Revealing the invisible sector of the craft brew industry

These days it’s easy to spot a craft beer drinker. They’re the ones talking about brewmasters the way other people talk about musicians and athletes. Craft beer drinkers wear T-shirts endorsing their favorite breweries or promoting the craft beer shops they’ve visited.

Supporting the beer makers and beer sellers--yup--craft aficionados know how to spread the love. Or do they? In fact, there is an entire segment of the industry that's often neglected. One that seemingly operates in the shadows, going about its business with hardly a word of recognition or thanks from the public.  

We're talking about distributors. Without them we wouldn't get our craft beer of choice.

In Michigan, as is the case in several states across the nation, the industry operates under a "three-tier system”: an arrangement in which brewers, wholesalers or distributors, and retailers work in concert to supply beer to the consumers.

IHS is one of a handful of major distributors who deliver beer across West Michigan. Some of these distributors are family owned, independent operations specializing in certain brands and serving small areas, while others, such as IHS, are part of significantly larger distribution networks and carry a large selection of national and international brands.

IHS, in operation since 1921, is a part of the M1 Group, a network of 11 distributors across Michigan that carry some of the nation's largest and most widely purchased beers, plus a growing portfolio of up-and-coming, local craft breweries.

“A big advantage for us is, if a given brewer wants to be a part of that network, they’ll be (distributed) throughout the state, as opposed to some other guys who might only have a corner of it,” says Brian Mills, Craft Brand Specialist for IHS.

That’s because wholesalers work in specifically designed and regulated territories, a practice that has allowed most companies to remain independent and keeps larger operations from muscling out of certain key markets already established, though perhaps smaller businesses.

The way in which territories are divided can be contentious, however, and Mills jokingly says the practice is a lot like “throwing darts while blindfolded.”

“Sometimes the dividing line is a city; sometimes it’s a street. We may distribute to a Meijer one side of the street, but the Walmart across the street, the same brewery might be delivered by somebody else,” Mills says.

Though navigating the logistics of who brings what where can give even the most ardent beer fan a hangover brand headache, what is becoming clear, especially to established breweries is just how important distributors are to the growth of craft beer.

“The middle tier is just as vital as the other tiers. They provide a local knowledge of the market and have embraced craft,” says Erik Frank, Field Marketing Manager for Deschutes Brewery. “If you look at all the categories--craft, domestic, premium, sub-premium, import--craft beer is the only one to grow in double digits within the last five, six, seven, eight years. That's all about distributors picking up the craft beer ball and running with it.”

But that wasn't always the case.

There was a time, when the craft beer movement was still in its infancy and the only way you could find your favorite microbrew was to either locate a store that carried it or luck out and discover a bar that had it on tap. In most cases even those two options were long shots. Most craft brands were being self-distributed by the breweries and only available close to their home base.

Somewhat Ironically, the wide scale distribution of craft beer to retail stores and taverns came thanks to a law allowing microbreweries and brewpubs to serve glasses on premises. It came at the expense of self-distribution.

It was early in 1992 and Kalamazoo’s Bell’s Brewery Inc. was already Michigan's best-known craft beer maker, having secured a distribution deal in 1988 with Paw Paw Wine Distributors to bring its beer to the east side of the state. Though its products were becoming sought after in several markets, and its yearly production was beginning a steady rise, Bell's, like other commercial breweries, was unable to serve beer to its patrons on site.

“We traded away the right to self-distribute for the right to serve beer by the glass--that was the brew pub bill,” says Larry Bell, founder and owner of Bell’s Brewery Inc.

Signed into law in 1992, Public Act 300 allowed restaurants and microbreweries to not only brew their own beer but to also serve it by the glass on premises. It was a small but clear departure from the strictly regulated three-tier system enacted as a way to regulate a post-prohibition liquor industry, much of which had become heavily entwined with organized crime.

The three-tier system was originally conceived to “prohibit someone in one tier from having a financial interest in one of the other two tiers," according to legislature.mi.gov. Generally the laws enacted under the system "were devised to prevent monopolies or cartels from participating in the manufacture, distribution, and sale of liquor."

