ASK MARK RODMAN.
The voluble distribution consultant discusses franchise law, and why small brewers need it.MODERN BREWERY AGE: Mark, our question this month regards franchise laws. Small brewers want changes in many states. Will this happen, and should it?
MARK H. RODMAN: Whether the product of statute, regulation or, enlightened case law precedent--as for example in New Jersey--laws setting minimal standards by which brewer-wholesaler relations are to be conducted have nothing but positive implications for the competitive and financial capacity of a brewer to succeed in a market place dominated by richer national and global suppliers.
Franchise law critics neglect to apportion blame on themselves. Only recently a few craft and import beer marketers have admitted that too many indistinguishable brands hit the shelves in the 1990s. They were introduced too swiftly, grew too fast, and lost the ability to offer wholesalers "critical mass" as the supplier moved too far from its core patronage.
Even fewer small brewers seem to realize that many are undercapitalized, over-leveraged and, like the dot.coms, there might be fundamental flaws in their early- and mid-stage business models. As Ben & Jerry taught us, no consumer product sells itself, no matter the skill and attention with which it is made.
Surely, it doesn't advance the small brewers' and importers' image, when, at the first sign the going is getting tougher, to try to swiftly and cheaply flee the distributors and markets that got them beachheads of retail acceptance.
Increasingly, we're seeing shortsighted episodes of market access panic as successful small marketers seek to expand the perimeters of their initial lodgments. There is callous disregard of distributor investments in new brands. As satirist Jonathan Swift pointed out, eating your children is no way to solve a famine.
State franchise laws defining distributors' rights have absolutely nothing to do with the brick wall the majority of independent brewers hit in the late-1990s. Neither do these franchise laws have anything to do with the bane of small brewers and importers--inadequate capital, sparse distribution expertise, and impotent distribution budgets. There is a host of Darwinian reasons why select beer brands sell-through while others just don't.
These laws are intended among other goals to give brewers and wholesalers predictability of outcome and to speed the termination process. Simply, the existence of distributor legal rights that call for recovery of market-level compensation for invested capital can't explain the fact many small brewers find themselves financially strapped or without an adequate market plan. It's absurd to think a wholesaler won't give a truly profitable line a fair shake. If a brand can't make it in a market place, the state legal rules under which suppliers enter and leave a house are certainly irrelevant. State franchise laws primarily address fairness questions when supplier and distributor first enter the relationship, and when one or the other exits They have little if anything to do while the parties conduct their day-to-day relationships.
MODERN BREWERY AGE: How do you explain this to small brewers that believe these laws are harming them?
MARK H. RODMAN: As I told a BAA convention in 1993 that these franchise fair dealing laws protect the small independent craft brewer, not just their wholesalers.
I think it is grotesque to malign brewer-wholesaler relationship law as "monopoly protection laws". I understand the laissez-faire mindset of the giant global distillers and wineries and their importer when they slander such remedial legislation. After all, their hostility to government intervention as a means to level the playing field stems from the fact their top executives were weaned under the British "Estate" or the European two-tier systems, the harsh anti-competitive consequences of which are only recently coming under scrutiny by antitrust enforcers in the European Union. Recent revelations from investigations of the beer business on the Continent tell us that this genre of executive elite prefers cartel-like cooperation to aggressive competition.
Executives who decry American state franchise protection laws should read an opinion by federal judge Easterbrook who rejected claims for competitive injury by saying: "Who says that competition is supposed to be fair, that we judge the behavior of the market place by the ethics of the courtroom? Real competition is bruising rivalry, in which people go out of business under intense pressure. Competition is 'a gale of creative destruction'."
Perhaps no message for small brewers in this discussion is more important than this one: Existing state alcoholic beverage trade practice laws, the three-tier distribution system, and brewer-wholesaler relationship laws are a means to safeguard small brewers and importers' presence and effectiveness in the domestic U.S. market.
State statutes restricting distribution options are sound competition law and don't collide with small brewer interests. These statutes warrant enthusiastic support from independent brewers and wholesalers alike. Particularly since the next administration may relegate antitrust enforcement to a back burner, this body of state law may be the last defense line for small beer businesses against the anticompetitive impact of the industry reorganization we are witnessing.
Laws that mandate and support the three-tier system of distribution are in the strong tradition of American hostility to great concentrations of economic power. It is important for small brewers to realize the following: beer franchise statutes protect competition as well competitors in a distribution network. Indeed, these laws stand as a sort of "special" antitrust and unfair competition measures to assure big and small producers alike bring their goods to market on a level playing field.
