SIC 5181
BEER AND ALE DISTRIBUTION



This industry includes establishments primarily engaged in the wholesale distribution of beer, ale, porter, and other fermented malt beverages.

NAICS Code(s)

422810 (Beer and Ale Wholesalers)

Industry and Snapshot

Beer and ale wholesale distribution constituted a $29.5 billion industry in 2003, representing a modest contraction from the $35 billion in annual sales in the late 1990s. While much of this downturn was attributed to tapering consumption patterns among an increasingly health-conscious public, the industry also faced a number of challenges inherent to the evolving beer-industry structure. Wholesalers faced continuing pressure from major breweries attempting to streamline their delivery systems by integrating distributing into their businesses, though the nature of the competitive brewery industry opened a window whereby crafty distributors could gain leverage. Consolidation and tough market conditions forced the total number of wholesale distributors from over 3,000 in 1997 to 2,765 in 2003. Total industry employment likewise diminished through the late 1990s and early 2000s, from about 96,000 to 88,000.

Organization and Structure

Beer and ale wholesaling has always been relatively dispersed, characterized by a large number of independent distributors. The major beer companies have periodically made attempts to purchase some of their independent distributors in an effort to vertically integrate and obtain more control over the channel of distribution. Company-owned distributors can provide an advantage in controlling the pricing and presentation of the product to the final consumer and in maintaining retailer relations to ensure availability of the product. However, for the most part, brewers have been prevented by anti-trust considerations from purchasing their distributors, and efforts to build their own distributorships risked alienating their existing distributors and losing the market penetration they already have. The major breweries still maintained only a small handful of company-owned distributors in the late 1990s.

In order to maintain a modicum of control over distributors, larger breweries have often tried to replace restrictions on the ability of distributors to carry products of other brewers. However, because of Anheuser-Busch's dominating market share, competing brewers, such as Miller Brewing and Coors, have been forced to relax such restrictions, allowing wholesalers to acquire each other's brands, in order to guard their market shares. However, upon the acquisition of competing brands by wholesalers in markets such as Chicago, where Anheuser-Busch's dominance is far less pronounced, brewers complained that wholesalers were taking undue advantage of their greater freedom and forsaking the very logic that led to relaxed restrictions in the first place. Many wholesalers, at any rate, elect to stay with one brewer in order to maintain their positive relations.

In the early 2000s distribution involved several hundred regional independent distributors. Distributors generally remain regional since they are regulated by the state in which they do business. In most states, each distributor is awarded an exclusive sales area by the brewer and is primarily responsible for building relations with the retail and other consumer outlets in order to build the sales of the product. In a few states, such as Indiana, exclusive territories are not allowed, and competition is fierce. In states with exclusive territories, retail customers, including grocery chains, bars, and restaurants, have only one source of supply and are therefore at the mercy of distributor pricing. A strong dealer network is essential for brewers in order for them to obtain shelf space and keep the product available to the consumer. However, this is offset somewhat by the fact that there are so many distributors, so each has only limited power over the brewer.

Background and Development

As long as breweries have done business in the United States, they have made refinements in their methods of distribution. For example, in the late 1870s, Adolphus Busch pioneered the use of refrigerated railroad cars for shipping beers long distances. Adolph Coors became the first brewer to develop and introduce an all-aluminum recyclable can in 1959.

When Prohibition was repealed in 1933, after 13 crime-ridden years, the federal and state governments tighten controls, and brewers, distillers, and vintners adopted policies of self-regulation. The Federal Alcohol Administration (FAA) Act was put into place soon after Prohibition ended. In the early 2000s the act still was responsible for the administration of regulations specifying who may qualify as a brewer; the collection of both brewer and wholesaler occupational taxes; and the regulation of trade practices, advertising, and labeling. As of 2004 most states had adopted various versions of the FAA Act in addition to their own statutes and rules. Different states used distribution techniques that varied from state-owned to private systems. But U.S. regulations demanded that brewers sell only to wholesalers, who then sell directly to bars in determined territorial markets.

After Prohibition, malt beverages were produced in some 750 different locations throughout the country and were distributed to wholesalers and then retailers within an extremely limited geographic region, by standards current in the early 2000s. Beer is a relatively expensive product to transport considering its value, so any brewers wishing to expand their area of sales had to consider the freight differences involved in shipping to another market. Thus for many years after Prohibition ended the United States developed a number of areas that might be called "brewing centers." That is, there were several areas that contained one or more local or regional brewers.

