Beer and Ale

SIC 5181

Companies in this industry

Industry report:

This industry includes establishments primarily engaged in the wholesale distribution of beer, ale, porter, and other fermented malt beverages.

Industry and Snapshot

Beer and ale wholesale distribution faced a number of challenges inherent to the evolving beer-industry structure in the late 2000s and early 2010s. Not only were major breweries consolidating and entering into joint ventures, they were attempting to streamline their delivery systems by integrating distributing into their businesses. In 2008, Belgian-Brazilian company InBev acquired Anheuser-Busch, the top beer brewer in the United States. Additionally, the second- and third-leading U.S. brewers, Miller and Coors, formed MillerCoors as a joint venture. In 2010, 80 percent of the beer market was taken up by these two industry giants.

However, wholesales continued to play an important role in the industry into the 2010s. More than 2,700 wholesale distributors in the United States in 2009 employed 87,000 people. Pennsylvania and New York were home to the most beer and ale merchant wholesalers, with 330 and 210, respectively, while 193 operated in California and 191 in Texas.

Organization and Structure

Beer and ale wholesaling has always been relatively dispersed, characterized by a large number of independent distributors. The major beer companies have periodically made attempts to purchase some of their independent distributors in an effort to vertically integrate and obtain more control over the channel of distribution. Company-owned distributors can provide an advantage in controlling the pricing and presentation of the product to the final consumer and in maintaining retailer relations to ensure availability of the product. However, for the most part, brewers have been prevented by anti-trust considerations from purchasing their distributors, and efforts to build their own distributorships risked alienating their existing distributors and losing the market penetration they already have. The major breweries still maintained only a small handful of company-owned distributors in the late 1990s.

In order to maintain a modicum of control over distributors, larger breweries have often tried to replace restrictions on the ability of distributors to carry products of other brewers. However, because of Anheuser-Busch's dominating market share, competing brewers, such as Miller Brewing and Coors, have been forced to relax such restrictions, allowing wholesalers to acquire each other's brands, in order to guard their market shares. However, upon the acquisition of competing brands by wholesalers in markets such as Chicago, where Anheuser-Busch's dominance is far less pronounced, brewers complained that wholesalers were taking undue advantage of their greater freedom and forsaking the very logic that led to relaxed restrictions in the first place. Many wholesalers, at any rate, elect to stay with one brewer in order to maintain their positive relations.

Distribution involves several hundred regional independent distributors. Distributors generally remain regional since they are regulated by the state in which they do business. In most states, each distributor is awarded an exclusive sales area by the brewer and is primarily responsible for building relations with the retail and other consumer outlets in order to build the sales of the product. In a few states, such as Indiana, exclusive territories are not allowed, and competition is fierce. In states with exclusive territories, retail customers, including grocery chains, bars, and restaurants, have only one source of supply and are therefore at the mercy of distributor pricing. A strong dealer network is essential for brewers in order for them to obtain shelf space and keep the product available to the consumer. However, this is offset somewhat by the fact that there are so many distributors, so each has only limited power over the brewer.

Background and Development

As long as breweries have done business in the United States, they have made refinements in their methods of distribution. For example, in the late 1870s, Adolphus Busch pioneered the use of refrigerated railroad cars for shipping beers long distances. Adolph Coors became the first brewer to develop and introduce an all-aluminum recyclable can in 1959.

When Prohibition was repealed in 1933, after 13 crime-ridden years, the federal and state governments tightened controls, and brewers, distillers, and vintners adopted policies of self-regulation. The Federal Alcohol Administration (FAA) Act was put into place soon after Prohibition ended. In the 2000s the act still was responsible for the administration of regulations specifying who may qualify as a brewer; the collection of both brewer and wholesaler occupational taxes; and the regulation of trade practices, advertising, and labeling. As of 2004 most states had adopted various versions of the FAA Act in addition to their own statutes and rules. Different states used distribution techniques that varied from state-owned to private systems. Through a federally mandated three-tier distribution system, U.S. regulations demanded that brewers sell only to wholesalers, who then sell directly to retailers and bars in determined territorial markets. Some states maintain exceptions to the three-tier distribution pattern to allow small brewpubs to distribute their own beer and for wineries to ship directly to consumers.

After Prohibition, malt beverages were produced in some 750 different locations throughout the country and were distributed to wholesalers then retailers within an extremely limited geographic region. Beer is a relatively expensive product to transport considering its value, so any brewers wishing to expand their area of sales had to consider the freight differences involved in shipping to another market. Thus for many years after Prohibition ended the United States developed a number of areas that might be called "brewing centers." That is, there were several areas that contained one or more local or regional brewers.

