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« Leveraging Distribution and Who Controls It – Part 1 | Main | Leveraging Distribution - Organizational Impact and State-Wide Associations - Part 3 »

Leveraging your distribution system and investigating wine and spirits – Part 2

Here’s a question… how do you plan to grow your business? Grow market share? That’s always a goal… which may or may not happen. It depends on the brands you distribute. But can you grow your business by say, 5% annually by taking share from your competitor? Dang tough to do. Even more tough to do if you are a high-share A-B house with almost no room to economically grow additional share. Of course maintaining or growing market share combined with population growth is always good. But since you don’t have much control over population growth, this is more the luck of the draw rather than anything you can control.

So how do you grow your business 5% annually? You could make acquisitions, following the Reyes model. But of course there are A LOT more willing buyers than willing sellers these days and for most of you, your dreams of significant acquisitions will sadly remain just that, dreams. Sorry, that’s just the way it is. As a side note, I have to give A-B, Miller, and Coors a tip of the hat. They have been stringing wholesalers along for years, keeping them “in line” with the hopes that SOME DAY the supplier will bring them an acquisition as a reward for being a loyal dog. Ah, hope springs eternal! They are like the prettiest girl at the dance who makes promises and promises to almost everyone, but generally leaves most with little more than hopes, dreams, and a wasted evening. And just like the prettiest girl at the dance, they can do this over and over again with some (most?) never learning the sad truth... and that is, ain’t going to happen.

Or you can look for additional products to run through your present system. This is probably the most likely strategy to succeed in growing your business. But what products? Beer? Everyone and his dog is after the next hot beer brand. And the suppliers are beginning to play aggressively in this arena too. Waters? You can make some decent money if you can get (or grow) a winner. But a lot more losers than winners. Same for NAs – but you generally don’t want to put yourself in direct competition with the Coke and Pepsi networks... they have a few strengths of their own too. Non-beverage products? A difficult and long-term path to try. Odds are to fail.

Just using basic business analysis, you should look to leverage your unique strengths and find products which fit this profile. And what is the most basic strength of beer wholesalers? Servicing licensed accounts. There is no other distributor of any product which has nearly the power of beer wholesalers in licensed accounts. No one calls on these accounts with the frequency of the beer wholesaler. If you are looking to expand your product line, why not leverage your strengths first, before heading off into uncharted territory where the differences between you and your distribution competitors are not so clear… and the odds of success are not as high.

And what is the 800 pound gorilla that you walk past every time you enter an on- or off-premise licensed account? Wine and spirits. Wine and spirits together make up just over 50% of the beverage alcohol market, yet many ignore this huge share while at the same time crawling through broken glass for illusions of the next Red Bull. Bad strategy. And I don’t care if you reside in a control state or not, entering the wine and spirits world – with the correct strategy and execution - makes sense for every beer wholesaler in the country (except in Pennsylvania where it is illegal – those wine and spirits guys have their lobbyist’s too). Please re-read that last point. Some of you have probably dabbled in wine and/or spirits but you have to do so with a valid, workable strategy… and not all strategies are created equal.

Let’s talk strategic issues and use Southern Wine and Spirits as a competitive comparison – they are THE big dog.

Southern Wine and Spirits background – they were founded in 1968 (started as the merger of two, small wine and spirits distribs in Fl) and are the country’s largest wine and spirits distributor. They have sales in excess of $7 billion, shipping over 70 million cases annually and control more than 19% of the total domestic wine and spirits wholesaler revenue. Southern operates in 28 state markets and represents approximately 1,500 wine, spirits, beer, and beverage suppliers from around the world, and distributes nearly 5,000 individual brands.

Quick start – In the vast majority of situations, wine and spirits products have no franchise protection… this is a good thing. 30 days notice and the brands are yours. It allows the beer wholesaler to start with a strategy of “poaching” suppliers. Rather than attempting to build a new brand(s) - a long, generally slow, and expensive process – why not “steal” suppliers and start with a large critical volume?! If you are lucky you may even be able to be profitable out of the chute. Much different than the slow slog of building individual brands from nothing. You build the individual brands AFTER you already have the critical mass… AFTER you have already picked all the low hanging fruit. Do you truly believe that Southern’s 1,500 suppliers are ALL happy with the performance and attention they are receiving? Not a chance. Have you seen a typical wine and spirits sell book? No way any sales rep can pay adequate attention to all those brands… can’t be done. In addition, due to wholesaler consolidation, in many markets the suppliers of wine and spirits have two options of who to go with, neither all that enticing. Who can you attract in your state? I have no way of knowing, but we could present a VERY enticing picture. The tremendous upside is well worth the “bet”.

