How To Find The Right Distributor For Your Craft Beer
By Mulcahy LLP on July 14, 2017
According to the National Beer Wholesalers Association, licensed beer distributors offer more than 13,000 labels produced by some 3,464 U.S. breweries. With the number of craft breweries increasing by nearly 20% per year, the distributor/brewer relationship continues to undergo a significant transformation.
Whether it’s a startup or well-established brand, the brewer should have specific goals and limitations in mind before distribution commences. These goals and limitations are often dictated by the size and capacity of the brewery and the existing consumer recognition of the brand. While multiple distributors may aggressively vie for the brewer’s business, the brewer should do his or her homework on each to select the distributor that is right for the brand. Typically, the right distributor will understand the needs of the brand and be in a position to help achieve the brewer’s goals.
Failing to complete the proper due diligence on a distributor before entering into a distribution relationship can lead to disastrous results for the brewer, including litigation. For example, in the case Specialty Bevs., L.L.C. v. Pabst Brewing Co., 537 F.3d 1165 (10th Cir. 2008), Pabst Brewing Company found itself in an untenable position after discovering that its exclusive distributor, Marrs, had capacity limitations and conflicting views on the distribution of the Pabst brand. Most notably, Marrs (i) failed to maintain sufficient inventory of Pabst products from which licensed wholesalers and retailers could order; (ii) only distributed seventeen of Pabst’s twenty-five brands; and (iii) made no effort to market Pabst’s brands to retail establishments, instead relying solely on re-orders from existing wholesalers. These distribution shortcomings led Pabst to terminate their relationship and appoint Specialty Beverages as the new distributor for the territory.
Marrs responded to the termination by filing suit against Pabst for breach of their distribution agreement. At Marrs’ request, the court entered an injunction requiring Pabst to continue using Marrs as its exclusive distributor for the duration of the litigation. This injunction disrupted the Pabst/Specialty Beverages relationship and ultimately let Pabst to settle the dispute by reinstating Marrs as the exclusive distributor for the territory.
The rekindled Pabst/Marrs relationship led Specialty Beverages to file its own lawsuit against Pabst for breach of contract and fraud. Following a lengthy litigation process, Specialty Beverage prevailed at trial and was awarded $674,022 in damages against Pabst.
While the Pabst case illustrates the type of harm that can befall a brewer for not properly vetting the distributor’s operational capacities and distribution plan before entering into the relationship, the case of In re Old S. Coors, 27 B.R. 923 (Bankr. N.D. Miss. 1983), is an example of how distributor undercapitalization can be equally harmful to a brand.
In that case, distributor Old South Coors, Inc. filed a chapter 11 bankruptcy in an attempt to reorganize its debts and pay off creditors. A principal asset of the company was its distribution agreement with Coors Brewing Company (formerly, Adolph Coors Company). As part of the distributor’s reorganization plan, it sought to breakup, sell and assign its territorial distribution rights over Coors’ products to three separate distributors. Coors objected to the proposed assignments on the grounds that the new distributors were unable to provide adequate assurance of future performance, and could not cover the entire market space at issue, thereby leaving part of the market without a distributor of the Coors’ products. The court rejected Coors’ arguments and allowed the assignments to go forward, thereby negating Coors’ ability to select a distributor that was best qualified to serve the needs of the brand.
As these cases illustrate, selecting the right distributor can be the most critical aspect of distribution for a brewer. It requires the brewer to ask tough questions, review financial records, get a first-hand look at the distributor’s facility, and seek third-party validation of the distributor, among other things. At a minimum, every brewer should strongly consider the following as part of the due diligence process:
- Don’t be afraid to ask the tough (and not so tough) questions. How long has the distributor been in business? How many sales people and delivery trucks does it have? How long has it been servicing the specific geographic territory at issue? What are its annual sales? What other labels and product lines does it carry? These questions seek foundational information that many distributors will offer as the negotiations/discussions progress.
- Review the distributor’s portfolio. This allows the brewer to identify the brands the distributor carries and whether the brewer’s products can be differentiated from the other products offered by the distributor. Also, if the brewer intends to sell a high volume of product in the near future, review of the portfolio will show whether the distributor is offering products for large brewers and therefore capable of doing the same for the brewer. Alternatively, if the brewer is limited in distribution to a certain locality, look for distributors with experience carrying brands from other brewers that are similar in size and geographic limitations to those of the brewer.
