Part 1 - The Evolution of Beer Wholesaling
Part 1 - Options to build and/or maintain your business
Beer wholesaling has undergone a remarkable transformation over the past 50 years. For many of you that path has been one of becoming the Coors – Miller – Stroh – Heileman – Schlitz – Pabst – Hamms – craft beer – import – etc. wholesaler. For others it has been one of picking up a lot of the fall-off volume as the regional brewers fell, a period of exclusivity with little new product, and now an explosion of new brands, products, and alliances.
In most situations around the country, the wholesalers who remain standing have strong, profitable, and defensible territories. Each is like a self-sustaining fiefdom. Unless serious problems were to impact the industry, each can probably remain in business well into the foreseeable future - unless they are overly burdened by debt. The concept of a single state-wide A-B or Coors/Miller/multi-brand distributor probably will not see the light of day in most states. I know many would like to be this entity, but it isn’t going to happen any time soon. And the pain required to force these fiefdoms to sell would be incredibly destructive to the remaining ‘winners”.
As for the model of a combined A-B - Coors/Miller/multi-brand distributor, i.e. only one distributor per market… I don’t think this has any hope of success. If you analyze almost any category of business, you will be hard pressed to find an industry where there is only one distributor. I know of none in any consumer goods products. You might have a very large one and a much smaller one, but the dynamics of competition almost always dictate at least 2, generally more. I think if you look around you’ll find this to be the case. I see no reason to think the beer distribution industry is any different. And I think most of the major suppliers would rather go direct than get in the same “distribution bed” with their significant competitors.
So what is the next step in the evolution of beer wholesaling? Let’s first look at your options if you want to build and/or maintain your business.
1. Grow your present brands – something I’m certain each of your organizations actively pursue. But of course this is ultimately limited by the marketplace and your suppliers.
2. Control costs – again something each of you pursue. Controlling service levels and operating costs is very important but ultimately you can only cut service levels so much without hurting sales. And most major operating costs are not within your power to significantly impact.
3. Expand via acquisition into contiguous territory. Something most of you would probably do in a heartbeat but the problem is there are many buyers but few sellers. The fiefdoms are set and most can remain in business if they choose.
4. Expand via acquisition into non-contiguous territory. Something you may look at but there are few, if any, operating efficiencies in these types of expansions. And generally the contiguous wholesaler(s) can out bid you since they do have operating efficiencies. They may choose not too, but they can if they desire. The Reyes family is clearly pursing this type of expansion strategy.
5. Expand into other territories – start servicing accounts outside of your present beer territory. Generally this is only successful if you can high-spot accounts. And it can become somewhat self-defeating in that if you find success, demands for increased distribution will grow. Thus costs go up significantly but usually the brand(s) still remain below the required share to be profitable (it’s all about average gross profit per stop). Once servicing chains becomes involved, costs go through the roof. Some larger players often attempt this. Of course if one attempts this and goes head-to-head against a stronger, well entrenched competitor, it is very difficult to match their service – thus the weaker organization is left to pick up brands that no one else generally wants. This is most definitely a long-term proposition that requires multiple years of investment spending with a fair probability of failure.
6. Expand your brand base in your present territory. This one has the greatest impact on your profitability – especially if you can generally limit the expansion to your present account base.
a. Expand with beer brands. This is an on-going battle. Other than those A-B houses that are sticking with exclusivity, everyone is chasing the hot craft beers, imports, you name it. This is even occurring at the supplier level, at an aggressive pace. Don’t expect this competition to end any time soon.
b. Expand into NAs. This too is an on-going battle. Wholesaler’s results have been across the board. If the brands are decent AND you can generally stick with your presently served account base, they can provide a significant boost in profit. If you have to greatly expand your account base, the brands had better have a pretty good volume and gross profit/unit. Ensuring operating costs remain in control becomes a significant factor.
You also often find these suppliers are designed around serving states, not just markets and not surprisingly want distribution far beyond just licensed accounts – both of these are significant handicaps for the beer wholesaler. Most often the beer wholesaler is not the distribution partner of choice for these suppliers, thus the stronger and more desirable brands often go to other types of distributors. Or if they do come the beer wholesaler’s way, they realize they are very desirable and act accordingly, ala Red Bull (remember that it’s not how much gross profit they bring in, it’s about how much of that gross profit makes it to the bottom-line). The upshot in many cases is that the beer wholesaler can only get the less desirable brands.
c. Expand into wine and spirits. Of all the operating choices confronting the average beer wholesaler, expanding into the wine and spirits world has the greatest potential for success and significant impact on your bottom-line. Wine had retail sales of $24.3 billion in 2005, spirits $53.9 billion - together they represent just under 48% of all retail sales dollars spent on beverage alcohol. 48%! On average, in every licensed account you service, your sales staff is cut out of almost half the beverage alcohol business – think of it as a pie chart, half the pie you simple ignore! Why ignore products which are a natural fit to your basic organizational design of selling to licensed retailers? It makes no sense.
In some states you may have to slightly expand your account base – but in almost every case the new retailer shares a parking lot with an account you presently service. This expansion even makes sense in control states.
Just as the loss (or gain) of the InBev brands won’t generally reduce (or increase) your costs much, the addition of these types of brands don’t increase your costs much. Therefore a great deal of this additional gross profit can be driven to your bottom-line. This is the next step in the evolution of beer wholesaling.
Just one problem… wine and spirits suppliers (like NAs and many craft beers) are designed around state-wide distribution. Until a beer wholesaler can provide quality state-wide distribution, they will suffer from being far from the prettiest girl at the dance. You will generally get brands that can’t find another home. In most cases wine and spirits don’t enjoy franchise protection, so you can attempt to poach brands presently distributed by others and thus jump-start your entry into these markets. A great strategy, but again you have to provide state-wide distribution. As an example, I think you will be hard pressed to find a supplier who is presently affiliated with a wine and spirits house who will leave to join your operation in just your market, leaving the rest of the state with the present wine and spirits guy. Never happen. Until the beer wholesaler can provide state-wide distribution the strategic advantage rests with the state-wide distributors, i.e. the wine and spirits wholesalers.
Next piece – The Solution… The Power of Connectivity