In other words, brewers could not own wholesalers or bars, wholesalers could not own breweries or bars, and bars and restaurants could not manufacture or wholesale beer.

For craft brewers the tier of production and retail merged on a very limited basis under the law, but it completely shut down the practice of self-distribution and mandated that brewers rely on the wholesale industry in order to grow and promote their business to a wider drinking public.

Few companies understand this more than Deschutes, located in Bend, Oregon, currently the country's 12th largest brewery by volume.

Despite having all the resources and financial backing afforded a brewery of its size, Deschutes relies heavily on wholesale partners to not only promote the brewery to the public but to inform the company itself regarding regional and local trends in markets Deschutes has no geographic ties with.

A recent addition to the West Michigan retail market, Deschutes has begun a partnership with West Side Beer Distributing of Kalamazoo and as of October is now offering several of its products in stores, bars and restaurants in a geographic triangle between Grand Rapids, Lansing and Kalamazoo.

And thanks to West Side's knowledge of the local craft beer climate, Deschutes will be able to accurately and adequately supply the area with beer that will satisfy the palates of potential consumers.

“Their jobs are similar to sales and marketing jobs at breweries,” Frank says. "Their job is to represent and sell the brand; they are the local sales rep. Most craft brewers don’t have the ability to represent the brand as effectively as they'd like in every market. Most craft brewers just don’t have that kind of sales force. The distributor has the local market relationships that they’ve been building over the years, they know how the local process works. We really rely on them to identify the right places for us to be. We don’t have that kind of local knowledge.”

Craft breweries both far afield and right here at home depend on the wholesalers to promote their brands as well as to help move the craft industry forward.

“There's been great enthusiasm amongst the wholesalers in Kalamazoo for craft beer," Bell says. "We're with Paw Paw, but Imperial (Beverage), even though they're the competition, they've been very interested in pushing craft beer, and West Side has had interest in promoting craft beer. I think those guys have been key in helping promoting our side of the industry.”

That’s not to say the relationship between brewers and distributors is perfect. Both still have their own best interest at heart and that can sometimes lead to rifts, some of which are patched through changes in the law, and others that need to be sealed through litigation.

“The distribution laws in the state are not perfect, but generally we agree with about 95 percent of what happens with the wholesalers. Could there be some tweaks to the laws? Yeah, I think that would be good, but that's an ongoing dialogue,” Bell says.

One thing Bell would like to see changed is for the Michigan distribution laws to work a little more like they do in Wisconsin where brewers have more power to control what happens to their brands once they begin a wholesale relationship.

“In Wisconsin if we want to switch wholesalers we just switch wholesalers, and the wholesalers, it’s up to them to figure out compensation. Now you don't switch wholesalers on a dime, not without reason, but if you're not feeling like you’re getting serviced properly, you have the right to move your brand. I'd like to see that (in Michigan)," Bell says. "If we want to stop selling to a wholesaler, we can’t. We signed a contract, we have to sell them beer if we have beer. But a wholesaler can tell us they don't want to sell our beer anymore and we don't get any compensation. It ought to be a two-way street."

Since laws governing the distribution of beer, wine and spirits vary from state to state, brewers need to make sure they are up-to-date and stay well informed on how practices work in territories in which they seek to expand.

In some cases, the laws are such that craft breweries will simply forego any possible sales in order to avoid what can be seen as unfavorable laws.

“There's a lot of legalese that gets involved,” Bell says. “West Virginia is extremely difficult to get licensed in and to navigate through everything they have. But, I think it’s coming pretty soon for us. Tennessee (also) has some very interesting taxation laws so we weren’t very interested in going over there.”

One place, however, that Bell was very interested in being was his home-away-from-home: Chicago.

With a metro population exceeding 9 million people Chicagoland seems like an ideal place to sell craft beer--and it was--until 2006 when Bell's was pulled from the market place in the whole of the Illinois.

As it turned out, the brewery's Illinois wholesaler, Union Beverage, made a play to sell its Bell's contract to a competitor, Chicago Beverage Systems. The sale in-and-of itself was not cause for concern, however after meeting with CBS, Larry Bell came away unsure the distributor had his company's best interest at heart. Legally unable to terminate the sale, Bell instead chose to pull Bell's entire line out of Illinois.

