By Matt Kelly
While legislators and beer enthusiasts across Florida attempt to lift a 50-year-old ban on growlers (64 oz. containers of beer), many are ignoring a key aspect of this controversial policy issue: franchise termination laws. Franchise law regulates contracts between beer manufacturers–breweries–(the franchisors) and distributors (the franchisees). Florida’s franchise laws, however, currently give distributors an unfair advantage over suppliers and legislators should consider reforming them to level the playing field.
As mentioned in a previous blog, breweries in Florida must sell their entire product to distributors. In turn retailers are required to buy beer from licensed distributors. This requirement aids distributors by limiting competition, but Florida’s franchise laws go further by making it difficult for brewers to terminate their contracts. Economist Douglas Glen Whitman from the Independent Institute writes, “The predictable result of impeding such terminations is inflated markups by wholesalers.”
To terminate a contract, brewers must prove that there’s “good cause,” which is narrowly defined as fraud or bankruptcy on the part of distributors. This is an unreasonably high standard not seen in most industries. According to a 2011 report by The Competitive Enterprise Institute, “Failure for a wholesaler to find markets for a product is usually not considered adequate reason for termination…” in the beer distribution market. Suppliers are stuck with their distributor whether it’s good for business or not. This handicap ultimately limits consumers’ choices and keeps prices high.
In his book Strange Brew, Whitman points out the “double markup problem,” in which the use of a distributor raises prices while profits fall, since they are divided between two companies. To avoid this problem, beer producers can “impose contractual obligations on wholesalers” in contract negotiations, requiring them to sell at a certain price or specifying a minimum sales quota. Problems like shirking and opportunism by brewers or distributors could be anticipated and addressed privately. Disputes could, and should be settled via traditional contract remedies as in most other businesses.
However, Florida’s franchise laws make such private agreements unenforceable. The difficulty in terminating an agreement creates a moral hazard, since distributors have no incentive to improve services when suppliers are locked into contracts indefinitely.
Franchise laws hurt small brewers most. Since the most profitable beers are established favorites like Budweiser and Miller Lite, distributors have little incentive to promote new beers that few customers have heard of. Allowing small breweries to switch distributors with greater ease could make them more flexible. As microbreweries grow, their distribution needs will change. Craft beer is leading growth in this industry, but tying craft brewers indefinitely to a single distributor greatly limits their profitability.
Distributors nevertheless perform an integral role in the beer business. As small breweries grow, they will likely need to contract with distributors who can deliver their product efficiently. However, without the option to exit, contracts can quickly become a ball-and-chain for start-up manufacturers.
Legalizing the 64 oz. growler and creating exemptions for small brewers to self-distribute would be worthwhile improvements to Florida’s beer regulations. However, franchise laws will continue to limit brewers’ choices as they grow. Growlers and self-distribution would add some hops into Florida’s craft beer industry, but any package that avoids reforming franchise law is likely to have a flat impact.