Leveraging Distribution - Organizational Impact and State-Wide Associations - Part 3
As the beer wholesaler evolves to a beverage wholesaler (or is it first to a beverage alcohol wholesaler?) how best to design your organization for the new realities of this mission? If you want to maximize your profitability (and I hope you do), remember that your ultimate goal is to leverage your present organization, not build entirely new “sub-organizations”. This leveraging is what drives the tremendous profit potential in the flow from beer to beverage wholesaler. Let this concept shape every organizational decision you make.
In the warehouse there will probably be few significant changes. Perhaps additional racking systems to handle the increased number of SKUs. An expanded picking area. And if you enter the wine and spirits world, some type of single bottle picking system. Let me repeat this last point… if you are truly going to participate in wine and spirits, you must provide single bottle pick. Single bottle picking is not really a big deal at all; all it takes is a simple flow rack and very little space... let’s worry about picking 10,000 bottles a night when we get there ;-) And a $12/hour picker can pick A LOT of bottles in an hour. Combine that with the added charge at retail for single bottles and you’ll actually make some additional money on single picks. In addition, if you target high-end products, and you should, offering single bottles greatly helps with retailer acceptance and can drive substantial distribution gains. Also in the warehouse, if you’re not already doing so, you will probably sooner or later switch to building individual orders versus loading the truck for the day.
In the office you’ll probably only encounter two possible changes. On the software side, you’ll have to ensure your software can handle single bottles. For some of you, a credit system will also have to be put in place. Many wholesalers in cash states are unnecessarily frightened by the idea of offering credit… it’s not that big of deal. Almost every business in the country seems to be able to do it and survive! And as I have tried to emphasize many times, when you enter new markets you don’t get to set the terms. Asking for everyone else to change so you don’t have to is not only destined to fail, it can profoundly hurt your attempt to enter new markets. Just because you don’t want to, doesn’t mean anything. Get over it.
As for delivery, a case is a case is a case. If at all possible, don’t run separate delivery routes for different product categories… remember our goal of leveraging what we’ve already got. Of course additional SKUs and single bottles will ultimately slow driver check-in at retail and at some point will require additional delivery routes (if volume increases don’t do it first). Don’t specialize; just add another route or two just as you would if the reason for the re-route was growing beer volume. Loading by the stop versus by the truck will save your drivers at least an hour a day on the route and with CDLs and the capital tied up in that tractor and trailer, the benefits far exceed the increased warehouse costs.
The area which scares many beer wholesalers from taking the leap to beverage wholesaler is the sales department. How can a single sales rep sell and service all those brands and SKUs, many in completely different beverage categories? The answer is they can’t… so don’t try it this way, change the paradigm.
I believe the evolution of the DSD beverage industry is one where the high-level sales functions become more and more removed from the basic account management activities… order replenishment, merchandising, delivery. Even today, if you analyze a typical beer sales rep’s day, you will find that the vast majority of their time is spent on non-direct selling activities. It’s just the nature of the beast. Presently you have a situation where the store-level account rep is the primary sales rep for the majority of the brands and they are supplemented by secondary, but higher-level brand or category specific sales reps (or brand managers or whatever you choose to call them).
If you want to leverage your present sales organization, when you enter new categories (or delve into more niche brands) you do just the opposite. For these brands, the primary sales responsibility rests with a small number of high-level, high-performance sales reps who call on retail at a relatively low frequency. The weekly store-level product support, order replenishment, and merchandising activities remain with the store-level account manager. The store-level account manger retains secondary sales responsibility for these brands… they are in essence an opportunistic sales rep for these brands.
Basically what you do to achieve the maximum benefit and the maximum selling effort is to leverage your present sales staff by adding a few high-level category specific sales reps and perhaps a senior category specific manager, i.e. Director of Wine and Spirits or VP of NAs.
The sales rep will call on the account at a much lower frequency and make high-level sales presentations. The account manager will support the core brands and manage the account for the full product line – beer, waters, NA, wine, spirits, whatever. The account manager does just what their name implies; they manage the individual retail account for all products you sell to that retailer.
Some wholesalers have mistakenly thought that as the account manager becomes more of an order taker (or more correctly stated an order creator and account manager), they can reduce the pay for this position. I firmly believe this is not the case. In fact I think most will find that the skill set required to properly manage a wide range of beverage products to any account base is more demanding. And therefore in the marketplace for employees, will require a higher pay, not lower. But the net effect of this is not to decrease overall profitability since the additional gross profit these account managers will generate through the added products will more than outweigh the required increase in compensation. And this structure is far superior, and substantially less costly, than having separate account managers calling on the account for each beverage category. Separate category specific sales staff, yes. Separate account managers, no.