- Tour the distribution facility. This allows the brewer to obtain some visual validation of the distributor’s verbal representations on size and capacity. It also allows the brewer to ask other important questions that may come to light as part of the visit.
- Ask about the distributor’s competition. By asking this question, the brewer should be able to learn the true size and breadth of the distributor in a particular market by virtue of its competition. This line of questioning also provides the distributor with an opportunity to further explain what makes it unique in the competitive industry.
- Learn about the representatives that are expected to cover the territory. The distributor must show that it already has an active sales force in place covering the geographical area in question. A representation that it “can” or “will” cover a specific territory “if needed” is not sufficient. Learn about the number of representatives that will be utilized in the territory? What are their experience levels? How many labels is each representative expected to service? What mechanisms are in place to replace representatives that are out of the field for short or extended periods of time (e.g., sick day, bereavement leave, paternity/maternity leave, etc.).
- Find out the key accounts currently serviced by the distributor. Are these accounts compatible with the brewer’s interests? Ask about other accounts that are not listed. Has the distributor served these in the past? If not, why not? What will the distributor do to attempt to gain access to these accounts?
- Obtain a list of references. Any easy way to confirm the distributor’s representations and avoid some of the more awkward questions is to request a list of contact information of current and past customers of the distributor. Ask these customers pointed questions about the mechanics of the relationship and broad, open-ended questions concerning the brewer/distributor relationship (e.g., “has the distributor placed your brand into your specified accounts?” or “why did your relationship with the distributor end?”).
This is not an exhaustive list of questions or steps in the vetting process. Instead, it merely reflects some of the more significant considerations faced by brewers. Each situation and brand can require its own unique set of questions and due diligence to find the right distributor match.
While some brewers may be inclined to give new distributors – often those with more favorable pricing – distribution rights, these brewers would be ill-advised to enter into any relationship with a distributor that cannot first satisfactorily show that it has the resources necessary to achieve the goals of the brewer. Remember, just like any other line of business, in the craft beer industry “you get what you pay for.”
Also, absent a strong familiarity with its distributor, a brewer should avoid exclusive distribution arrangements that grant the distributor an expansive geographic territory. Exclusivity would provide the distributor with full access to a territory free from competition with other distributors offering the brewer’s brand or certain products within that brand. A territory that is too large for the distributor to cover would likely cut the brewer’s products off from some retailers and consumers within the territory. It would also preclude the brewer from bringing in additional distributors if sales start to lag or if brand demand exceeds the distributor’s capacity.
Despite the potential negative consequences associated with the use of exclusive territories, in practice, it is often reasonable – and perhaps necessary – to grant the distributor this type of control over the brewer’s products. For instance, many distributors insist on an exclusive distribution arrangement in exchange for their investment of time, money and effort building a market for the new products. Exclusivity provides the distributor with security in knowing that its investment into the product for the designated territory will not be usurped by another distributor. Still, exclusivity relationships are often one-sided and should be avoided by the brewer when possible.
Of course, smaller, start-up brewers have little leverage in convincing a distributor to distribute the brand in a non-exclusive territory. If the brewer cannot avoid an exclusive distribution arrangement, proper vetting of the prospective distributor becomes that much more important. It is also wise for the brewer to include language in the distribution agreement that allows it to terminate the relationship for cause if certain quotas or other obligations are not met by the distributor.
As the craft brewing industry matures, so does the legal savvy of its entrepreneurs. One of the shrewdest decisions a brewer can make is to consult with an experienced attorney before entering into the distribution relationship.
Many craft brewers enter into distribution agreements prepared by counsel for the distributor and containing terms that strongly favor the distributor at the expense of the brewer. These are often terms the brewer (and the brand) will have to live with until the contract expires. Unfavorable and poorly written distribution agreements frequently lead to legal disputes that monopolize the brewer’s time and financial resources.
A well-written distribution agreement and the assistance of legal counsel will help the brewer navigate the distribution relationships and laws and should greatly minimize the brewer’s exposure to a future legal dispute.
This article was prepared by Kevin A. Adams (email@example.com), of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of antitrust, trademark, copyright, trade secret, unfair competition, franchise, and distribution laws.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.