Illinois Law Causes Beer Battle

Published February 1, 2007

Rigid state franchise laws may be to blame for Bell’s Beer, a highly respected craft beer brewed in Kalamazoo, Michigan, disappearing from Illinois bar taps and stock shelves.

In Illinois, as in most states, brewers have little control over who distributes their beer, because wholesaler franchise regulations governing the brewer-wholesaler relationship prevent brewers from terminating a contract without “good cause.”

In October 2006, Larry Bell announced he would stop selling his beer in Illinois after a dispute with his distributor, Union Beverage Company, over plans to sell Bell’s Illinois franchise rights to Chicago Beverage Systems (CBS).

Bell objected to the sale because he thought CBS would not effectively represent his brand in Illinois.

“They have a bad reputation nationally with regard to distributing craft beers,” Bell said, “and they admitted to knowing next to nothing about [Bell’s Beer].”

Little Distribution Control

According to Bell, operating in Illinois costs four times what it costs him in other markets. He said a big part of the cost is rampant corruption and the lack of competition among wholesalers.

“Ethically, legally, and financially,” said Bell, “I just couldn’t afford to stay in the [Illinois] market any longer.”

The franchise regulations were originally intended to protect wholesalers from abrupt termination of contracts with major brewers such as Anheuser-Busch, which controls nearly 50 percent of the U.S. domestic market.

It was thought that in a market dominated by a few large breweries, the wholesale industry would not be sufficiently independent or stable to attract investment.

Lower Service, Higher Prices

But aggressive regulation of wholesaler contracts reduces competition and leads to lower quality service and higher prices, according to critics.

In a letter to the Illinois Legislature in 1999, C. Steven Baker, then director of the Chicago Regional Office of the Federal Trade Commission, advised against strict franchise laws, noting they “likely interfere with market forces by increasing the supplier’s costs of adding or eliminating distributors or switching from one distributor to another.”

Big Brewers Favored

Franchise protection is particularly costly to small craft brewers, who are often forced to take a back seat to the needs of large breweries.

“We understand the need for franchise protection,” said Tom McCormick, former editor of BeerWEEK, a beer industry trade publication, and executive director of the California Small Brewers Association, “but the laws are too often written specifically for dealing with large brewers.”

According to McCormick, small brewers see wholesalers as credible partners who deserve to be compensated for investing in the brand.

“But nevertheless,” said McCormick, “most simply cannot afford to be locked into a wholesaler who isn’t meeting their needs.”

Other States Freer

Bell agrees wholesalers and brewers can work together, and points out that in some states they do.

In Wisconsin, for instance, a small brewer can transfer his franchise to another wholesaler for any cause. The wholesaler is obliged to sell the franchise at fair market value. If the two wholesalers cannot agree on a fair market price, they can enter into arbitration.

By contrast, some states–including Alaska, California, Colorado, Hawaii, New Jersey, and Oklahoma–have next to no franchise protections for craft brewers, though some offer protections for certain classes of beverage.

Mike Van Winkle ([email protected]) is media relations manager for The Heartland Institute.