Message to Brewers Association Members on Three-Tier System and Franchise Law Reform

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On May 20, 2014 the following message regarding the three-tier system and franchise law reform was sent to all Brewers Association members.

Dear Brewers Association (BA) Brewery, Distributor and Retailer Members,

A conversation is underway across our industry and in the trade press about franchise law reform. The BA prompted this conversation with the recent New York Times op-ed on the matter, which was written by BA leadership, with the required local byline coming from BA Board of Directors member Steve Hindy of Brooklyn Brewery. We think this is an important conversation to have, and—while perhaps not easy—the BA is glad that we are having it.

We Value the Three-Tier System

The Brewers Association continues to vigorously support the three-tier system—even as we advocate for franchise law reform. Published on our website, the BA’s Statement on the Importance of an Independent Three-Tier Beer Distribution System reads:

The Brewers Association (BA) believes the American consumer should have access to the widest range of beers made available by licensed breweries. The success or failure of a beer should depend on beer drinker demand, rather than artificial restraints to distribution. BA supports laws that respect and enhance beer drinkers’ choice in the marketplace. State laws should support an independent distribution tier that is unencumbered by undue influence, ownership or control by the largest brewers and ensures access to market for all brewers. For small brewers, the ability to be licensed as a distributor is often an essential element that serves to provide them access to market and increase consumer choice.

Distributors are a critical part of the three-tier system, helping provide an efficient marketplace as the middle tier between brewers and retailers. The BA’s appreciation of this value and our organization’s support for the three-tier system remains unchanged.

We Support Franchise Law Reform

Franchise laws, however, were originally passed to protect distributors from arbitrary termination by their major supplier breweries. Such terminations would have been devastating to the distributor’s business. Today these same franchise laws are used in ways that were never intended, to prevent small brands from changing distributors even in situations where the brewer-distributor relationship is not working.

Given this situation and the market changes that have happened with distributors and small brewers, the BA supports franchise law reform to allow brewers whose economic impact with their beer distributor is small to move from one distributor to another without a major legal battle. The idea that craft brewers can terminate distributors for cause in a state with onerous franchise laws is unrealistic. Terminating for cause typically requires a costly legal battle that is beyond the means of the vast majority of small brewers. (Outside the top 50 craft brewers, the average packaging craft brewer produces under 3,000 barrels annually.) Franchise law reform is a better, less litigious solution.

As one example, the BA supports franchise law reform such as the carve-outs for craft brewers that were enacted in New York State, allowing brewers that ship fewer than 300,000 barrels annually and that constitute less than 3% of a distributor’s business to move to another distributor upon paying fair market value. This is just one example, but it is a reasonable way to address the plight of small brewers, arrived at by respectful negotiation between brewers and distributors. (Of course, specific remedies will vary state to state.) These changes in New York have made franchise law in the state more equitable, and have not compromised the three-tier system.

Small brewers need a strong, independent distribution system as an option for growing their brands. Working in partnership serves both distributors and brewers. The three-tier system is not threatened by franchise law reform.

Franchise laws were created at a time when big brewers had undue influence over distributors. The landscape has changed. Shouldn’t we expect those laws to change along with the rest of the industry—even as we preserve and protect the three-tier system?

Cheers to this important dialogue.

Gary Fish

Chair, BA Board of Directors on behalf of the Board