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This is a fight that is just starting to warm up in Michigan.

As some in the industry may have noted, one of current Michigan Governor Rick Snyder‘s goals has been to increase “business efficiency” through various taskforces designed to reduce red tape and make life easier for commerce. Called the “Office of Regulatory Reinvention,” they have addressed numerous areas of government and business regulation over the past couple years – for better or worse, depending largely on your political views.

Well, they just released a list of Committee recommendations (summary) regarding this state’s Liquor Control system, which governs the beer industry in the state, among other things. (The entire list of recommendations is HERE.) While there are many items worthy of discussion, a few proposals stand out. Specifically for the craft beer fan, it contains some bombs for the state’s “three tier” system.

As many people are aware, Michigan is one of the strictest three tier states in terms of alcohol distribution. Producers (breweries/wineries), wholesalers/distributors (middlemen) and retailers (bars/convenience stores/retailers/taverns) are all separate entities according to current regulation and ALL beer sales (aside from brewpub and microbrewery on-premise sales) MUST go through the three tiers. Cross-ownership is not allowed. In other words, a brewery cannot own any part of a bar or distributor and cannot self-distributed. A distributor cannot own a store or produce product. A tavern bartender cannot work for a distributor. You get the idea.

This video illustrates the argument on one side:

A number of political and industry lobbies have noted the Committee’s recommendations, including the Michigan Brewer’s Guild, libertarian think tank Mackinac Center (with multiple resources listed), media, and, of course, the wholesalers.

One of the most interesting recommendations is to allow self distribution or at least end “exclusive” Wholesaler contracts/territories for small brewers (under 30,000 Bbl, which would be every Michigan brewery except Bells, Founders & perhaps New Holland).

This would effectively diminish the power and control – and expense – of the middle tier, the wholesalers. Expect to see a TON of rhetoric on this one, as one side will argue for business “business freedom” from archaic laws along with “reduced expenses,” while the other will argue for “public safety,” “protecting minors,” and a continuation of a system that has (arguably) “served well.”

To briefly summarize this particular issue relative to the consumer, one of the biggest challenges for a small brewer is distribution. Many people in Michigan may not realize that a producer (brewery) enters into an exclusive territorial contract with a wholesaler or distributor that is relatively unbreakable. A brewery is unable to change or switch distributors regardless of how that wholesaler performs for them (…actually, they must leave a market for a full year to sever a relationship with a distributor under current Michigan regulations, unless a distributor releases them or sells their rights to a competitor, which is pretty much the same thing). In end effect, a producer in a poor distributor relationship is stuck…unable to end their agreement or move to another distribution partner in that territory if they are dissatisfied for whatever reason – even if that wholesaler “sits” on their product and doesn’t sell, support, or move it.

As one can imagine, this has lead to some difficult situations where a brewery has NO options aside from “stay with the current distributor” or essentially “go out of business” in that territory.

In some regions, there are only a handful of wholesalers to serve an entire market and these few wholesalers are stretched pretty thin with a huge catalogue that is virtually impossible to fully service, particularly for little guys and small brands, as a wholesaler’s “bread” is often buttered by large brands that move quickly with little effort.

In addition, there is a significant markup in consumer costs with this additonal tier. To use an example (based on reality) of “ABC Brewery,” who sells a keg of their finest pale ale to the “XYZ Wholesaler” for $60. The wholesaler will turn around and sell this keg to a bar or convenience store for $110, even if that retailer is located down the street from the brewery. That store may then sell the keg to a customer for $150 retail. The breweries will get in on it, too, because ABC Brewery will sell the same keg to a customer at the brewery for the same price as the store, to avoid undercutting the store and taking the full retail price for themselves.

Beer festivals are often subject to this arrangement. Often, beer selections are limited to those carried by the distributors involved in the event. When you attend a beer festival, most breweries have paid the festival a fee for their table or space. They sell their beer to the distributor, who sells it to the (often non-profit) festival – who are purchasing the beer with proceeds from the table fees. The wholesaler gets paid their full cut, but the brewery has “paid for” their own beer to be sold and the festival relies on entrance or drink tokens to make their money. Regardless, the patrons have their choices limited to the breweries who are willing to pay and the distributors who participate.

To be fair, if breweries were allowed to self-distribute, they would absorb some of those distribution costs (additional employees, equipment, vehicles, storage space, etc.) and pass these costs on to their retailers. While many wholesalers do a very nice job and try very hard to support their many craft brands and do so very efficiently, there are certainly cases, such as cited in the Saugatuck example in the above video, where inefficiencies exist and a cost savings can be realized.

It seems to me, that the essential part of this potential change is the give the small guy the ability to “opt out” or change distribution partners if they wish – or at least with a more reasonable 30 day notice, etc. – and allow them to avoid or seek alternatives – such as multiple distributors in a given territory – to unfavorable wholesaler relationships. This will force distributors, who in some cases may take their small vendors for granted, to pay attention to those brands and service those they wish to keep – like most of “business,” you need to do a good job to keep your job.

As a benefit to the middle tier, it allows wholesalers to avoid some of the major time, effort and expense it takes to “build a brand” that may be unknown in a market as the good ones DO put major investment into brands that may or may not pan out over time. If little guys had self-distribution, they could take on that effort and expense themselves before seeking distributor assistance in a marketplace. It may also give brewers a better understanding of the difficulties faced by their distribution partners in a competitive marketplace. It is often the wholesalers and their sales staff who have the relationships with stores, bars and restaurants that earn new guys shelf space, tap handlese and new accounts. The value of those wholesaler-retailer relationships is significant.

Bottom line is that there is probably some room for reasonable reform here. It will be very interesting to see how these proposals are debated and ultimately adopted. The results of which WILL influence the choices and variety consumers are ultimately allowed to enjoy at their favorite bar, retailer or beer festival.

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