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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My 2015 Superbowl Ad Recap

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That was a great Super Bowl! Well, as great a game as it could be without the Colts in it. That said, I’m sure many of you joined me watching the actual big game – the commercials. I did not evaluate every one, but the most notable discussions (I posted on Facebook and Twitter as the night went on and had lots of interesting interaction) I recap below.

My comments denoted with @smokewallin. Where others commented or tweeted I list their Twitter handle.

Interesting Comments and Un-categorized:

@smokewallin: Pretty close.. RT @jack_welch: Product Managers….every day try to design a perfect product like NFL

@smokewallin: Really? RT @adage: Whoa RT @LoctiteGlue Hey, @BUDWEISER! Stop bidding on our ad keywords. Love, Loctite

@smokewallin: Wix.com websites.. Farve & Carve… nice ad! Worked

Farve & Carve

NASCAR

@smokewallin: Nice @NASCAR @nbc ad at end… @DISupdates coming soon! #SuperBowl #superbowlcommercials

video-undefined-2541D2B800000578-109_637x358

BUDWEISER:

The horses saving the puppy from wolves was beautifully done.  There was a lot of push back from the craft beer world on the This BUD’S FOR YOU slaming craft beer. My sentiment was ABI (Anheier-Busch Inbev) is simply playing to their strength and their core audience with the through-back ad.   The PacMan ad for Budlight did not work for me though.

@smokewallin:Big Beer fights back Craft beer .. @Budweiser “Let them sip their Pumpkin, Peach Ale we’ll be brewing golden suds” nicely done4 target!

This buds for you This Buds for you horse

@smokewallin: I think @Budweiser bringing back old school works better than Pacman @budlight hard to see how it connects #upforanything #SuperBowl commercials

@smokewallin: Play to your strength? RT @businessinsider: People are slamming Budweiser ad that mocks craft beer http://read.bi/1BR2DGF 

@smokewallin: Play your strength? RT @adage: Look what came back at the #SuperBowl: An old slogan http://trib.al/oYGzM1N 

Here is one example of the craft beer world reaction from the Ashley V Routson aka “BeerWench”

https://twitter.com/TheBeerWench Hazzah ‪#craftbeer! Budweiser has officially admitted to being threatened by us, albeit passive aggressively though a Super Bowl commercial.

Soft Drinks

Coca-Cola a big win with their positive message. Love the reply to negative tweets and see message. Oh and thanks for the retweet Coke! Pepsi with their half time extravaganza with Katy Perry did well. Most seemed to like the show and it was well executed.

@smokewallin: Coca-Cola #makeithappy nice sentiment. #superbowlcommercials

@smokewallin: Thx RT @CocaCola: @SmokeWallin #MakeItHappy is more than a # Reply 2 negative Tweets + see! http://bit.ly/1BgZw8b 

Coke happyimages-4

AUTOS

Fiat had the best ad, hands down. The little blue pill told a whole story in a short spot. Loved it! Liked the Harry Chapin ad (and song), but the message might be mixed up a bit… I expected the kids to leave at end and become a race driver, just as the dad was hanging it up – it would have matched the story of the song. Mercedes-Benz tortoise and the hare was cute and effective.

@smokewallin: The @FIATUSA 500 and the little blue pill… told a whole story.. nicely done! #SuperBowl commercials

fiat images-5 fiat2

Mercedes-Benz USA nice touch on old tortoise and hare fable.. tortoise gets the “girl”.. cute

@smokewallin: Nissan Kid growing up with Racing dad while Harry Chapin Cats In the Cradle plays… worked #superbowlcommercials

nissan racing growing up

@smokewallin: This land was made for you and me.. @Jeep Nice touch making it international! @FIATUSA #SuperBowl commercials

@smokewallin: Ok, Being a Dad… @Toyota USA hits home… Nice.. but did all these companies discuss the Dad theme? #SuperBowl commercials

@smokewallin: concur RT @adage: We’ve reached Peak Dad with that one. #withdad @nissan #SuperBowlads

@smokewallin: the BMW i3 ad with Bryant Gumbel and Katie Couric flash back to what is the internet was cute. #superbowlcommercials

Fast Company @FastCompany @BMW‘s #SuperBowl ad takes @katiecouric and Bryant Gumbel back in time: http://f-st.co/t3jR3wa  by @jeffcbeer

katie and bryant - BMW electric

The Kia ad with Pierce Bronson was actually pretty good as well.

Insurance

Nationwide was a fail mainly because it was such a serious ad and using a horrible thought like losing a child to an accident did not fit Superbowl. The American Family Insurance ad with Jennifer Hudson was cute, but pretty short and kind of got lost.

