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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Napa Smith to Launch in Sweden After Organic IPA Wins Monopoly Listing

Exciting news today for Paddington Brands and Napa Smith Brewery!  Entering the Swedish market!

Napa Smith to Launch in Sweden After Organic IPA Wins Monopoly Listing

TOMP Beer, Wine & Spirits appointed exclusive Swedish distributor for Paddington Brands portfolio.

INDIANAPOLIS, IN, January 12, 2012 /PRNEWSWIRE/ — Paddington Brands and TOMP Beer, Wine & Spirits announced today that they will partner to bring Paddington’s brand portfolio to the vibrant Swedish market. TOMP will start by launching the Napa Smith craft beer portfolio and in particular the award winning Organic IPA, which will be featured in 100 Systembolaget stores from 2nd of April 2012.

J. Smoke Wallin, Chairman & CEO of Paddington Brands, said, “We have a very focused growth strategy with very few international targets – Sweden is one of these. So I am delighted to be partnering with Tommy Olsson and his team at TOMP to launch our brands there. TOMP is hugely respected and the perfect partner for us in what is a tough market to crack. I look forwards to a successful launch of Napa Smith’s beers and a long and fruitful relationship. We could not be more thrilled.”

Napa Smith brews a portfolio of award winning beers in Napa, California. Its portfolio is available in 30 states within the US with plans to be available nationally by early 2012. Sweden will be the first international market. Napa Smith is proud to number Whole Foods, Safeway, Beverages & More, Total Wine, Publix and now Sweden’s Systembolaget amongst its many retail partners.

“We first tasted Napa Smith’s beers 2 years ago and we were convinced that they would be a great addition to our portfolio. So winning the tender and setting launch dates is very exciting for us. Organic products are very important to the monopoly and the Napa Smith Organic IPA is utterly amazing,” said Tommy Olsson, Managing Director of TOMP Beer Wine & Spirits.

“Winning the recent IPA tender into Systembolaget is further testament to the genius of our Master Brewer, Don Barkley, coming as it does on the back of our huge success at the Great American Beer Festival. IPA the hottest segment of the US craft beer category, but many IPAs lack complexity and balance. This is proof that it is possible to brew a benchmark IPA that is drinkable and food friendly,” said Steve Morgan, President of Napa Smith Brewery and Winery. He continued, “In addition our beer is also certified organic, which makes this achievement even more noteworthy. I am confident that Sweden’s exciting craft brewing scene will take Napa Smith to heart.”

About Napa Smith Brewery
Napa Smith Brewery is located at the southern gateway to Napa Valley, just south of the town of Napa. Napa Valley is internationally known as a destination for those individuals who seek the best that life has to offer. Napa Smith is proud to contribute to the Napa tradition of hard work, craftsmanship, and artistry with the introduction of its unique family of beers. It creates its beers using proprietary recipes developed by Master Brewer Don Barkley – the most experienced brewer in the craft brewing industry. Come visit us at our newly opened Brewpub in Napa or on the web at www.napasmithbrewery.com.

About Paddington Brands
Paddington Brands (www.Paddingtonbrands.com) manages a portfolio of owned and agency premier import and craft beers, artisanal spirits and fine wines. Paddington owns the Napa Smith Brewery & Winery and 3 Amigos Tequila. It imports a portfolio of beers, wines and spirits including Agoston Wines (Spain), Chase Distillery (UK), Calatrasi (Italy), Gemtree Vineyards (AU), Marisco Wines (NZ). Paddington is headquartered in the Indianapolis, Ind., metro area with offices in the United Kingdom and Napa, Calif., and a sales team covering the U.S. market and select international markets.

About TOMP Beer, Wine & Spirits
TOMP is one of Sweden’s leading beer, wine and spirits importers with a portfolio that includes brands such as [yellow tail], Fish Hoek, Chang Beer and their own successful beer, Guldkallan. TOMP operates a national sales force from it base in Orebro. Seewww.tomp.se.

