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« How not to re-organize your business | Main | Time Bandits – Managing Corporate Time - Part 1 »

Charting a Course to 2010

Charting a Course to 2010

John Conlin

Conlin Beverage Consulting

This was going to be a comprehensive and, if I do say so myself, elegant treatise on the path beer wholesalers must walk to prosper in the future. But with the recent sky rocketing fuel prices I felt it was perhaps a better time to discuss the more immediate situation as well as what wholesalers can and cannot do to address their near-term operating environment.

Organization

It is never a good time to panic but today some concern is in order and it is best to plan and act BEFORE trouble, not after you’ve taken the hit to your bottom-line. Some wholesalers have considerable debt due to past acquisitions. Some have yet to consolidate, with perhaps barely adequate total market share and are, therefore, in a tight operational and profit environment. Some must make acquisitions for long-term viability. Some are debt-free with considerable market share but even those face a possible significant decline in profitability if no operational adjustments are made.

Fuel prices, shipping fuel surcharges and discounting are taking a big bite out of each and every beer distributor, in addition to the "normal" increases in business costs. On the energy side there is probably little relief at the pump at least in the near-term. It is certain that the impact of these sky high energy costs will roll across the entire economy. Don’t be lulled into a false sense of comfort – it takes between six and 18 months for significant hits like this to work their way through the national economy. Most are predicting a half to one percent decline in 2006 GDP although a minority is predicting recession – but recent robust economic news muddies the entire picture.

This pain will not be just in the gas and diesel world. Natural gas and fuel oil for this winter are going to cost much more. This is going to have an impact on our business environment; it might be minor, it might be huge but it is here and is going to get worse. Most working people only have so many discretionary dollars to go around. With gas costing twice what it did and heating costs increasing at least that much (in addition to the present amount of consumer debt), something has to give. In addition, sooner or later these increased energy costs find their way into almost every product and service. But remember that not all of these costs will make their way to the final consumer, especially in consumer products. Based on the dynamics of the specific market place (product, elasticity of demand, competitors and their relative market shares, maturity of market, replacement products, etc.), some will see these costs eaten by those in the production and/or distribution channels. Those with the least power will be the losers in this situation – in our three-tier distribution system guess who has the least power?

In this overall economy one would expect to see on-premise business drop off, trading down and perhaps less per capita consumption. You probably won’t be seeing any of the "drinking less, but drinking better" behavior. This happens when individuals are voluntarily reducing their consumption, not when the choice is made by economic necessity. Price increases are difficult in this environment. In turn, suppliers make money by brewing beer, not distributing it; they have different operating efficiencies which drive their decisions. This would imply that discounting and promoting will at least remain at the present levels, perhaps even increasing as various brewers fight for volume. It is like having a wolf by the ears; it is difficult to find a way out once you are in that situation.

In the short-term (whatever that may be), the wholesaler is looking at a tough volume environment, continued downward pressure on margins, and increased costs. So what can be done?

First, look at your organization. Ultimately, your organizational design is the vehicle that will to get you and your business to meet your goals. Regardless of your debt-load, regardless of your profitability and regardless of your market share, you should have a lean, efficient organization. For the high share/high profitability wholesalers, it is easy to fall into the trap of throwing people and money at problems rather than truly addressing why the problems are happening in the first place. An excellent quote in business is that "success breeds failure." Success allows your organization to get fat and lazy, which sets employee’s expectations of what the normal work load should be and allows you to be blind to significant change until it is right in front of you. John Maynard Keynes once said "wealth is the relentless enemy of understanding." Sadly, this quote rings true for far too many owners (in all industries) and their employees who evolve in this culture—don’t let this happen to you. It is also a fallacy that if you give people more time to complete a task, they will do a better job. This simply isn’t true.

Ideally your organization is like an elegant machine, where each part works in complete harmony with all other parts in order to accomplish a well-defined goal. Look at all of your policies and procedures, are they also elegant? There must be consistency in your thought and action to ensure you do not have any part in conflict with another. Often one department’s goals or ways of doing things conflicts with another department’s, which creates inefficiencies, wasted effort and frustration and quarrel between departments. In your machine you cannot have one part fighting another and still manage to run at peak efficiency.

