Dear legislatures: Distributors are amused by your pissant fines
For beer distributors, there’s no real downside to graft
It doesn’t appear to have been an awful week at Breakthru Beverage, one of the mid-size beer distributors. Sure they were fined a couple million for graft in Pa., which likely was less than pleasant, but they still were able to open a massive, state of the art facility in Colorado. Apparently they were pretty confident no amount of fine money should put a damper on their expansion plans. That, in a nutshell, is the trouble with any attempt to end graft in distribution: The risk/reward ratio encourages bad behavior. But let’s start slow: Here are a couple of things that will have to count as facts until we can rethink the way we move beer around the country: Thing number one: Distributors are necessary, important partners in the three-tier system for any brewer that wants their beer to be available regionally. Thing number two: This legislatively-mandated middleman status is a breeding ground for corruption. A few years ago I was hanging out with a couple brewers who were talking about the (then) latest pay-to-play scandal. One of the brewers said a reporter asked him whether his brand paid for taphandles and he honestly didn’t know. “Paying for taphandles” refers to the illegal practice of exchanging goods or services for a place on a bar’s draft system.The brewer said he knew he wasn’t paying for tap handles, but honestly wasn’t certain that his distributor wasn’t. He made a couple of phone calls, was confident that the distributors he spoke to honestly hadn’t paid for tap handles and then answered the reporter’s question in the negative. The point of the story is that once the beer leaves the brewery, it is tough to know whether you’re a white hat or a black hat. Even the most above-board brewers don’t know whether they are part of an extortion scheme between distributors and retailers. Many brewers, though, may be perfectly happy with a “Don’t ask don’t tell” policy when it comes to graft. After all, when you’re locked in with a different company selling your product as well as your competitor’s product, how hard are you going to fight to make certain a retailer is treated fairly? And this just goes to thing number one: It’s easier and more efficient in a lot of cases to have someone deliver your beer, take the risks and reap the rewards, than it is to do it yourself. It benefits both breweries of a certain size as well as consumers that the distributor takes the responsibility as well as the heat. But the fact that distributors are necessary (and know they are necessary) may make some a little bolder than they would be if distributors were a little more dispensable. They are the gatekeepers for many brewers. Like bouncers at the door of a club, some of them are no nonsense and others will trade access for cash. It is inevitable given demand and what’s at stake. It also is inevitable given how proportionately paltry fines for getting caught cheating are. If I extort your business or in anyway hamper your ability to compete, I go to jail. If a business uses criminally anti-competitive practices to improve their profit margins, they get fined. This is an important distinction. In many of these cases the distribution company pays a fine rather than let their people face criminal charges. The fines may look intimidating on paper, but they are only intimidating in the way that, say, a speeding fine is. When you get one, mostly you hate on the cop and pitch about the unfairness of being caught doing something that everyone does, but in the end you pay it because it is easier and because (really) you have the cash. If you’re like me, you add up all the hours of productivity and leisure you got for the times you didn’t get caught speeding and use that as a justification for this fine and any others that might follow. Now imagine that it wasn’t you, but rather your company who paid your speeding tickets. How worried would you be about pushing the limit? This week, we got a particular insight into how that works for distributors. There is too much money at stake to allow the off-chance that someone might bumble upon your graft (AND that someone else might prosecute it, AND that you might lose AND have to pay a fine) affect your thinking. Especially with your boss paying your fines and zero chance of actual jail time, you’re kind of a sucker if you don’t cheat. That’s why the Breakthru Beverage stories seemed to apt. This week they were fined $2 million for bribing Pennsylvania retailers and opened a 15-acre state of the art distribution facility in Colorado. But (to be fair and honest) they’re just doing business. The real graft takes place in the statehouse. Breakthru Beverage’s employees could have been prosecuted. They violated a law and were open to criminal prosecution, but the state would rather get a check from Breakthru (and the other four distributors in the $9 million court case) than put a couple of salesmen in jail. From Breakthru’s perspective, it is hard to get sales people to engage in graft when they can’t be sure they’ll get bailed up by the company. Paying the fine rather than lose aggressive sales people with proven bribery experience is a no-brainer. Add the fines to the cost of doing business and let the sales people learn from their mistakes. The state (in this case Pennsylvania, but it’s just the latest in a long list) on the other hand, sold out its consumers for a couple of million dollars. Worse, it handed over the future of the state’s craft brewers, vintners and distillers, to a conglomerate for a couple of million dollars.
If legislators remain committed to let distributors buy their way out of graft so cheaply, there can be no hope of effective enforcement. But that’s probably the way they want it anyway.
Originally published at stateofthebeer.com on August 3, 2017.