Every small brewer should carefully read the 1998 New York act, as an example of how not just wholesalers are protected. The law is Section 55-c of the state's alcoholic beverage control law, and it is proof positive small brewers got significant added rights. Practically speaking, the small brewer/importer in a multi-line house perfectly fits the law's definition of an "affected brewer" and gains the rights to notice, flee and or to make other arrangements every time a bigger, richer competitor triggers consolidation, takes a sizable equity stake or makes an out-of-the-normal course loan to the distributor.
It is also vital for small brewers to recognize the beer franchise statutes are a by-product of the abuses by some brewers back in the 1960s and 1970s. Then the big players consistently told their distributors and dealers: "Do as we say, because we and only we own the brand, we can move or do with it as we wish. Cross us, and then you'll get nada when we terminate."
Things really haven't changed. In many ways, this script runs true to life today. And the script was employed before "100% State of Mind" and similar anti-competitive stratagems by powerful brand owners to seize control of a wholesaler's mind and resources. Even where vertical integration by ownership--which really places small brewers at a disadvantage--is prohibited, tight integration by contract isn't. There has to be some control over the potential for abuse and that rests in the beer franchise laws.
Modern Brewery Age: What alternative do you suggest to small brewers in lieu of relaxation of franchise laws?
Mark H. Rodman: My proposal for small brewers and importers -- for that matter for all brewers--is a sharing of the rewards. There are a myriad of rarely-tested ways for suppliers to gain real attention to their brands. The most effective likely are long-term and tax-favorable financial incentives for brewery-distributor "family" members to focus, prefer and produce solid, lasting results for all. That would include small and mid-sized beer marketers offering participation in set-asides of minority equity stakes by way of stock options for distributor "partners" hitting sales and distribution performance goals.
Fundamentally, such incentives are little different (but theoretically much more powerful) than the cents-per-case and expansion-opportunity incentives Anheuser-Busch offers for brand exclusivity. I say "more powerful" since 33 years of experience tells me the heated debates over what is "the going rate" of termination compensation would drastically subside if an exiting distributor knows it will reap some of what it sowed. Why not fashion novel mechanisms to reward wholesalers who get the job done?
Almost eight years ago I urged small independent brewers realize one overriding fact of life: despite their numbers today, they operate in an oligopoly settling that is well along to being globalized. With the rarest of exceptions, small and micro producers can't meaningfully compete outside their home markets unless they collaborate in pre- and post-sale transaction functions.
Taking this road to survival, I first said in 1993, means defying entrenched competitive wisdom and beginning to piggyback on each others strengths and market penetration. Back then I recommended some small brewers and importers might start in-depth study of what the European brewers consider normal, that is producer and marketer "federations", when they explore geographic expansion. I sense from the interview of Tom Potter carried in your November 27, 2000 edition, this is the business model he wants to follow.
These arrangements call for sharing brewing facilities, marketing administration, brand development and distribution collaborations, with or without an equity stake. If huge Scottish & Newcastle finds a comfortable profit in hosting German giant Holsten's brewing and distribution in Great Britain, while Holsten reciprocates for Scottish & Newcastle in Germany, there is no reason a West Coast craft can't do the same for an East Coast brother or two or three. Such a collaborative model isn't what the typical independent brewer is used to, but so what?
In the same way neighboring distributors typically piggyback small loads, small and micro producers need to evaluate the complexities of negotiating joint distribution appointments, or at least cooperative distribution administration, and the logistics of assembling and jointly shipping orders headed to the same geography. In the appointment process, preference might go to the distributors used by a "host brewer". I've recommended and still recommend cooperatives that assemble scattered small brands and styles as a solid organizing principle to allow small players to begin to match the supplier clout and selling power that comes with critical mass, tight distribution management, and coordinated market investment. Here is an area in which it looks like the UK-European brewers have it right. Labatt USA's portfolio management achievements are emblematic of the potential of this principle.
In due course, these cooperative relationships may prevent small brewers from being locked into a organizing model that doesn't work, where they can't earn distribution respect and can build only limited brand equity. If an independent brewer going it alone can't sign-up a sizable, efficient distribution partner to do more than take orders, then why not join forces with others similarly situated and create one in each market where the potential makes it worthwhile?
Mark H. Rodman is the principal of Beverage Distribution Consultants of Swampscott, MA. He is a former general counsel of the National Beer Wholesalers Association and is now a consultant to the beer distribution industry.
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| Publication: | Modern Brewery Age |
|---|---|
| Geographic Code: | 1USA |
| Date: | Jan 29, 2001 |
| Words: | 1794 |
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