Photo credit Breton Shepherd, with apologies to Miles Davis
Before we get started, this is not a doom & gloom piece on the “bubble” I’m not foretelling the end of Craft (or whatever we’re going to call it next). What I AM bemoaning is the possible death of “the Cool”. What is/was the Cool? As Don Younger, the late owner of Portland, Oregon’s eponymous Horse Brass Pub said, ‘we were never the cool kids in school, none of us. We made our own cool and now other people want to be part of our kind of cool.’ Craft brewing was a bunch of anarchists that figured they could do things better (or at least more interesting) than the Lowest Common Denominator Pablum that was virtually our only choice for beer by the time the 1970’s rolled around. We didn’t want to play by the big-business pay-to-play rules. We chose a different path, we chose our own “Cool.” The big distributors, most of them controlled directly or indirectly by the big brewers and/or wine & spirits companies were not interested in these little breweries, for quite a while it seemed like not many people were. But through getting independent-minded retailers, both on & off premise, plus a few like-minded distributors (very few) interested in offering different “styles” of beer, styles not seen in the US for decades, the small, independent brewers thrived. For those of you in the industry for very long, a lot of this is going to be somewhat tedious definitions of how the industry works, but I feel that for the benefit of some of the newbies in the industry as well as the layperson who just enjoys craft beer, some explanation is necessary.
First off, a mea culpa, I accept some of the responsibility for this. I should have spoken up/out earlier, but across the breadth of these United States, small brewers in many states do not benefit from the laws that we here in Colorado take for granted. 2 decades ago I left my home state of Texas partially due to the ridiculous, arbitrary, & logically fallacious laws governing brewing and the beer industry. I think we, as an industry, need to have an honest, frank, and realistic discussion about boundaries. For the last 3 + decades, we haven’t needed this discussion; we’ve been fighting the “good fight” against “the man” & have pretty much universally followed an unspoken “code” of conduct. I think we need to speak the unspoken for multiple reasons: Lots of newcomers in the industry have no experience with the way we have strived to be different (they haven’t learned & been steeped in the code), plus fortunately/unfortunately (it’s full-on both) money has entered the discussion (along with outside persons that don’t abide) so the waters have become a bit, well, muddied, to put it kindly. At a time when “the man” is doing its utmost to sow discourse & confusion into the world of craft beer, we as an industry need to define ourselves, not, all the time, by what we are, but let’s start with what we are not.
So, let’s discuss some things about our industry. We exist in a 3 tiered system. For people not in the industry (and many of the newer entrants), this may seem like an odd way of doing things. Prior to Prohibition, many problems with the sale of alcohol contributed to its being banned. The collusion between the largest brewers to fix prices and eliminate competition was a big issue that the 3-tiered system was designed to eliminate. The 3 tiers are: manufacturers (brewers, vintners, and distillers), distributors, & retailers. I really get agitated when folks bemoan the 3 tier system. When people bring up & criticize the system for, sometimes very obvious problems or abuses, I’m ready for discussion & problem-solving, but the system was put into place as an attempt to fix & mitigate the influence of “big-alcohol” on the marketplace. Often I see comments online about people wanting to abolish the 3-tier system, so let’s take a step back & look at countries that don’t have these restrictions, like virtually the entire rest of the world. If you were a new, independent beer producer in say Europe like Stone Brewing is, where a large majority (in some countries nearing 90%) of the on-premise market (bars & restaurants) are contracted to only sell beer (and/or liquor) from one producer/group, you would have ZERO chance of getting into those bars/restaurants. Here, under the 3-tiered system, you theoretically have access to 100% of the marketplace. The reality here is not quite there, but you get the picture, & we all should work on the outliers to root them out. We have had the most vibrant small brewery industry in the world for the last 3 ½ decades, something being emulated around the globe. OK, Chris, we understand what a manufacturer is & what a retailer is, but what good is a distributor, it just seems to be an unnecessary middleman designed to jack-up the price. I can totally understand a layman’s interpretation of this, but let me explain what a distributor does. A distributor is 1) a consolidator 2) a warehouser & 3) a delivery service. Full-Stop. Anything above this & it’s time to shout “thank you Jesus” a few times when you awake every morning.
1- Consolidator– the distributor gets breweries from all over the globe to agree that they can carry that brewery’s beers for a specific area (territory). What does this mean for the consumer? It means that retailers, like me or the liquor store down the street, don’t have to contact each brewery and arrange shipment of small amounts of cases/kegs to be shipped directly from the brewery to the account. I deal with around 2 dozen breweries that distribute directly to me from the immediate area; I can’t imagine how much time it would take if I had to do 100% of it. The consumer would also suffer, if I had to contact each individual brewery, arrange shipment of a small amount of product direct to me, & then find a way to store it, the price would be astronomical, and you would be drinking a lot more old beer. Distributors arrange for larger loads that cost, per unit, much less in shipping.