For competitive reasons, these local or regional brewers priced their beers at levels that would permit their wholesalers to generate the lowest consumer prices possible within their geographical areas. Any brewer desiring to sell in that area would need to consider the regional price structure, both in making their decisions about whether to enter the markets and in pricing their products. While there were fewer brewers in the mid-2000s, this basic pricing situation continued. Beer was priced to wholesalers by the case. It was packed in different sized packs and sometimes packed loose. Domestic brewers sold beer to wholesalers FOB (free on board) the brewery, meaning the wholesalers paid the freight charges. Importers generally sold beer to wholesalers CIF (cost, insurance, and freight) port of entry, although some importers also maintained warehouses from which they sold FOB.

In the 1930s the chief means of selling beer were in draft form and in refillable bottles. Both of these packages were expensive to ship and return and, as a result, the need for less costly containers arose. The first answer to the shipping problem came with the development of the beer can in 1935. While World War II delayed its widespread use domestically, it was used extensively by the armed forces, and after the war sales in aluminum containers started to boom. The aluminum can, along with the glass companies' response to it (the one-way bottle), enabled brewers to ship more cheaply and expand their markets accordingly.

The shipping breweries, which had penetrated new markets in 1946 with minimal quantities of beer, now had product and lightweight one-way containers available to ship to these distant markets. Local breweries that had withdrawn from regional markets to protect more profitable local markets found it difficult to reenter markets they had left. In addition, many local breweries did not have the equipment to fill flat-top cans, which facilitated shipping. So, for the first time, the shipping breweries gained advantages not formerly available to them.

Current Conditions

While consolidation was the major buzzword as the beer and ale wholesaling industry entered the twenty-first century, major breweries increasingly viewed the effectiveness of the newly formed large multi-brand wholesalers with skepticism. In the early 2000s, according to Beverage World, the consolidation was in a rut, due largely to the financial structuring of the trend. Large wholesalers acquired smaller competitors and tended to assume those companies' debts entirely. Thus, the new multi-brand wholesaling behemoths were stuck in the middle of banks demanding debt-service payments, suppliers with high expectations for their new multi-brand distribution deals, and demanding retailers. The net result was a consolidation trend that was failing to register its predicted benefits, at least at the pace expected by suppliers and distributors alike.

By far the most popular off-premise outlet for beer consumers was the convenience store, where 2002 sales of $12 billion outpaced the combined total from super-markets, drug stores, supercenters, and wholesale clubs, according to ACNielsen. Over one-fifth of all U.S. beer was purchased at convenience and gasoline stores, according to National Petroleum News.

Beer drinkers' thirst for healthier and more value-added alternatives to traditional domestic beers was evidenced in a number of trends defining the beer and ale market in the early 2000s. The list of leading beer brands

SIC 5181 Beer and Ale Distribution

in the United States was dominated by light versions, which claimed more than 40 percent of the domestic market, continuing a fifteen-year trend. And so-called "malternative" beverages, which add everything from vodka to lemon flavoring to their malt alcohol content, registered a 30 percent increase in retail sales in 2002, representing one of the fastest-growing sectors of the market.

Beer wholesalers meanwhile reported that, in the wake of a number of diet crazes featuring a diminished intake of carbohydrates, led by the Atkins diet, many of their suppliers were working to develop new low-carb beers that might appeal to an increasingly health- and body image-conscious beer-drinking market. Anheuser-Busch paved the way among the leading brands with its introduction of Michelob Ultra, which registered strong sales through its first year on the market.

The Specialty Brew Explosion The 1990s and early 2000s saw explosive growth in the number of microbreweries and brewpubs. In addition to the nation's 910 brewpubs, the mushrooming microbrewery industry boasted over 600 establishments in 2003. These breweries generally had a very localized distribution network, though even in their small, regional markets, they had to fight hard for distribution with larger brewers who covet the smaller markets. The major breweries quickly responded to the microbrew explosion with their own upscale beers intended mainly for urban markets. Anheuser-Busch, for instance, launched several brands, including Michelob Maple and Michelob Spiced Ale, to compete with microbrews, but these products tended to flounder on a lack of consumer interest in major breweries' encroachment on the market niche.

