I’ve been to New York city twice this summer on business. The first trip I spoke to several investment people on the topic of craft beers verses domestics; the second visit, I met industry lawyers. During my conversation with the lawyers, we discussed the impact of franchise protection when a wholesaler sells their business. As I have previously written, some industry consultants attribute up to 50% of the selling price to the franchise protection. It is difficult to put a price on the franchise affect. One might argue that in states where franchise protection is either non-existent or weak, the wholesaler has a greater incentive to be motivated to perform at a higher level, compared with states with a higher level of franchise protection. Given the umbrella of protection, some wholesalers simply do not have the incentive to perform, instead relying on the knowledge that termination will almost never take place.
Joe Thompson’s recent article, “Carve Out” in Modern Brewery Age, addressed this issue. If a state had “carve out” laws, regardless of specifics, any wholesaler who had a brand that fell into that category would then focus their efforts on that brand to ensure the brand’s success.
Joe, however, does not mention what is happening in states that have statewide distributors, because of the lack of “carve out laws.” Such states include: Florida, Texas, Illinois, and New York. Successful large crafts are requesting their own sales force, and getting it! Smaller, but fast growing crafts, are writing distributor agreements with language that waives certain provisions of their state franchise. Such distributors are not taking a chance on losing the rights for a potential winner and wholesalers are agreeing to these contracts. We have all seen the success of Yuengling in Ohio, and soon we will see the impact of New Belgium in Florida. The question becomes: will an established wholesaler pass on a potential viable vendor given the price they would have to agree to?
It’s only a matter of time before more and more independent distributors (e.g., those without a major anchor vendor) appear. They will only specialize in crafts, and some with certain imports. These start-ups will agree to contracts which will have provisions that make allowances for carve outs, or putting it another way, “out clauses” for the vendor. One only has to look at the success of Chicago’s Windy City as a template for this model. Established or major distributors will have a decision to make: either agree to the vendors terms, or hope that the vendor does not succeed. Of course, there is always the option of waiting until the independent distributor builds these brands then a competing distributor comes in and buys them out. Such was the case with Reyes and Windy City, Brown with Fresh and even BEK with CR Goodman. That can be expensive.
The NBWA and the state associations are faced with some key decisions regarding these carve out provisions. If wholesalers want to maintain franchise protection, then they will have to finally agree to allow some type of relief for frustrated vendors. In fact, whether wholesalers agree or not, a change in the system will be good for all. Right now vendors are improvising, adapting, and overcoming these laws. Will distributors do the same?
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