2) Warehouser – They store the kegs/cases (hopefully at appropriate temperatures, if you are not, you are part of the problem here) until I need it, freeing up space for the consumer to have a place to drink & lowering the cost of the bar/restaurant/liquor store to operate (we all pay for every square foot as does the Distributor & the Producer).
3) Delivery Service – When I need product, a salesperson swings by or I call, and generally the next day (with the exception of my Coors distributor who doesn’t seem to be able to handle that), the product arrives. Now I don’t have to own a truck for hauling the kegs from wherever they came from. Oh, & the empty kegs go back to wherever they came from also.
But all of this has a cost. Around the US, the average markup for all of this is around 30%. Some are a little more, some a little less.
What are the problems with the 3 tier system? This could be the subject of MANY hours of debate/discussion, but let’s center on the main issues of contention. The Distributor wants to have a territory where they have the right to sell a brewer’s beer. That right should have a value. In the early days of the Craft Brewing industry, most brewers were excited that someone would take their brand & distribute it. For most brands, their brand has a value now, & it’s substantial. It is generally calculated by multiplying the case volume times the profit on a case with a “multiplier” that represents a time period of lost profits you expect the buyer of the franchise rights to compensate you for. If the Distributor wants this “right”, there needs to be a corresponding and balancing “responsibility.” This “responsibility” should be to represent & sell the brand in the marketplace to the best of their ability. Unfortunately for brewers, there exist many Distributors that are brand collectors; their only desire in collecting some brands is to stifle their impact/growth in the marketplace, they have little or no desire to do a brewer’s brand any good. These distributors are the outliers and deserve to have the negative consequence of ‘value’ & responsibility. If they fail to represent the brand well, or even minimally, the consequence should be the loss of ‘value.’ If the distributor can be shown to be failing by some sort of mutually acceptable metrics (like growth numbers that bare some relation to average trends nationwide), there should be some sort of ‘out’ for the brand. By the same token, there should be a stipulation for the brewery on support levels (personnel, marketing, etc.). The takeaway is the thought of structuring a partnership that allows for the ‘win-win’ situation. EVERY partnership should be one where each partner walks away thinking ‘I can make money with this’ because this is the way that true partnerships operate, & operate for long periods of time.
The small, independent brewer has, in many states, been given some extraordinary privileges & exceptions from the 3-tier system in order to foster the growth of the industry in the face of so many obstacles. One such obstacle is access to the marketplace. If the distributors, many of whom are controlled directly or indirectly by Big Beer/Big Liquor, didn’t want you there, they could just not carry your product and you would have no chance to sell your beer to the retailer, enter the extraordinary privileges. These privileges allow the brewer (in many states) to self-distribute their own beer (& sometimes that of others). For the most part, this has always been a bit self-limiting, sometime around the third truck, the brewery starts figuring out that it would be more cost effective to allow a distributor to take over those responsibilities and allow the brewer to focus on making the best possible beer. Another privilege is allowing for the sale of beer for on & off-premise consumption. Both were always sold to the other stakeholders and legislators as being limited in scope and never as an end run around local liquor laws. The reality of the current implementation of these privileges bears little or no resemblance to what other stakeholders were sold. For years the brewery tap houses existed in relative harmony with their retail partners through careful attention to the concept known in the industry as “not shitting where you eat” i.e. not selling 6 packs/cases/kegs cheaper than your retailers do, having limited hours of operation, you know, the things you said you’d do when the exceptions were being asked for. Before the Brewers Association starts arguing over my use of the word “privilege” (they prefer the word “right”), remember, everything we do as brewers, distributors, retailers (or any other business for that matter) requires a license, and that license is a privilege granted by the various governments that allow you to conduct that business.
Are there problems with the three-tier system, are there abuses, yes, without a doubt. Are there distributors that squat on brands, yes. Are there problems with illegal practices, yes, so many different yeses to so many problems. Should we just chuck the whole thing and start over?
Not a chance.
Do we need to keep working on fixing the problems? Yes.
Does anyone out there, regardless of your political stance, think that starting from scratch will get us a system that benefits the small brewer? No matter how much the Brewers Association tries, it can’t possibly compete with the multinational companies.
