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« Non-exempt does not mean hourly, it means overtime must be paid. Please repeat this three times. | Main | Leveraging your distribution system and investigating wine and spirits – Part 2 »

Leveraging Distribution and Who Controls It – Part 1

I have got to give August the 4th and his senior team a big tip of the hat for some great strategy that is literally creating hundreds of millions of dollars in value for Anheuser-Busch.  Following up on the initial Modelo and Hansen/Monster partnerships, first the InBev move - great strategy on so many levels – and recently Icelandic Glacial Water and BORBA.  Who knows whether the brands themselves will prove to be winners but the overall strategy is most certainly a winner.

It was reported A-B will receive a 20% equity stake in Icelandic JUST for distributing it. Terms of the BORBA deal weren’t announced but I’m certain A-B is going to get their share.  In addition, they’re not stupid.  Not only is there equity involved, but they get a piece of the gross profit for every box moved by “their” distribution system.

Notice I put the word their in quotations.  Why?  Well, were do you think the real value is for Monster, Icelandic and BORBA and whoever else comes along?  Is it A-B corporate’s ability to provide their back office support, consolidate orders and deliver product to around 1,200 A-B wholesalers?  I don’t think that is where the meat is.  I could set that up in a week or two with a common carrier. 

Or is the real value in those independent distributors?  All of you.  Those distributors who service each and every licensed account in their territory, most once per week?  Those distributors who can quickly service almost any type of account – licensed or not - in their territory?  Combine them nationwide and now every licensed account in the country is serviced.  Powerful.

Now attempting to match THAT would take a heck of a lot more than a couple of weeks and a common carrier or two!  That is where the value is.  That is what the 4th and his team are leveraging.  Miller and Coors could do the same – although obviously they individually don’t have as much power over their distribs as does A-B.  I congratulate the 4th for these moves but since I don’t work with suppliers, only wholesalers, I wonder why wholesalers just sit back and let A-B (or Miller and Coors) create all this value off of assets they don’t even own? (it truly is great strategy – all of the advantages of the distribution network with few of the associated costs).

I’m not implying the suppliers shouldn’t continue to try to leverage “their” distribution network (I would if I were in their shoes, and it is generally ultimately good for the wholesaler), but wholesalers don’t have to be passive players in this game. Yes, I know you are not completely passive.  Many (most?) of you are out looking for brands and products each and every day.  You will be pounding the aisles at the upcoming NBWA trade show in Vegas searching for the next hot brand… or just some decent incremental volume.  But as stand-alone distributors your desirability is severely limited.  Icelandic or BORBA or whoever often don’t have the desire or ability to reach out to 1,200 (or 600) wholesalers to cover the country.  Thus the ability to create these millions of dollars in value rests with the main suppliers… and they get the bulk of the benefits. 

But this doesn’t have to be so.  In fact the solution is incredibly simple… Have you ever seen a cartoon or movie where the “normal” characters reach out and join hands, and in the flash of an instant, become super human with amazing abilities?  They become infused with POWER that was never there before.  You can do the same. The power of connectivity.

Build an organization to supply yourself! It could focus on beer, water, NAs, wine, spirits, or ? … any or all.  Why give your major (only?) suppliers a cut of the action AND let them control your margins?!  You don’t have to be a reactive player in this game.  It doesn’t have to be.  Build your own funnel to supply yourself form a state-wide association and change the rules of the game.  In fact by forming state-wide associations, wholesalers collectively have the ability to completely change the paradigm… and the power.  Instead of an evolution from a 3 tier system towards 2 ½ tiers (a concept some have proposed… and guess who is losing and becoming the ½?), why not completely change the rules.  Grab the future by the throat and make certain the future that comes is one that you desire. 

And since I am burdened by this vision thing ;-)…  once these state-wide associations are formed, many will also find it desirable to form loose multi-state alliances, thereby providing suppliers almost one-stop shopping for immediate multi-state distribution.  Perhaps even national distribution someday… all controlled by the wholesalers themselves.  Talk about power and value formation!  There is no business reason why this can’t happen, and happen relatively quickly. 

It is incredibly easy and absolutely guaranteed to increase your desirability to suppliers versus you going it alone.  Think of this analogy… imagine having two magnets which are the same in every feature expect one is 10 times as large as the other.  It is a statistical certainty and a physical reality, not an opinion, that the much larger magnet will have a much larger attraction.  It must be so.  The exact same reality is true with these state-wide associations.  It must be so.  In fact, since we can collectively capitalize on the strengths of each member, there are tremendous synergies which are possible… so that 1 + 1 + 1 + 1 +1 +1 +1 +1 + 1 + 1 does not just equal 10, but rather equals 20!  Change the paradigm.

Other than your present beer wholesaler competitor, there is NO ONE, no other distributor which provides the level and frequency of service to licensed accounts that you do.  No one comes close.  Capitalize on this reality! A-B corporate is doing a great job of doing so. Leverage your strengths.  They are substantial and very defensible.  You can fight the fight as a single, stand-alone entity and have little to no power.  Or you can grab hands and almost instantly become the 800 pound gorilla.  What are you waiting for?

And you can do this for a surprisingly small investment.  Let’s assume it will take a $1 million investment to get the association up and running – it is probably much less but let us plan for the high-end.  If it takes 10 wholesalers to cover your state (and for this example we’ll assume they are all the same size and share equally in the initial expenses), each would have to contribute $100K for start-up costs.  This is not chicken feed but it is far from a significant investment for most wholesalers.  It wouldn’t take too much additional volume to repay this investment.  In fact with some luck, the payback period could be easily less than one year.

Join hands, leverage what you already have, add a small, specialized high-performance sales team (more on this in part 3 of this series) and you will drive mountains of cash to the bottom line for every member. Transform the competitive landscape.  A-B is already effectively exploiting and taking market value for it.  It is there waiting for you.  All you need to do is stop the petty bull, and grab hands and do it.

To all the A-B distributors reading this, the 4th is already leveraging you.  There is nothing to stop you from leveraging yourself other than the will to do it.  The same holds true for the Miller/Coors folks.  One insightful A-B wholesaler told me the only reason A-B corporate won’t like these state-wide associations is that they won’t get a piece of the action.  And since I only work with wholesalers, not suppliers, that is OK with me.  A-B corporate would rather put themselves at the front of this line where they get a piece of the action on both ends and they control your margins.  But you can also play.

The 4th and his team are creating hundreds of millions of dollars in value and you’re just standing there handing it to them.  Why not reach out to your fellow wholesalers and at least actively participate in this process?  Significant increase the cash flow and profitability of your business with a corresponding increase in value.  Whether you plan to be in business 5 years from now or 50 years from now, this makes sense with almost no downside.  If your suppliers are going to effectively “remake” you, don’t you think you should have some say in how you are remade? Why not participate in the value created, more than just the additional boxes and their margins which are effectively set by others?

There is nothing stopping you other than the will to do it.

Next part in this series… The natural target, wine and spirits and a comparison with the big dog, Southern Wine and Spirits.

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