The Paddington Corp Announces Merger With Pelican Brands

Pleased to share this announcement – Paddington Corp Merges with Pelican Brands forming Paddington Brands, LLC

 

FOR RELEASE June 23, 2011

Media contact:

Heather Carden

001-317-574-6408

 

 

 

 

The Paddington Corp Announces Merger With Pelican Brands

Indianapolis, IN USA – June 23, 2011 – The Paddington Corporation today announced the completion of a merger with Pelican Brands, LLC.  The combined company will be known as Paddington Brands, LLC.  Paddington is based in Carmel, IN and also has offices in Napa, CA and 3rd party warehousing in NJ and CA. Paddington owns Tequila 3 Amigos, the Napa Smith Brewery & Winery, and is the exclusive Importer and U.S. sales agent for a prestigious portfolio of wine and spirit brands.

Since January, Paddington, through outside investors, has injected nearly $1 million into the business to expand Napa Smith Beer and Tequila 3 Amigos in multiple markets throughout the US.  The Company is committed to rolling out both brands nationally in 2011.

J. Smoke Wallin, Chairman & CEO of Paddington Brands said, “Paddington understands what today’s consumer wants– authentic, hand crafted brands with a great taste.  Our team has deep industry knowledge of the distribution and retail tiers of the business providing a rapid national route-to-market in all segments of beverage alcohol.”

Our Brands

  • Napa Smith Brewery & Winery: Napa Smith Beer, now available in 32 states, is a unique brand that brings the best of Napa Valley in quality and lifestyle to the fastest growing segment of the beverage industry, Craft Beer.  Our brew master, Don Barkley, has been brewing amazing craft beers since 1979. Napa Smith Winery has produced award-winning wines in the past three years and is sold primarily in the Western U.S.
  • Tequila 3 Amigos: Paddington’s partner in Tequila 3 Amigos is the Gonzalez family of Arizona and Mexico, where they have grown agave for generations. Paddington has announced partnerships for  Tequila 3 Amigos with major NASCAR venues including Talladega, Phoenix International Raceway, California’s Auto Club Speedway, Darlington Raceway, Kansas, and Michigan International Speedways.  Tequila 3 Amigos has had three named races in the past year including the 3 Amigos Tequila Talladega 250 ARCA race in April. The Company expects Tequila 3 Amigos to be distributed in over 25 states by year-end.
  • Chase Distillery: Paddington also imports the Herefordshire, UK-based Chase Distillery’s Chase Vodka and Elderflower Liqueur and has launched it in ten states in the U.S..
  • Paddington Wines: Since January 2011, Paddington has sold Agostón Wines from Spain into 4,085 Walgreens stores in thirty-one states. Agostón has also consistently received 90+ points in the Penin Wine Rating Guide.  Paddington Brands also represents: Calatrasi from Italy, award-winning Gemtree from McLaren Vale Australia, and Brent Marris’s newest venture, Marisco Wines – The Kings Series and The Ned.

Wallin continued, “The new Paddington Brands is an exciting company that aligns an extremely talented group of industry leaders with explosive growth brands. We plan to build on our momentum as a brand investor and incubator.  We are also continuing to selectively and opportunistically make acquisitions providing us additional scale.”

About Paddington

 

The Paddington Corp. was built upon a rich tradition of some of the industry’s greatest brands.  In 1937, Charles Guttman founded the original Paddington Corporation, which became the exclusive importer of Justerini & Brooks Ltd. (J&B) scotch, and a very successful creator of brands including Bailey’s Irish Cream.  Paddington was acquired by several large conglomerates in the 1960s – 1980s and eventually became a division of Diageo, the worlds largest spirits company.  Diageo later folded the Paddington entity into its larger North American sales force and it has remained dormant until now.  The new Paddington Brands, LLC, though a completely independent and unaffiliated company, draws on this rich tradition of building brands over the long term that Charles Guttman started so many years ago.

Paddington is headquartered in Carmel, IN, with offices in the United Kingdom and Napa, CA and a sales team covering the U.S. market and select international markets. Paddington is actively seeking acquisitions in the wine, spirits, beer and non-alcoholic beverage space.   Follow us on Facebook http://on.fb.me/afmdBU and on Twitter @paddingtonbrands and on the web at www.paddingtonbrands.com

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