The Pay-to-Play Scandal In The Beer Biz: How Far It Goes Nobody Knows

 

Source: Forbes

March 31st

 

 “In the pharma industry we called it ‘The Hustle.’

 

You can call it The Hustle, you can call it The Spin, or you can simply call it pay-to-play. Whatever name you use, the definition is the same: the exchange of favors for product placement. Despite the fact that in many industries it falls somewhere below the line of what’s legal or ethical, it’s how oh-so-many business-to-business salespeople get their medicine, technology, beer or widgets through the gatekeeper and in front of you, the consumer.

 

“At the end of the day somebody’s trying to gain preferential treatment for their product or ware and they’re going to do what they can to make that happen.”

 

That’s Mike LaCouture, the same guy who mentioned The Hustle, above. LaCouture is a career salesperson who co-founded Broken Goblet Brewery in suburban Philadelphia almost two years ago. Though Broken Goblet self-distributes, LaCouture is well aware that his beer competes for draught placement against better funded breweries whose wholesalers may be illegally paying cash, building draught towers or supplying concert tickets to bars that carry them.

 

“Sometimes you’ll go into a bar and you’ll see one distributor has six (rotating draught) lines and another has two. You go in six months later and it’s reversed. How do you police that? I don’t know but there’s a new 50-inch flat screen on the wall,” he says.

 

In the world of beer sales, pay-to-play is a common yet whispered business practice. A few months ago, a popular craft beer distributor called Craft Brewers Guild got busted in Boston for funneling up to $120,000 worth of payments to sham companies set up by big bar chains. This month CBG, owned by a parent company with a national portfolio of 19 wholesalers, paid a fine of $2.6 million instead of accepting a debilitating 90-day license suspension. That company, Sheehan Family Companies, has since sued the Commonwealth of Massachusetts to appeal the locally unprecedented amount of the fine and has gone on record saying it’s instructed all of its properties to comply with the letter of law in every state where it operates.

 

But in an industry where the practice is so widespread that some greedy bar managers start bidding wars between wholesalers, will the punishment have any effect on distributors across the country? And what, if anything, can be done to rein it in?

 

“I really can’t speculate as to what other distributors are doing,” weighs in Tom Schreibel, Sheehan’s VP of industry, community and government affairs. “There have been actions taken against other wholesalers. This one’s gotten a ton of media attention.”

 

Undoubtedly, the well-publicized case will keep Sheehan companies from misbehaving for the foreseeable future. And their in-market competitors may well take advantage of the powerplay to gain marketshare. But for a while, it’s likely that distributors will at least be a little more cautious or stay on the legal side of the line to make deals.

 

“Instead of handing out checks they’ll reduce your beer bill,” predicts a brewery sales rep who’s sold beer and cider in multiple east coast states for the past five years. “They can do an accumulation credit, which means we’ll credit you back a certain amount if you buy something like 50 kegs.”

 

In most states, if not all, that’s legal. But for some unscrupulous account managers, it’s not enough. And the ever increasing number of SKUs makes it harder for any individual brewery to keep up.

 

“A lot of bar owners have got their hands out because they know there are too many brands,” says Jeffrey House, founder of California’s Ace Cider, who distributes through CBG in Massachusetts. “The game’s too expensive to play now. When we got in there were only two cideries in the U.S.”

 

House doesn’t think his peers in the ownership game would knowingly condone payments made on their behalf, trusting that they, like he, believe in playing fair.

 

“It’s supposed to be a level playing field,” he says.

 

But when the pressure’s on wholesaler reps to make their numbers, they sometimes get the go-ahead to bet on their own horses.

 

“Is it gonna stop? No,” House says.

 

Officially, the National Beer Wholesalers Association (NBWA) takes a stand against these activities but is expending more energy pushing for better enforcement over education or self-policing by its members.

 

“Recent actions by the (federal Tax and Trade Bureau) and state alcohol regulators concerning trade practices underscore the need for all beer industry members to ensure they are complying with federal and state trade practice laws. It’s essential for the long-term health of the industry that trade practice laws are being enforced,” emails Communications Director Kathleen Joyce.

 

According to the association, the bureau is charged with enforcing laws at 620,000 licensed retailers across the country, on top of regulating 48,000 permitted alcohol producers, wholesalers and importers and approving 100,000 labels and recipes per year. These numbers have increased by half over the past five years, yet funding for the TTB has decreased. Employment at state agencies has dropped precipitously, with two enforcement agents covering the entire state of Minnesota and a reported three in Missouri.

 

It makes sense, then, that one of the NBWA’s top legislative priorities is to get Congress to fully fund the TTB, the third largest revenue-generating agency in the federal government.

 

But part of the problem is that laws vary from state to state, and too often, no one’s really sure how far they go anyway. So until states and the federal government clear up all confusion, the hustle will surely continue.

 

“What do you define as a pay off?” asks LaCouture, who’s thanked one of his loyal accounts by gifting two cases of pint glasses that say “Broken Goblet” on one side and the bar’s name on the other.

 

“Is that bar going to be like, ‘Whoa they’re paying us off!’ Where does it end? I’m a little three-barrel brewery being sold in 10 bars in the United States so if I’m doing it you’re trying to tell me the other guys aren’t doing it?”