So here we are. What’s my issue? Actually, it’s not just MY issue, it’s an issue that has been stewing for a few years now (at the very least since 2008), Mission Creep & the Satellite Tap Room. Brewers Tap Rooms were originally envisaged as a place to sample beers after a tour & maybe have a beer or two. Most Tap Rooms closed at fairly early hours. The activities were, taking a tour, having a beer & maybe a few games of Cornhole or Washoos.
From Michael Roper (Hopleaf- Chicago, IL)
“What started as humble tasting rooms, places to have a sample in a plastic cup after a brewery tour or growler fill stations has morphed into something much more sophisticated and tavern-like. Laws that differentiate between tap rooms and taverns can be and are changing in other states to make them more and more like bars. In my city, there are nearly 80 breweries with taprooms. Some sell beer from other breweries, some sell food, some sell ciders and wine, and some stay open late hours. It has had a tremendous impact on traditional corner pubs and specialty craft beer bars like mine as it has siphoned off a lot of business. For us, it has brought a plunge in business, staff cuts, and caused us to reevaluate plans. It means we focus more on food, wine, and spirits. I go to neighboring taprooms. They are busy. That is a good thing except that the audience for beer is finite. Every full seat there means there is an empty seat at a nearby bar. We have seen the statistics. The overall volume of beer being consumed is flat or falling. With hundreds of new competing tap rooms entering a stagnant market, there will be closures. Some of the closures will be traditional pubs and some will no doubt be tap rooms themselves. Until consumption rises, it will be brutally competitive for each customer’s beer dollar.”
This is what we signed on for. These days, many breweries have become veritable Disneyland “Destination Breweries” with events every weekend, movie nights, weekly bands, the list goes on and on. I’m not talking about the anniversary parties or the annual festivals; I’m talking about the things that suck up dollars every day. I’m trying to remember what you are and what your purpose is, this is what I mean by “mission creep”. Satellite Tap Rooms are Tap Rooms outside of your brewing Facility (or taprooms attached to “cursory” brewing facilities where the brewing facility is there solely to for legality sake) where the primary goal is retail sales. In October 2017, I was asked to discuss this subject at the annual National Beer Wholesalers Convention (full disclosure, they invited me & paid for my room) just 2 days after the end of GABF. It was a great opportunity to discuss the issue with dozens of people from all over the US. I thought the discussion would be at a break-out session in a room with a few interested people, it was during their General Session, with most of the 3200 attendees in the room. At the end of my allotted 2 minutes, I was pleased by the loud applause and people standing. The only people not so pleased, the Brewers Association. I am a HUGE supporter of the Brewers Association, I was on the Board of Directors for the Association of Brewers (one of the predecessor organizations) for 5 years, & was Chairman the year of the merger with the Brewers Association of America (this formed the BA), and was on the Events Committee (the committee in charge of the Great American Beer Festival, Craft Brewers Conference, Savor, and National Homebrewers Conference) for 12 years. The BA talks a good game about their support of the Three Tier System, but often their talking points and actions are somewhat lacking. In address after address at the Craft Brewers Conference, Charlie Papazian & others always talk about their support for the three-tier system, they talk about the brewers (of course), then they talk about their Distributor Partners, then ….nothing about the other tier they are also dependent on, the Retailer. I’ve attended more Craft Brewers Conferences than probably any other bar owner (I think I’ve been to 9 dating back to 1993) and I’ve never heard them mention Retailers once.
After thinking about this for a couple of years now & spending hours debating this with other retailers, distributors & brewers, here are my thoughts, these are opinions, not demands or suggestions for new laws, this is where The Cool comes back into play. You can either be part of The Cool, or part of The Killing of The Cool;
Every brewing facility that serves a legitimate purpose for the brewery should be allowed to have a Taproom.
What do I consider “legitimate”?
-Where you started your brewery
-Where you expanded your brewery when you outgrew your original facility, even if you didn’t close down your original brewery
-If you don’t have a pilot brewery to experiment on at your production brewery, I can be persuaded to allow it (some degree of NIMBY will still apply)
-If you make ‘Clean’ beers & you want to have a ‘Funk’ beer facility to avoid cross-contamination (or the other way around)
-If you want to open up a facility/Taproom in any “Closed Market” venue (Stadiums, Airports, Amusement Parks, etc)
When brewers open up tasting room solely for the purpose of retail sales, I have to be against it. When brewers’ business plans rely on multiple retail facilities of their own to be successful, I am against it & I feel that they are taking advantage of the laws to the detriment of other local retailers, distributors, and brewers (as well as brewers in other States that don’t have the same privileges). These additional locations often skirt local laws on alcohol, and are “tied houses,” this is exactly what the 3-tier system was put in place to prevent.
