Brewer's Association position paper on Miller contract.

The Brewers Association of America (BAA), the trade association which represents small brewers who produce fewer than 2 million barrels of beer annually, is deeply concerned about the distributor contracts issued by Anheuser-Busch and Miller brewing companies. Both contracts would inevitably interfere with the independent wholesaler's ability to distribute the products of small brewers. These contracts bode ill for competition in the beer industry and ultimately for the American beer drinker.

Last year, A-B unveiled its distributor contract that introduced the "100% share of mind" program. Under this program, wholesalers were rewarded, through various financial and promotional incentives, for expelling small brewers, imports and others. They were given incentives to make their distributorships exclusive to A-B products. Last month, Miller introduced a new contract with "Fair Share" provisions with objectives similar to the "100% share of mind" proposal. These contracts are restricting growth possibilities for all other brewers and especially small brewers. Ultimately, they will reduce consumer choice.

BAA members rely on and support America's network of independent beer wholesalers for distribution. Wholesalers who represent A-B and Miller are the principal network of beer distribution in the country, accounting for almost 80 percent of the beer delivered. Because of the quickening pace of wholesaler consolidation, these independent small businesses which carry A-B and Miller products are often the best means of beer distribution in most states. Under the legal concept of the three-tier system, a product of the Repeal of Prohibition and the 21st Amendment, wholesalers and retailers are supposed to be independent of big brewer control. Until now, this system has fostered a relatively level playing field which has given Americans the widest variety of competitively priced beers in the world.

Unfortunately, there are elements of the A-B and Miller contracts between brewer and wholesaler that are specifically designed to enforce big brewer control over the supposedly independent wholesaler's business. These contracts weaken the competitive position of the small brewer and limit their access to store shelves. They undermine the independence of the wholesaler and thereby threaten the three-tier system and the essence of the state franchise laws that define the relationship between a brewer and wholesaler. They severely limit competition among breweries, reduce consumer choice and lead to further big brewer domination of the marketplace.

The BAA objects to these provisions of the Miller contract:

* One provision requires distributor employee sales commissions for Miller Brewing Co. brands to be greater to or equal than the per-case employees sales incentives for any other brand carried by the wholesaler. In general, specialty brands carry a much higher profit margin per case than mainstream brands like those brewed by Miller. It therefore makes good business sense for wholesalers to spend relatively more per case on promoting specialty brands because they are more profitable on a per case basis. By requiring per case incentives on Miller products to be at least equal to incentives spent on promoting specialty brands, the new contract caps a wholesalers ability to promote specialty brands and does so in a manner that will often be contrary to the wholesalers best economic interest which is to maximize profits.

This provision would effectively allow Miller to dictate the amount of resources the distributor could devote to a small brand. How would anyone ever start a brewery or launch and grow a new beer brand with such a provision? This provision, like many others in the A-B and Miller contracts, would allow big brewer control of the wholesaler's business by locking out or freezing in place small brewers.

* Another provision of the proposed Miller contract dictates that a distributor must notify Miller in writing prior to acquisition or divestiture of any new business, and submit a plan about how the change would maintain or enhance Miller's business, for approval by Miller. We interpret this provision to give Miller veto power over the acquisition of any new brands for its portfolio. It would also give Miller a sneak preview of any new products being introduced by competitors.

* Another provision mandates the wholesaler cannot hire a general manager without the approval of Miller.

* Additionally, signing the contract waives the distributors' right to a jury trial and provides that any dispute must be litigated in Wisconsin, home of the Miller Brewing Company.

* Yet another provision dictates the debt-to-equity ratio which must be maintained by a wholesaler, thereby threatening the independence of smaller wholesalers and subjecting them to acquisition by financially stronger, larger wholesalers. Bigger wholesalers may be better wholesalers for big brewers, but are not necessarily better for small brewers who often feel their brands are "lost" in a large house.

These contracts, if enforced, would squeeze the small brewer out of business, crushing them between the rock of the Anheuser-Busch and Miller contracts and the hard place of the state franchise laws. On one side, the small brewer is required by the laws of most states to assign their brands to a wholesaler. Many franchise laws limit the small brewers ability to move the brands from poorly performing wholesalers. On the other, small brewers will be squeezed by these contracts which could allow a competitor to control the support wholesalers can give to a small brewers products.

The fundamental assumption of the state franchise laws is that a wholesaler is an independent business which has a right to protect the franchise they helped develop. The Anheuser-Busch and Miller agreements go a long way to change wholesalers from being independent businesses to becoming divisions of the major brewing corporations. If the wholesaler is in fact an independent business, then business decisions as basic as sales incentives or hiring a general manager should be made by them and not dictated to by a large brewer.

If wholesalers are not independent businesses, able to make their own marketplace decisions, they should not have the benefit of the franchise laws that restrict the freedom of small brewers. If all the Miller wholesalers sign this contract as their Anheuser-Busch brethren did, small brewers will be further restricted from growing their brands and giving their customers what they have clearly demonstrated they want: variety. In the past 20 years, the number of breweries in this country has grown from less than 40 to more than 1200. If these contracts are enforced, they may doom the American beer drinker to only a few brands from a few brewers.