and a fun time. “It is a true crossover spirit that can be enjoyed straight, on the rocks or mixed in a number of innovative and traditional cocktails,” says Wallin.

At launch, the Sugar Skull Rum portfolio includes Tribal Original, Mystic Vanilla, Native Coconut, Madagascar Wild Berry and Hellfire Cinnamon flavors.

The brand’s distinctive name and packaging honor the Dia de los Muertos. Often mis-understood as a slightly morbid relative of Halloween, the ‘Day of the Dead’ is a convergence of European Catholic and ancient Aztec traditions that celebrate those who have left this world but mean so much to the people they touched.

“Sugar Skull Rum was founded on the principle that life should be celebrated and is at its best when we celebrate those who are important to us,” said Wallin. “We like being a part of what – and who – people love, so if there is a great time to be had, Sugar Skull Rum will be there. Join us!”

Sugar Skull Rum is initially available in Arizona, California, Nevada and Florida, with a selective rollout planned in additional major markets in early 2015.

About Taliera, LLC.
Taliera was founded in 2006 by beverage industry leader J. Smoke Wallin to incubate, acquire, and grow new and existing brands by combining core brand building expertise, relationships and capabilities with leading edge technologies and innovative business approaches. Taliera is the exclusive global sales, marketing and distribution agent for Sugar Skull Rum.

Sugar Skull Rum created by a group of serial entrepreneurs and innovative thinkers who dared to ask the question: “If not us, then who?” and “If not now, when?”

J. Smoke Wallin heads this team of leaders in the ice cream, beverage, sports, entertainment and hospitality industries, who have combined their expertise to create one of the finest super premium spirits to hit the back bar.

Sugar Skull is a celebration of life. It is the life we live, the lives we touch and those that have touched us. We celebrate them all. Live. Love. Celebrate. How do you celebrate? Sugar Skull Rum.

Media samples and hi-res images are available upon request.
Contact Laura Peet, PeetCom, Inc., lbptalk@aol.com, (917) 860-6285.

Craft Beer Sales Boom Continues… Best Is Yet To Come.

This weeks release of the full 2013 numbers on craft beer by the Craft Brewers Association confirms something many of us already knew: this movement is accelerating.  I’d go a step further and say the best is yet to come.  Here is the info-graphic the CBA published this week:

Craft Breweries 2013 Growth-Small_HR

Pretty incredible numbers – going from 4.4% volume share in 2009 to 7.8% in 2013.  On a dollar basis, even more impressive with a 20% increase over 2012 to $14.3 billion, giving craft beer a 14.3% share of the $100 billion US beer market.  The number of breweries grew at a slightly slower pace (15%), giving slightly more sales per brewery.

This is a booming market and with that there are multiple new entrants and there will be inevitably, winners and losers.  That said, a growing market makes up for a lot of mistakes and there are a lot more winners right now than not.  The key is matching investment to real potential in any particular INDIVIDUAL business.   A growing market is good for everyone, but it does an individual aspiring brewery little good if they spend too much on their building, don’t brew great beer that people enjoy, don’t create a brand that resonates with consumers and market place, take too long to get up and running, hire the wrong time, don’t know what their numbers are or what the right things to measure are, run out of money, etc.  I could continue, but there are a ton of ways to be unsuccessful in this space, no matter what the growth is.

That is why I got together with a number of industry thought leaders to create the Beer Industry Technology Symposium (BITS) being held in Napa, CA June 30 & July 1 in conjunction with the Wine Industry Technology Symposium (WITS)

BITS logo small for web3                  wits logo

Yes, technology is in the name and there will be a bunch of things at the 2 day event that revolve around technology, but that is NOT the main point.  The main point is what I am talking about above.  There are so many challenges with running any new business and craft beer is no different.  With all the new players and the many existing players who are experience growth beyond their wildest expectations, these businesses need sound strategic thinking around what matters.   Technology is not “What Matters”, but it is the great enabler that in 2014, done right, can create the conditions for a successful business venture.  Thinking through the myriad of options and what exactly one is trying to do is critical before you even start your brewery.  If you already have one, and skipped this part of the planning, it is never to early to get on it and address these issues.

I really enjoyed the new Siemens commercial (that seems to be running on TV on every show I watch – which is not very many) profiling the Schlafly Brewery and American manufacturing. Here it is:

 

What a terrific message and a boost to the craft brewing industry at the same time.  I reached out to the Siemens team and they jumped at the opportunity to be a part of the first BITS.  How cool!    This is also true of the California Craft Brewers Association who joined us recently as a GOLD sponsor and are marketing the BITS event to their 200+ members in CA.

CCBA_colorlogo jpeg

 

BITS will be announcing these and many other great contributors in the form of keynote speakers and panels who are lining up to be a part of what we hope will become a must attend event for everyone in the industry who wants to be smart about running their business.  Please reach out to me directly if you’d like to get involved.  Registration will open up in mid April.

The craft brewing industry is in its preteen days… there is much growth in front of us and a lot of learning and growing up.  This is an opportunity for collaboration with fellow breweries and professionals and leading edge thinkers in technology on how to grow up and be successful in your beer business.  The best is yet to come!