One absolute requirement of a lean operation is that every single employee must do their full and complete job. You cannot run a lean operation otherwise. In far too many fat organizations the additional people are employed to take up the slack when others don’t perform. Instead of adding people or lowering work-loads which accomplishes the same thing, demand that every employee perform at a peak level. This is a case of the fewer the better, when you have the right workforce. Sometimes it is beneficial to go to battle with fewer soldiers who are extremely well trained and the best of the best (and pay them accordingly) than with more soldiers who are only average at best. More battles are won than lost with this strategy.

For a lean organization you must start with your sales organization. Without an efficient, well executing sales team, you cannot run a lean organization. I’m not talking about selling here. I’m talking about simple order fulfillment and anticipating the retailer’s needs. The retailer doesn’t really care how great of a sales person your representative is if they can’t get a proper order written and delivered. It must start here and then flow to delivery and merchandising. But of course if you don’t have the proper product in the warehouse or it is loaded incorrectly or billed improperly… I hope you begin to see what a lean, integrated system implies.

Look at how you allocate sales resources. Do you send expensive sales representatives into accounts where there is simply no ability to sell? It is important to ensure a match between real job duties and the employee skill set.

If you demand the best from yourself and your employees, pay them well and give them substantial incentives to achieve their part of a common goal, you are building an organization that is not easily copied in the marketplace. Unlike lowering prices or increasing frequency of service or all those other actions that increase cost without providing any long-term gain or advantage, these types of strategic and managerial moves can give you long-term market advantage and add true value to both your suppliers and retailers.

Service

Now we move to service but before we discuss frequency of service and method of service delivery let us first define what service is and isn’t. Service is not defined by how many times your truck is parked in front of the account. Quality service is not defined by being the best firefighter in town – if you run out (or need anything) just give us a call and we’ll be there today! Providing quality retail service means that the retailer never has to call because there never was a problem in the first place. Quality service is pro-active, not re-active. Quality service is doing it right the first time and empowering employees to deal with problems on the spot.

With fuel costs providing cover, now is a great time to squeeze the frequency of service to many of your accounts. Now is also an excellent time to expand your use of tel-sell. Tel-sell is a very effective and efficient method to service many types of accounts. But remember, tel-sell is a SALES function, not a glorified administrative position.

For most of you, the reality is that the only way to find substantial operating savings is by building a more efficient merchandising, sales and delivery structure.

Here’s something every wholesaler should know. What does it cost on average to make a delivery stop at a retail account? Calculate this under all selling alternatives, pre-sold by a street sales representative, pre-sold by a tel-sell representative and driver-sold (if any). Use this knowledge as a guide when setting service levels and types of service. Remember that there are no such things as a "free stop." Each time you make a delivery your organization on average incurs the calculated costs. You can even fine tune this further by looking at draught accounts, those accounts that require additional merchandising and even method of delivery (bulk, side-loader loaded by account, side-loader loaded by day).

Compare these total costs/delivery to your average margin per case. This gives you the average breakeven case volume for each stop. On average you need to deliver this many cases just to cover the cost of selling, merchandising and delivery every single time the truck makes a stop.

You and your organization should always be aware of these numbers. Ultimately it is the average that matters and each of you have many accounts that are simply unprofitable – attempt to make them less unprofitable. You can actually address both frequency of service and type of service and still maximize sales to these accounts. It is a false choice that doing these things will cost sales in these accounts; this is not the case in a well-designed and executing organization.

Look at your use of technology, far too many wholesalers have invested a lot of money in technology but only use a small fraction of its capabilities, which is true throughout most industries. Be careful where you spend your technology dollars; they can eat up a lot of cash while often providing little value.

Examine your expenses. The reality is very few of your large expense items are controllable, that makes those that are controllable even more important. Run a "cheap" or thrifty organization, as in we will gladly spend the money but only in those areas where we get the most bang for our buck – always have a return on investment mentality. Having the nicest this or the newest that might do your ego good but what does it do for sales and margins? And spending money too freely will come back and bite you when your employees ask, "why didn’t they spend that money on me?," "how come the last time I requested X I was told we couldn’t afford it or it wasn’t in the budget yet they spend money on that!" or "I haven’t had a raise in three years…" It can be very damaging to your corporate culture. Remember that everything matters, whether you know it or not.

