THE GIST
On July 18, Massachusetts brewers and wholesalers reached a compromise that would resolve a decade-long dispute over distribution contracts in the Bay State. The move would allow most small breweries based in the state, as well as those that distribute there, to terminate their contracts with wholesalers at will—with certain stipulations. That means businesses will be free to find new partners to sell their beer at stores, bars, or restaurants.
The agreement, touted as critical to the survival of the state’s smallest breweries during COVID-19, has support from both the Massachusetts Brewers Guild and the Beer Distributors of Massachusetts. Under current law, breweries must show cause in order to break a contract, a tough requirement involving either a cataclysmic event—like a distributor being found guilty of a federal crime or declaring bankruptcy—or evidence that the distributor acted in bad faith or deliberately made no effort to sell a brewery’s products. It’s a murky and often protracted legal challenge that discourages almost all breweries from taking that action, even if they feel neglected by their wholesalers.
Speaking in favor of changing this law, Boston Beer Company founder Jim Koch reportedly told a group of reporters in 2017 that, “It’s easier to get out of a bad marriage than a bad wholesaler relationship.”
The recent compromise required the state’s largest brewery, Boston Beer Company, to essentially exempt itself from the parameters of the deal. The new law would allow breweries that annually produce fewer than 250,000 barrels of beer to terminate their contracts with distributors, provided they give 30 days’ notice. Breweries must also pay “fair market value” for brand rights, which isn’t defined by the law. If that value isn’t agreed on, the bill caps arbitration to determine the value at 90 days.
The bill must be approved by state lawmakers before this year’s legislative session ends July 31; it would then go to the governor for signature into law. While the legislation is not yet a done deal, it represents a resolution to a long-standing battle.
WHY IT MATTERS
The bill is a compromise not just between brewers and distributors, but between the state’s smallest and largest breweries, which face different outcomes from the legislation. Only Massachusetts’ smallest breweries are likely to make wholesaler changes as a result of the bill, while its largest breweries don’t benefit at all.
For years, the Massachusetts Brewers Guild was adamant that any agreement have a large enough barrelage cap. It previously proposed 6 million BBLs—in line with federal tax code and the Brewers Association’s definition of craft—to include Boston Beer, which produced 5.3 million BBLs of alcoholic products in 2019 (1.75 million BBLs of which was beer). Subsequent back-and-forth proposals set the cap at 30,000 BBLs, then 100,000 BBLs, but those limits would have excluded long-standing and influential breweries like Harpoon Brewery (which produced roughly 175,000 BBLs in 2019) and Wachusett Brewing Company (which produced roughly 73,000 BBLs in 2019). The cap proved to be the sticking point that threatened to stall this bill until the next legislative session in two years.
Meanwhile, as negotiations were taking place, COVID-19 proved an existential threat to the state’s smallest breweries, which had traditionally supplemented modest distribution sales with high-margin taproom sales. With on-premise sales demolished, those breweries needed distributor support to ramp up retail presence. But distributors were, in the early days of the pandemic, overwhelmed by huge volume sales increases in grocery and big-box stores. As they hustled to keep their fastest-moving brands on shelves, smaller breweries in their portfolios might not have been top priority. If small breweries wanted to leave what they perceived to be ineffectual wholesaler relationships, they needed urgent franchise reform.
Realistically, it’s only those small breweries that will likely take advantage of the proposed change. Under the bill, breweries (or their prospective new distributors) would have to pay fair market value for their brands, though the legislation stops short of defining how that’s calculated. Instead, the bill leaves that value to be negotiated between a brewery and its current distributor, or between its current distributor and its prospective new distributor. As COVID’s economic fallout continues, few breweries have cash on hand to buy back those rights.
Small, craft-focused distributors aren’t flush with cash either. That’s why Rob Burns, co-founder and president of Night Shift Brewing and Night Shift Distributing, doesn’t expect his distributorship to begin scooping up new brands if the bill becomes law. Night Shift Distributing was founded as an alternative to traditional wholesaler agreements, but it’s not currently pursuing acquisitions.
“I don’t see us having a big budget to pay fair market value for brands,” Burns says. “The law is set up so that if the brewery really wants out bad enough, they can foot that bill. I just think it’s not going to be our primary use of capital or taking on debt.”
With neither small breweries nor independent distributors eager to foot the bill for brand rights, Massachusetts probably won’t see distribution agreement terminations en masse. But Sam Hendler, president of the Massachusetts Brewers Guild and co-founder/co-owner of Jack’s Abby Craft Lagers, says there’s a more subtle benefit to small brewers: knowing they have a bit more power to take their brands elsewhere creates a more balanced dynamic in discussions with their wholesalers. He says a small brewery would typically be afraid to criticize its wholesaler for fear the wholesaler would begin ignoring that brewery’s products entirely. He hopes this reform levels the playing field at a time when breweries are feeling the financial fallout of COVID-19 and an economic recession. While some small breweries may choose to switch wholesalers if the bill passes, Hendler thinks it’s unlikely “the floodgates will open.”
If there are distributor shake-ups, Burns thinks they will come from the state’s very smallest breweries: those that sell just a pallet a month in distribution because they haven’t found a foothold with their current distributors. Their fair market value would therefore be relatively low, so it potentially makes breweries’ decisions to jump ship, either toward new distributors or into self-distribution, a bit easier.
Contrast that with the state’s biggest breweries—Boston Beer Company and Craft Brew Alliance-owned Cisco Brewers—which see no relief as a result of the bill.
“This doesn’t protect Boston Beer, obviously. And a brewery like Sierra Nevada doesn’t have a seat on the Massachusetts Brewers Guild but looking at it from their national viewpoint, a lot of brewers who helped build this industry won’t see relief from this bill,” Hendler says.
This signals an economic divide between the state’s breweries based on size—a divide they were ultimately able to overcome, but only because of a concession on behalf of Boston Beer. As Koch saw it, if Boston Beer didn’t exempt itself to fast-track franchise law reform, some small breweries in the state could be in immediate danger of closing. Koch has advocated on behalf of these reforms for a decade, but ultimately, Boston Beer is unlikely to see much fallout as a result of its exclusion from the bill.
Koch says he doesn’t expect the bill to change Boston Beer’s relationships with distributors, many of whom he considers his personal friends. In fact, he says, it’s a relief to not be fighting a battle at the state legislature with companies Boston Beer is supposed to be partners with.
“It was the right thing to do,” Koch says. “It got everybody else protected, and us excluded, but sometimes you have to do what’s right for the industry and for your fellow brewers.”
The Massachusetts Brewers Guild calls the deal a win for about 200 of the state’s breweries. (Most recent data from the Brewers Association shows 113 breweries in the state that produce fewer than 1,000 BBLs annually.)
In a series of tweets about the bill, Michael Uhrich, founder of Seventh Point Analytic Consulting, says it’s an indication that the “rift between small and medium brewers is growing.” He notes that the national Brewers Association (BA) and Massachusetts law will soon, in effect, have different definitions of what it means to be a small brewery—the BA’s 6-million-BBL cap vs. Massachusetts’ 250,000-BBL cap.
The bill, if signed into law, would have very different outcomes for the smallest of the state’s breweries and the largest of the state’s breweries—though it’s not expected to completely revamp the state’s distribution landscape for either.
Words by Kate Bernot