Cheers!  jsw at NSB pub

 

Vanderbilt Business: How I Did It

Note: This is the first in a series that Vanderbilt Business (the Owen Graduate School of Management at Vanderbilt University) is doing on Alumni to share their stories.   Interestingly, I have subsequently left Lipman Brands and sold the majority of my interests in Napa Smith Brewery.  So it is already a little out of date in terms of what I do (the first question), however,  the rest of the Q&A is not.   That’s why the title is a little bit off.. I’m not done doing what I’m going to do (stay tuned).  I hope to encourage and inspire those who aspire to achieve their success in any way I can.  Hopefully this interview gives a bit of insight to some and is encouraging if you need it.  Kind Regards, Smoke

VBusiness-Masthead

 

LINK:

Have you ever wanted to ask someone questions about their career path? How I Did It asks those questions for you. Serial entrepreneur and beverage magnate J. Smoke Wallin, MBA’93, starts off this recurring series.

jsw at NSB pub

COPY OF INTERVIEW:
Q. What do you do?

I turn ideas into actionable things. Whether working on community issues, industry issues or business ideas, time and time again, I tackle a challenge by manifesting something that was not before.

J. Smoke Wallin
Wallin
In recent years, I have been looking for ways to acquire or create new brand businesses in the beer, wine and spirits space. This pursuit has taken many a twist and turn, and the process has not always been pretty. Today I run several businesses.

I am president and CEO of the Napa Smith Brewery and Winery in Napa, Calif. I acquired the brewery in late 2010 with some partners. We sell in 10 states and Sweden, the U.K. and Hong Kong.

I serve as managing director of Lipman Brands, a brand marketing and sales company. My task has been to build out the infrastructure (systems, process and people) for Lipman Brands to be a national selling organization.

I am chairman, CEO and founder of eSkye Solutions, a technology dot-com I started with a number of Owen alumni back in 1999. Though we have changed our business model a number of times, acquired numerous companies and sold our winery software division in 2007, we continue to build our national account pricing business with large retailers and brands.

And through my holding company, I am still engaged in various consulting projects for new brands, existing businesses and startups. This is a minor part of my job, but it keeps me in touch with new ideas, people and opportunities.

Q. What’s your educational background?

I started as an engineer at Cornell, then was in the hotel management school and then settled on agricultural economics (Cornell’s undergraduate business program). It turns out my time in hospitality management and the agricultural economics department—with a huge emphasis on the grocery and consumer packaged goods industries—gave me a great initial preparation for the beverage industry. At Owen I had a triple concentration in finance, marketing and operations. My view was I wanted to be a general manager/entrepreneur so I needed to learn about all those areas.

Q. What was your first job?

My first job out of Cornell was with Seagram in their management training program. After a summer at Seagram, I had the opportunity to join them full time or join their distributor, National Wine and Spirits. I joined NWS when it was doing $150 million annually. When I left 14 years later, we were a $1 billion operation.

Q. Tell us about your consulting and brand work.

With eSkye, we were doing business with beer, wine and spirits companies all over the world. At one point we had over 250 wineries making or selling their wine using our software. I ended up advising many clients on not just their technology but also on their distribution and business strategy.

I got a bit frustrated with trying to get an old, sleepy and successful industry to be creative in their business strategy. This inevitably led me to want to own my own brands so I could demonstrate my ideas in real life. Starting a new business takes a level of commitment that has to overcome huge obstacles. To make such a commitment, one has to be fairly passionate about whatever it is one does. I have been passionate about the brands business for some time now.

Q. What would you say was your big break or opportunity?

Growing up with a mom who was (and is) very independent-minded, hard-working and stubborn. Becoming a wrestler in high school and later at Cornell. No sport teaches better discipline and self-reliance. Select coaches, teachers and mentors along the way who saw potential in a kid with big ideas and no wallet.

Q. What was—or has been—your biggest challenge?

Overcoming financial distress when either markets or circumstances have gone against me at select moments. …The good news is, if you can get through those times and never forget them, it makes for a wiser, more humble perspective. This is something I think I was meant to learn.

Q. What was—or has been—your greatest thrill (or accomplishment if you’d prefer to answer that)?

Biggest thrills: Closing on a $110 million bond deal for NWS as CFO, closing on a $60 million equity deal for eSkye as CEO and acquiring the Napa Smith Brewery. Also a handful of sales closes over the years that were big enough to materially impact that particular business.

Biggest accomplishments: I would say seeing some of the people I hired, believed in and worked with go on to be very successful in their own right. That includes some Owen grads and many others along the way.

Q. If you could give one piece of advice, what would it be?

I’ll give two:

Don’t let fear prevent you from pursing your dreams. Nothing great was ever accomplished by someone who simply thought great things. It only happens in doing.
Enjoy the journey. I spent a lot of energy focusing on outcomes: raising money, IPOs, deals and sale closes. Those are important, but enjoying the process of getting there, each and every day, needs to be constantly remembered. This is where we spend most of our time and if that is so, how do you want to remember most of your time?

Easier said than done, but you asked for advice.

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