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Breaking Up is Hard to Do for Michigan Brewers

If you thought leaving a spouse was tough, just be thankful that you're not a brewery in need of a divorce from your dead-beat distributor. A recently released video from the Mackinac Center for Public Policy explains how the mandatory three-tier system for alcohol distribution has resulted in an acrimonious relationship between brewers and wholesalers and the deleterious effects it has had on the state's market.

I have been writing for a while on the many problems stemming from the Prohibition-era system of alcohol distribution which, in most states, requires that producers of alcohol (i.e., distillers, brewers, or wineries) to sell their product to wholesalers/distributors (i.e., middlemen) and then those distributors then sell the products to retailers (i.e., pubs, restaurants, and stores). This means that producers are not allowed to sell their products directly to consumers, restaurants, pubs, or stores: they must sell them to one of a handful of wholesalers operating in their state. Apart from the often unnecessary increase in the producer's cost of doing business, the requirement gives wholesalers an extraordinary amount of power and influence over producers because in most states breaking such a contract is difficult or impossible, which means that a wholesaler can literally shelve the producers product in their warehouse and the brewer can do very little about it.

In the video, Brett VanderKamp, the president of New Holland Brewing Co., describes the contract that brewers must make with distributors in Michigan as "harder to get out of than a marriage." That is certainly the case in Massachusetts where small brewers have been lobbying to change the laws. Small brewers who want out of a contract with a distributor often have to go through an expensive legal battle only to take a chance on another wholesaler. Even if the brewery can prove that the wholesaler is failing to get their product on shelves or in restaurants, the cost of the legal battle is often too great for start-up breweries that -- even if they manage to break one contract -- have no guarantee that the next distributor they find will be any better.

For many years, the wholesalers lobby in Michigan has pushed legislation that makes distribution difficult for producers and purchasing more difficult and expensive for consumers. The motivation behind their actions is painfully obvious: they want to limit or eliminate competition to protect their revenue stream. In Michigan, as in many states, wholesalers have a virtual monopoly on how where alcohol can be sold. As I’ve written before, monopolies like this are not natural to a free market and cannot be sustained without government regulations to protect them.

If the partnership between brewers and producers was voluntary then the distributor would be motivated to effectively get all of their client’s products on shelves lest they risk losing clients to other wholesalers. In the current mandatory scheme, however, wholesalers are only motivated to serve their largest and most profitable clients, to the disservice sometimes of their craft brewing clientele. As Brett VanderKamp explains, if there’s a dispute over the quality of service or pricing, the brewer can’t just up and leave for a new distributor. They are essentially locked into the partnership for years.

Wholesaler/distributors have something to offer the open market: their knowledge of retail outlets and state regulations could be extremely beneficial to start-up brewers who really only know how to make beer, not sell it. On the other hand, some breweries would rather use their own people to navigate the state’s retail option rather than outsourcing distribution. While this means that wholesalers might lose some customers, a voluntary system would benefit producers, consumers, and smaller or new wholesalers who could attract producers by competing on the basis of quality of service and price. The only beneficiaries of the current mandatory three-tier system are the behemoth wholesalers. When the system was first set up after Prohibition the stated goal was to prevent the monopolies and protect consumers. Now that system is the cause of monopolies and works to the detriment of the consumer. Simply put, it's time for a change.