In part one of this series, we looked at the rapidly expanding reach of Reyes Beverage Group in California. The country’s largest distribution company has amassed a powerful network of businesses across much of the state. Because of Reyes’ increasing power over beer’s middle tier, businesses intent on selling beer through distribution in the Golden State—whether they’ve already aligned with distributors or plan to in the future—may feel like the ground is shifting under them.
Breweries aligned with distributors who’ve sold already have choices to make. Several breweries who’d been with DBI, like 21st Amendment Brewery and Drake’s Brewing Company, chose not to remain with Reyes once it bought DBI. Those who stay confront new leadership in charge of their distribution, some of whom may have differing priorities and ideas about retail strategy.
“This is what people have always said about big distributors and why a large consolidation machine like Reyes is scary: they set the terms. They can do things like just stop buying beer from [your brewery],” says Collin McDonnell, CEO of HenHouse Brewing Company in Santa Rosa, California, which self-distributes its beer in the Bay Area and sells its beer through Mussetter Distributing in the Sacramento area. “If you don’t have a clause in there that says, ‘If you don’t buy beer from me, I can get out of this contract,’ then they can do just that.”
Breweries carried by competing distributors may also see the retail landscape mutate as a result. A brewery could see its retail placements diminished as a new distributor takes over a portfolio and tries to place brands in big-box or grocery stores, in what could be a stark contrast to a previous strategy of smaller or specialized stores.
As the number of distribution options gets smaller, some breweries may choose to forgo traditional distribution altogether in an uncertain and highly competitive climate. They can either sell beer entirely through their “own-premise” taprooms, begin self-distributing, or—if they’re of a certain size—potentially form distribution alliances with other breweries to collaboratively service a geographic area. (Picture the shared sales arrangement 21st Amendment, Funkwerks, and Brooklyn Brewery created.) But even then, all of these models carry limitations.
For California breweries looking to move more volume through distribution channels in grocery, convenience, and other stores, traditional distribution can still look like a leap worth taking, even as Reyes’ consolidation makes the move more complicated.
Take Mother Earth Brewing Company, a Vista, California- and Nampa, Idaho-based brewery that launched California distribution in 2013. At the time, Stone was the dominant player in craft distribution in Southern California; as Mother Earth’s executive vice president Kevin Hopkins says, “The Reyes of the world didn’t care about us.”
Stone felt like the right relationship for distribution, built on mutual respect and close geographic proximity. Fast-forward just a few years, and Mother Earth found itself with a new challenge: how to expand distribution to Northern California and beyond when Stone only serviced Southern California? “The only houses that could do that were the same houses we talked to before we went with Stone,” Hopkins says.
Mother Earth decided to sign with Wine Warehouse, which now also covers Southern California, setting up a situation in which the brewery’s distribution partner in one part of the state is its competition in another. To distribute to the central part of the state, Mother Earth went with two distributors who’ve since been acquired by Reyes. In total, the brewery has six distribution partners in California, part of what Hopkins calls “a convoluted landscape.”
“People tend to overlook that the distribution ecosystem is more fragile than the brewery ecosystem,” McDonnell says. “I’m sure Budweiser will be fine one way or the other [as consolidation continues], but if you’re a small brewery who aligned with Bud houses because you thought it would get you those corporate retail placements, and that changes, that’s huge.”
McDonnell is referencing the influence distributors can exert on specific breweries’ placements at chain accounts. While a small brewery might not expect to have its beers on every grocery endcap, it does ride the coattails of larger breweries that have access to premium retail space. For example, when a 20,000-BBL-per-year brewery wants to get its IPA on more grocery shelves, it might pay to be aligned with an AB house that gets premium placement for Bud Light in that chain.
But that’s no guarantee the placement will last. If a new distributor enters a certain geography and snatches up those desirable retail placements, that can have ramifications for even the smaller breweries in competing distributors’ portfolios. When a category captain at a major retailer shifts from an AB InBev product to a Molson Coors or Constellation product, say, the downstream effects for other brands in those houses can be dramatic.
“When there’s a change in category captain, theoretically the rest of that portfolio loses out. It doesn’t always happen that way, but that’s really important for a brewery itself to have those relationships with the retailer,” Clements says. “If you’re just relying on your distributor, then yeah, those things could potentially happen.”
McDonnell echoes that sentiment, adding that changes in the power structure of distributors are hardest on breweries who don’t have mutual communication with and clear expectations of their distributor partners. That becomes even more crucial as consolidation increases. As Reyes throws its weight around new areas of the state, breweries and distributors should be clear about how they’ll work together to mitigate any potential threat Reyes poses. McDonnell recommends setting those goals down in writing, ideally through an annual business plan reviewed by both parties.
“Every business owner has probably run into a $10,000 problem or a $100,000 problem that could have been an $8,000 legal bill. Distribution contracts are no exception,” McDonnell says. “Small breweries need to be thinking of them as long-term investments that require legal assistance. Agreements are based on the best-case scenario, but good contracts are based on the worst-case scenario.”
Supplier-distributor relationships are a two-way street, now more than ever before. A decade ago, when distributors were playing catch-up in the craft beer space (and some were signing on any local option they could), the expectation was that, once the beer left the brewery for the distributor’s warehouse, it was not just out of the brewery’s hands, but its mind. No more.
“Brewers can’t just drop off the beer and think that it’s going to sell. Managing distributors and distribution is not easy,” Clements says. “Reyes is a good choice for a lot of breweries, otherwise it wouldn’t have as many brands as it has. Just because you’re a big distributor doesn’t mean you’re a bad distributor. You just might not be the right long-term choice for every brand.”
Stuck in The Middle With Who?, Pt. 2 — What California’s Distribution Consolidation Could Mean for Breweries
Words by Kate Bernot