Franchise Laws—Chronic Injustice in the Alcohol Business

stinkIf one were to make a list of the various chronic injustices that exist in the alcohol industry, it would be a long one. But, if you were to rank those many injustices, it seems unquestionable that the Franchise Law would top the list. Franchise Laws are supported by wholesaler across the country because it makes it nearly impossible for their suppliers to change distributors, thereby giving wholesalers all the power in the business relationship and placing suppliers at their mercy.

For the perfect example of the evil of the Franchise Law, consider the injustice visited upon Massachusetts beer and cider importer Shelton Brothers. The Boston Globe reports that “In February, the [Massachusetts] ABCC imposed a record $2.6 million fine on Craft Brewers Guild [Shelton’s Distributor] for engaging in a ‘pervasive illegal enterprise’ by paying some Boston bars to put certain beers on tap, a practice known as “pay-to-play.”

Among those harmed by this distributors illegal actions was Shelton Brothers, whose products were shoved to the side while Craft Brewers Guild pushed other products—illegally. Shelton Brothers has sued the Craft Brewers Guild for “overpricing its products and intentionally allowing them to languish on shelves while aggressively pushing beers from preferred suppliers.”

At this point, in any normal business environment, Shelton Brothers would terminate its distribution contract with Craft Brewers Guild and find a new distributor that was actually interested in selling its products rather than keeping them off the shelves.

But a normal business environment would not include a Franchise Law as Massachusetts does.

The Massachusetts Franchise Law makes it nearly impossible for an importer like Shelton Brothers to move on to a new distributor. In order to liberate one’s self from a relationship with a wholesaler, an importer or producer must show good cause. What would constitute “good cause”? Glad you asked: wholesaler’s disparagement of the brewer’s product, unfair preference of a competing brand, failure to exercise best efforts, encouragement of improper practices, or failure to comply with contract terms.

Remember, Craft Brewers Guild is a wholesaler that shoved aside Shelton Brothers brands and focused on other brands to the point of actually paying off taverns to take those bigger brands. It got caught by the Massachusetts Alcohol Beverage Control and was fined $2.6 million for its crimes.

However, the MA Alcohol Beverage Control Commission has issued an order that Shelton must continue to sell product to Craft Brewers Guild until a hearing can be held later in 2017—likely around May. Does anyone think that Craft Brewers are going to work gangbusters for Shelton? Of course they are not. Yet the Massachusetts Franchise Law requires Shelton continue to sell Craft Brewers Guild wine and rely only on them for distribution.

This year there have been legislative attempts to end the unfair and one-sided Franchise Law in Massachusetts. And there are more to come in 2017. However, the wholesalers, who can’t put up a real argument for the continuation of Franchise Laws, unfortunately have bought the attention of legislators who are often very happy to do the bidding of wholesalers in exchange for campaign contributions.

The Shelton Brothers situation is just one example of the chronically stupid and unjust nature of the Franchise Law that also exists in numerous other states. It is perfect example of how wholesalers, though their indefensible regulatory advantage, have gamed the system to make them among the most unreliable business partners in America. If ever there were an example of the need for reform in the American alcohol system it is the Franchise Law.


Posted In: Wine Business


3 Responses

  1. Kevin Cleary - December 1, 2016

    Sad situation for Shelton Bros. There is also a franchise law in Vermont (and the state controls liquor to boot). While it is a bad situation for importers and distributors it is also bad for retailers and customers. When a wholesaler drops an importer that importers wines do not necessarily get picked up by another wholesaler right away, if ever. Especially if the wholesalers in the state don’t get along all that well and don’t want to ‘trade’. It limits choice which is not good for anybody.

  2. Tom Wark - December 1, 2016

    Thanks for the comment, Kevin.

    The ways in which Franchise Laws are criminal go on and on. They benefit a single element of the industry and in turn do absolutely nothing for any other sector, let alone consumers.

    The National Beer Wholesalers Association has this to say about Franchise Laws:

    “The brewer benefits because they gain access to equipment and personnel provided by independent distributors, who deliver and sell beer to retailers across the country. Small brewers especially benefit because distributors are able to act independently and carry all brands.”

    As though wholesalers would not sell brewers products if there were no Franchise Laws.

    There simply is no rational reason for these laws other than if your goal is to enhance wholesalers’ profits at the expense of everyone else.

  3. Jimmy Kawalek - December 1, 2016

    Until the consumer is fully informed (and engaged) that their beverage selections are being adversely hindered because of these rules nothing will change. Many of the smaller producers cannot retain a distributor (required by law) due to limited choices or will not deal in certain states due to franchise laws, enslaving them to either a good or bad relationship. The crap-shoot is too great to wager so they do not deal in those states.

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