Part 4 - The Evolution of Beer Wholesaling
Part 4 – A brief look at other beverages – and why ignoring wine and spirits might be a mistake
The lines between beverages continue to erode in all areas of the supply chain. Whether beverage alcohol products like beer, wine or spirits… or the entire spectrum or non-alcoholic products; the lines at the supplier, distributor, and retailer levels are clearly eroding and merging. Of course the regulatory aspect of the alcohol versus non-alcohol products will continue to be a bright line, but that doesn’t mean folks can’t, and don’t play on both sides of the line. Consumers are being offered an ever widening array of beverage products and everyone in all areas of the supply chain are racing to both keep up and find the next winner.
Beer wholesalers are no different. They are actively investigating and aggressively playing in many of these beverage categories. The day of the stand-alone, beer-only wholesaler is long gone in all but a very few, select markets. As the beer wholesaler investigates these other categories, here are some ideas to keep in mind. Let us look at NAs and waters as one group, and wine and spirits as another.
NAs and waters – This is a huge category which spans literally thousands of products and brands. From a beer wholesaler’s perspective, one whose organization is primarily designed around servicing licensed accounts, the key factor for these types of products rests with the licensed versus non-licensed retailer and supplier service demands.
Let’s start with the ideal situation for the wholesaler and progress from there. The ideal initial situation is a brand which brings in the maximum gross profit dollars with the least additional cost. This is a premium/super premium product with high-margins and high-volume – and one which the supplier “allows” the wholesaler to sell to only licensed/presently serviced accounts. You may expand into non-licensed/new accounts but only after success in your present account base. This allows you to create a situation where expenses follow revenue, rather than the other way around. This greatly decreases both financial and operational risks. This is a good strategy to pursue in all new areas – first prove the revenue/brand potential then accept the increased cost. Of course this is often easier said than done, but it is an ideal goal. Suppliers on the other hand would probably prefer you spend the money upfront, thus giving the brand the maximum boost from the start – and putting the dollar risk on you.
These products generally become much more questionable when you have to leave your presently serviced account base. High spotting of new accounts can help minimize your costs - and be quite profitable under the right circumstances. But greatly expanding your account base can have a very significant impact on the net profitability of these brands. When (if) you enter vending, all bets are off. I know of a very few wholesalers who have done all right in vending but most have experienced costly failures.
When developing your corporate plan for these types of brands, remember that all success (and failure) begins at the strategic level. Your organization is designed in a certain way. It has its’ strengths and weaknesses. Always play to your strengths. You don’t have the volume or velocity of a Coke or Pepsi – or the organization already in place to execute this volume. Trying to match them play-for-play on the street generally ends poorly. Your suppliers might want you to, but they might want lots of things. Coke’s goal is to never have a customer be more than a few hundred yards from a Coke product. Good luck on trying to match that, especially from your organization which is most likely built heavily towards servicing licensed accounts – with an emphasis on chains. Regardless of the path you choose, you must ensure operating costs remain in control.
Also, if you are truly going to significantly expand beyond your licensed account base; few single suppliers/brands will give you adequate gross profit dollars to be a real player in these new accounts. Therefore if you make the jump, plan on doing it with multiple suppliers. It is the rare brand that can cover all of your additional costs by itself – and even then, why not supplement it with other high margin products? What happens when that “super brand” trips or falters or leaves? And there is ALWAYS competitive response. For your protection, expand your brand base.
In addition, here again I believe the power of connectivity (see Part 2 of this series, The Power of Connectivity) can greatly expand your power and success in the NA and water categories. You will 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.
If you’re going to get into the game, then get in and play to your strengths. Use the power of connectivity to increase your collective strengths so that you and your fellow members are much more desirable. For those of you “enjoying” the dictates of Red Bull… do you think the balance of power might be different if they had to deal with a state-wide association rather than taking you on, one at a time? Yanking an entire state is more than just a little different than canning some wholesaler in a specific market. Protect yourself and your investment by the power of connectivity.
