The traditional three-tier system of beer was born out of The Prohibition Era in these United States. The law was set up, in theory, to provide a system of checks and balances, not unlike the idea behind the three branches of government. In terms of beer, from production to consumption, the beer starts with the brewer – who sells to a wholesaler – who distributes the beer to a retailer. You, the craft beer drinking consumer, can then buy from the retailer. In California we do, however, have the designation of being a self-distribution state and, therefore, we are an exception where brewers can distribute and sell their own beer directly to retailers and consumers. Though there are opportunities for brewers to sell there wares and distribute them directly, distributors already have the relationships with retailers such as liquor stores, bottle shops, bars, and restaurants, as well as a workforce of sales reps who can make or break a brewery’s business.
It’s not as ominous as it sounds. There is a finite number of bars, with a finite number of tap handles. There is a finite number of markets, liquor stores, and bottle shops with a finite amount of shelf space. There is a finite number of consumers. However, what seems to be infinite is their selection on that finite number of taps and shelves. The infinite selection, in and of itself, is not a bad thing. In San Diego, with more than 70 operational breweries, there are few locations that have a tap system that could pour even one beer from each locale.
So then how do brands find themselves in a retail space? Of course, the quality of the beer is key. Also, if there are existing relationships among people in the industry, that too can be advantageous. If there is buzz for a new brand and people clamoring for it, that will help. Yet there exists something nefarious, a potential cancer in any beer market, which is the dreaded quid pro quo – “this for that” in Latin. In the business of beer this back-and-forth, barter, commutation, swap, trade, whatever you want to call it, can mean the beginning of the end.
According to a ChicagoBusiness.com article titled “Graft Beer” by James Ylisela and colleagues, the authors divulge that their fair city – which for our purposes can serve as a cautionary tale – has faced pay-to-play in their craft beer industry. “Independent (Craft Beer) brewers say the brand-name distributors, with deep pockets and abundant supply, often resort to pay-to-play business practices,” the report reads. “Offering cash, new tap systems, free beer and other incentives to tavern owners and retailers in exchange for taps or shelf space. Federal and state laws prevent producers and distributors from offering money, loans or anything else of value to retailers to freeze out the competition, with such exceptions as signs or ad materials under certain dollar limits. It’s also unlawful for bars to accept these gifts. For fledgling, cash-strapped brewers, the practice can force a difficult choice: dig deep into their pockets and play along by giving distributors discount beer or freebies that can be passed along to bar owners—or effectively be shut out of the taps and shelf space of the businesses that serve alcohol.” In talking to local business managers and owners, these incentives, though offered, do not outweigh reputation and are indicative of a day gone by. How has that come to be; what makes San Diego special?
I spoke to Sonny Jensen, former general manager of The Beer Co. in Downtown San Diego and current operating partner of Stumbling Steer Brewing Co. in Albuquerque, New Mexico. “Pay-to-play is bad for the craft beer business. It turns craft beer into a commodity. People care about quality, local beer, and supporting local brewers. It’s crucial not to play these games.” When asked about “these games” Jensen specified: “free kegs, free shirts, and other free tchotchkes, that’s not what San Diego is about. We are about good local craft beer. Larger distributors in San Diego know not to play this game in here, at least at craft beer bars. They are, however, likely still playing those games at chain restaurants and the like. I was given pitches by these large distributors for free beer, et cetera, and I let them know that, for me, it is all about variety and new, local beers. The major concern of local craft beer bar owners, operators, and staff isn’t to get free stuff, it is to support local breweries so that they can keep making good beer. I love to buy a shirt, and wear it proudly, knowing I am supporting a local brewery.”
Nate Soroko, of Toronado San Diego, went on the record to talk about what new trends he has seen in the realm of pay-to-play. “I guess you would say there’s a sort of pay-to-play in the craft side too.” How so? “Well in a subtle way craft beer bars play. It’s a unspoken rule that you can’t get a company’s specialty keg without selling their core line of beers.” I asked Greg Koch, co-founder and CEO of Stone Brewing Company, to comment on this matter. From his perspective, it is less pay-to-play, and more about good business sense. “When you have a limited beer with a limited amount of kegs, you want those kegs to go to places that have shown loyalty. This is not a shocking concept,” he said. “We have no official policy, we do things that make good business sense. You have 10 kegs, but 50 places that want them. You’re going to be smart about where you place them.”
The most important factor in San Diego for a brand to find shelf space, however, is the brand’s reputation and integrity. Reputation can mean a variety of things: quality, flavor, personality, sense of community, a name that is synonymous with beer. Integrity means having respect for San Diego’s craft beer culture and community. In San Diego one such company whose reputation is synonymous with beer is Stone Brewing Company. I asked Greg Koch if he felt that pay-to-play culture exists in San Diego. “You will always find people on both sides of the aisle when it comes to this issue. That culture still exists in spots and pockets in San Diego, but it is not pervasive.” Not pervasive? “In 1996, when we started, the culture was much more pervasive. Lots of places would lay out their desires: free shirts for staff, free glasses, and even free beer. We refused to do it. Always have. Never will,” Koch continued. Why not I wondered? If pay-to-play can get you handles and shelf space, why not play?
“This is a slippery slope. In the short term, it might get you somewhere, but it’s a lazy sales person’s sales technique. There were places in San Diego where, when Stone began, that would shake me down. One day I asked a bar owner Why? To which he responded incredulously ‘It’s you (breweries) that taught me to do this, to expect this.’ The industry practice of buying their way in, there was an influx (in 1996). If consumers think that this will result in cheap drinks and free swag, there is no such thing. Their choices become limited if decisions are made for them ahead of time. ‘Selling out’ means ‘sold out’ and ‘selling out’ rarely leads to a better situation; that’s the nature of being a ‘sell out’ in this industry.”
I asked Koch who is responsible for pay-to-play antics? Is it the producer, the distributor, the retailer, or is it even the consumer? “Everyone.” Koch replied. “Everyone is responsible. The consumer can be responsible as to what beers they buy and where they spend their money. Brewers need to be smart about who they do business with. Distributors and retailers are responsible for not engaging in, or perpetuating this.” In his video Craft Beer Profitability (www.sellingcraftbeer.com) Koch shares his thoughts on why the beer itself should be the most important factor. Koch asserts that “Beer selection makes a big impression.” Retailers should be using their “real estate” to provide consumer with actual choice of quality. Koch also touches upon why pay-to-play is bad for business when he states that “free kegs lowers profits.” How so? Essentially a retailer has said that the cost of real estate is worth $0, and that their customer only deserves, in all likelihood, access to a mediocre beer. However, craft beer drinkers are looking for quality beers, will have loyalty to establishments that serve quality beers, and will, in the end, be the people who keep the lights on, not the entity that gave a free keg.
In researching this story I found people at all tiers that said pay-to-play either does not exist, or exists only “in pockets” of San Diego. That, to me, means it is not eradicated, and therefore, could see a reemergence, especially with the industry’s growing popularity locally, nationally, and worldwide. How can this be prevented? First we can establish a formal dialogue. The San Diego Brewers Guild can put out a formal statement on the matter, for example. Moreover, they, as a unified industry voice, can engage the San Diego hospitality industry and other industries within the county to educate them on the detriments of pay-to-play.
Managing the reputation of our craft beer community is everyone’s responsibility because our craft beer reputation is, in a real way, the reputation of our city and county. Even with an exponential increase in beer production, beer quality, beer education, and beer tourism, the craft beer movement in San Diego, though a quarter century old, is still not very well known. We have our future to think about, and that future is worth a lot more than a free t-shirt, glass or keg.