“A rose by any other name would smell as sweet,” proclaimed Juliet Capulet of her forbidden lover Romeo. Is the same true of consolidation in the beer industry’s all-important middle tier of distributors? Alas, William Shakespeare didn’t live long enough to see the rise of the United States, much less its post-Prohibition three-tier system for regulating the alcohol trade, so we’re going to have to sort this one out ourselves. And we’d better, because in fair California, a new alliance of seven beverage wholesalers has united under a collective banner to strengthen their collective position against more horizontally integrated and deeper-pocketed foes.

Whether this upstart septemvirate, California Beverage Solution (CBS), represents an answer to the considerable middle-tier consolidation underway in the state — arguably the most important drinking market in the country, though it’s no longer technically the largest behind Texas — or just consolidation by any other name depends on the details of its operation. But before we get into those, allow your humble Hop Take columnist to make like the Bard and set the stage a bit.

Just over two years ago, President Joe Biden issued Executive Order 14036, titled “Promoting Competition in the American Economy.” It has promoted cautious celebration on one side of the beverage-alcohol business, and teeth-gnashing on the other, for the aim it took at “anticompetitive distribution practices” and “patterns of consolidation in production, distribution, or retail beer, wine, and spirits markets.” In the beer industry, size is an approximate litmus test for E.O. 14036 support. Smaller breweries and their allies, including the Brewers Association, tend to support it, because they feel the pinch of reduced access to retail that has accompanied mergers and acquisitions across all three tiers, and particularly distribution. On the other hand, larger firms in each tier have bristled at the Biden administration’s insinuation (and the TTB’s subsequent findings along those lines) that they’ve mayyyyybe merged and acquired their way into obscene behemoths that might stymie healthy competition just a smidgeon in the $409 billion American beer market.

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The Biden administration’s scrutiny of the U.S. beer market’s gatekeepers is based on the fact that even as the drinking population increased and dollar and volume sales of beer rose over the last 40 years, fewer distributors have been handling the bulk of America’s kegs and cases. According to the National Beer Wholesalers Association (NBWA), the count of “traditional beer distributors” has declined from 4,595 in 1980 to around 3,000 in 2020 – a decrease of nearly 35 percent.

California, home to the country’s largest beer distributor and its sixth-largest privately held company overall, Reyes Beer Division, has not been exempted from the trend. A letter submitted to the TTB last summer by the executive director of California Family Beer Distributors (CFBD), a new-ish trade group created partially in response to Reyes’ acquisition-powered recent expansion in the state, the number of distributors bringing Californians beer has dropped from 51 in 2018 to 37 in 2020. (Reyes Beer Division’s chief executive called allegations that its acquisitions were killing competition in California “inflammatory rhetoric” in 2022 TTB comments of his own, but as Beer Marketers Insights’ executive editor David Steinmann noted at CFBD’s inaugural meeting in November 2022, the mega-firm does now handle more than half the beer sold in the state. So, y’know.)

And as lines blur between beer, wine, and spirits, it puts beer distributors across the country in more direct competition with multi-state heavyweights that traditionally ran other styles of alcohol, too. It’s consolidation of a different kind — a “total beverage-ication” that industry types call “convergence” — but it spells tough sledding for smaller distributors nonetheless, very much including California’s.

Peter Heimark should know. He owns Heimark Distributing LLC, the Coachella Valley’s Anheuser-Busch InBev-aligned independent distributor (a “red house,” in the jargon) that is one of the seven firms throwing in under the CBS aegis. A former chairman of the NBWA, Heimark also has firsthand experience with getting pushed around by larger competitors: In 2018, Constellation Brands forced his Los Angeles-area business, Triangle Distributing, to sell its rights to distribute the macrobrewer’s products to Reyes Beer Division.

“The rise of all these very strong, very well-financed mega-competitors was certainly a prime motivation for us,” Heimark tells Hop Take, describing CBS’s genesis. The seven wholesalers involved in the group — Advance Beverage Company, Donaghy Sales, Markstein Sales Company, Matagrano Beverage, Pacific Beverage, Stone Distributing, and Heimark’s namesake Indio outfit — have struggled to compete against Reyes, Southern Glazer’s Wine & Spirits, Republic National Distributing Company, and Breakthru Beverages, especially as drinker interest in spirits-based canned cocktails has surged over the past few years, he says. “Spirits is the dominant category of alcohol in California right now, so if we didn’t get into it, we were just letting an opportunity pass by.”

The opportunity is obvious. The beer business is built on economies of scale, and seven independent distributors can achieve them a lot faster together than alone, especially as heavyweights move into their territory and high borrowing costs disincentivize acquisitions of their own. CBS’s website claims the group’s combined footprint covers 90 percent of the Golden State’s population; together, they boast 37,100 accounts and 2,200 workers.

