Single Distributor Per Market Model
Let us take a brief hiatus from our year-end planning discussions and talk for a while about a topic which made a big stir at the recent California Beer and Beverage Distributors annual get together… the “one distributor per market” forecast by consultant Mike Mazzoni. Mike first brought his concept to prominence about a year ago and of course it gathered much more interest when Gold Coast - market-leader - Coors, Miller, multi-brand attempted to purchase their over-lapping A-B competitor, Eagle Brands.
A-B wouldn’t approve - there’s a surprise! Lawsuits filed by everyone and his dog. Gold Coast’s suit got thrown out since they had no standing. Everyone thought better of it and A-B brought in new purchaser who bought Eagle Brands. Net result, Eagle Brands owner Carlos de la Cruz walks away with a ton of money, Gold Coast now competes against an A-B distributor who is not only weak in the market, but loaded with a ton of debt. Perhaps that was the fiendish plan all along? ;-) Just kidding Art.
This is about the only way I see the single distributor market “working”. Somebody walks with a boatload of cash and the remaining wholesaler gets to compete against a new owner who will be saddled with significant debt for the next 25 years. As a good friend and long time client Byron says (with his strong southern accent), “I love a competitor who is in debt”.
Other than that way of “working… my cut-to-the-chase summary? … never going to happen in any major way. Why not? One word, reality. I know of no consumer products industry where what Mike describes has occurred. In fact I know of no industry where it has occurred. I can see no freaking way (please feel free to add much stronger adjectives if you desire) any of the suppliers would be happy with the results. In fact rather than being a response to direct shipping, I strongly believe that a push towards a single distributor market would actually drive many suppliers to look at alternative means to reach the market. What other choice would they have? They’d be stuck with one company to distribute their’s (and their competitor’s) products. What could they do if they were unhappy with the results?... and they would be. They would have no place to go, so they would look to go elsewhere.
I think Mike must have a couple large clients who want to purchase their competitors and he’s laying the ground work ;-)
Now I’m not against purchasing your direct competitor… I just don’t think your suppliers will play along. Quite a few wholesalers have talked to me about trying to do it (both A-B and Miller/Coors). You could pay A LOT of money for your overlapping competitor and still rake in the cash. If one would also show a little huevos in pricing, it only gets better. Ah, but supplier approval, that’s another thing. And even in those few states where supplier approval is not as required because of state law, if the major suppliers desire, they can easily make your life hell. Getting crewed every other week for the rest of your business life is not a real pleasant experience. And of course once you start giving a lot of attention to the complaining supplier, your remaining suppliers will get upset and start complaining and so on and so on, a circle of pain and headaches.
And the seller? As long as they are willing to fight a potentially long and drawn out lawsuit (and live with the day-to-day impact in their business, and there will be an impact), they can probably walk with some serious cash… assuming they win. Remember that the potential purchaser will never be able to sue, so don’t plan on that. A-B’s problem with the attempted Eagle Brands deal (well at least one of their problems) is that Carlos is a very big dog and his threat of a sustained lawsuit was a heck of a lot more than a bluff. Of all the people you might want to fight, Carlos is not one of them.
Mike says A-B made a mistake in not approving the Gold Coast deal because “....A-B actually missed an opportunity to structure the template for it.” This of course assumes they want to structure a template for it. Which they clearly don’t… nor do Miller or Coors or Modelo or FEMSA or fill in the blank.
In the 1960’s, management gurus were predicting that in a very short period of time (perhaps Mike’s half-generation?) there would only be a handful of corporations left in the entire world. The age of the conglomerate was upon us and there was nothing that would stop this process. The cost savings were so great and the market power of these companies so tremendous that it only made sense this would happen. Competitive advantage that couldn’t be matched! They taught this stuff in MBA classes around the country. Just one problem, that pesky little thing about does it actually work in the real world, where real people and their emotions and desires come into play. So where are these conglomerates today? Do you see only a handful of corporations in the entire world? This is what happens when we allow our spreadsheets to predict the future.
Heck, if you follow Mike’s thinking to its logical conclusion why does he stop at a single distributor per market model? Why would there even be a beer distributor-based “full service logistics, delivery, and warehousing” operation? Why wouldn’t the cases of beer simply be added to those trucks which already service these accounts with other products? If we are only going to let our Excel spreadsheets define the future, I can assure you this would take additional costs out of the system. Going back to the ‘60’s way of thinking, “soon there will only be a single distributor of all products for all retailers throughout the country”. Trust me, I can show you on a spreadsheet how it makes tremendous sense and would take a lot of costs out of the system. And I have a bridge to sell you too!