For competitive reasons, these local or regional brewers priced their beers at levels that would permit their wholesalers to generate the lowest consumer prices possible within their geographical areas. Any brewer desiring to sell in that area would need to consider the regional price structure, both in making their decisions about whether to enter the markets and in pricing their products. This basic pricing situation continued in the 2000s. Beer was priced to wholesalers by the case. It was packed in different-sized packs and sometimes packed loose. Domestic brewers sold beer to wholesalers free on board (FOB) the brewery, meaning the wholesalers paid the freight charges. Importers generally sold beer to wholesalers cost, insurance, and freight (CIF) port of entry, although some importers also maintained warehouses from which they sold FOB.

In the 1930s the chief means of selling beer were in draft form and in refillable bottles. Both of these packages were expensive to ship and return and, as a result, the need for less costly containers arose. The first answer to the shipping problem came with the development of the beer can in 1935. While World War II delayed its widespread use domestically, it was used extensively by the armed forces, and after the war sales in aluminum containers started to boom. The aluminum can, along with the glass companies' response to it (the one-way bottle), enabled brewers to ship more cheaply and expand their markets accordingly.

The shipping breweries, which had penetrated new markets in 1946 with minimal quantities of beer, now had product and lightweight one-way containers available to ship to these distant markets. Local breweries that had withdrawn from regional markets to protect more profitable local markets found it difficult to re-enter markets they had left. In addition, many local breweries did not have the equipment to fill flat-top cans, which facilitated shipping. So, for the first time, the shipping breweries gained advantages not formerly available to them.

By far the most popular off-premise outlet for beer consumers was the convenience store, where 2002 sales of $12 billion outpaced the combined total from supermarkets, drug stores, supercenters, and wholesale clubs, according to ACNielsen. Over one-fifth of all U.S. beer was purchased at convenience and gasoline stores, according to National Petroleum News.

Beer drinkers' thirst for healthier and more value-added alternatives to traditional domestic beers was evidenced in a number of trends defining the beer and ale market in the early 2000s. The list of leading beer brands in the United States was dominated by light versions, which claimed more than 40 percent of the domestic market, continuing a fifteen-year trend. And so-called "malternative" beverages, which add everything from vodka to lemon flavoring to their malt alcohol content, registered a 30 percent increase in retail sales in 2002, representing one of the fastest-growing sectors of the market.

Beer wholesalers meanwhile reported that, in the wake of a number of diet crazes featuring a diminished intake of carbohydrates, led by the Atkins diet, many of their suppliers were working to develop new low-carb beers that might appeal to an increasingly health- and body image-conscious beer-drinking market. Anheuser-Busch paved the way among the leading brands with its introduction of Michelob Ultra, which registered strong sales through its first year on the market.

The Specialty Brew Explosion
The 1990s and early 2000s saw explosive growth in the number of microbreweries and brewpubs. In addition to the nation's 910 brewpubs, the mushrooming microbrewery industry boasted over 600 establishments in 2003. These breweries generally had a very localized distribution network, though even in their small, regional markets, they had to fight hard for distribution with larger brewers who covet the smaller markets. The major breweries quickly responded to the microbrew explosion with their own upscale beers intended mainly for urban markets. Anheuser-Busch, for instance, launched several brands, including Michelob Maple and Michelob Spiced Ale, to compete with microbrews, but these products tended to flounder on a lack of consumer interest in major breweries' encroachment on the market niche.

Current Conditions

The changing landscape of the brewery industry in the United States in the late 2000s left distributors wary. The acquisition of Anheuser-Busch by InBev created the most uncertainty because InBev has a history of cost cutting into developing markets. Moreover, as wholesalers wrestled to grab a share of MillerCoors' distribution, MillerCoors expressed desire to impose greater control over its wholesalers, much like Anheuser-Busch.

Wholesalers affiliated with Crown Imports, which imports Corona, faced uncertainty as rumors spread of Crown offering itself for sale. Corona had declining sales for a second consecutive summer in 2008 after 16 years of growth. Despite Corona's decline, annual per capita consumption of alcohol has held steady over the past decade at about 22 gallons of beer. "Recent actions by our supplier partners have created real problems for many," Aldo Madrigrano, chairman of the National Beer Wholesalers Association (NBWA), said at the group's convention in September 2008, as reported by Advertising Age. As a result of these changes in the industry, wholesalers' profitability, which peaked at 4.8 percent in 2007, fell to 4 percent in 2010.