Industry Leaders

Distributors face a market in which three major brewing companies—Anheuser-Busch Co., Miller Brewing Co., and Adolph Coors Co.—account for roughly 75 percent of all beer category sales, and Anheuser-Busch alone controls about half the market. Thus, relationships with these brewers are of primary importance to the distribution market as a whole, though many wholesalers earn their bread and butter in localized or specialty-brew niches.

Based in Atlanta, Georgia, National Distributing Company Inc. focused its operations on the east coast but also reached into Colorado, New Mexico, and Ohio, and New Mexico. The private firm generated sales of $1.6 billion in 2002, while employing 2,500. DeCrescente Distributing Co. of Albany, New York, boasted such clients as Coors, Miller, and Molson, which together accounted for about half of DeCrescente's 7.8 million annually shipped cases. The firm also distributed such heavy-hitting imports as Guinness, Corona, and Heineken.

America and the World

North America continued to lead the world's major market regions in beer consumption per capita, at 62.9 liters per head in 2002. Eastern Europe registered the largest growth in consumption between 1997 and 2002, jumping 66.8 percent to reach 41.2 liters per capita. Western Europeans consumed an average of 34.5 liters, and Latin Americans consumed 23.5 liters, according to Euromonitor International.

Imported beers, an increasingly crucial sector for distributors, have met with some difficulties regarding their products' freshness. The resulting backlash focused scrutiny on distributors, who were under pressure to reduce "inventory days," the number of days beer and ale remain on their shelves. Domestic breweries, eyeing the possible vulnerability of the burgeoning import sector, launched a campaign advertising their own freshness as a way of marketing on the strength of this problem. While analysts hold that Eurobrews generally have a longer shelf life than domestic products, wholesalers were scrambling to streamline their operations by more carefully and systematically monitoring product code dates in order to reduce turnaround time.

Still, imports have risen steadily, from $1.2 billion in 1995 to over $2.3 billion in 2002, representing the industry's fastest-growing sector. This growth was partly driven by shifting consumer tastes from mass-produced U.S. beers to more pricey imports. This preference was good news for the larger U.S. wholesalers who invested heavily in the highly competitive market for distribution contracts with foreign brewers. Almost 95 percent of U.S. beer and ale imports come from Canada, Mexico, and Western Europe, especially the Netherlands, Germany, and the United Kingdom. The most popular beer import was Mexico's Corona, which sold 93.8 million cases in the United States in 2002, followed by Heineken, at 61.6 million cases.

In 2003, Anheuser-Busch rolled out Anheuser World Select, which was brewed from European noble hops, manufactured in several countries, and bottled to resemble European-style upscale imports. Although the major breweries enjoyed little success with their similar strategies to win back beer drinkers from microbrew and imported alternatives, their sheer market share and distribution muscle ensured at least a leg up in the competition with foreign imports.

Distribution is clearly an important factor in the domestic market, and its importance internationally has taken a significantly boosted priority. Obtaining access to distribution systems is a driving force behind the early 2000s wave of international joint ventures and alliances. The accelerating globalization of the brewing industry has generally tended to diminish the power and influence that distributors wield, since the larger multinational breweries tend to have significantly greater ability to move into foreign markets and establish deals on their own terms.

The European market differs from that of the United States and Japan in that it is more regional, with local brands dominating their regions. Very few European brands have established widespread distribution, and most have had difficulty in gaining acceptance outside their regions. U.S. beers have had tremendous difficulty reaching elsewhere the kind of market penetration they enjoy at home.

Further Reading

Beirne, Mike. "A-B Rivals Carb Out a Niche." Brandweek, 6 October 2003.

Bennett. Stephen. "Big Brew." National Petroleum News, September 2003.

Foote, Andrea. "At Your Service." Beverage World, 15 September 2003.

"Imports Prove Stiff Competition." Beverage Industry, July 2003.

Lawton, Christopher. "Pushing Foreign—and Faux Foreign—Beer in the U.S." Wall Street Journal, 27 June 2003.

Rodwan, John Jr. "What's New with Brew?" National Petroleum News, July 2003.

Thompson, Joe. "The Consolidation Quagmire." Beverage World, 15 Jan 2003.



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