Ettelman & Hochheiser, P.C.

100 Quentin Roosevelt Blvd • Garden City, NY 11530 • Tel (516) 227-6300 • Fax (516) 227-6307,,,

ARTICLES AND NEWSLETTERS

“THE LEGAL BUZZ”
BARTON GETS (HALF OF) THE EAST

Déjà Vu

Oh, the wonders of modern technology! In the middle of an arbitration against a major brewer that is seeking to terminate a wholesaler client pursuant to an alleged national consolidation policy, I received two e-mails within minutes of one another on my crackberry – I mean blackberry. The first announced the management shake up at Miller. The second was the blockbuster – the long-awaited announcement of the Constellation (Barton)-Modelo joint venture for the importation/distribution of Modelo products on the East Coast. Since it had been widely reported in the weeks leading up to the announcement that A-B was out of the running, the announcement was somewhat anti-climactic. Still, I thought I heard the collective sobbing of A-B wholesalers throughout the East bemoaning what might have been. In any event, there we were; myself, my client, a high ranking executive of the brewer who was in the middle of testifying and the brewer’s counsel, all discussing the widespread ramifications of the day’s events – including potential wholesaler alignment issues. What made this scene somewhat surreal was the fact that we were smack in the middle of a trial, testing whether that brewer had the right to align its wholesaler network as the result of a similar joint venture which had occurred several years back.

The irony of the situation was incredible. Here was Modelo announcing a joint venture with Barton for the distribution of Modelo products in the East, while simultaneously announcing their intent to continue working with their existing distributors in the East. In fact, the exact same words were uttered by the brewer with whom we were litigating just a few years back when it completed its joint venture. Then almost immediately thereafter, that brewer implemented a national policy of consolidation designed to get rid of most of the wholesalers they had just promised to continue to work with. Could this be déjà vu all over again? Maybe I am paranoid, but when a brewer says “trust me”, my radar goes on high alert. Then again, just because I am paranoid does not mean that everybody is not out to get me!

Will The New Joint Venture Try To Align Their Distribution Networks?

Certainly the first question that Barton distributors in the East will ask is what impact is this going to have on me. Clearly, if you are presently a Barton-Modelo house, you are golden. But what if you are a Modelo only or Barton only house? Should you be concerned that the joint venture will try to align the two networks? Well, from all of the testimony that I have listened to over the last several days from supplier executives explaining why alignment makes their lives easier, the answer would appear to be unequivocal, you can bet that they will try to align.

Corona Esta El Rey!

While Budweiser may be the king of beers in the domestic market, there is no disputing who the king of the imports market is. Corona has locked up that crown, ending the lengthy reign of Heineken. So, although Barton is contributing the Tsing-Tao and St. Pauli Girl brands to the joint venture there is no question as to what the flagship of the new portfolio is. Accordingly, while the JV will want to grow all brands in its portfolio, the clear focus will be on Corona. Obviously, this gives existing Corona distributors that have been performing well under Gambrinus a real leg up in any alignment strategy. However, there are no doubt markets where for a variety of reasons the new supplier might want to move the Corona out of the existing house and into the Barton house. Moreover, the joint venture may present some significant opportunities for them to make these type of moves. Overall, however, it makes little sense for the new joint venture to do anything dramatic with respect to the present Corona distribution network. Barton’s East Coast distribution is not that extensive, and the Barton brand volume is only a fraction of the Modelo volume.

The real question is whether the JV will seek to move the Tsing-Tao and St. Pauli Girl brands into Corona houses. Only time will tell. Certainly, there are many obstacles, including distribution agreements and state franchise laws which will interfere with any attempt by the new joint venture to compel a consolidation into one house, but as we all know, that is not likely to discourage them from trying to consolidate. Chances are, however, that where there are significant obstacles, the joint venture will take the same approach that many other brewers have taken in implementing consolidation strategies; which is simply to attempt to persuade their target wholesalers to sell to their preferred wholesalers.

When The Hatchet Man Comes Knocking

Nobody likes to be the target of a proposed consolidation. Even though consolidation typically has nothing to do with the wholesaler’s performance, it is human nature to take exception with a supplier that wants out of your house; particularly if you have been doing a good job. So what are your alternatives when the supplier’s anointed hatchet man comes calling to tell you they want you to sell. The answer of course, depends upon the particulars of each case, including such factors as your distribution agreement and the application of various laws, including state franchise laws. Fortunately, however, in many if not most instances you can not be compelled to sell. However, selling or, better yet, trading for brands of equal value and volume may be the wiser choice.

Just because you can’t be forced to sell, does not mean that you should not consider cooperating with the brewer. After all, it is far better to try and foster positive relations with a brewer even under difficult circumstances such as being targeted for consolidation. From the target’s perspective, the best way to assist a brewer with its consolidation plans is to offer to trade brands. By trading, you don’t lose scale, profit or good-will. The problem with trading brands, however, is that frequently the consolidating wholesaler is not willing to part with any brand of equal value and volume; which, if you think about it, is nothing short of astonishing. On the one hand you have a brewer trying to consolidate because it believes a consolidated wholesaler will have more focus on its brands. Yet, often the wholesaler that the brewer selects to consolidate into demonstrates by refusing to engage in an equitable trade for the brewer’s products that it does not and will not have focus on the brewer’s brands. One would think that such a refusal would make the brewer think twice about its decision to try and get into that wholesaler’s house.

If a trade is not possible, offer to buy the brand from the other wholesaler or, if possible, offer to trade for the brand with the other wholesaler. Not only is this a demonstration of your good faith and dedication to the brand, but it may actually work. There are instances where a brewer may have doubts about their “first choice” for consolidation and an aggressive move by a target to get the brands coupled with a recalcitrance of the original consolidator to “go the extra mile” by trading to obtain the brand may change the brewer’s mind as to whom they would like as their long-term partner. While this is admittedly a long shot, it’s still worth the effort if you are looking to maintain your scale, profit and good-will while avoiding, to the extent possible, potential conflicts with the brewer over the attempt to consolidate.

Stand Up For Your Rights

If all else fails, you have two choices – sell or fight. If the loss of scale and good-will associated with the brands won’t adversely affect you, and you are offered a fair market price for the brands then by all means, sell. If, however, as is usually the case, the target brands are significant to your overall profitability and the consolidating wholesaler is looking to steal the brands (or at least get them at a discount), then listen to Nancy Reagan’s advice, and Just Say No! Of course, this assumes that you have already examined your rights and have determined that you have the ability to say no without risking termination.

Be Vigilant!

Brewers spend a lot of time and attention developing their consolidation strategies. Wholesalers should devote similar time and attention to developing consolidation defense strategies. Before implementing your strategy, you should have a firm understanding of all of your rights and the tools that are available to counter the brewer’s actions. Here is where a healthy dose of paranoia can help you. Don’t wait until the hatchet-man knocks on your door; as soon as the brewer says “we are dedicated to our wholesalers,” call your lawyer!