Where the three-tier system is broken...
In the 5 short years that our brewery has been open we have engaged in business with 6 different distributor partners. One of those was the very first that we ever worked with, and no doubt the worst. The other 5 are distributors that we still work with with one of them being the worst piece of $%*# and ultimately the inspiration for this post. I'm leaving any names out for posterity's sake.
In this short timeframe I've come to understand distributor operations as ultimately, if not generally, existing in two different forms, outlined below. Keep in mind this is a very simplistic explanation and nomenclature and is not referring at all to the hard working folks that bust ass every day selling beer and carrying out the Lord's work. But for simplicity's sake, here you have it.
Small Distributors: These are the fine folks that are either A) driven to sell and grow artisanal, boutique brands of beer that aren't necessarily high volume but carry a higher margin and are generally considered "specialty". You won't generally find a Bud, Miller or Coors product in these portfolios. Inside of this designation you have those that are eager to grow their business and bring on new, exciting brands and then you the those that are eager to grow their current portfolio with as little investment as possible with an eye towards being acquired by a larger distributor.
Large Distributors: These are the fine folks that have invested literally millions of dollars to build state of the art distribution centers and employ hundreds of people to sell a literal "shit-ton" of beer each year. They talk in terms of "millions" when it comes to the number of case equivalents that they sell in a year and most of them generate anywhere between 70-90% of their total sales from brands like Bud, Miller, Coors, Corona, Dos Equis, and a whole host of other imports. Most of these distributors have, over the last decade, begun to not only embrace but aggressively sell craft beer. Some of them have invested loads of money in sales training, warehouse efficiencies, state of the art equipment and literally thousands of square feet of temperature controlled space for beer storage. Inside of this category I also see two distinct varieties of distributor. On the one had you have the distributor that views a supplier relationship as just that, a relationship. One that is built on trust and commitment to quality in an effort to grow sales for both the supplier and the distributor because they are, ultimately, tied together. But they go even further than just trying to sell more beer, they invest in cold storage space, staff training and marketing dollars to grow the business. They understand that their global suppliers will generate the most sales but they see the writing on the wall in consumer preference towards small and local and they invest in that because it makes sense. Then you have the distributors on the other side of that description. And that is precisely the inspiration for this very smattering of words. We'll get to them in just a second. But first, a short story.
When we first opened the brewery we self-distributed all of our beer. One of the perks of the regulatory structure in the state of Texas is that small breweries have the ability to bypass the wholesale tier and deliver their product directly to retail customers up to 40,000 bbls per year. It's a nice perk and one that many start up breweries in Texas will attribute to their ultimate success. Until 2013 breweries in Texas were not allowed to sell beer for on-site consumption so the increased margin (albeit diminished when you factor in delivery trucks, maintenance, etc.) is a nice perk. My model never involved self-distribution as a long term solution but it enabled us to make some great relationships with our retail partners that still benefit us to this day. It was really hard work but I don't regret it for a minute.
As we approached a point of needing to invest fairly heavily in distribution infrastructure to continue self-distributing we began to run up against a problem. We couldn't afford to invest to grow both our distribution capacity (trucks, people, etc,) and our production capacity (fermenters, packaging line). At this point in time, we could afford one or the other. So, we chose to invest in production capacity and began the search for a distribution partner. My romantic vision at the time had convinced me that we needed to find an "independent" distributor that wasn't selling any of the big 3 brands or their import acquisitions. We wanted a distribution partner that was solely focused on small brands and growing them. After some time we finally settled on a small outfit that had a statewide footprint through some other non-alcohol products that they also distributed, namely a very well established coffee brand that was sold throughout the state in every major retail chain. We viewed this as a great opportunity to have the ability to sell our beer across the state and only have to work with one distributor. At the time we couldn't wrap our head around selling 5,000 bbls of beer in any one market in Texas so we felt like we could fill out the state fairly quickly and this new distributor was the answer. Or so we thought.
Fairly quickly we began to realize that this distributor was not extremely interested in the concept of investing in infrastructure to continue to grow the few brands that they sold. Meanwhile we were continually investing in infrastructure to grow not only our production volume but also the quality of our product. These components are not cheap but we were selling every drop of beer that we could make, growing much faster than anticipated and I could see a bright future for our brand. We toughed it out for a year, consistently trying to convince the accounts that were selling our beer, and had been since we were a self-distributing brewery, that everything would get better once this distributor bought more delivery vans. But they never did and it just got worse. With the investment that we had made to grow our brewery and the obvious lack of care or concern with providing even the basic level of customer service from our distirbutor, we had to make a change, for the good of our company.