As the U.S. economy stagnated in the late 2000s, falling into a recession, consumers cut back on their spending, drinking less and buying cheaper brands when they did indulge. Consequently, industry revenues declined to $49.2 billion in 2010, representing a 0.7 percent average decline over that last five years. However, based on a recovering economy, population growth, and the increasing popularity of microbrews, IBISWorld predicted that wholesalers would experience an average 1.7 percent increase in sales through 2015 to reach sales of $53.6 billion. Although profit margins were expected to remain low, continued industry consolidation would create less competition and more opportunities for the remaining players in the industry.

In the late 2000s and early 2010s, craft beers became increasing popular among wholesalers who began to seriously market many microbrewery brands under their portfolios. Using the Internet and even mobile phone apps to promote their brands, wholesalers keyed in directly on retailers to promote upstart craft beers. "So distributors have to be able to market themselves as companies that offer a highly valuable service to be the most attractive option in any given market for a particular craft brewery, where as in previous years, say five-plus years ago, that was rarely a part of a large distributor's growth strategy," explained Eric McKay, director of communications, L. Knife & Son Cos. to Beverage World. Two of the most successful examples of this wholesale marketing strategy are GreatBrewers.com and WorldClassBeverages.com.

Industry Leaders

According to Beverage World, the top three beer wholesalers in the United States in 2010 were as follows. First, Reyes Beverage Group (RBG), of Rosemount, Illinois, distributed 74.4 million cases and had $1.4 billion in revenues. RBG operates 13 warehouses and employees 2,000. The company's brands include Dogfish Head, FEMSA, Firestone Walker, Flying Dog, Half Acre, Heineken USA, Magic Hat, MillerCoors, New Belgium, Pabst, , Sweetwater, and Yuengling. Second, Silver Eagle Distributors, L.P., distributed 46.2 million cases and had 2010 revenues of 806.1 million (ranked third in revenues). Headquartered in Houston, Silver Eagle is the nation's largest Anheuser-Busch and one of nation's largest distributors of Grupo Modelo. Third, Goldring Holdings, of New Orleans, distributed 43.5 million cases and had revenues of $839 million (ranked second in revenues). Goldring consists of an independent partnership between Goldring/Moffett Holdings and Republic National Distributing Co. Brands include, Asahi, Boston Beer, Heineken SA/FEMSA, High Falls, Hornell, Kirin, McKenzie River, MillerCoors, Molson, New Belgium, Pabst, Paulaner, Warsteiner, and Yuengling.

Other top wholesalers include Ben E. Keith Beverages of Dallas, Texas (38.5 million cases; $700 million in 2010 revenues); Manhattan Beer Distributors of Bronx, New York (30.7 million cases; $610 million); and Andrews Distributing Cos. of Dallas, Texas (27.5 million cases; $542 million).

America and the World

According to a report by CNBC, the United State ranked thirteenth in beer consumption per capita, at 81.6 liters per person. However, the United States had more breweries than any other country across the global. The top three beer-drinking nations were, in ascending order, Germany (115.8 liters per capita), Ireland (131.1 liters per capita), and the Czech Republic (156.9 liters per capita).

Imported beers, an increasingly crucial sector for distributors, have met with some difficulties regarding their products' freshness. The resulting backlash focused scrutiny on distributors, who were under pressure to reduce "inventory days," the number of days beer and ale remain on their shelves. Domestic breweries, eyeing the possible vulnerability of the burgeoning import sector, launched a campaign advertising their own freshness as a way of marketing on the strength of this problem. While analysts hold that Eurobrews generally have a longer shelf life than domestic products, wholesalers were scrambling to streamline their operations by more carefully and systematically monitoring product code dates in order to reduce turnaround time.

Still, imports have risen steadily, representing the industry's fastest-growing sector. This growth was partly driven by shifting consumer tastes from mass-produced U.S. beers to more pricey imports. This preference was good news for the larger U.S. wholesalers who invested heavily in the highly competitive market for distribution contracts with foreign brewers. Almost 95 percent of U.S. beer and ale imports come from Canada, Mexico, and Western Europe, especially the Netherlands, Germany, and the United Kingdom.

Distribution is clearly an important factor in the domestic market, and its importance internationally has taken a significantly boosted priority. Obtaining access to distribution systems is a driving force behind a wave of international joint ventures and alliances. The accelerating globalization of the brewing industry has generally tended to diminish the power and influence that distributors wield, since the larger multinational breweries tend to have significantly greater ability to move into foreign markets and establish deals on their own terms.

The European market differs from that of the United States and Japan in that it is more regional, with local brands dominating their regions. Very few European brands have established widespread distribution, and most have had difficulty in gaining acceptance outside their regions. U.S. beers have had tremendous difficulty reaching elsewhere the kind of market penetration they enjoy at home.

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