Distribution 101

So, you are probably familiar with the three-tier system.  As such, you know that, in Georgia, a supplier may sell only to a distributor, a distributor to a retailer, and a retailer to a consumer.

Additionally, Georgia is what is oftentimes referred to as a “franchise state”; that is, there is a statutory and regulatory requirement imposed upon alcohol suppliers that requires them to designate an exclusive wholesaler for each brand for each territory in which that brand is sold.  Let’s refer to this requirement as the regulatory designation.   In addition to the regulatory designation, suppliers and wholesalers will sometimes enter into distribution agreements, i.e., a contract.  Thus, there are two key aspects to distribution in Georgia: (1) the regulatory designation, and (2) the distribution agreement.

Consider for purposes of this discussion that Start-Up Brewery, LLC (“SUP”) produces an amber ale called Red Head, an IPA called HopSkip, and stout called So Dark You Need a Flashlight to See Me.  SUP wants to distribute in the Metro-Atlanta area, which includes, say, the following distribution territories: Fulton County, DeKalb County, Cobb County, and Gwinnett County.  SUP has to choose a distributor for each one of its three brands for each one of the territories in Metro-Atlanta.  Typically, a brewery will choose one distributor for all three brands for all territories in the Metro-Atlanta area, but it’s not a requirement imposed by law.  For instance, SUP could choose Eagle Rock to distribute Red Head in Gwinnett and HopSkip in Fulton.  SUP might choose Atlanta Beverage Company to distribute Red Head in Fulton, HopSkip in Gwinnett, and So Dark You Need a Flashlight to See Me in Cobb.  SUP might then choose Savannah Distributing to distribute Red Head in Cobb County, HopSkip in Cobb County, and So Dark You Need a Flashlight to See Me in Gwinnett.  The combinations are extensive.

But, like I said, this doesn’t usually happen, because most distributors will show you the door if you suggest such an arrangement.  I provide the example for illustration purposes only.

More likely is that SUP would choose, say, Eagle Rock for distribution within the Metro-Atlanta territories.  So what happens next?

SUP must file an ATT-104 form with the Georgia Department of Revenue. Here’s a link to the form so you can see what it looks like: ATT-104. See Revenue Rule 560-2-5-.08 – .09.

Once a supplier designates a distributor(s) with the GDOR, it is very difficult for the supplier to switch to a different wholesaler.  To do so, the supplier must have cause, i.e., a really good reason.  Further, if the distributor won’t voluntarily release the brands, the supplier must bring a notice of intention to change wholesaler, which is a proceeding before the Administrative Hearing Office of GDOR.  See Revenue Rule 560-2-5-.10.

The difficulty in changing wholesalers is one reason it is so important to make sure you really evaluate your distribution options before settling into a relationship.

But what about all the terms involved with the sale of beer from SUP to Eagle Rock? Price? Sales goals? Trademark license? New Products?

That’s where the distribution agreement comes into play (or should come into play).

A distribution agreement may cover many, many areas of the distribution relationship not covered by the regulatory designation (ATT-104).

Here’s a key point, though:  the distribution agreement does not trump the regulatory designation.  For instance, let’s say that Eagle Rock fails to meet its sales goals for SUP products.  As a result, SUP terminates the distribution agreement.  Well, SUP is still tied to Eagle Rock because of the regulatory designation.  The only way out is for SUP to file a Notice of Intention to Change Wholesaler, and show to the GDOR that Eagle Rock’s failure to meet sales goals constitutes cause to terminate (or change wholesaler) under the revenue rules.  This can be a difficult showing.

There are ways, however, to correlate the terms of the distribution agreement with the reasons (cause)provided in the revenue rules for termination (or change) of a wholesaler.  Doing so puts the supplier in a better position should it want to get out of its relationship with the distributor.