Brewbound Frontlines: The Direct-to-Consumer Shipping Opportunity for Craft Brewers, with Sovos ShipCompliant’s Larry Cormier

Justin Kindle [00:07] Welcome to Brewbound Frontlines, our check-in with industry leaders on the pressing issues in this industry. My name is Justin Kindle, and I am the editor of Brewbound, and I'm joined by Justin Fonte, the managing editor of Brewbound. What's up, Jess?

Speaker 2 [00:22] Nothing, Justin. How are you?

Justin Kindle [00:24] I'm doing well. I'm ready to talk direct to consumer shipping. How about you?

Speaker 2 [00:28] I am excited to talk direct to consumer shipping. It's It's always changing, always different, and never not super interesting.

Justin Kindle [00:37] Exactly, and we've got an expert here to discuss it with us today. We've got Larry Cormier, vice president and general manager of Sovos Ship Compliant. Thanks for being here, Larry.

Speaker 3 [00:49] You're welcome, Justin. Jess, great to see you. I'm excited to talk about DTC shipping as well. Yeah,

Justin Kindle [00:55] well, direct to consumer shipping is on the wish list of many state guilds and craft breweries across the country, but only 12 locales offer it. But it's also on the legislative agenda in several states. So can you give us sort of an update, a state of play of where we are as things stand today on early in early May, we'll say early May.

Speaker 3 [01:18] Yeah, so as you mentioned, um, we have a rather limited scope of distribution, states plus the District of Columbia that allow DTC shipping of beer today. That the total of 12 locales is, you know, for comparison's sakes, 48 locales for direct to consumer shipping of wine. Uh, so, you know, where we are today, uh, from the big picture is that Ber DTC is still very much in the emerging stage, there's a lot of activity behind the scenes from the guilds, as you mentioned, but also from the industry associations, and obviously there's a lot of consumer demand and those consumer. sentiments are starting to be expressed, uh, you know, more forcefully, so I think that's part of what's driving this discussion and hopefully the change.

Speaker 2 [02:28] So one thing I look forward to every year is the the survey that that you guys put out on how consumers feel about DTC shipping, and not surprisingly, they are very much in favor of it. A recent survey found that interest among craft beer consumers in direct to consumer shipments of beer from out of state brewers is up to 85%. That's massive. Why do you think there's greater interest among core craft drinkers?

Speaker 3 [02:57] Well, I think there's uh 2 or 3 reasons. Uh, one is we're back to a normal life or kind of normal post-COVID life, meaning people are traveling, right? And, and one of the things I do whenever I go somewhere, uh, that has great local craft breweries is I, I'm gonna go and sample as many of those as I can, right? And I think a lot of people are doing that. The people are back in In, in bars, uh, but also going on site tours at breweries, which is something people love to do. And I know my inclination is, boy, I'd like to ship a case of this home, right? Uh, and, and people are realizing, oh, well, I can't do that unless I'm in one of the chosen 12 locales out there, right? So that's, that's driving some of the demand. Uh, at the macro level, uh, the other thing the pandemic did was make it even more, uh, apparent to consumers that, you know, they, they can buy anything they want online, right? If you can buy a mattress online, why can't you buy a case of beer from Vermont online, right? So there's that kind of demand from consumers for the, uh, you know, ease of, of purchasing. Um, and then, you know, the, the other thing I think that's driving it is the, um, it's getting harder and harder to find craft beers in your local retailer, right? There's so much competition for shelf space. There's a limited number of distributors that are delivering, you know, craft, real craft beer. Uh, so I think that is, you know, that, that, uh, You know, desire to get something special is, is the other thing that's driving that consumer behavior, and those numbers that you cited are up year over year pretty significantly, so it's, it's a growing kind of awareness and demand.

Speaker 2 [05:10] So we know people want it and they're excited about it and in many cases they don't really understand why they can't have it, but they're in favor of expanding legislation. Why has the tide been so slow to turn on this front?

