Massachusetts Craft Brewers, Distributors Reach Agreement On Franchise Law Reform

Food & Drink

After a decade of contentious quarreling, craft brewers and distributors in Massachusetts have finally compromised on a reformation of strict state franchise laws that govern relationships between the two parties.

Under the terms of a bill that is working its way through the Massachusetts Senate, nearly all of the 8,200-plus craft breweries in the U.S. would be able to terminate contracts with Massachusetts-based wholesalers for no cause.

As written, the bill enables breweries producing fewer than 250,000 barrels of beer over a trailing 12-month period to cancel distribution agreements with wholesalers without proving “good cause,” however they must provide 30 days’ notice and pay fair market value for the brands being terminated.

Only one in-state brewery – Boston Beer Company – will not benefit from a change in the law.

In a statement, Boston Beer founder and chairman Jim Koch said wholesalers would only accept a deal that did not include his company, one of the largest in the industry. Boston Beer made 5.3 million barrels of beer, cider and flavored malt beverages last year.

Koch — who has spent years advocating for franchise law reform — said he agreed to step out of the way so that smaller producers could benefit and end years of disagreement between brewers and wholesalers.

“Boston Beer had to make a decision,” he said. “At the end of the day, that decision was to sacrifice ourselves by being excluded from franchise law reform in order to protect the hundreds of our fellow craft brewers in the state.”

Meanwhile, only 14 domestic beer companies made more than 250,000 barrels of beer in 2019, according to data compiled by Colorado-based trade group the Brewers Association, which works to promote and protect the interests of small brewers across the country.

The Massachusetts Senate is expected to advance the legislation during a full floor vote on Thursday, and industry stakeholders are hopeful that representatives in the House will also vote in favor of the bill by next Wednesday. That would give Governor Charlie Baker 48 hours to sign the bill into law before the 2020 session concludes on July 31.

Recently appointed Massachusetts Brewers Guild president Sam Hendler, the co-founder Framingham-based Jack’s Abby Brewing, and Atlas Distributing owner Joe Salois, who sits on the board of the Beer Distributors of Massachusetts, were able to get the bill over finish line after weeks of negotiating.

In separate interviews, both Salois and Hendler said the coronavirus pandemic was a catalyst for the deal, as small brewers who had been generating significant revenue from sales at now-shuttered taprooms have come to rely more heavily on the distribution services that wholesalers provide.

“The industry and the world have changed a lot, and I suspect that many of these small brewers, because on the situation with COVID-19, are financially challenged and operationally challenged,” Salois said, acknowledging that craft beer makers should have the “autonomy and freedom” to pivot during uncertain times.

Hendler agreed, saying that the compromise would “even the playing field” and give brewers confidence to have “open and honest” conversations with their wholesale partners without the fear of being blocked out from potential new retail opportunities.

“It can be hard to bring a serious critique back to a wholesaler when there is no other option for you,” he said. “Some brewers might have issues with their distributors and end up shying away from tough conversations, probably to their detriment. Hopefully, this can unlock those conversations and they can feel more comfortable voicing concerns.”

Craft brewers and distributors have long been at odds on how to alter the 50-year-old language that makes up chapter 138, section 25E of the Massachusetts General Laws.

Currently, alcohol manufacturers are prohibited from severing ties with their appointed distributors after six months unless they are able to show that the wholesaler damaged their brand or reputation or prioritized the sale of offerings from competitors in marketplace.

Unfortunately, it is nearly impossible for brewery owners to prove when a wholesaler has failed to meet the terms of a contract, and small producers often lack the financial wherewithal to fight distributors in court.

The franchise laws that govern relationships between the two parties exist in some form in nearly every U.S. state and were originally designed to protect wholesalers from having their businesses wiped out in the event that a large supplier such as Anheuser-Busch InBev or Molson Coors

wanted to terminate a contract.

However, when the Massachusetts franchise law was enacted in 1971, there were just 78 breweries operating across the U.S., according to data from the Beer Institute.

Since then, the number of domestic craft breweries has swelled to nearly 8,500, and franchise laws in most states have not been updated to reflect the current realities of the marketplace.

“Boston Beer initiated franchise reform a decade ago to update the antiquated laws that have governed the beer industry for decades and level the playing field for craft brewers,” Koch said.

“In this moment of COVID, brewers are especially vulnerable to wholesalers that may focus on other priorities,” he added. “Without the ability to move their beer business to another wholesaler, there are several brewers that are in immediate danger of closing permanently.”

Indeed, as the beer market has changed, so have distributor business models. When franchise laws were first being written, there were thousands of wholesalers across the U.S. selling a handful of beers made by just a few companies.

In recent years, there has been significant consolidation within the “middle tier,” and fewer wholesalers are now selling an ever-growing number of SKUs manufactured by thousands of smaller producers.

“Updating these antiquated laws will help the three-tier system adapt to the current industry structure, of many small and independent brewers and a consolidating wholesaler tier,” Koch noted.

While many distributors work hard to grow the craft beer market, some have made a habit of securing the distribution rights to hundreds of craft brands in an effort to block competitors from capturing additional market share or to make their portfolios more valuable in the event of a sale. In certain cases, these so-called “brand collectors” have little or no intention of growing a craft brewery’s business, leaving the producer stuck in a bad relationship with nowhere to go.

Over the last decade, the two groups in Massachusetts have made repeated attempts to strike a deal, but brewers always felt that distributor proposals didn’t go far enough.

Around this time last year, brewers had suggested a tiered system that would give beer companies making as much as 6 million barrels annually an opportunity break their contracts. In 2017, they were pushing for a bill that would allow any brewery making up less than 20% of a wholesaler’s total annual sales to be able to walk for no cause.

But wholesalers, who have historically balked at the idea of reforming the law at all, said those proposals left their businesses too exposed.

After years of refusing to negotiate with brewers, distributors finally put forth a bill in 2017 that would have enabled companies making fewer than 30,000 barrels annually to terminate contracts for no cause. Last year, they agreed to raise the cap to 100,000 barrels.

Still, brewery owners always maintained that those volume amounts were not enough, arguing that successful companies would be excluded as sales grew.

Salois, who took over negotiations this year, agreed.

“I like to talk about run room,” he said. “Their aspirations are to grow their businesses. The 250,000-barrel figure allows some run room. You can continue being entrepreneurial, expanding your business to other states, and introducing new brands. This is what made sense to the Brewers Guild and small brewers in the marketplace, and the beer distributors stepped up and were very supportive.”

If the bill is signed into law, Massachusetts would join other states like New York, Maine, Maryland and North Carolina that have already updated their franchise laws.

Additionally, the Massachusetts reform effort could serve as a model for other states to follow, according to Koch.

“Franchise law reform in Massachusetts will show other states that the three-tier system can be strengthened by making it more resilient, responsive and more equitable,” he said.

“Outdated legislation and the specific needs of their membership will drive brewers in other states to introduce unique proposals,” he added. “In some cases, in addition to clarity around how to fairly exit agreements with wholesalers, there may be a need to deal with ambiguous definitions or allowing for self-distribution. The common thread is that the COVID pandemic has shown us the inequities of current franchise laws and the urgent need to take action.”

News of the reform effort in Massachusetts was first reported by The Boston Globe on Saturday evening.

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