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Wednesday, March 4, 2015

The Great Train Wreck Revisited

Last week's piece on the dysfunctional situation with Anheuser-Busch, Maletis Distributing and 10 Barrel drew a firestorm of traffic here. I suppose a lot of people enjoy seeing big beer flounder. The post was shared on a few sites and attracted some comments, some of them fairly naive.

It turns out some people out in the national audience don't understand the situation on the ground here in Portland. They also don't understand the concept of branch distributors and why Anheuser-Busch wants all of its brands to run through those wholesalers.

Maletis, Craft and Portland 
One of the more interesting comments came from someone who thought I was drastically underestimating the value of the AB portfolio to Maletis. The implication, of course, is that Maletis would be DOA without all those great AB products.

I actually explored this issue a while ago. After looking at IRI data (tracks beer sales in grocery chains) and talking to some industry folks about draft sales (not part of IRI), I concluded craft's share of the Portland market is greater than 60 percent.

Actual IRI data puts Portland's craft share at around 45 percent. But IRA does not track sales at specialty stores like New Seasons and Whole Foods, or at bottleshops like Belmont Station, Tin Bucket and Beermongers. When you extrapolate for what's missing, you quickly realize craft's share is in the 60 percent range, at least.

Draft is a harder nut to crack. But Portland is a huge draft city. The national average for draft consumption is around 30 percent. Industry sources told me it's 50-60 percent by volume in Portland, greater than 60 percent in dollars..and growing. That's fairly shocking.

Something to keep in mind is the overall numbers look a bit different outside Portland's core. Yellow beer retains a greater following in suburban and rural areas, and Maletis does distribute there. They surely have greater success with their AB book out there. I admit it.

Nonetheless, the dollar volume within Portland's core suggests the Maletis craft portfolio is worth more than the AB book. Could they survive if they lost their AB portfolio? Tough question. Perhaps more importantly, could they survive without their craft portfolio? I bet not.

Branch Distributors vs Maletis
Another of the more interesting comments concerned the issue of why Anheuser-Busch would want to move 10 Barrel to a branch distributor, in this case Western (formerly Morgan). I mean, Maletis already distributes AB products. Why not just let them hang onto 10 Barrel?

That viewpoint completely misses the point of owning distributors and buying up craft brands. Anheuser-Busch has a history of leveraging every possible advantage. In fact, an AB sales exec recently said he wants all of their owned brands handled by branch distributors. Any other arrangement, he said, is unacceptable.

You need to read some of my earlier posts if you don't understand why AB wants it this way. It isn't strictly about the small percentage they're losing when an independent like Maletis sells a brand like 10 Barrel. It's much more about control and leverage.

Buying distributors and craft brands is part of a vertical integration strategy that AB naturally denies it's pursuing. But we know how it works because we've seen it in action here in Oregon and in other places around the country.

After acquiring Goose Island, AB pushed distributors to heavily discount kegs of Goose as a means of undercutting craft brands and winning tap handles. A lot of independent distributors balked. There's very little skin in it for them. But branch distributors have no choice. They have to tow the company line. This is why the AB brass wants their brands handled by branch distributors.

The fact that Maletis is holding onto 10 Barrel and distributing it within Western's territory is comical. The big shots in St Louis must have steam rolling from their ears and noses. They could fix the problem by paying Maletis for the rights to 10 Barrel. But they refuse to do so. Why? Because they already paid for that goddamn brand!

Such a marvelous little train wreck.

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