Also, although I know it goes against the grain of most beer wholesalers who live with some type of franchise protection, don’t be afraid to poach established brands from other wholesalers. With an established brand you know what you are getting – spending additional dollars when you already know how many gross profit dollars are coming your way is much easier, and less risky.
Wine and Spirits – This too is a huge and complicated category. In most states, the products are separated but I will treat them as one. 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.
I’ve watched wholesalers crawl through broken glass to get Red Bull, yet they act as though wine and spirits are another, alien world. You already service the VAST majority of these accounts. 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. You already have a sales and merchandising force on the street and in all likelihood are already calling on these accounts. Retail delivery becomes a non-issue. A chain-link fence in your warehouse to separate the product from your other products and you are ready to go. Whether control state or not, a great deal of this additional gross profit can be driven to your bottom-line. Executed properly, probably more than any other category choice confronting the beer wholesaler.
Yes, I know the likes of Southern Wine and Spirits are not just going to roll over and play dead, but beer wholesalers have tremendous advantages over the wine and spirits folks. Wine and spirits organizations and beer wholesalers both reflect the fundamental differences in the nature of the product they distribute – and this basically comes down to one thing, velocity. A case of beer is very different than a case of wine or liquor. Both organizations are designed around this reality. Beer wholesalers have a profit and cost structure adapted to this reality – i.e. we’re at retail A LOT more than the wine and spirits folks and we move A LOT more boxes at retail. Our sales, delivery, and merchandising operations reflect this reality. From a retail (and supplier) perspective, this makes us more desirable. No wine or spirits competitor can match the average beer wholesaler on the street. It makes more operational sense for beer wholesalers to distribute wine and spirits than for wine and spirits folks to distribute beer.
Use this higher frequency of service to your advantage. Price and discount accordingly. Retailers can see their working capital tied up in wine and spirits decrease greatly with beer wholesalers. When I walk around a large wine/liquor store I am always amused at how much money they have tied up in VERY expensive “shelving”. All of those full boxes of product acting as shelving is not the best use of the retailer’s working capital. Wine and spirits folks face a tremendous operating challenge if they attempt to match the beer wholesaler’s service – a very costly challenge that I don’t believe they can match.
But, and this is a huge but, as long as beer wholesalers remain independent, non-connected entities, the strategic advantage rests with the wine and spirits distributors. This is true even though collectively the beer wholesalers have far superior operating organizations. The strategic advantage still resides with the wine and spirits folks since they meet their supplier’s basic needs – state-wide distribution. The beer wholesaler will generally only have an opportunity to pick up brands that can’t find a better home. And you’re going to create a winning team with this? It can be done but it is far from easy and there will be a lot more failures than successes.
For the vast majority of you, if you are to truly be a player in the wine and spirits categories, you must create a state-wide operating association. You can be a small player and pick up this or that non-“must have” product but if you really want to enter these categories, you MUST form the state wide association. This isn’t because Conlin says so… it is because that’s the way it truly is. I don’t decide market structure and neither do you; I simply analyze the realities we confront. Southern Wine and Spirits changed this game a long time ago, read their web site and they brag about it, providing state-wide distribution is a must – the price of admission. In many control states, you can’t even distribute wine or spirits unless you provide state-wide coverage (beer wholesalers aren’t the only ones with lobbyists up at the state capital). You can attempt to provide state-wide distribution all by yourself but of course what operating efficiencies do you bring to the table once you leave your present territory? None. Companies like Southern will eat your lunch.
But this can all change with the creation of the state-wide association. Once completed, the strategic advantage now firmly rests with the beer wholesaler – allowing you to now capitalize on your superior street-level organizations. Once completed, this strategic advantage remains with the beer wholesaler, regardless of what the wine and spirits distributors do. We can take a great deal of their gross profit dollars with only minor operating adjustments.