Because they’re able to distribute spirits, too, the CBS wholesalers aim to pitch themselves as a statewide solution to suppliers, offering turnkey access to the Golden State’s legions of thirsty drinkers at scale and the hard-won, pavement-pounding expertise typically associated with smaller local outfits. As CBS goes after spirits-based RTDs, both traits offer the org potential advantages. “We can get to c[onvenience] stores, and we can get to on-premise in a much bigger way” than spirits-first distributors, argues Heimark.

But if the opportunity is straightforward, CBS’s structure is less so. To comply with antitrust laws, it’s incorporated as a limited-liability corporation into which each member has invested, but it’s not meant to make money directly. Heimark says this allows CBS to make decisions in concern, like coordinating chain pricing across its network. And while the goal is very much to attract new suppliers to CBS’s massive new footprint, each wholesaler’s existing portfolio remains its own. “It absolutely, categorically does not affect our existing relationships with our suppliers,” he insists.

It’s a bit of a tightrope act, too. Six of the seven CBS distributorships are red houses; only Stone Distributing, spun-off from the same-named San Diego craft brewery as part of its acquisition by Sapporo last summer, is not. To be successful, CBS will have to stake its claim on new brands, especially in spirits, without casting ABI’s owned-and-operated branches (with which they often collaborate on brand campaigns and carriage) as deficient despite their prohibition from acquiring licenses to handle distillates. Heimark emphasizes that the ABI’s owned-and-operated branches in the state “are certainly still open for business when it comes to non-alc[oholic beverages] and things that they’re allowed to carry under their beer and wine licenses,” and expects CBS’s red houses to continue working with them apace.

CBS’s wholesalers already sell some spirits-based RTDs individually, but in pinning its future goals on competing more aggressively in that category, the group raises the question of whether its team can handle and sell those beverages as well as competitors. Heimark allows that “it’s going to be a learning curve across the board” to figure out how to flow distillates through the CBS system, but argues that with “barely a thousand” SKUs between them, the firms have “ample mindshare to be able to do it” — especially when compared with the tens of thousands of SKUs major wholesalers’ portfolios often contain.

Spirits may be an opportunity for CBS, but they’re also an imperative. The ongoing anti-trans boycott against Bud Light, and ABI’s mismanagement of it, has put pressure on most of the collective’s wholesalers to look beyond the big blue flagship. “What’s happened with Anheuser-Busch and Bud Light recently was also a motivating factor to make sure this got done for those of us who are Anheuser-Busch wholesalers,” says Heimark, because it emphasized the “importance of a fully diversified beverage portfolio” that could withstand unexpected market shifts against a single brand.

But back to our Shakespearean dilemma. With 90 percent of California’s drinkers by territory, tens of thousands of accounts, and chain-pricing coordination power, isn’t CBS just consolidation by another name? Heimark acknowledges the criticism, but insists the org is a response to the “existential threat” of a rapidly consolidating field, not its latest entrant. “From the perspective of the members of this new group, and any prospective associate members that we may pick up as we expand to the corners of California that we haven’t quite reached yet, this is a wholesaler independence preservation plan,” he tells Hop Take. CBS members’ local ownership, unique collective structure, and hundreds of years of combined experience serving California are all differentiators from bigger players both inside and outside the state, he argues. And maybe so. But one thing is true for both CBS and its competitors: They’re ultimately judged on performance. Heimark knows it. “Quite frankly, it comes down to dollars-per-stop, and this will help with dollars-per-stop. We’re trying to make [the beer wholesaling business] a viable option for the next generation.”

In fair California, the beer distributor’s drama enters its next act.

🤯 Hop-ocalypse Now

There’s been an enormous amount of reporting and punditry over the past five months about how Anheuser-Busch InBev’s mismanagement of Bud Light is contributing to the brand’s demise. But lest you think that slide poses a serious threat to the multinational firm’s prime position as the world’s biggest macrobrewer, it’s worth considering just how gargantuan ABI really is. According to an annual report from BarthHass (itself one of the world’s biggest hops traders), Bud Light’s parent company is over twice the size of its next-largest competitor, Heineken, by volume. Big Red soaked the globe with a mind-blowing 518 million hectoliters of beer in 2022, while Big Green did a comparatively paltry (though still objectively staggering) 256.9 million.

📈 Ups…

The moribund craft beer segment is showing signs of life in the National Beer Wholesalers Association’s August 2023 Beer Purchasers’ IndexInstacart’s long-awaited initial public offering is officially afoot… Workers at Elysian Brewing Co. voted last week to unionize with Teamsters Local 117…

📉 …and downs

Craft may be up year-over-year, but overall, the latest BPI data from the NBWA also indicate there’s more at-risk inventory in the system than last month… Constellation Brands, Coca-Cola Company, and Kroger all appear on the Institute for Policy Study’s “Low-Wage 100” this year…

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