BAD BREW: DAY TWO
Express stores hurt small brewers
The man who rejected an invitation to join Ontario’s exclusive beer club
Day 2 of a three-part series
Jul 06, 2008 04:30 AM
Dana Flavelle
Business Reporter
More than two decades ago, Jim Brickman had the opportunity to buy an ownership stake in The Beer Store.
Brickman says he’s now kicking himself for saying “no.”
The owner of Brick Brewing Co. Ltd., Ontario’s biggest little brewery, says he didn’t realize how important – or lucrative – membership in that exclusive club would become as time went on.
“Walk into any Beer Store. All you see is Molson, Labatt and Coors,” he says, referring to the fact the most prominent brands belong to the store’s two biggest owners.
Coincidence?
Brickman and other beer store critics think not.
The owners of The Beer Store say they operate one of the most efficient, cost-effective, socially responsible systems for distributing beer in the world.
They say the system remains true to its founding principles as a brewers’ co-operative, ensuring fair and open access to all brewers in the province, including non-owners like Brick.
And they point to the fact many small brewers’ sales through The Beer Store are growing faster than the overall market.
Sales of small Ontario non-owner brewers rose 30 per cent last year and 47 per cent the year before, according to data supplied by Canada’s National Brewers. During the same period, overall beer sales through the chain rose just 1.7 per cent and 4.2 per cent, the group noted.
Canada’s National Brewers represents The Beer Store owners. Labatt, a unit of Belgium-based InBev SA, and Molson Coors Brewing Co., incorporated in the U.S., own the lion’s share of The Beer Store. Japan’s Sapporo holds a small stake.
But some small brewers say the current structure lacks government oversight and is rife with potential conflicts of interest.
“This is a provincially sanctioned monopoly, don’t forget,” says John Hay, president of the 29-member Ontario Craft Brewers.
The association, formed about three years ago, represents some of the smallest brewers in the province, including Lakes of Muskoka Cottage Brewery, Black Oak, Neustadt Springs and Robert Simpson.
They operate on a shoestring, using hand-me-down equipment in low-rent facilities, yet still manage to win awards for their small-batch, handcrafted brews.
Together, they account for just 5 per cent of Ontario’s $2.9-billion-a-year beer market.
“There’s some unwritten understanding that they’ll treat all users fairly,” Hay says of the small brewers’ sometimes uneasy relationship with the multinational owners of The Beer Store.
But, in practice, that’s not always the case, he says.
Hay cites the rise and fall of the self-serve beer store as an example.
In conventional beer stores, most of the beer is warehoused out of sight and customers tend to order based on the ads they’ve seen on TV or on billboards, a structure that favours the larger brewers with massive marketing budgets.
“In a typical beer store, you have to know what you want before you go in,” Hay says.
Small brewers fare better in self-serve stores where all products are on display, he says. The format levels the playing field for small brewers, who don’t have big advertising budgets and rely more on packaging and catchy slogans to boost sales.
“If you’re a small brewery like Great Lakes, you don’t have $50 million a year to tell people about your brand,” Hays says, while consumers in self-serve stores “see the package, give it a try.”
But, after converting more than a quarter of its stores to a self-serve format, The Beer Store began moving back to a design that puts most beer out of sight.
Called Ice Cold Express, these new stores limit the number of brands on display, based on market share, or a brewer’s willingness to pay fees for greater prominence.
“The Ice Cold Express stores are great for the owners,” says Hay. “They have bigger lobbies. The cooler in the front of the store contains the top sellers. You pretty much only see the owners’ brands in there.”
The owners of The Beer Store say the new store format addresses the problem of how to cost-effectively handle the exploding number of new brands on the market. The chain, which can’t refuse any qualified brewer access to its stores, now carries mores than 300 brands made by 75 different brewers.
In its Ice Cold Express stores, the display in the cooler is based on each brewers’ market share, a system that is fair to all, the owners say.
“If we operated every store as self-serve, you’d have to have these massive big stores. The cost of selling beer would increase dramatically,” says Jeff Newton, who speaks for Canada’s National Brewers.
But small brewers say the new stores marginalize their brands.
They also say it’s a classic example of the store’s owners putting their needs ahead of the wider beer industry.
“The owners are on a mission to make their distribution system as efficient and low cost as possible for their shareholders,” Hay says. “They believe the Ice Cold Express format is cheaper. I don’t know because their books are all closed to us.”
The new store design is just one example of the bigger problem, Hay says. The Beer Store is privately owned by a small number of very big brewers with powerful shareholders that control more than 80 per cent of the sales in Ontario.
Even the most well-intentioned operators are going to find themselves in a potential conflict of interest, Hay says.
Meanwhile, the provincial government’s involvement in beer distribution is limited to ensuring the chain conforms to certain laws safeguarding the health and safety of the province’s citizens, critics say.
Beer can’t be sold to minors, or sold below a certain minimum price. The stores can’t be located near schools or churches. They can’t open before 9 a.m. or close after 11 p.m. The alcohol content of the products must be clearly labelled.
Beyond that, the owners of The Beer Store decide everything from stores’ layout, to the prices they charge for special displays, or the cost of recycling non-industry standard bottles, an issue of particular relevance to Brick when it launched the Red Cap “stubby.”
None of this was readily apparent to him, Brickman says, back in 1984 when Brick Brewing burst on the Canadian beer scene, the first new brewery in the province in 22 years.
In fact, Brick’s arrival created a huge dilemma for the store’s owners, he recalled.
Founded in 1927 at the end of Prohibition, The Beer Store was originally a brewers’ co-operative in which every mom-and-pop brewer then in business had an ownership stake.
Over time, industry consolidation had reduced their numbers to half a dozen large Canadian-owned companies, and later just three very large multinational companies.
No one was even sure what to charge Brick for a stake in The Beer Store.
So, when the owners of the store offered to charge Brick the same fees they charge themselves to get on the store’s shelves, he said okay. But the thing he overlooked at the time, he says, is the fact that the owners of the store get to share in any profits the store makes. As a non-owner, he doesn’t get that benefit.
“We were the first on the scene. So they were grappling with what to do; what value they would put on this thing? And what to do if more brewers came into it,” Brickman says. “It was easier for them to say, ‘Okay, Jim, we’ll charge you the same fees we’re paying and you don’t have to buy in.’ And I thought to myself, ‘If I don’t have to pay $3 (million) to $4 million – I’m just picking a figure out of the air – and I get the same service fees, that might work out.’
“But the thing is, there are dividends. I mean, it’s a profitable company,” he added, citing figures The Beer Store used to share with anyone who sold beer through its stores. The Beer Store no longer discloses its financial results.
The owners of The Beer Store say the chain is operated on a “cost recovery basis.” When the fees exceed the projected costs, the excess is returned to the store’s owners in the form of a dividend. When the fees fall short, the owners pay the difference.
They also say that while there may be potential for conflicts, they don’t see evidence that it’s taking place. In fact, The Beer Store gave small brewers a break on the fees and other special considerations, notes the national brewers’ Newton.
“There’s a long list of different policies we’ve put in place with the craft brewers and the Ontario government to accommodate the unique needs of small brewers.”
For many small brewers, the cost of buying an ownership stake in The Beer Store at this stage would be prohibitive, Newton adds. “I’d question what’s the purpose of doing that? Right now, they get complete access. The same listing policies. You get all the benefits without any of the obligations.”
http://www.thestar.com/Business/article/455141