And again, the poaching of brands becomes very desirable. Do you think every brand in any wine and spirits house is happy with the share of mind they are receiving? Not by a long shot. Instead of building your wine and spirits business from only new brands (a long road with many failures), poach existing brands and jump start your entire effort. If you form a state-wide association, this is the first course of action. Rank the potential candidates by net gross profit dollars and go after them. When you run out of poaching opportunities, then turn your attention to new brands/suppliers. In most situations, all it takes is for the supplier to give 30 days written notice and those brands are yours. Cost to you? Nothing.
Some of you will say we tried wine and/or spirits before and it didn’t work (please see Part 3 of this series for a brief discussion of this thought), so what’s changed? Well here’s why now…
1. In the past you didn’t offer what the supplier needs – state-wide coverage. Again, I would probably advise not spending a great deal of time and money on these categories without this. In most cases it is not an option; it’s the price of admission. Read Southern Wine and Spirits’ web site if you doubt me.
2. The sophistication of the beer wholesaler has increased tremendously. Most wholesalers, especially those in major markets, are strong, professional operations. Most operations have the people, technology, and expertise to execute these changes without negatively impacting their present operations.
3. Consolidation in wine and spirits distribution has left many suppliers with few choices.
4. Consolidation in beer wholesaling has reduced the number of wholesalers required to provide state-wide coverage. It is easier to get 10 wholesalers to agree than to get 20 to agree. Now we have larger, stronger, and fewer. And most wholesalers’ eyes have been opened wide regarding the tremendous changes and challenges their organizations confront. Their continue existence is far from guaranteed.
5. The retail selling environment has changed dramatically. Many, many retailers offer no true selling opportunity at the account level – the people servicing the individual retail account are doing much more order replenishment and merchandising rather than selling. This allows the beer wholesaler to leverage their far superior street-level organization. No one can touch the average beer wholesaler for execution, retailer contact and relationships, etc. We supplement this with a small team of experienced wine and spirits sales reps and you have suddenly built a superior organization (an expansion of this concept will be the topic of Part 5 of this series).
6. The lines have already been blurred between beer, wine, and spirits at the supplier/producer level. I can see no reason to believe it will not flow with even greater speed into the distribution level. But either the wine and spirits guys will continue to invade your turf – taking ever more and more high-end gross profit - or you will join hands to form a state-wide alliance (something the suppliers require) and invade their’s. I don’t see many other options.
7. Finally, it takes a dedicated professional to guide the analysis and construction of these alliances – someone who aggressively pushes the concept – that’s me. Without an advocate, this simply doesn’t happen. In the past there was no outside advocate and having a peer direct the formation of these organizations generally leads to failure. Not always, just often.
This entire concept makes sense even for those beer wholesalers who already carry wine and/or spirits. In fact it makes even more sense for them. They receive all of the benefits of being attractive to many more suppliers, generally without increasing their operating costs at all.
And the good news for all is that the challenge is not operational – that is relatively easy – the challenge is for each beer wholesaler in the state to put whatever issues they may have aside, and to join hands and create this monster. And once this monster is created, it becomes a powerful tool to funnel wine and spirits products, craft beers and imports, and even NAs to the member wholesalers. With a good operational strategy (see Conlin Beverage Consulting), each wholesaler will be able to drive a substantial portion of this additional gross profit to the bottom-line… in most cases providing bottom-line increases which are a significant percent increase. Almost assuredly the largest bottom-line impact of any strategic or operational choice you confront or will confront in the near future.
Nothing else even comes close. Instead of ignoring almost half the market for beverage alcohol products, the beer wholesaler can becomes a significant player in this space in a relatively short period of time – you just need to join hands and form the association. The investment required to form this association and fund it for a year or so is minuscule, especially when compared to the potential (and very likely) returns.
Whether wine and spirits, or NAs and waters… the world is quickly changing for the beer wholesaler. Determine who you are and then don’t wait for just any future to come along, grab the future by the throat and make certain the future that comes is the one you desire.
Next piece – the evolution of retail selling, order replenishment and merchandising… and how to use this to your advantage