Proponent Testimony on HB 306 — Mark Stuhlreyer, March First Brewing Company (December 5, 2023)

Summary

This is proponent testimony on HB 306 from Mark Stuhlreyer, CEO of March First Brewing Company, to the House Commerce and Labor Committee, dated December 5, 2023. It states that the Ohio Alcoholic Beverages Franchise Act was written in 1974 and that there are now more than 9,000 breweries in the U.S. (more than 400 of which are in Ohio) but fewer than 50 beer distribution companies in Ohio. It states that small brewing businesses are beholden to very one-sided contracts designed to protect the distributor's interests almost exclusively. It also states that an annual production cap would mean the exclusion to franchise law only applies to smaller breweries.

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Proponent Testimony
Mark Stuhlreyer, CEO
March First Brewing Company

HB 306

December 5, 2023

House Commerce and Labor Committee


Chairman Johnson, Vice Chair Manchester, Ranking Member McNally and members of the
committee,

When the Ohio Alcoholic Beverages Franchise Act was written in 1974, it was done to protect the
interests of small businesses in our state. Forty years after the repeal of prohibition, the three-tier
system of alcohol sales and distribution that had emerged in Ohio needed some “tweaking.” At that
time, there were a little more than 100 breweries in the entire nation, while around 200 wholesale
distributors operated in Ohio alone. These distributors were mostly small, family-owned businesses and
those 100 or so breweries had grown into primarily large companies, selling beer nationwide or in
multipleregions. It was deemed necessary at that time to build safeguards for these small businesses in
their dealings with these large organizations that accounted for an overwhelming percentage of their
income. This system worked reasonably well for many years.

Fast forward nearly 50 years from that point and we find a similar landscape in many ways, but not all.
There are now more than 9,000 breweries in the U.S. (more than 400 of which are in Ohio) but fewer
than 50 beer distribution companies in Ohio. Many of these breweries are small, family-owned
businesses and are generally much smaller organizations than the vast majority of the beer distributors.
The consolidation of the 1960s and 1970s that led to fewer, larger breweries has now mirrored itself to a
large extent in the beer distribution business. The numerous small breweries that have been born in
Ohio in the last 10+ years now need the same help that all those small beer distributors needed back in
the 1970s. The franchise law is now having the opposite effect that was intended when it was written.
Small brewing businesses are beholden to very one-sided contracts that are designed to protect the
distributor’s interests almost exclusively.

Given the over-arching umbrella of protection afforded to distributors under the current franchise law, it
is nearly impossible for brewers to build measurable, actionable goals and conditions into a distribution
contract. Often the inclusion of simple things like sales goals and marketing expenditures into a draft of
an agreement are met with guffaws and a response along the lines of “you can’t put that in the contract,
franchise law will just overrule it.” Most distribution agreements therefore generally include a lot of
vague terminology such as “good faith effort” and “just cause” with very little specifically actionable
language beyond the standard legal statutes that apply in these types of contracts. It goes without saying
that small brewers want these contracts to work well for both parties, but when they don’t it can be a
much greater burden to the business of the small brewery than the distributor to sever them. The
distributor sells many other brands and any given small brewery is probably only a few percent or less of
their overall sales, whereas the vast majority of the breweries income is dependent on that distributor
for that territory. If a distributor only wants to sell enough of your product to barely stay above the vague
level of “just cause” for termination because they are more heavily invested in a competing brand in the
same market, they can effectively “sideline” you and there is essentially nothing you can do about it
without a protracted and expensive legal fight. If, several years after signing an agreement, you or the
distributor’s business model no longer works for the needs of your business (or theirs), tough luck: you
are “married” for life. Not even marriage itself works like that these days! It is this readily available ability
for distributors to pick winners and losers (if they choose to) due to their protection under the franchise
law that is just one of the many reasons we feel reform is needed.

It will be argued from the other side of this debate that these contracts can indeed be severed for “just
cause.” While this is technically true, there are many additional hurdles installed into the process for a
brewery to overcome due to the franchise law that are not required in non-franchise contract
negotiations. These burdens can require a great deal of expense for a small brewery to overcome. It
would be disingenuous to say that breweries want to repeal the franchise law so that we can “just do
whatever we want, whenever we want.” All we want is to be able to negotiate the conditions of these
contracts equitably with our potential distribution partners in the same way that any other business
would want to conduct similar negotiations. The proposed legislation is not a 100% reversal of the
existing rules. By creating an annual production cap so that the exclusion to franchise law only applies to
smaller breweries, any concerns regarding the influence of large breweries that created the need for the
franchise law originally in 1974 will still be averted. Instead, this new statute will restore the balance of
protection that has been afforded to Ohio small businesses for many years.

This limited rollback of beer distribution franchise laws has been similarly installed in several other states
in recent years with successful outcomes. It is time to add Ohio to that list.


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