Go for the cream – Far too many wholesalers just don’t seem to understand a very basic truth about distribution… volume equals cost. It is FAR better to distribute 10,000 cases at $100 per case than 100,000 at $10. Yet when I discuss wine and spirits often they immediately start talking about jug wines or getting the liquor guns on-premise. No. Shoot for the premium and super-premium products and leave the lower-end stuff for now. As you can calculate from above, Southern’s average per case PTR is around $100. That’s the average! So simple math would imply that if you targeted only high-end products, your average PTR per case would most likely be higher than that. It doesn’t take too many cases at $25+ gross profit to pay for a high performance, specialized sales force. And there are plenty of high-end suppliers who are not getting the attention they desire… being one of 1,500 suppliers and 5,000 brands doesn’t give your brands much individual attention. Do you think your high-performance, much more dedicated sales force would be an attractive and superior alternative for these high-end products? Of course.

You don’t get to change the market structure – If you are to be a true player in the wine and spirits world… you MUST provide state-wide distribution! This isn’t because Conlin says it is so, it is the reality of wine and spirits distribution. Southern brags about it on their web site:

 Beginning in Florida, Southern worked hard to achieve efficient, statewide distribution capability, which it gained in 1972. In 1984, when much of California's wine and spirits wholesale business was still handled by dozens of small, regional players, the Southern Wine and Spirits of California operation was the first such distributor to gain statewide distribution capability. From then on, the company's strategy of offering statewide distribution in each of its markets ultimately added an invaluable dimension of service to both its suppliers and to its retail and restaurant customers alike.

 Southern became one of the first distributors—if not the first—that was able to provide statewide distribution, merchandising and promotional support behind leading wine and spirits brands. The statewide distribution trend that Southern Wine and Spirits of America established in Florida and California became the industry standard over time.

o If you don’t offer state-wide distribution, you will only attract those suppliers who have no place else to go. This is a go small, go slow, build from the ground up strategy which most likely ends with you losing a fair amount of money and failing to enter these markets in any significant fashion. While the likes of Southern and Republic National and Glaziers laugh all the way to the bank. Go back and read part one of this series here if you want a refresher. In the vast majority of markets in the US, if you can’t offer wine and spirits state-wide distribution, don’t bother. Spend your resources elsewhere.

o In many states, the organization MUST provide state-wide distribution. It’s the state law. As I’ve mentioned before, beer wholesalers aren’t the only ones with effective lobbyists.

You can’t be touched in the marketplace

o Southern notes they have over 10,000 employees in 28 states. That averages out to just under 360 employees per state. Note that this is total employment, not just the sales and delivery team. Collectively how many total employees would the members of your state-wide association have? I’ll bet a few more than 360. Or let’s estimate the combined total number of employees that these state-wide associations would have in these same 28 states. One heck of a lot more than 10,000.

o Southern has “35 large, state-of-the-art distribution centers in many of the 28 state markets in which it operates”. Note they state in “many” of the states they operate, i.e. they don’t even have warehouses in every state they operate in. Collectively how many warehouses would the members of your state-wide association have? Each one being a valuable warehousing and distribution asset.

o Southern has “over 200,000 customers” in their 28 states. That averages out to just over 7,000 customers per state! Heck, Miami alone has almost that many licensed accounts! Just California has over 77,000 licensed retailers! How many licensed accounts would the members of your state-wide association service? That’s easy… all of them! Every single one of them. The vast majority at least once per week. Those that do any significant volume multiple times per week. Chain groceries and other major accounts? Probably have someone in the stores every single day of the week. And not to brag… but this is great strategy because it will be very difficult, if not impossible for the Southern’s of the world to try and match the service levels you already provide.

o Add up all the delivery trucks your association puts on the street each and every day. Add up the merchandisers, sales reps, and sales and delivery management. How many sign making shops does the association have?! Add up the square footage in the warehouses. Add up the combined financial assets this monster has. I don’t care how big Southern is, in your state your state-wide association will dwarf them. Leverage what you already have and add a small, specialized, high-performance sales team (more on this in part 3) and no one can touch you. This monster will attract supplier interest.