I realize this doesn’t work for those A-B wholesalers who want to remain exclusive. Sorry, but if you want to expand beyond the A-B product line and want to generate the maximum return, you have to leverage your present operations. It is a mathematical reality. I realize there are many issues regarding exclusivity, many of them emotional - not that this is bad… dedication to a partner who has helped make you very successful (and wealthy) is not wrong. And of course there is the financial aspect of abandoning exclusivity. Dealing with that is much easier… it is simply a cost that must be included in your analysis; in effect it increases your break-even point. I still firmly believe that A-B wholesalers should consider expanding their product lines. Although A-B is slowly entering the spirits arena (and perhaps wine), I question whether they will be able to bring enough volume to make you a significant player in these new areas. Just because you may “control” the beer section doesn’t mean much when you enter wine and spirits with only a single brand or two. To have much power at retail in these new categories will take more than a single brand or two.
This separation of high-performance selling and account management also allows us to better match individuals for these positions. It requires a different skill set to be a super sales rep (truly selling) versus a kick-ass account manager. They are much different positions and require much different skills. And from a retailer’s perspective, they don’t give a damn about having a super sales rep and being sold anything. They want a super account manager. They want proper orders written, i.e. no out of stocks or over supply. They want the correct product delivered. They want clean invoices. They want their distributors to help them run their businesses, not create unnecessary additional costs and headaches. They want a beer (or beverage) consultant to help them make more money. The account manager and their most important tool, the route book (be it paper or electronic) becomes the beverage consultant for the retailer. Their strongest sales tool is service… properly managing the account and noting what works and what doesn’t to help maximize the retailer’s return on the space we are given… that is ultimately our only goal. The category-specific sales reps is more of an analytic sales rep who makes scheduled calls at retail to present new products and programs and analyze the results of past efforts.
This design allows a beer wholesaler to quickly, easily and relatively inexpensively enter any new category… like wine and spirits. And not to beat a dead horse, but wine and spirits are such a good strategic match for the beer wholesaler. If you enter other beverage categories you will find that success in these brands (waters, NAs) ultimately leads you away from your organizational strengths. These suppliers like your licensed account coverage to build their brands but ultimately they will want to expand into more and more non-licensed accounts. And it takes a fairly significant brand to cover the additional sales and delivery costs of extensive (non-high spotting) servicing of non-licensed accounts. But you should also start focusing on creating a portfolio of brands in new categories rather than just a single brand. Sadly, in many situations your success in building these types of brands will actually come back and bite you as the supplier abandons you for other distribution options which better meets their desires. Although over the years there have been many examples of this, recently you only need to talk to those wholesalers who helped build Glaceau’s VitaminWater to understand how success leads to bad outcomes. There are plenty of Red Bull, ArizonaIced Tea and Monster (Hansen’s) distribs who fear the same thing.
I believe all success or failure begins at the strategic level. Not that going into NAs or waters is a bad idea; it’s just that you have to accept that ultimately they expose a strategic mismatch with the strengths of the beer wholesaler – or you have to profoundly change who you are and prepare to deal with these new realities. But as a side note, if you do go this route, here too the state-wide associations will only help you with these non-alcoholic products. But with success in these non-alcoholic categories you either keep the brands and have to greatly expand your account base, a costly move which can actually REDUCE profitability (at least over the short-term). Or with success, the brands are taken from you and given to another type of distributor who better matches the needs and desires of these non-alcoholic products. This is not so for wine and spirits!
Wine and spirits are a perfect strategic match for the beer wholesaler. With success only comes more success and an even stronger relationship at licensed retail. You become even more important to the retailer (even in control states). Your account managers spend even more time in each and every account, only strengthening their role as the retailer’s beverage consultant. Sure you might not have much franchise protection but so what? Kick butt on the street and this will never be an issue. Success in wine and spirits doesn’t lead you away from who you are, it allows you to leverage who you are. From a strategic viewpoint, the evolution from beer wholesaler to beverage alcohol wholesaler makes more sense (at least in the short-term) than the evolution to a generic beverage wholesaler. You only need to do ONE little thing to become a significant player… form the state-wide association so collectively you can provide state-wide coverage for your suppliers… leveraging each member’s tremendous strengths. Without this, this strategic option is most likely not viable, at least to any significant degree.