Instead of tilting at windmills that are “a half-generation away”, let’s look at the reality on the street. The street is where this business takes place. The street is where the wholesaler lives. The street is the ultimate arbiter of what works and what doesn’t. I know the street very, very well. It is where I work; not in some remote office building pushing numbers around a spreadsheet, but out there on the street. Why won’t a single distributor market evolve? Very simply, competition. Let’s look at the reality on the street of the beer wholesaling world.
First and foremost, some get carried away when discussing “selling” in beer distribution. Not to be insulting, but the beer/beverage sales process is really relatively simple. We do not live in a world of some truly complicated sale process. This is not a moral judgment; it is simply a statement of fact.
The last high-tech business I started – www.vericept.com – had a sales process which included the ENTIRE C-level of a corporation. First you would have to swim upstream to reach them and then every CEO, COO, CIO, CFO, CTO, etc. would have to be sold (and sign off) and then legal would get a crack at it. Our product crossed every department in the organization and impacted everyone. It took months and months and you often got kicked in the groin just as you thought you had reached the finish line. That is a complicated sales process.
As probably every wholesaler can tell you, obviously we sell, but service is where we compete. Not the foolish competition of blindly increasing frequency of service, but rather quality of service. Long ago, in the pre-sell conversion days, wholesalers would often ask what type of traits they should look for in this brand new position, the pre-sales rep (or account manager as I prefer to call them since this is a much more descriptive term about what their job really entails). My advice then (and now) was that I want someone who is very service and detail oriented and a good sales person. But if I can only have one of these traits, give me a service-focused account manager every time! In this industry you will sell A LOT MORE by providing great service and being a weak sales rep than you ever will by being weak on service but a great sales person. In fact those rare individuals who are truly great sales people probably won’t stay in our industry very long… they can make an order of magnitude more money selling real estate or high tech equipment. Give me a service focused person and I can teach them selling. Better yet, give me a service focused person who also knows how to use their route book (or is willing to learn) and we will dominate at retail.
Look at all those great driver-sales reps of long ago - yes GaryB., I know there are still plenty of great driver-sales reps out there today ;-)… they “sold” by providing the best service possible. They “sold” by being the retailer’s expert advisor. They “sold” by taking care of their retailers. Now these same driver-sales reps might not have known a classic sales process or even a single sales close, but they still excelled. They provided great service and their “selling” was very straight-forward… they simply asked!
Hey, we’ve got this new product, how about you give it a try? (well, often they just put it in anyway and the retailer didn’t really mind since he knew they’d take care of it if it didn’t sell through). Would you mind if I put a five stack with a price card over by the steaks? How about putting this on tap and seeing how it sells? Can I have that end-cap for a display? And of course every sales rep’s classic fall back, I’m trying to win this contest and it sure would help if you’d (fill in the blank).
Now the world today is a little more complicated than that but at its base, it still is the same. It is a street business where relations (and more importantly, execution) at the individual account level still matter a great deal. And although everyone pays lip service to the concept of store-level marketing, as it grows so does the importance of individual retail relations… and these are generally determined by quality of service. They are determined by the people the retailer sees 50 to 100+ times in a year, not by some schmuck who visits once a quarter.
I’ve worked on and written about shared services, but have you ever asked yourself why there aren’t A LOT more shared services going on? Is it just that wholesalers are too dull to understand this? Are wholesalers just so hardheaded they can’t get along? I mean the cost savings are very easily obtained... and they are pretty easy to identify. Combine your line cleaning or merchandising or warehouse and delivery and just look at all the savings. Want to know why you don’t see shared services from sea to shining sea? Competition.
Wholesalers (and their suppliers) believe they do these things better than their competition. And if they do, they truly are significant drivers of competitive advantage. Look, we as wholesalers can’t make the consumer drink the product but we can give the consumer every possible chance to purchase the product. And we can be certain that each and every retailer looks to us as the leader, and gives us those small rewards (which add up to a huge impact for us and our suppliers) that come with being better than the other guy.
We can only do what we can do. And in general, this is played at the fringes. You probably aren’t 50% better than your competitor (I’m not talking market share here but rather how much better you might be on the sales and service side of things). That type of competitive advantage simply doesn’t exist very often. But remember, in a close race, the smaller things matter even more. And most of these small things are service and execution related. The exact things that shared services and the single distributor model casts aside.
Rather than being five times better than the competition, instead you might be a few percent better over here, perhaps another percent or two better over there… add these up and sustain them year after year and then we’re talking about a pretty significant competitive advantage… and one that is difficult to overcome.
