That proposed mega-merger of ABI distributors in the southeast (total cases 35 million spread over 3 states) got me thinking about the future of beer distribution in specific and beverage/consumer products in general.
As a side note, mergers are a great way to position yourself to remain in this business IF you have willing potential partners. If so, give me a call and let me lend a hand.
But what might the future hold for distribution and how might it affect your businesses’ operations and valuations? What should it mean to you and your business for operational, estate, and family planning?
First let’s look at demographics and technology. Each and every year about 4 million young adults graduate high school… well actually just over 80% graduate, the rest just move one. Of these 4 million, around 2.6 million will either never attend or never graduate from college. And as a WAG (wild ass guess), let’s say at least 400,000 of those who do graduate college do so with a degree which holds little economic value.
So in total about 3 million young adults, each and every year, will be entering the work-force looking for relatively low-skill jobs (that’s 250,000 jobs required per month – forever… and as our population grows, so does this number). The question is whether the economy will actually be able to produce enough of these jobs to offer these folks employment and all the benefits (economic, social, and personal) that come with having a job.
My gut says not a chance, and sadly so does a whole lot of other folks. The construction trades used to be where a lot of these people went (yes, mostly males). And construction is a big industry, employing just under 7 million folks (average wage of $28.50 per hour) according to the Bureau of Labor Statistics – beer drinkers all ;-)
Sadly the construction trade has effectively been taken over by illegal immigrants over the past few decades. This is not a personal statement, just an observation of facts; Spanish in the primary language spoken on most construction sites around the country. Of course they drink plenty of beer too ;-) But we can leave it to another day to discuss whether this is good or bad, for now let’s just accept it as is.
Assuming the vast majority of people know what they are talking about – always a dubious proposition at best ;-), there is a coming robotics revolution which is going to remake the entire workplace. Low skill, repetitive jobs are simply going to disappear – forever - driven both by technology and the insanity (IMHO) of $15 minimum wages. This is going to occur in months, not decades.
This has already been happening in manufacturing for the past few decades… look at the typical large brewery. Years ago it would have employed 5,000 to 6,000 people in good paying jobs. Today that same production (if not more) is accomplished by around 150 folks. How many of you have automated warehouses? How many people no long work in your warehouses due to this automation? I’m not asking this as a moral statement, just an observational one.
In addition, many high-skilled jobs are also going to disappear as the artificial intelligence that drives this process becomes better and better. Anything that is somewhat “rules based” is under potential assault. Engineering, architecture, design, law, software engineering, hardware design, manufacturing, some areas of medicine, the list is potentially quite long. The impact on these higher skilled jobs is more difficult to quantify but keep it in the back of your mind, to some degree it will be happening. And just like the lower skilled workers, these folks may find it very difficult to get another similar paying job.
For beer/beverage distributors a significant disruptor is going to be self-driving vehicles – and I’d guess the net result for many of you will be much more negative than positive.
Many are betting big dollars this will become a reality and much sooner than later – they will be legal on California roads NEXT YEAR! Many had predicted self-driving vehicles were coming but were a decade or two away. Not anymore. We are now talking a few years at best. ABI already had a show run of a self-driving delivery truck taking a load from their Ft. Collins brewery to Colorado Springs.
If you believe in following the money…
Intel jumps into the autonomous vehicle business with the purchase of Israel-based Mobileye for $15 billion – March 14, 2017
In February, Ford invested $1 billion in Argo AI, an artificial intelligence startup. Ford sees their corporate vision changing from simply an automotive company to being automotive and mobility.
General Motors announced early in 2016 they were making a $500-million investment in self-driving vehicles via a partnership with rideshare company Lyft.
Last year, Uber acquired Ottomotto LLC, a startup that is working on self-driving tractor trailers – terms not disclosed.
Tesla, Google (Alphabet), Volvo, Apple, Chinese company Didi Chuxing (with an investment of $1 billion from Apple) are all jumping into this world… big time! And this list isn’t complete.
Unless there is some unforeseen technological problem which simply can’t be economically solved, the reality of autonomous vehicles is going to be here far sooner than even the most optimistic planned.
This is going to hit beer/wine/spirits distributors in a couple of ways. On the consumption side, according to the Bureau of Labor Statistics there are just over 5.8 million people who work in the wholesale trade sector and another 4.65 million in transportation and warehousing. That is almost 10.5 million people! If we use the same employment reduction ratio as with a large brewery (I admit probably a way too high WAG at best), we could be seeing a reduction in these labor forces of around 10 million.
If one wants to just focus on trucking and delivery… there are 1.7 million over-the-road truckers in America, and another 1.7 million drivers of taxis, buses and delivery vehicles. So 3.4 million folks behind the wheel… and very likely almost all will be replaced.
Again, trying to match consumption with these demographics is difficult but one would have to guess a serious amount of beer/alcohol consumption is driven by these people. What will the effect be on consumption and selling prices (and thus GP$)?
In the short-term you often see alcohol consumption actually go up during bad times (you see a similar trend going on right now in deaths from alcohol, commercially manufactured opioids, and heroin throughout much of the country as they experience tough economic/social times).
So best case – if you can call it that ;-) distributors could expect to see significant price pressure, significant trading down, and a corresponding growth of “bang-for-the-buck” thinking – which often drives the beer drinker to spirits. This environment may be far different than the recent GP$ good times driven by the craft brewing craze and ABI’s focus on profit rather than market share.