Instead of forfeiting the estimated $1.3 million per year in sales in the Chicago metro area, Bell's decided to introduce the "Kalamazoo" brand there, a beer brewed at Bell's facilities, using Bell's recipes, but not branded with the Bell's name.

In 2006, following the departure of CBS's parent company, National Wine and Spirits from the state, Bell reintroduced the entire Bell's line back into the land of Lincoln.

This type of legal contretemps, though, is the exception not the rule in what is normally a fruitful and mutually beneficial relationship between breweries and wholesalers.

“People have different opinions of the three tier system, but the distribution tier is critical,” Mills says. “Some states have laws saying that if you're under a certain volume you can distribute yourself; that is not the case in Michigan. I think for those smaller brewers to get any marketshare whatsoever it's on the distributor to educate their sales staff, do the promotion, and host marketing events.”

Events can be as simple as a brewery tasting night at a local retailer or as complex as a multi-brewery festival such as the recently completed Kalamazoo Craft Beer Festival.

However it’s done, these are opportunities for brewers and wholesalers to work together and put a human face on the second tier of the system. It also give consumers the chance to meet the people that bring them their beer.

“We’ll work with our suppliers and have reps come in and go do samplings in store, set up a table, educate the public. We’ll do tap takeovers, we’ll do promotional charity events," Mills says. "We just did one with (San Diego California brewery) Green Flash for breast cancer awareness month in October. Saugatuck does a brew on site thing, so we'll take clients up there. They’ll brew their own beer. We'll buy it from Saugatuck. They'll buy it from IHS then they can put a beer they brewed on at their pub."

Spreading the word about good beer is the easy part for most wholesalers. The hard part is having to say no to a brewery, or at the very least knowing when taking on a new client is not the right choice.

With an extensive network of distributors crisscrossing the country, and a public thirsty for new brewery options, it’s not unheard of for a brewery to expand beyond its means, leaving both wholesalers and retail operations in the lurch.

In May 2011, Denver, Colorado’s Great Divide Brewing ran into that very situation when it found demand for its product greatly outstripped its ability to produce beer. With a massive expansion in the pipeline, but not yet finalized, it was forced to pull out of five states, including Michigan. And it had already ceased shipments to seven other states earlier in the year.

Saugatuck Brewing Company, a member of the IHS portfolio is currently in the midst of a major distribution expansion of its own, recently adding northern Ohio, Northern Indiana and Minnesota while also shipping beer to Canada, Denmark, Germany and the United Kingdom.

To meet this, and future demand Saugatuck built a new facility with a 45 barrel brew system. Though the growth is rapid, Mills feels positive that Saugatuck will be able to continue expanding, so long as the brewery does so discerningly, growing alongside the markets it seeks to enter.

“Right now Saugatuck is working at capacity, which is great because they're getting their brand out there. But there's always a risk. Look at Great Divide, for example, they went to a lot of different states, they won a lot of awards, but they had to pull back because the brewery couldn’t handle the capacity they were doing,” Mills says.

Part of the blame for a brewery not meeting its demand can be placed on the distributors who facilitated a company expanding beyond its means.

For the three-tier system to continue to work, breweries need to understand when to halt expansion and wait for organic growth to take place. On the flipside, wholesalers must be aware of their clients' abilities to supply not only that specific market, but other areas as well.

This is part of the "two-way street" Bell spoke of and why both Deschutes and IHS talk about the coming together of breweries and distributors as relationships and not simply as business partnerships.

If these two entities don’t listen to each other and don’t meet one another’s needs, then they both suffer, as do the consumers.

“The wholesalers don't have to take on brands,” Deschutes Brewery's Frank says. "West Side doesn’t have to take us on. They want to. We feel really strongly that our distributor partners are full partners with us. We together try to make sure that we get our beer into our fans' hands. Without our distributors we wouldn’t be able to do that."

Jeremy Martin is the craft brew writer for Southwest Michigan's Second Wave.