The Beerening off-topic: The three tier system and the rise of a craft

I think it's time we sit down and have a bit of a serious chat.

A bit of background

From 1920 to 1933 the United States was under a period of alcoholic prohibition.  A result of the Temperance movement, the 18th amendment prohibited the production or sale of alcoholic beverages except for medicinal purposes.  After several years, and the rise of organized crime, the noble experiment was abandoned.

Prior to prohibition the limited ability to transport beer prevented national distribution, as such there were over 1,500 breweries in the U.S.  These breweries served small geographic areas and were often the only brewery in that area.  Also, bars in the area were often either owned or wholly supplied by a single brewery. 

In the 13 years prohibition was in effect, refridgeration technology improved quite a bit.  This meant that beer lasted longer and could be transported further.  When prohibition was repealed, the surviving breweries wanted to increase their range and influence, and also bars needed access to beer.

And so, the 3-tier system was created.  Effectively, the system created Producers, Distributors and Retailers.  A brewery was a producer and not allowed to sell to retailers, which is to say liquor stores and bars.  Bars could now buy whatever they wanted from distributors and sell that to their customers.  Neither bars nor brewers had to focus on distribution infrastructure as there was a whole other industry that was now dedicated to moving beer from brewer to customer.

What went wrong

Success, of course.  Of the 1,500 breweries, only 750 or so survived the prohibition.  By 1945 this number was down to 468 and in 1980 there were only 101 operating breweries in the U.S.  How do you consolidate an industry that much, that quickly without a few major winners?  It's simple economics: A product with less competition in a market does better in that market, and any company producing something invariably wants to produce more and sell more.  Since brewers had to rely on distributors to get their products to consumers, it became the brewer's best interest that distributors not sell their competition.

Think about the beer delivery trucks you see on the road.  How many have their own logos, and how many are just advertisements for "their brand".  These are Miller trucks, or Budweiser trucks...not really just beer trucks.  And they can do this because the effectively own the distributors.

Back in 2010 AB InBev, the company that owns Budweiser, tried to buy 70% of the distributor City Beverage.  This is pretty bad already, but is made worse by the fact that AB InBev already owned 30% of the distributor.  Luckily, this was widely regarded as a bullshit move and the state blocked the buy out.  The matter is still under review, but this is highly indicative of the way the large companies behave.

Why it matters

Check it:  Since the low point in 1980 the number of breweries in America has been increasing.  Craft breweries have gained a ~6% market share in 2011, up .71% from 2010 while the overall beer sales have gone down 1.32%.  Craft beer is still growing even while the industry itself shrinks.  In order to continue to do good business, even major distributors have begun to carry craft beers.  Obviously, a trend like this interferes with InBev's profits, and obviously they don't like that.

Recent articles in the Wall Street Journal have noted AB InBev's plans to recoup some of their lost U.S. market.  Some of their plans involve funneling money into craft labels like Shock Top, and making malt liquors that aren't even beer.  Disturbingly, is the decision to lean on major distributors that have begun carrying craft beer due to the increased demand for it.

The new head of Bud has said that since he shows 'loyalty' to Budweiser's distributors those same distributors should show 'loyalty' to Budweiser...by dropping the craft beers that are on the rise to sell more InBev.

How do you show loyalty to a distributor as a brewer?  You're legally obligated to sell them your beer if you want to get it to people.  Apparently by allowing distributors to acquire other distributors.

That's perverse.  In the 3-tier system distributors are supposed to be the independent agents who provide the beers consumers demand.  A producer like AB InBev should not have a say in how a distributor runs its business.  If it does, how is it different than the brewery selling directly to the retailer?

If AB InBev does have this level of control over their distribution tier, it is unfair to the point that it should be illegal.  Smaller brewers, people I know personally, are not allowed to dictate how any other business is run and AB InBev should not be allowed to do so in order to save their brands.

If Budweiser is no longer profitable it should be allowed to fade without interfering with breweries like Harpoon, or Oberon, or New Glarus, or Real Ale Brewing Co., or Alesmith, or Goose Island, or anyone.  AB InBev should learn to make their money brewing beer people want to drink instead of punishing businesses who are providing that beer.

These small, local breweries are on the rise because they're making a product people are literally thirsty for and this massive international conglomerate is trying to legislate them out of the possibility of making a living just to protect a few fractions of a percentage of the market share of a company that sells 20% of all the beer sold on the entire planet.

Fuck that.