@smokewallin: Didn’t like Nationwide Insurance kid who will never grow up- I get it but not really mood of the Superbowl to me. #SuperBowl commercial

 

Medicine and Soap:

Dove was a great feeling ad, but kind of letdown when it got to the product. Jublia did not work and was not cleaver.

Dove

@smokewallin: exactly RT @marcmalkin: That dad’s commercial was good until they showed it was for soap. Kinda killed the emotional buzz #SuperBowl

 Jublia

@smokewallin: Jublia… uhm.. no. #SuperBowl commercials

@smokewallin: My sentiment… ugh RT @adage: Talk about turf toe. @kenwheaton gives Jublia commercial 1.5 stars.

jublia toe

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

 

New Beer Industry Technology Symposium™ “BITS™” Set For June 30 & July 1 in Napa, California

Excited to announce the first Beer Industry Technology Symposium in collaboration with our 10th Annual Wine Industry Technology Symposium… it will be a technology extravaganza!

New Beer Industry Technology Symposium™ “BITS™”
Set For June 30 & July 1 in Napa, California

Craft Brewing Industry Leaders to Collaborate on Best Practices and Strategies
BITS to partner with the 10th Annual Wine Industry Technology Symposium® “WITS®” for First Event

For Immediate Release
February 20, 2014

(NAPA, Calif.) – Leaders of the brewing, distribution and technology industries have formed the new Beer Industry Technology Symposium, BITS, to create a dedicated industry forum where technology and strategy intersect. The first BITS will be held in Napa, California in conjunction with the Wine Industry Technology Symposium® – WITS® June 30 & July 1, 2014 at the Napa Valley Marriott.

The purpose of BITS is to address the unique information technology, and service needs, of the beer industry. BITS is dedicated to bringing the world’s leading beer industry professionals together with the world’s leading technology experts, to foster learning and discussion. Panels of experts will discuss specific examples and case studies that will deliver tangible take-home value and create relationships.

SteadyServ Technologies®, has built technology to help bars and restaurants, distributors and craft brewers — even patrons — keep track of the beer remaining in a keg and more effectively manage their beer inventories. SteadyServ’s Founder and CEO Steve Hershberger said, “Given the massive changes occurring in the beer industry, BITS is the right gathering at the right time. Getting the craft beer industry together, to discuss technology solutions and the strategies needed to ensure continued growth and success, is difficult due to both the high number of beer producers and the vast geographic differences in their physical locations. BITS will provide an important venue for the industry’s thought leaders to collaborate for the greater good of the industry. SteadyServ will be there in full force.”

The growth and importance of craft beer is widely documented. According to the Brewers Association, the number of craft breweries in the US has risen from a low of > 100 1977 to > 3,500 in 2013. Over the next 5 years, the growth in craft beer volume is expected to be greater than over the past 25 years combined. Given this explosion in consumer demand, and the number of new operations that have been formed, there is a specific need to understand best practices and strategies within the industry. Many new brewery owners are attempting to reinvent the wheel in terms of processes and systems to run their businesses. BITS aims to be the industry-wide resource to help educate beer industry members and unite them with best-of-class technology providers.

“After owning a rapidly-growing craft brewery from 2010 – 2013, and then working with a number of others to help build their beer businesses, I spent a lot of time networking with other breweries and observed their efforts to manage growth and establish systems that are vital to run an efficient and effective business,” said J. Smoke Wallin, BITS Chairman and Founder. “While there are many beer industry events such as NBWA and GABF, there has never been a forum focused on the technology needs of craft brew operators. BITS will fill that void.”

Expected attendees include craft breweries, distributors, retailers and on-premise and technology providers. There will be content for everyone from the Owner/GM/President to the Information Technology Manager or CFO to the Brewers to the Sales Managers. Building on the successful model of WITS, with cross-functional workshops and keynote speakers, BITS will draw from industry leaders to present tangible take-home value as a result of a focused gathering.

The agenda includes sessions on: Technology Leadership – Best-of-Class Tools, Consumer Direct Sales – Managing the Tap Room and Online Presence, Trade Sales & Marketing – Craft Beer Route To Market – Gaining & Managing Distribution, Brewery Operations – Hops to Kettle to Keg or Can

Interested sponsors and speakers can contact Waunice Orchid (Tradeshow Coordinator) Waunice@swgnapa.com (707) 261-8716 today. Registration will open March 1, 2014. Space is limited and BITS is expected to sell out, so register early.
www.beertechnologysymposium.com

ABOUT BITS:
The Beer Industry Technology Symposium (BITS) was created to address the unique information technology and services needs of the Beer industry. BITS is dedicated to bringing the world’s leading breweries, distributors and retailers together with the leading technology experts to foster learning and discussion. Expert panels and keynotes discuss leading edge case studies involving consumer direct marketing and sales, operations, financial management, trade sales and distribution, brewing and input management

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