Speaker 3 [05:22] Well, you know, that, that's a matter of perspective. Again, if I compare it to the wine world, uh, that started in 2005. And it's taken 20 years to get to this space, and, and a lot of what's going on today in terms of legislative and regulatory change is exactly what we experienced in the wine space, you know, there were years when there were bills and, and the bills died. Well, that's what happened to beer in 2022, right? There were Lots of activity in a lot of state legislators to open up PTC beer shipping, and most of those either didn't get out of committee, didn't get to the floor, got put aside in favor of focusing on local delivery regulations as opposed to shipping regulations. So we're hopeful and optimistic. That, that, you know, cause all of those states that were active last year, those bills were reintroduced this year, and there's a couple of more new states that are introducing it. So, I hate to say it, it's a long slog. It's kind of, you know, you have to, to get to, uh, you know, they, uh, you have to get to the legislators. You have to overcome a lot of headwinds. Uh, there's a lot of inter-industry. Bickering over DTC, uh, that, that makes it more difficult at the legislative level.

Justin Kindle [07:02] You're being very polite. Very, very, uh, diplomatic of you in, in some of these replies, which I totally understand. Um, and you mentioned that a number of states have reintroduced these bills. There are more states that have or more guilds or more brewery groups that have brought new legislation. Uh, one of those states would be Texas. I know that in my home state of Iowa, there's also legislation there. How much progress have we seen this year? Could we add one state, two states, you know, is there anyone that you see that is, you know, potentially going to flip this year?

Speaker 3 [07:42] I think California and Texas are the two that I'm watching the most closely, and the reason is, uh, again, comparing to the wine is that once you get those high population states, high demand states, right, so Texas, um, New York, Florida would be, you know, that would be. Kind of that would make the ball really start rolling and that those states alone with California would create enough, enough market on their own to entice more craft brewers to ship.

Justin Kindle [08:23] What do you see as the biggest opportunity for both brewers and the states that haven't added this yet?

Speaker 3 [08:32] Uh, well, the, the, the, the opportunity is, um, twofold. One is more sales, right? I mean, that's from the brewer's perspective, uh, especially, you know, the, you guys know that the mass, uh, segment of craft brewers are pretty small, right? And that, again, is very reflective of, of the wine shipping market. It, it was a way, it is a way for small winery that produce, you know, under 5000 cases a year or many cases under 1000 cases a year. It's an opportunity for them to get their, their product in the market, you know. So that's the same opportunity that, that craft breweries are, are looking at. Um, and then, you know, the other opportunity is Um, just to break that, that sort of. Uh, distribution, uh, consolidation that's forcing, uh, a lot of, um, people to look for that other channel. Uh, so it's, it's a way to, uh, not only increase sales, it's a way to increase your, to establish your brand, uh, to, to get a brand out there. And that can eventually lead to, uh, distribution deals. So that's another thing we have seen in the wine world, you know, you start your small winery, you start by sending direct to consumer, you establish that there's demand out there. You establish there's, you know, your brand is recognized. That opens the doors at the distribution level. So that's why we say, and the Craft Brewers Association very clear in saying, we do not look at VTC as a uh a way to Uh, skirt the, the three-tier system more as a way to fill in the gaps in the total market economy.

Justin Kindle [10:41] Yeah, wholesalers have a limited amount of warehouse space that they can take these products. There's only so much shelf space. Uh, one thing though I did want to follow up on is for states, it seems like there's a lot of tax money that could potentially be on the table as well. Can you sort of quantify how much there is already and how much there could be?

Speaker 3 [11:04] Yeah, uh, yeah, we move hundreds of millions of dollars for our customers, um, you know, that, that's part of. What our software does in addition to ensuring that the shipments are compliant, meaning that the shippers are licensed in the states that they're shipping to, and they're registered, you know, to, to collect and pay sales taxes, so we're constantly moving hundreds of millions of dollars into. State coffers. So that's another kind of myth of the, of the people that are fighting not just DTC beer but DTC anything, right? Any alcohol. There's, there's a, a, a group of people that, that, you know, fight that and, and part of what they fail to recognize is the revenue that is there for the states and, and in a lot of cases. Cities and counties because everybody has an opportunity to win when when there is more commerce going on in their jurisdictions.