Don’t try to re-invent the wheel – If you want to jump start your entry (and you do), don’t try and have beer folks build your wine and spirits business. Again, poach the best, experienced people you can find. Pay these organizational pioneers whatever it takes to bring the right ones on-board. Let them build your team with even more experienced folks. In this manner you organizationally gain almost immediate industry expertise. Don’t go through a steep learning curve, purchase the learning curve. In addition, these experienced employees will help deal with potential supplier’s concerns… help make them warmer and fuzzier with the entire concept.

Want a quick estimate of the potential in your market?

o Estimate the total beer market in $$ in the territory you service.

o Assume this is also about the same size as the wine and spirits market in your territory, i.e. if you estimate the beer market at $150M; assume the wine and spirits market is also $150M.

o Based on the monster this association is… based on its service frequencies and total licensed account coverage... based on having a focused, dedicated high-level sales force… what percent of market share do you think you can immediately poach? 1%? 5%? 10%? 1 percent of $150M is $1.5M. 5 percent is $7.5M. The gross profit on $1.5M at a 25 percent margin is $375K… on $7.5M it is just under $1.9M. Plenty of cash to pay for the additional sales staff and drive some serious cash to the bottom-line.

o And how many boxes is that? To make the math easy, let’s assume PTRs of $100/case. At the 1% penetration, that’s 15,000 boxes. At 5%, it is 75,000 boxes. Do you think your present order replenishment, merchandising, delivery, and warehousing operations could handle this “tremendous” volume? Of course! Those 75,000 boxes are less than 300 per day! How many trucks do you run every day? The volume per truck per day will be easily melded into your present operations. If (when?) the volume grows to be more of a pain, we will be dancing around your warehouse. It (when?) the volume grows to be a pain, you will be generating millions and millions of dollars in additional gross profit, and driving a substantial portion of this to the bottom-line.

Now would a supplier like Diageo be willing to jump ship (or throw you a few brands) and join a state-wide association of A-B or Miller/Coors beer wholesalers? Couldn’t say… The state-wide coverage… dedicated sales force… much higher service levels… full-account coverage... extensive warehousing capabilities… tremendous financial assets. Combine them with some experienced players and I think you have a very enticing story to tell. I’d sure take a look if I were them.

And it is not as though the suppliers (big and small) are overjoyed with the performance of their present wine and spirits distributors. As recently reported in Harry’s publication, Wine and Spirits Daily:
Diageo North America president Ivan Menezes told investors last week:
"We are in the process of renewing our contracts with our distributors. The main issue is improving the game, which Jeff talked about, and moving forward in improving our relationship with our wholesalers. It's about really building the muscle and capability to drive sustained top line growth. I'll give you an example. In New York where we're restructuring our arrangements right now, we are going to have a significantly stepped up presence in the on-premise in New York City. We have about 28 people building our luxury brands in New York and that's the type of arrangements we are driving for…….. I'd say that US wholesalers are still notoriously weak on customer service. If you walk into a supermarket in California on a Monday morning you'll still find many stores out of Cuervo, out of Smirnoff because wine and spirits distributors for the most part do not deliver on Saturdays.”

Well guess what? Any beer wholesaler-based, state-wide association will kick the butt of ANY competitive distributor in licensed accounts. Any. Hey California beer wholesalers… are you in your supermarkets on Saturday? Of course. And Monday and Tuesday and Wednesday and Thursday and Friday and Sunday. Probably twice per day on the weekends in high volume accounts.

And by the way, want to know who distributes Diageo products in California? Southern Wine and Spirits. Having out-of-stocks on a product like Cuervo or Smirnoff is the equivalent of being OOS on Bud Light 12 packs or Coors Light or Miller Lite! A dang rare experience for this to happen to ANY beer guy. And it would probably only happen once if it did happen.

This beast is waiting to come into existence; all you have to do is grab hands and do it.

Coming next, the final part in this series… A-B network or Miller/Coors network or a hybrid, and some insights on the ideal organizational design


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