North Carolina Craft Brewers Fight for Freedom from ABI-Controlled Distributors
Photo from Flickr user criminalintent.
North Carolina is home to a booming craft beer industry, including Highland Brewing Company and Olde Mecklenberg. But the growing power of the independent breweries has put them at odds with an increasingly consolidated distribution and wholesale industry in the state. In response, the brewers are backing a bill that would raise the amount of beer they could distribute on their own before having to contract with a distributor.
Independent brewers argue the bill is necessary because mega-brewer Anheuser-Busch InBev has gained control over many North Carolina distributors through exclusive contracts. Such captive distributors, they say, favor the products of ABI over those of independent brewers. The independents also say they should have more leeway to grow their brand before handing over a chunk of their profits to a middleman.
Current state regulations cap self-distribution for breweries at 25,000 barrels. The proposed legislation would raise that cap to 100,000 barrels. Many other states, including California, Arkansas, New Hampshire, and Wyoming, regulate breweries’ self-distribution. Restrictions vary on where breweries can distribute, and how much beer they can distribute. The self-distribution cap is designed to uphold the three-tier system, in which producers, distributors, and retailers of alcohol must remain independent from one another.
In recent years, however, ABI and to a lesser extent Miller-Coors have used a variety of means to capture control over distributors. The most powerful brewer in the world, ABI has focused both on direct acquisitions of distributors in some states, and in using restrictive contract provisions in others. Distributors have themselves consolidated to keep pace with brewery buy-ups. In 1982, there were around 4,500 distributors in the United States, whereas today the number is down to around 3,000. Meanwhile, the number of craft breweries has exploded, from just 50 in 1980 to over 7,100 today.
Craft Freedom, an alliance of dozens of North Carolina craft brewers, argues that raising the self-distribution cap is necessary to allow brewers to keep pace with the changing landscape of an increasingly consolidated beer industry. “The goal is not to tear down the [three-tier] system,” says Ryan Self, of the alliance. “The goal is to make the system fit the market.”
Craft brewers argue that it has become very hard for distributors today to do a good job of representing so many brands. When the original legislation setting self-distribution caps in North Carolina was passed in 1996, the average distributor marketed fewer than 200 brands, most of which were brewed by the same few companies. Today, that number is nearly 950. Self says that distributors in the state already control about 98% of beer that’s consumed.
Craft Freedom says brewers can lose up to 30% of their revenue by partnering with a major distributor, as compared with distributing the beer directly themselves. According to one analysis, the brewer’s margin on craft beer production is around 8% when working with a distributor, while the distributor’s is around 20%.
In North Carolina giant brewers have already captured much of the distribution industry. The legislation faces strong opposition from the North Carolina Beer & Wine Wholesalers Association. NCBWWA’s partners include Constellation Brands, the third-largest beer and the largest wine producer in the world, and the Craft Brew Alliance, which has brewing and distribution contracts with ABI. NCBWWA’s members include distributors of ABI products, including R. A. Jeffreys, one of the largest beer distributors in the U.S.
Nation wide, ABI has used exclusive deals and other contractual provisions with distributors to chip away at the boundaries created by the three-tier system. In Mississippi, the company is currently being sued for interfering in a deal between two distributors. In that case, in 2016, Rex Distributing Company, an ABI distributor in the state, negotiated a buy-out with another local distributor. But ABI wanted to reward a third distributor who had recently turned away business from one of ABI’s competitors. So ABI enacted a clause in its contract that allows it to “match and redirect” deals among its distributors, and allowed the third distributor to buy out Rex.
The Department of Justice, in its July 2016 deal approving ABI’s acquisition of SABMiller, prohibited ABI from using such anti-competitive tactics to prevent its distributors from carrying competing brands. In a letter submitted to the DOJ during its review of the ABI/SAB merger, executives from Yuengling brewery wrote that ABI’s control over its largest distributors amounted to “complete domination,” and that those distributors are “monitored and policed by ABI as effectively as would a wholly-owned subsidiary.”
Other states have blocked ABI from acquiring local distributors. In 2010, Illinois blocked ABI from acquiring a Chicago-area distributor, citing the risk of ABI becoming a “vertical monopoly.” In 2015, ABI was made to sell off two of its distributors in Kentucky, as legislators cited violation of the three-tier system.
ABI produced about 100 million barrels of beer in North America alone in 2016, and around 390 million worldwide. The company holds about a 45% share of the American beer market by volume.
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