As regular readers well know, I am a FIRM believer in the power of connectivity. For a refresher go here. In fact I see the evolution of beer wholesaling as probably going one of two ways… either the large players will ultimately buy everyone else, thereby becoming state-wide organizations, ala Southern Wine and Spirits or the present wholesalers will join hands and use the power of connectivity to in effect become state-wide associations for many brands and suppliers. The first option, state-wide wholesaler consolidation will take a considerable amount of time and faces many hurdles, the primary one being that many of you don’t want to sell, (and won’t) almost regardless of the price. The second option, using the transformational power of connectivity can happen almost immediately, all it takes is willing players. As a side note, I might write of the silliness of the one-distributor per market concept some time in the future, for now I’ll leave it for what it is… a pipe-dream which will never see the light of day in any major market.
But for state-wide associations, the key phrase, all willing players, is the primary hurdle. As of today, 09/21/07, I’ve already been involved in attempts in 3 states and in each situation 90% of the wholesalers were at least preliminarily on-board and ready to move forward, but what of the other 10%? They either see a different strategic vision for their businesses, or are too busy, or just don’t want get along. Sadly, as many of you can attest, this last point is painfully common. Because of past water under the bridge, many wholesalers simply don’t want to get along with their fellow wholesalers! and would rather cause problems than make a lot more money! I can’t figure it out, but you all see it and live it each and every day.
In each of these situations I’ve worked, the attempted state-wide association restricted itself to only fellow major supplier wholesalers, i.e. the A-B network or the Miller/Coors network. This is without a doubt the ideal situation, but until these associations are sweeping the country (and they will), in many states building these networks will prove to be difficult (all while the Southern Wine and Spirits of the world laugh all the way to the bank and continue to grow their beer portfolios). As a side note though, I tip my hat to the A-B network in TN for coming together awhile back and getting Yuengling for the entire state… showing the real power of connectivity.
So what to do? I think wholesalers need to re-think some of their ideas about who their competition is. Perhaps it is my black hearted, mercenary nature but I consider a competitor as someone who is selling products in my retail accounts. Perhaps instead of looking at a non-overlapping “other network” wholesaler as a competitor, you should consider them a potential partner? If I’m a Miller/Coors distributor in the southern part of the state, why should I consider the A-B distributor from upstate my “competitor” in my search for additional gross profit? If together we are both stronger, why do I care that they too benefit? I realize from a supplier viewpoint ALL non-A-B wholesalers are A-B competitors and ALL non-Miller/Coors wholesalers are Miller/Coors competitors, but why should that necessarily be true for the distribution tier? In fact if push should come to shove in the various fights in the 3-tier system, you will find that ALL distributors are partners at some level, even your direct wholesaler competitor. The suppliers have infused you with their thinking, now might be a good time to re-frame your thinking as a distributor.
I realize this is a profound paradigm shift for many wholesalers, but that doesn’t mean it isn’t true. If I were king and were building a state-wide association, I’d want to go with the strongest players that will give me state-wide coverage… period. I don’t care if they are A-B, Miller/Coors, or even someone else. The strongest players only increase the power of the association; thereby increasing both the quality and quantity of willing suppliers… they help create a more powerful funnel to bring each and every member additional brands and gross profit dollars… and isn’t this the association’s only goal? The weaker wholesalers only shrink this funnel and act as a drag on the entire enterprise.
I’m afraid that in many (most?) states, there will always be at least one “problem wholesaler” who won’t go along. If you don’t change your thinking, you give this single person complete veto power over the formation of these associations… and why do you want to start a business when you know from the start that one of your partners is a pain in the …? Do you think this will lead to more success or more friction and possible failure? I repeat I know this is a profound shift in thinking, but if it is true, it is true.
Of course I also believe that if those 90% would decide to move forward, the problem wholesalers might just change their minds when they see the train is leaving the station. If not, the association rolls with Plan B. And since just the act of grabbing hands creates tremendous value, I’d make these “laggard” wholesalers pay more for joining the association than those who stepped to the plate from the start. These laggards have a lot less risk, and therefore should pay more than the higher risk-takers… but once again, perhaps that’s just my black hearted mercenary nature speaking ;-)
Don’t let a single wholesaler or two stop you from taking the single action which has the greatest potential to forever transform your business… the creation of a state-wide funnel to bring you additional brands – they can be beer, wine, spirits, waters, NAs, whatever – any and all. Look at all the options in front of you; this is one of the most profound business opportunities that will likely present itself to today’s beer wholesaling world.
Grab the future by the throat and make certain the future that comes is one that you desire. Let no one stand in your way.