THE GIST
In a rare example of legislative alignment between breweries and beer wholesalers, Virginia is poised to become the first state in the U.S. to enact a self-funding system by which breweries can directly distribute their beer to retailers. The “limited self-distribution” model aims to lower some of the sales hurdles facing the smallest of the state’s breweries at a time when craft beer sales slow nationally and wholesalers are wary of taking on new brands. The new law would allow all in-state breweries to self-distribute up to 500 barrels of beer per year.
The change provides a unique support system through a model of beer sales that allows breweries to maintain higher margins at a time when they need it the most.
According to data collected by the National Institutes of Health, Virginia residents have declined their per-capita intake of beer by -11% in the past decade. The amount of spirits consumed has increased +30%.
In chain grocery, big box, and convenience stores, craft beer specifically performed only slightly better in Virginia last year (-8% volume) than nationally (-8.7%).
Last year’s craft beer sales in those chain stores was roughly the same as 2019, despite adding 64 breweries between 2019 and 2021. (2022 brewery numbers are not yet available.) This new law has the potential to open up more stores for more businesses than ever before.
House Bill 2258 (also known as the Beer Industry Limited Distribution Act, or the BILD Act) is good news for Virginia’s smallest breweries, especially because it’s an acknowledgment of the difficult sales reality they face moving forward without it. In discussing the deal, the state’s beer wholesalers association admits that the existing distribution model isn’t well equipped to handle small-volume beermakers while those breweries are happy to maintain additional control over transportation and portfolio management that self-distribution provides.
It all comes at a time when costs of ingredients and materials have risen for breweries over the past two years, and distributor consolidation across the country leaves fewer wholesalers to service a still-growing number of breweries. Virginia breweries have a new lifeline to grow and support their bottom line while distributors—historically resistant to giving up control of their codified role in the country’s three-tier system—don’t have to worry about losing work thanks to a cap on how much those companies can sell themselves.
WHY IT MATTERS
The BILD Act could seem like a concession from Virginia’s wholesalers, but it’s more so an acknowledgment that the smallest breweries in the state aren’t top priorities for most distributors to begin with—and that likely affects how those breweries are represented on store shelves and draft lists.
For the roughly 60% of Virginia breweries that sell their beer only through their taprooms, the legislation represents a chance to also sell to bars, restaurants, bottle shops, and grocery stores that they otherwise would not have had access to without a long-term distribution agreement. Even for breweries with existing distribution contracts, the opportunity to sell 500 barrels directly to retailers represents an enhanced business model: Those breweries would be able to self-distribute outside of geographies where they have existing wholesale contracts, or within those areas once they’ve offered their distributor first right of refusal.
Supporters of the BILD Act say it still upholds the three-tier system, which generally requires a middleman (tier two) between producers (breweries, tier one) and retailers (bars and stores, tier three). Virginia already has a similar self-distribution company for wine since 2008, which serves as the model for how it would work:
The law would establish the Virginia Beer Distribution Company (VBDC), nested under the state’s Department of Agriculture and Consumer Services.
After initial taxpayer funding of an estimated $760,000, the VBDC expects to be self-funded by excise taxes, sales taxes, and transaction fees.
The VBDC will create a digital sales portal where breweries can receive orders and set up schedules to deliver beer.
Because of the initial funding, the BILD Act requires budgetary approval, but Virginia lawmakers are currently at an impasse over that budget. Yet there is no significant opposition to the bill, so it’s expected to be funded either this year or, failing a budget compromise, in 2024.
“Our understanding was that for the truly craft breweries, traditional distribution was not the best model for them and so they were blocked out of the market,” says Phil Boykin, president of the Virginia Beer Wholesalers Association. “When we had the first explosion of craft a little over a decade ago, [Virginia distributors] were rushing to sign on as many as we could. … As that market has matured, they’re trying to build a portfolio that complements each other. You want a strong mix rather than just having every craft brewery. We’re not in the crazy phase right now of signing up as much as we can.”
Boykin’s sentiment matches what consumers are doing, too. In Virginia chain retail from 2019-2022:
Spirit-based brands like High Noon and other canned cocktails tripled their sales volume.
Flavored malt beverages, which includes brands like Twisted Tea, are +64% in that same timeframe.
Imports (+13%) and “premium plus” (+22%) are the only areas of volume growth in beer.