Another thing that has happened, is that in the past, new releases (other than some deemed too small) for breweries took place in multiple towns at multiple bars/restaurants that supported that brewery in the past. That kind of thing has pretty much gone away in brewer’s home markets, they just release things at the brewery. When I get the keg the next week, I get nowhere near the response I got in the past because the people that would have come to my place or the place down the street already went to the brewery, I see the Facebook posts and the check-ins on unTapped. Yet these same brewers will turn around 2 seconds later and complain about how retailers aren’t loyal anymore. These releases and beers used to be the reward for loyalty, but that ended a few years back (some people might remember a piece I wrote a few years ago www.craftbeer.com/craft-beer-muses/so-you-want-to-open-the-next-great-craft-beer-bar ) Why should I or any other retailer be loyal, why should I put out much effort when I’m just going to get the same participation trophy as everyone else? I understand the frustration brewers have with “Rotation Nation” but you just gave up one of the only cards you had to play in that game. Why would people do that? Because far too many breweries don’t have salespeople with sales skills or maybe they just don’t have anything else to offer an account except the “special stuff”.
Everyone has noticed the explosive growth in the number of breweries, many brewers cite this as why they need additional taprooms, but just look at what has happened on the retail side. Most major cities have seen a doubling of bars and restaurants over the last 7-8 years. I’m in Denver, which has grown faster than any other major market during that time, and we haven’t doubled the number of people (as much as it may feel like it, at least Denver isn’t shrinking like Chicago where the same doubling has occurred). Where do the breweries think those dollars are coming from? They aren’t raising any tide here. When a brewery from another town opens a satellite taproom here in Denver, I don’t think it’s drawing any additional visitors to Denver, it’s just another mouth on the Denver retail teat. I especially love it when brewers open up a satellite location in the middle of neighborhoods where they have had success in the past.
From Karen Barnett (Small Bar-San Diego, CA)
“I don’t think breweries realize the impact on the market when they open satellite tasting rooms in already competitive neighborhoods. It affects not only the surrounding small business owners but the income of all staff – from bartenders to brewery sales reps. Their presence alone makes the pie just a little bit smaller for everyone. This is especially disappointing to have supported and celebrated breweries only to watch them take your job for granted. Opening a small business and turning our communities on to good beer is something that many of us have worked hard at for years. When you open a satellite tasting room in an already saturated market, you’re capitalizing on our hard work and it’s hardly compliment. We will stop carrying your product. It’s that simple.”
So is my beef only that it’s taking away customers/money? No. The 3-tiered system is a symbiotic relationship that is most successful when everyone works towards the common goal, getting the consumer a great beer at a reasonable price. During my 35 years in this industry, I’ve worked for all 3 tiers, and I see the satellite tap rooms as a poor long-term strategy for a brewer trying to build a brand and grow beyond their own taproom(s). Instead of going out into the marketplace attempting to get as many shelf placements & tap handles to expose your brand (with the added touchy-feely reinforcement pilgrimage visits to the Mothership) you are trying to rely solely on your own outlets to sell your beer. Looks great in the short-term, I mean, it’s WAY easier than working at getting & keeping tap handles, but you will be losing so many other opportunities in the long run. Each taproom creates holes in your distribution footprint, put a few holes in & retailers in surrounding areas will get the message that you are not a good partner for them to get beer from. It is also the absolute reincarnation of the “tied-house”. I recently had a discussion with an out-of-state brewer that currently has multiple satellite taprooms in multiple states, I asked him why would I invest my time & my tap space to help them build their brand, when, if I and the other bars & liquor stores in the area are successful, you are just going to open up a brewery down the street from us? He seemed stunned when I said that, because, yes, that’s what they were opening up this market for, scouting out a new place to open a brewery in 4-5 years.
I hear “but that’s just business” but we’ve worked hard these last 4 decades not to be “just business.” The Craft Brewing industry is not about commodity, it’s about community. We did something different with a collaborative and community-based ethos, and that difference was our strength and resulted in success beyond anyone’s expectations. It was our “Cool.” It has become a model that small brewers and their partners have tried to repeat all over the world. Small brewers are experiencing problems with growth, and instead of using The Cool to figure out how to tack the sails to deal with the changing marketplace, they’ve resorted to “just business” and seem bewildered that it isn’t working for them. You know who does “Just Business”? Big Beer does. They’ve done everything to try to keep you out of the marketplace, they’ve tried to keep you out of their distributors through their “share of mind” tactics and buying of distributors (wherever legal). They’ve bought cherished (and some not-so-cherished) brands and substituted them for your handles everywhere possible to give the illusion of choice in the marketplace.
Falling Rock Tap House