Politics & Government

Craft brewers say this document shows the distribution system is ‘rigged’

North Carolina’s craft brewers say they’ve found a smoking gun in their fight against the state’s beer wholesalers, a document that suggests the market is tilted toward their competitors – big national conglomerates.

The document is a franchise agreement between Anheuser-Busch LLC and R. A. Jeffreys, a Raleigh-based wholesale distributor. It requires Jeffreys to give Anheuser-Busch “priority over all other products.”

The wholesaler “agrees that its primary effort will be to sell the (Anheuser-Busch) Products, that it will devote greater effort to the Products than it devotes to any other products,” according to the so-called equity agreement.

“It’s outrageous,” said John Marrino, owner of Charlotte’s Olde Mecklenburg Brewery. “This is what we’ve been trying to tell people, that the large distributors favor the big breweries over the smaller breweries.”

The agreement, disclosed in a recent lawsuit against Jeffreys and other wholesalers by Anheuser-Busch LLC, appears to reinforce the argument the so-called Craft Freedom brewers have taken first to the General Assembly and then to court.

The brewers, led by Olde Mecklenburg and NoDa Brewing, are fighting the state’s 25,000-barrel annual production cap. Under the law, a craft brewer who produces any more must contract with a beer wholesaler.

A spokesman for distributors said the kind of favoritism suggested in the 1997 franchise agreement is barred by a 2012 state law involving franchisers. He said it also would be prohibited in a pending consent agreement between Anheuser-Busch and the U.S. Justice Department.

Craft brewers’ fight

The fight pits North Carolina’s fast-growing craft beer industry against the N.C. Beer and Wine Wholesalers Association. The group has reinforced its clout with more than $1.5 million in campaign donations over the last four years.

After a legislative effort to raise the cap failed, the two Charlotte brewers went to court, arguing that state laws limiting their production are unconstitutional.

The brewers argue that the cap forces them into costly contracts with wholesalers, who would take over all sales and distribution rights. They say the state is impeding the free market by treating their businesses differently than others.

The wholesalers say that the current system works for brewers as well as consumers. Tim Kent, executive director of the wholesalers association, has said the law allows craft brewers to produce as much as they want as long as they’re willing to work through a distributor. Distributors, he said, can expand markets for craft beers.

Kent said the 2012 state law makes it illegal for any supplier to “prohibit a wholesaler from distributing the product of any other supplier.” He also cited a consent agreement occasioned by Anheuser-Busch InBev’s $107 billion acquisition of rival SABMiller. The consent agreement prohibits Anheuser-Busch from preventing a distributor “from using best efforts to sell, market, advertise, or promote” another beer.

“The language in a 1997 equity agreement is effectively trumped by this action,” Kent said.

Craft brewers and their allies contend the 1997 agreement, submitted in court just last month, shows that distributors play favorites.

“It confirms that the state is forcing small craft breweries into a system that is rigged,” said Drew Erteschik, an attorney for the craft brewers. “So now that the distributors’ secret contract with Anheuser-Busch has been discovered … the distributors’ response is to point out that this secret contract is also illegal? That only makes things worse for them.”

Becki Gray, a senior vice president of the John Locke Foundation, a Raleigh-based conservative group that supports the craft brewers, said the Anheuser-Busch franchise agreement shows “that rhetoric that we heard from the wholesalers that they’re going to treat everybody the same is not necessarily true.”

“They say there’s equitable treatment,” she said, “but there obviously isn’t.”

‘Unfortunate side effect’

Some craft brewers have chosen to work with wholesalers. One is Carolina Brewing Co. of Holly Springs. It distributes through Jeffreys and other distributors. Co-owner Mark Heath said he’s not surprised by the language in the Anheuser-Busch agreement.

“It is an unfortunate side effect of the business for craft brewers, but it’s not something that comes as a surprise,” Heath said. “If it comes as a surprise, they’re naïve.”

Heath, who supports efforts to raise the cap, said he has a good relationship with his distributors. But “from the top down, you’re not always feeling like you get your fair shake,” he said. “But that’s part of the business.”

According to the suit, R. A. Jeffreys, which operates in 36 N.C. counties, sold over 16 million cases of Anheuser-Busch products in 2016. That’s 1.1 million barrels through one wholesaler alone. Olde Mecklenburg’s annual production has yet to reach 25,000 barrels.

Last month, Anheuser-Busch InBev bought Asheville’s Wicked Weed Brewing. The craft brewer has a stable of award-winning beers and a prime location in downtown Asheville.

Marrino of Olde Mecklenburg said the combination of the 25,000-barrel cap and franchise agreements like the one between Anheuser-Busch and Jeffreys hurts businesses like his.

“The state of North Carolina is effectively holding our hands behind our backs while Anheuser-Busch is beating us up,” he said.

Jim Morrill: 704-358-5059, @jimmorrill

Related stories from Charlotte Observer