Tuesday, November 14, 2006

Illinois Beer Distribution Law Blamed in Microbrewer’s Market Withdrawal

The Illinois Beer Industry Fair Dealing Act is being blamed for a popular Michigan microbrewery’s withdrawal from the Illinois market, according to a story in the November10 issue of the Chicago Tribune.

Bell’s Brewery, Inc. of Kalamazoo, Michigan has decided to stop shipping product to Illinois, after a dispute arose between the microbrewery and Chicago Beverage Systems, which recently purchased the Illinois distribution rights for Bell brands from another distributor.

Apparently, microbrewery owner Larry Bell feared that his highly-regarded, but relatively modest, product line would not be fully serviced by the new distributor, one of the largest liquor distributors in the Midwest. A meeting with the distributor did not ease his fears that his brands would get short shrift in light of the distributor’s representation of Miller, Coors, and other national and foreign brands. Under the Illinois Beer Industry Fair Dealing Act (815 Illinois Compiled Statutes 720/1-10), Bell’s Brewery had to distribute its product in Illinois through Chicago Beverage Systems or not at all.

“My choice was to be sold to [Chicago Beverage Systems], to be sued, or pull out,” Bell was quoted as saying in the Tribune. “I saw the lesser evil as pulling out.”

These choices apparently were dictated by the law’s prohibition of termination, cancellation, or nonrenewal of wholesalers and distributors except with good cause and 90 days’ written notice. Brewers that terminate or refuse to renew a wholesaler or distributor without good cause must pay reasonable compensation. Like liquor distribution laws in other states (and distribution laws affecting other industries), the Illinois statute was intended to remedy the inequality in bargaining power between large manufacturers or suppliers and smaller distributors.

However, this dispute—between a brewer with annual revenues of $12 million and one of the largest beer distributorships in the Midwest—stands the legislative intent of such laws on its head. In fact, Chicago Beverage Systems is owned by Reyes Holdings, L.L.C., the largest privately-held company based in Chicago, with 2005 revenues of $7.27 billion.

This conceptual flaw is only one criticism of beer and liquor distribution laws, which have been enacted, in some form, in 45 states. When the Illinois legislature considered enacting a similar law for wine and spirits distribution in 1999, the Director of the Chicago Regional Office of the Federal Trade Commission warned that the legislation would (1) make permanent existing agreements between suppliers and distributors by prohibiting a supplier from canceling, failing to renew, or terminating any such agreement without good cause; (2) shield the business of liquor distribution from market forces; and (3) deter the entry of new distributors and new products. http://www.ftc.gov/be/v990005.htm

The FTC wrote a similar letter in 2005 to a California state senator regarding a proposed beer “Franchise Act.” According to the letter, the proposal was likely to increase the cost of beer distribution and reduce competition among wholesalers, resulting in higher retail prices and a possible reduction in the variety of beers available to consumers. http://www.ftc.gov/os/2005/08/050826beerfranchiseact.pdf

There is speculation on BeerAdvocate.com (a web site for beer aficionados) that Bell’s will sit out for a period of 12 to 18 months and then re-enter the market with another distributor. http://beeradvocate.com/forum/read/841604/?start=0

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