So I began the process of meeting with new distributors to see if anyone was interested in potentially acquiring our distribution rights from our current distributor. You see, in the state of Texas we have a set of franchise restrictions that basically prevent you from exiting a distributor agreement once you've entered into one, without paying an absurd sum of money. The process for terminating an agreement is arduous and very rarely stands up in a court and to be honest, very few of us can afford the legal battle. Our brand had gained a wonderful reputation in Austin and we were convinced that we could find a distributor interested in helping us grow. It didn't take long for us to find a solid partner and so we moved forward. Of course, there were negotiations to be had between these two distributors as transferring distribution territories doesn't come free of charge for distributors. But, I should add, we were not a party to these discussions nor did we receive any compensation as a result of the deal. We just wanted to keep growing our brand with a distribution partner that was interested in the same. And, by finding a much larger distributor partner we were able to access resources that we never had before. Things like storage space, refrigerated trucks, on site print shop and over 100 sales professionals in the market. It was a great evolution for us and one that enabled us to take the next step in filling out our Austin distribution footprint.
Unfortunately, a short year or so after this agreement went into place our new distributor agreed to be acquired by another distributor. There are very real pressures that the large brewers such as ABI and SAB have placed on distributors in relation to consolidating distribution footprints. For the same reason that we wanted to have only one distributor for the entire state of Texas, so does ABI and SAB. This makes, on the simplest level, things like accounts receivable much easier to handle but it also increases efficiencies in a number of capacities all the way from freight to the effectiveness and ultimate size of sales staff. Because both of these distributors sold the Miller/Coors portfolio of brands and had a patchwork of counties that each had access to in central Texas it made sense for them to consolidate. But, for us, we were back at square one. Because of the way that our distribution contracts were drafted we protected ourselves from this and ultimate gave us the ability to exit our agreement in the event of an acquisition. While that was an option that we entertained we ultimately determined that the switch would be too cumbersome and quite frankly, we weren't impressed with the other distributor options available so we decided to move forward with the new distributor, our 3rd since opening and the 2nd transaction made for the distribution rights to our brand that we made not a single penny on. Even though we had invested hundreds of thousands of dollars growing our brand, the ultimate value on that transaction stayed between the two distributors.
We were confident in the move given that most of the employees from distributor #2 moved forward with distributor #3 and we were gaining access to a few more counties around central Texas. This was also when it was brought to my attention that this transaction was only giving distributor #3 fourteen counties in the state of Texas and distributor #2 was holding onto our distribution rights in the rest of the state of Texas that they had acquired from distributor #1. Never mind that distributor #2 had absolutely no infrastructure to distribute our beer around the state but they nonetheless saw a value that they could place on those rights if/when we decided to expand outside of the greater Austin area. All of this due to the ultimate inability for a brewer to exit a distribution agreement without forking over a large sum of money even though that brewer never sees a penny from the transactions that took place between distributors. Pretty shitty position for us to be in but at the time, it was our only option.
Now I must say, distributor #3 has been an incredible partner and one that we look forward to a very long relationship with. They are finishing up construction on a 600,000 square foot, state of the art distribution facility complete with a 60,000 square foot cold room devoted to storing only packaged beer from their craft brewers. Yes, you read the right, a 60,000 square foot walk in cooler just for cans and bottles. They're investing in quality, education and growing their level customer service and are currently on track to sell over 7,000 bbls of our beer within a 50 mile radius of our brewery. And that's only because we couldn't get them more of our beer due to capacity constraints.
Many of you may be familiar with our current plans to open a new production facility in San Marcos in 2017. The facility will have over 4 times our current production capacity and will enable us to begin moving into more markets across Texas. We are incredibly excited to sell more beer in Houston, San Antonio and the DFW markets as well as a whole host of other smaller markets across the state. But, remember that little glitch where distributor #2 held onto our distribution rights for the rest of the state? Oh yeah, that shit.
So now we are in the remarkably unfortunate position of being at the mercy of a distributor who we no longer do business with but currently holds the distribution rights for every county in the state of Texas that we don't currently distribute to. All of that with virtually no infrastructure to sell our beer in those territories even if they wanted to. But make no mistake, they have no interest in selling our beer, only making money off of the investments that we've made to grow the quality and consistency of our beer as well as the recognition of our brand. Holding our brand hostage is one way of looking at it. Unethical is certainly another way of looking at it. Whatever you want to call it, it's pretty F$%&ed up.
And that, my friends, is where I believe the three-tier system is broken. But it's not holding us down from growing and doing what we do best. You just might see our beer pop up in out of state markets before any more markets in the state of Texas. Because believe it or not, sometimes it's easier to ship beer out of the state than it is to sell it in the state.
Onward through the fog