If you're connected to North Carolina, be you beer industry member, affiliate or passionate craft beer consumer, there's a better-than-decent chance you're aware of the regulations concerning the distribution of beer throughout our state. With the current legislative session setting an early pace, 2017 is already labeled by discussion of North Carolina's "barrel cap."
Regardless of whether the cap on production for self-distribution is ultimately lifted, the elements of a decision to distribute are unique to each brewery. For the young ones, the path to cashflow/break-even is paved with healthy on-premise sales and a brand-centric focus to its wholesale distribution. Irrespective of its timing, a brewery's decision to engage a distributor should come from a position of strength.
Below you'll find a basic brewery guide to beer distribution in North Carolina. It's divided into two sections. The first provides law and context. The second provides a framework for approaching a potential agreement with some helpful considerations.
North Carolina Beer Distribution and the Small Brewery Carve-Out
Like many other states, North Carolina regulates the production, distribution and sale of beer through the three-tier system. Generally speaking, there are rigid restrictions between the tiers that prevent multi-tier ownership and certain business practices. Most typically, breweries (producers) use beer wholesalers (distributors) to get their product to market (retailers).
However, North Carolina allows a permitted brewery to also obtain a Malt Beverage Wholesaler Permit and self-distribute its own beer to retailers until the brewery produces at or above 25,000 barrels of beer in one calendar year. Once that production threshold has been met, a brewery must then deliver its product to market through the use of at least one licensed and independent wholesaler.
North Carolina’s Franchise Laws require that these newly formed distribution agreements grant a prospective wholesaler exclusivity with respect to the geographical territory and brands contemplated. In addition, though the distribution agreements can recite a natural termination date, North Carolina law allows distribution agreements to embody lifetime arrangements. A brewery producing at or above 25,000 barrels may only terminate a distribution agreement through a showing of good cause.
North Carolina law does recognize a carve-out for a Small Brewery looking to terminate an existing relationship with a beer wholesaler. N.C.G.S. 18B-1305(a1) allows a brewery producing less than 25,000 barrels of beer per calendar year to claw back its authorization to self-distribute by giving written notice to the wholesaler and an accompanying payment of fair market value for the affected brand(s). This carve-out can be vitally important for a Small Brewery looking to reconfigure its approach to distribution and to better individualize its path to market.
Quick Distribution Tips for the Small Brewery
Valuation is key. Distribution rights for distributors represent, on average, $6-$8 in margin per case. If your chosen path to market is through the independent wholesale tier, vet multiple distributors. We find that "great deals" are often not.
Ask questions. Remember, distribution agreements are essentially lifetime arrangements. Even as a Small Brewery, exercising the above-mentioned carve-out can prove expensive. With so much at stake, take an opportunity to consider:
“Where does my brand fit within the distributor portfolio?” — Many distributor portfolios contain hundreds and sometimes thousands of other beer brands. Have an understanding of who you are to your consumer and consider how your beer will compete with others in that distributor's portfolio.
“Who is in charge of marketing collateral? How am I protecting my brand? How will I continue to educate my consumer?” — A considerable part of the retail velocity of your beer is brand driven. Have a strategy to continue connecting with your ideal beer drinker.
“What is the scope of this agreement? Have we construed the territory properly? What about potential changes in the law?” — Once these things are written, it's incredibly difficult to turn back.
Have a written document. Make sure your rights, obligations and remedies are clear before you transfer a drop of liquid. Distribution relationships can exist without a written agreement and it's best to be avoid being stuck without one.
Without a doubt, the topic of beer distribution is one of great passion for us. We're here for whatever, be it an informal discussion about your brand or to engage on your behalf. As always, give us a call or shoot us an email.
This material is for informational purposes only and not for the purpose of providing legal advice. Please contact an attorney of competent jurisdiction with any particular issue or problem. Use of this material does not create an attorney-client relationship between Carolina Craft Legal and the user.