Speaker 2 [12:17] Larry, one thing we've seen lately is, you know, brewers who say they're able to ship it to 40 plus states. How's that

Speaker 3 [12:24] possible? There is this sort of gray middle uh um path. That is what we call Flaw DTC and um there are a lot of people that are uh. Enabling what looks like DTC meaning for the consumer, meaning that I can go online and I can place an order for a case of beer. And it shows up at my doorstep, but what's really happening in the background is somebody's using the three-tier system to route that product. From the producer through a distributor, through a retailer to the consumer. So, you know, it's not real DTC it, but it does, it is um a kind of stopgap method uh before we get to real full DTC. Uh, it's a more complicated and as you can imagine from an economics point of view. Somebody's taking a cut at every step of that process. So part of the beauty and the attraction of direct to consumer for brewers is margins, right? You're, you're not giving 30 points to a distributor, right? You're, you're taking that as part of your profit. So, in that far DTC that, that's not there, right? But at least there is a way, you know, there's some brand building there and there are a lot of um uh. Software and hardware companies that are offering platforms that make it look like, you know, that website is your local brewery, right? When in fact, you know, it's a, it's a website and somebody's like making all those connections in the background to make that transaction happen.

Speaker 2 [14:30] Got you. That, that makes sense. And I see that there's, there's pros and cons to that, obviously getting your beer in front of a much broader audience than you would have been able to. Sure, Makes sense. Um, so for brewers who want to ship out of state. What do they need to know? Cause there's, there's a lot to know.

Speaker 3 [14:50] Yeah, that's, that's why I'm in business, right? That's why ship client is here, uh, but there are also, uh, a lot of consultants in the space. There's a lot of attorneys that specialize in this kind of, of work because as you mentioned. Uh, you know. God bless the three-tier system. There's a lot of complexity in, in, in alcohol regulation, and one of the things that, that happened way back in 1930 when prohibition was repealed was there were a bunch of federal regulations, but they also said Every state can have their own set of rules and so, you know, it is, it, it's very complex. There's a, uh, even in today in the 12 locales that that Josh mentioned up front, within that set, there's a bunch of gotchas, right? Like there's, I forget which state it is, it's limits. You can have DTC, but only if you have actually visited that brewery at some point in time, right? It's like, OK. Uh, you know, they're, they're just little gotchas in different, uh, uh, regulations. So, um, you know, they need to understand that going into it. Uh, they need to understand the requirements of being licensed to, you know, collect and remit sales tax, um, and. Again, as a comparison to the wine space that has matured over the past 20 years to the point where it's a $4 billion plus market. Um, that, uh, is Part of the hurdle, right? For, for brewers to get into it, but. It's been done, right? We, we know all of those, uh, uh, batches, and we, and, and there are people other than us. I'm not, I'm not doing a sales pitch. There are a lot of people out there that can help a brewer get their product into that channel.

Speaker 2 [17:05] Gotcha. Now, so I live in Massachusetts, where you can ship beer intrastate, which is kind of Fine. I mean, we're a small state. If I really wanted beer from a brewery on the other side of it, I could easily go there in the morning, but Um, that seems to be something pretty common. We, we tracked this pretty closely in the early days of the pandemic because it was a way for breweries to get their product to consumers who couldn't go anywhere. Now, interstate shipping has a lot of other interesting things that go along with it in that you are potentially running afoul of the Commerce Clause, which is what we're seeing happen in Washington and Oregon, but how many brewery, how many states, excuse me, states don't allow shipping within their own borders at all? Is that common?

Speaker 3 [17:53] Uh, yeah, I can't, I can't tell you that number right now. It is increasing. It's obviously increasing a lot faster than interstate shipping, but as you point out, what Massachusetts is doing, your beloved home state, is violating the Constitution because, you know, that was the whole idea in the 2005 Supreme Court ruling, Granholm that opened up the world. We at the time we thought for all beverage alcohol shipping it got narrowed down to wine and that's why we're having to fight to open it back up, but you're exactly right, that the decision was based on the violation of the commerce law, which is basically if you allow it to happen in your state, you have to allow it to happen, you know, interstate. And and that Oregon's a really interesting case when I was talking about the gotchas, they allow it, but only if the state that they're shipping to ship or the shipping in also allows shipping in into that state. So yeah, it's a um that and that's the basis for the court activity that we see going on. We talked about legislative activity which is You know, they're kind of happening in parallel, but there's a lot of pending court cases that are working their way, you know, hopefully back to the Supreme Court to say, yeah, what those guys said back then was alcohol could be shipped, right? It wasn't limited to wine. So you have the beer people pushing it, you have the spirits people pushing it, obviously. That's another interesting kind of angle and what's playing out today in the state legislatures is in some cases, uh, they're being combined, spirits and beer, as, you know, let's do both. I think what we learned last year is that, that's not a good pitch, right? Cause spirits really brings out the Anti-alcohol people and the underage, you know, drinking possibilities. So what we see is that the sponsors are separating those bills, and I think that will give us a much better chance to get to beer DTC probably much sooner than we get to a spirits DTC world.