The rapid expansion of legal weed in this environment will also take a chunk out of the business as from a “bang-for-the-buck” thinking, weed is a far superior value than beer/alcohol. And as legal weed takes the profit from the drug cartels, you will continue to see them increasing their efforts to flood the country with other drugs… why do you think heroin is now everywhere in the country? It was just reported the coca crop in Columbia is back to its highest levels ever… to say nothing of the new designer drugs flowing out of China. That stuff is going to end up someplace.
I think the far bigger impact from autonomous vehicles - if the consumption hit wasn’t enough! – will be on the fundamental need for as many beer distributors as we presently have.
Many of you have confronted the decision whether to close a branch warehouse. The process is pretty simple… figure all the savings of the closure versus the increased cost/feasibility of running operations without this warehouse – people, drive-times, fuel consumption, hot-shots, customer service, etc.
Perhaps you can use this technology to get rid of most of your delivery drivers (but again that brings back the testy notion of consumption… if these folks don’t have jobs how are they going to purchase your beer?). But I think the potential negatives (the fundamental need for distributors) FAR outweigh the potential personnel savings.
Because autonomous delivery vehicles changes the entire concept of warehousing and distribution. No longer do we have to concern ourselves about driver-time and thus distance and the need for remote warehouses become far less important. These trucks can be running 24 hours per day (and of course that would be the most efficient use of the assets). Companies are already using artificial intelligence and a subset of this, something called swarm intelligence to allow technology to direct the when’s and where’s of these delivery operations. Taking the driver out of the equation is already rather simple.
In this environment, are these warehouses scattered across the land as necessary as before? I’d have to guess not. Which comes down to are you, the beer distributor as necessary as before? Again, I’d have to guess not as much as before. Sure retail service/operations of some sort are still required, although they could be far different than in the past. But are YOU needed in this equation?
For a thought experiment I recommend you get a state map and draw a circle around your warehouse(s) at a distance you think is the maximum (or optimal if you desire) that can serviced from that warehouse – drive-time, loads, etc. Now double that distance (something I’d guess would be quite do-able with autonomous delivery). I’d guess well over half the distributors in any state would be looking redundant. What if one could triple the distance? A couple distributors left in an entire state?
Think about it… if you can figure out how to service retail by using self-driving trucks (and of course you will try), why can’t someone else use the same process but just take you and your warehouse out of the picture? They can and most likely will at least try.
Could chain grocery use self-driving trucks as the leverage to finally break the three-tier system and go direct? If possible they will try… why wouldn’t they? You might still exist to service on-premise, provide merchandising, etc. but only a shadow of your former self. And even here, just because these activities might be done, they don’t need to be done by you, the local guy.
Think about the entire supply line. Already brewing, bottling, packaging, palletization is done with no human hands touching the product. With automated truck loading, self-driving vehicles, automated unloading and storage at your warehouse, automated order pick and build, automated delivery truck loading, self-driving truck to retail… From brewing all the way to the consumer, the first time human hands might even touch the product could be at retail delivery!
And having fewer but higher volume automated warehouses helps spread the costs of this technology over many more cases, thus making it more cost efficient.
Combine this fundamental question – why are you and more fundamentally your warehouse needed? – with the potential consumption hit driven by the disappearance of millions of jobs and it could be very ugly indeed.
In the past low skilled workers simply moved to the next low skilled job… those who made buggy whips simply left that dying field and stated turning wrenches and making cars… but now, for the first time in human history, perhaps there will not be anywhere for these worker to go. Then what do we collectively do? Remember each and every year those 3 million young, relatively low-skilled workers entering the workforce (to say nothing of immigration, both legal and illegal) and we might be facing a unique time in the “advancement” of human society.
In a very short period of time, we are going to discover our new society needs far fewer workers to produce the same amount of economic activity… and for lower-skilled workers there likely aren’t going to be a whole lot of options. This isn’t just Conlin talking; many are discussing the same thing and what if anything we are going to do about it.
Unfortunately our social welfare systems (as in Europe) are designed as a Ponzi-scheme which only works if there are an ever increasing number of new workers to support the scheme. This is not a political statement, just a fact.
Thus technology is driving us in one direction while our social welfare systems (and in fact most government operations, especially their underfunded and over-promised pension systems) require more and more workers to keep them afloat.
This is a monumental crash that sure looks like will occur sooner rather than later. Some have suggested a “solution” to this lack of jobs is a national guaranteed income… a system whereby we get rid of all welfare (and all the costs associated with delivering it) and simply give every adult citizen a check for some amount. It would be far more efficient and effective than the present welfare system and most likely would simply expand to provide a living income to these folks who have no jobs to go to… depending of course on whether it can be afforded.
Of course this too would drive a massive loss of jobs as all of those in the welfare-delivery complex would no longer be needed. In addition, unfortunately from any real-world observation a life-on-the dole has historically had pretty bad results for the individual, their families and society as a whole. Is it sustainable for the longer term from both an economic and societal perspective? I think not. And remember those social programs and government require WORKERS creating wealth and paying taxes, not just folks on the dole.
We won’t be solving this issue in this blog but beer/alcohol distributors (in fact all consumer goods companies) need to be planning for both a potentially significant impact on consumption/product mix AND the possibility that technology is going to replace the need for having distributors dotted across our fruited plains.
Does this mean sell? Buy? Merge? Keep on keeping on? That answer to that is it depends. But not the coming, but the present technological revolution is not going to leave you all unscathed. And it is coming far faster than many predicted even just a few years past.
If I can help, give me a call… if not, take a careful look out into the future and PLAN. Disruption is coming whether any of us like it or not… try to ride this disruptive wave to your advantage rather than have it crash over you, perhaps destroying decades of the family business.
Ain’t technology grand? ;-)