Simply put, most distributors are already focusing on higher-volume brands and growth categories, so carving out a segment for craft breweries to find new ways to pad their bottom line has the potential to benefit everyone.
Most distributors thrive by making repeat sales of high-volume brands, which is why in the world of Virginia craft, Anheuser Busch InBev-owned Devils Backbone Brewing and its 481,000 cases of beer sold in chain retail last year would be more enticing than Old Bust Head Brewing, which moved almost 8,000 in 2022. It’s why there’s generally less interest and distribution access for small breweries with rotating portfolios of specialty beers. Those companies are more difficult to logistically manage than consistent sellers from the largest breweries.
Among the top priorities for distributors this year and next, as identified by Bump Williams Consulting, “reducing operating costs and logistics” was number one. Bart Watson, chief economist for the craft brewer trade group Brewers Association, says that this focus, combined with increasing distributor consolidation, has led to declines in service at small accounts like locally-owned bottle shops and independent bars that matter most to locally-focused breweries.
“Increasingly, distributors are focused on larger-scale chain accounts and for many start-up breweries, that’s not their goal at all. They don’t want to be in those places,” Watson says. “With both the decline of draft in recent years and the change in distributor business models to bigger, more consolidated models, there’s a mismatch there. That’s another strong reason to allow self-distribution.”
A recent Sightlines+ analysis of chain retail sales from across the Mid-Atlantic showed how challenging this can be for some states where self-distribution isn’t allowed. The research found that without self-distribution, some states like South Carolina have an otherwise thriving craft brewery scene that’s stunted in chain retail without easier access to those shelves. In South Carolina, Sightlines+ found craft was far underrepresented in major stores while breweries from nearby states took increased share year after year. The implication for a state like Virginia is that this new law could provide something of a buffer to help its small businesses grow and reinforce in-state excitement about homegrown craft beer.
These realities are why small breweries—who have felt mostly ignored by distributors—say they welcome the chance to test the wholesale market themselves through the VBDC.
“We can sell our beer best. A distributor sells everybody’s beer,” says Courtney White, owner of Intermission Beer Company in Glen Allen, Virginia. “We don’t get the attention that we want [in distributors’ portfolios] … Distributors don’t want one or two kegs, they want volume.”
Intermission produced 60 barrels of beer last year, making it among the smallest breweries in the state because it focuses specifically on taproom sales in its hometown. And there are more producers in Virginia like Intermission than a relative giant like Devils Backbone or Starr Hill Brewing: Based on 2021 excise taxes reported to the Virginia Alcoholic Beverage Control Authority, 84% of the state’s breweries produced less than 500 barrels in 2021.
Intermission signed with Pretty Ugly Distribution, a Chesapeake, Virginia-based wholesaler about five years ago, but has sold hardly any beer in distribution since the outbreak of COVID in 2020. White says the effort required to get a small volume of beer to the distributor wasn’t worth it over the past few years because she makes two- or three-times more when selling at her taproom. (The most the brewery ever sold through its distributor was 14 BBLs of beer, in 2019.) She says she makes $2-$3 for every can of beer sold over the bar, compared to 50 cents or $1 for every can of beer sold in distribution.
“If we could self-distribute, we can negotiate directly with the restaurant or bottle shop and that middle man is gone,” she says. “It would help the margins for us greatly.”
Along with a new brewpub in Hanover County that Intermission has in the works, White is hopeful that self-distribution could help her brewery get to the next level of growth, potentially upgrading from a seven-barrel brewhouse to a 15-barrel system.
This is what Virginia beer wholesalers hope for the BILD Act, according to Boykin. He says that allowing breweries limited self-distribution should enable the most promising businesses to grow and potentially sign on with wholesalers for wider distribution.
“This helps them because the more access to market we can give them to keep them sustainable and thriving, for those who want to break out, they have the potential to break out and grow,” Boykin says.
In other words, the Virginia Beer Wholesalers Association is happy to let small breweries self-distribute modest amounts of beer. Once they’ve outgrown that arrangement, they may have the sales volume and interest to catch a wholesaler’s eye and launch statewide or regional sales. This won’t happen for every brewery, or even most small breweries, however.
“Can all 9,500 breweries in the country scale up through distribution? There’s no way. Will there be cases of breweries that come into the market, have a differentiated product that resonates with consumers, and will they be able to scale up? Yes,” Watson says. “Brewers need to understand their strategy and need to understand those odds.”
Words by Kate Bernot