In addition, look at breakage, shrinkage and out-of-date product costs. To make the math easy, assume on average your organization has an average margin of $2.00 per case. And assume that on average each case costs your organization $12.00. In this example, for every case lost in breakage, shrinkage or for being out-of-date, your organization must sell an ADDITIONAL six cases just to return to where you would have been had the original case not been lost. Your employees need to be aware of the tremendous impact this can have. Every warehouse, sales and delivery office should have a simple display visible which emphasizes this point.

Take a look at implementing fuel surcharges. I know this is tough to do and you don’t remotely have the power to force it on the chains, but push it where you can. There will of course be market resistance to this – how do you feel when the pizza delivery place adds their fuel surcharge? If you attempt this, think about the amount. I don’t think you will get beat up any more for a $3-$5 charge than for a $1 charge so why not make 3 to 5 times the money for the same pain?

Look at instituting minimum orders, such as fuel surcharges below a minimum order quantity. Again, you’ll probably get beat up in the marketplace and even if you do gain a little traction, in far too many cases your competitors will ensure whatever you gained is quickly relinquished. Your competitors do this even though it is not in their long-term interest. It doesn’t make sense but that’s again the way it is. Now is the time for competitive wholesalers to follow each other in these moves, not ensure that they don’t stick. Remember that each market is different--I can’t tell each of you exactly what will and won’t work in your territory but now is the time to think outside the box. Now is the time to make moves that will increase your profitability for years to come.

Look at pricing. You can often set price breaks so that they are in effect a minimum order or at least they push the retailer in that direction. Always attempt to increase average cases/stop and even better, average gross profit dollars/stop. Don’t drop your prices to do this. RAISE your prices from case one and then put your first price break (five cases? 10?) so that it equals your present case one price. In this manner you don’t give up any margin and you push your smaller retailers to larger drops. Those that can’t or choose not too pay a little more.

Pause and look at all of your brands and packages differently. Instead of thinking of them separately; look at them as a cohesive whole, as your entire arsenal that you go to battle with even though they come from many different suppliers. Chart out where they and their competitors fit in the consumer’s mind, not where you or your employees think they fit. Think of the old football strategy, hit them high and low at the same time and they’ll know they’ve been hit. Better yet, hit them head-on, hit them high and hit them low with your extensive brand and package mix. Work with your suppliers to hit the PTCs that you need (always back into PTRs, PTC is all that matters). Then execute and correct where your assumptions were wrong and push forward where they are kicking butt. Never let up.

Take a look at the managerial and supervisory positions in your organization. What is the ROI being generated by these positions? Is there a better way to allocate these resources?

If you are thinking of making an operational acquisition, get it done. If you are thinking of selling, get it done now. Although values based on operational efficiencies are always very market specific, the operating environment we discussed earlier must put downward pressure on general values.

Lastly, look at every aspect of your business. Squeezing doesn’t mean accepting poorer performance in any area, it just means you’ll have to plan, execute and coordinate better. This either/or thinking is a false choice. But tougher times are coming – it could be a little, it could be a lot, but they are racing your way. Prepare now and you will never regret it.

This information is brought to you by NBWA as a member service. The views reflected in the Associate Member Viewpoints article are those of the associate member author. If you are an NBWA associate member and would like to share industry information by writing an article for NBWA’s Associate Member Viewpoints, please contact Crystal Naomi Crosby, coordinator of membership programs, at 800-300-6417, ext. 126.

John Conlin is a life-long entrepreneur and is currently president of Conlin Beverage Consulting, Inc. Conlin has provided management consulting services to beer wholesalers around the country since 1986. He specializes in operational improvement and driving corporate change. He can be reached at:

Conlin Beverage Consulting, Inc.

26 W. Dry Creek Circle, Suite 600

Littleton, CO 80120

303-707-0542

Conlin_Beverage_Consulting@msn.com

http://johnconlin.typepad.com/conlin_beverage/

NBWA

ASSOCIATE MEMBER VIEWPOINTS

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