Justin Kindle [20:23] You mentioned the, the Washington, Oregon scenario where Washington State breweries filed a lawsuit against Oregon for the right to ship beer to consumers there. There was an agreement to settle that and now breweries in other states can ship there. Could this sort of lead to more change via lawsuit before we see it through legislation?

Speaker 3 [20:47] Absolutely, yeah, and that's why, um, you know, again, back to the wine that happened through uh legal challenges, not through. State bills, state bills came later, right? What really opened it up was the court activity. So I, I would expect that uh we'll see more of that, um, you know, it's great if, if we can make the change, get it into law, but the courts generally act faster. Uh, than legislators do, so I, I would think we'll see a lot more activity in that space this year.

Speaker 2 [21:29] We mentioned how wine obviously has the widest DTC shipping privileges that that industry was really, you know, organized 20 years ago on this front. Uh, beer is a distant second. Spirits are an even more distant third, uh, for reasons you just kind of covered. Do you think we'll see the spirits industry make much progress on this front in the next few years? I know they've got a lot more headwinds coming their way.

Speaker 3 [21:54] They have more headwinds, but they, uh, frankly have more, um. Industry activity, you know, I hate to say it, uh, but, uh, they're more organized, uh, from an industry association activity. Uh, so they have DISCUS, which is the big Distillers Association, and the American Craft Distillers Association, which is focused on the craft guys, uh, and, uh, they're actively, uh, working at the, uh, federal and state level, uh, to move, um, that their, their, uh, their legislation, their regulatory, uh, changes, uh. And you know, that's how, that's what the way why it happened. It was thanks to two groups. The Wine Institute in California uh built out a lobbying organization that exists today because One thing we're going to learn when beer DTC is here. is you can't take it for granted. There's a constant battle going on today to try to roll back DTC privileges in states by the same aforementioned industry players that we aren't naming names, but that's going to happen in, in the DTC world too. But the other part of the, the lobbying was a group called Free the Grapes, which also still exists today. And that group was specifically set up to marshal consumer sentiment, right? So we have the consumer sentiment, but I don't think we really have anybody in our beer industry that is using that consumer sentiment to affect change at the state level. So, you know, what the Wine Institute. Worked on the legal side, Free the grapes, worked on PR, basically having events in the states, organizing uh consumers to write and talk to their legislators to, to help push that. So, you know, I, I'm looking for that to emerge in our industry, in the craft beer industry right now. Um, and, you know, the, the Craft Brewers Association has been pretty clear that they're champion of DTC. Uh, they do have a consumer website where they encourage people to comment on specific legislation. Like right now, there's a bill that would allow the US Postal Service to ship, uh, beer. Uh, so they're, they're trying to get people to write in support of that to the, the federal legislators. Uh. We need more of that, right? That, that's really what's going to bring about the change is the consumer demand, um. Well, I think, be the catalyst that really makes this happen.

Justin Kindle [25:12] Well, you're giving folks the blueprint with your surveys, so that's, that's right out there.

Speaker 3 [25:19] Yeah, and, and. That one of the reasons we do that report um is that we've been doing the wine report for 17 years now. And we know that report is used at the legislative level in court cases to show primarily that um that, you know, in the early days it was obviously to show the consumer demand for it. But it's also showing that, you know, this is possible to do legally compliantly. Without, you know, impacting or encouraging underage drinking, you know, without causing public health and safety issues, all the, the kind of, you know, canards that get thrown up as why we shouldn't be doing DTC, it's like, wait a minute, we've been doing it, you know, over here for 20 years, and by the way, the states have profited very nicely from it. So, you know, we want to, you know, we, we don't have the resources to go hire that lobbying group or to marshal that consumer sentiment. Except in the small way that we do with our annual report and survey in conjunction with the Craft Brewers Association.

Justin Kindle [26:44] Larry, we really appreciate you taking the time out to join us today. How can folks get in touch with you in Sovos?

Speaker 3 [26:52] Go to shipcompliant.com or Silvohicompliant.com. Uh, write me directly at Larry Cormier.com. Bobos.com. Happy to, to, uh, to take any questions and help point people to places where they can help us all make this a reality.

Justin Kindle [27:15] Fantastic. Well, thanks for doing this and that's our latest Frontlines.