Of course true selling matters, but so does…
· line cleaning
· leadership, motivational management, being able to build and execute a better team
· accuracy of orders
· proper order amounts
· ease of transactions
· quality of delivery personnel
· quality of merchandising personnel
· account management quality – focused on helping the retailer make more money
· image of fleet (even cleanliness of fleet)
· quality inventory control in your warehouse so there are few out-of-stocks and you’re not always pushing aging beer
· just keeping the backroom at retail straightened up
· facing the product
· the list goes on and on
Basically the entire operation of your business matters and can provide competitive advantage (or disadvantage). You need to look at every aspect of your business from this perspective… office, warehouse, ordering, delivery, sales, merchandising, everything.
When I direct corporate planning we always do a SWOT analysis (strengths, weaknesses, opportunities, threats). Pretty much all the strengths are competitive advantages. Weaknesses either need to be turned into strengths or minimized to whatever degree we can.
Take the time with your management team and examine absolutely everything you do. Is there a way to make it a competitive advantage (or more of an advantage)? How can we bring this to the retailer’s and/or consumer’s mind? How can we further capitalize on what we are already doing? If we are going to spend the money on having the cleanest fleet on the street, obviously retailers and consumers might notice them, but what other steps can we take to further capitalize on this? Are there low-cost or no cost actions we can take to take further advantage of what we are already doing? There might be. There might not. But you should take the time to consider all the possibilities. And don’t just assume the retailer will notice you do this or that so much better than your competitor… tell them, show them. Blow your own horn.
Perhaps you view your entire organization as a competitive advantage. Perhaps you are a better leader and manager. Perhaps you have built a better team and they are more motivated and dedicated because of your leadership (I recently finished a job where this is most definitely the case). You hire better people. You train better people. If this is true it is a significant competitive advantage.
The suppliers do the same. They have training programs for their wholesalers and their employees to help them become better, i.e. helping their wholesalers become better, which flows back to the supplier as their competitive advantage. A-B probably has the most extensive wholesaler training programs and they most certainly consider this a competitive advantage. By training and having demanding standards, the suppliers see this as a competitive advantage at retail. A-B thinks having an independent distribution channel that is exclusively their’s is a competitive advantage at retail. They pay millions of dollars a year in incentives to their distributors to entice them to remain exclusive. I’d guess the other suppliers would like the same thing if they could pull it off. Why would they want to give this away by embracing and “structuring a template” for a single distributor model? They won’t and don’t.
The “selling” part of what a beer distributor brings to the table is really relatively small. Selling is only a small portion of the entire job. EVERY wholesaler who reads this can tell stories of the new hot-shot brewery rep who blows into town, makes a few “sales” at retail (which quite often involves giving things away), then leaves town, never follows up on the promises they’ve made and the wholesaler is left holding the bag. The actual selling of something is almost always only a small part in the full sales cycle in any industry.
All those “other things”, almost everything a wholesaler does, become somewhat meaningless in a single distributor model. Everyone gets the same service. There is no way for any supplier to benefit from the superior team, motivation, systems, execution, planning, etc. of their distribution channel. In the single distributor model, the only competitive space that remains is selling (and of course consumer pull-thru). Everything else just disappears as a means to compete. But as I’ve just explained above, all those other things are VERY important and in many ways drive the success of this or that brand far more than just the selling action. Trust me, if the brand is remotely hot, wholesalers will be selling it with a vengeance.
No supplier wants to give up all these competitive features. That’s the reason the stand alone “hot brands” spend so much time analyzing who to choose as their distribution partners. It’s a heck of a lot more than just selling product and walking away. The single distributor model simply ignores the reality of beer and beverage wholesaling at the individual account level.
And the reason this matters so much is that as a business owner you must be looking out 5 – 20 years and designing your company accordingly. If you believe a single distributor model is your future, you will make different choices than if you don’t.
Other than worrying about a single distributor model, I recommend you examine your overall execution in every aspect of your business – and improve it across the board – and the way you do that is with a better designed, more elegant system.
Look at the assets you presently have deployed, be it people, fleet, money, whatever and see if there is a better way to leverage these assets for better performance… or wringing excess costs out of the system. That’s where you should be focusing your efforts.
You might also be focusing on getting some deals done, but I realize many people don’t want to sell… so maybe a merger… if not that, perhaps forming a state-wide association… if not that… who knows? I’ve got a recommendation for those who are attempting to purchase an adjacent wholesaler… if they keep saying no, then raise your offer price. It’s really rather simple. If you want to purchase something from someone who doesn’t want to sell, then by definition the price will have to be at a premium. This is simple economics.
If you can’t do that then do something else. If looking at your surrounding wholesalers as your next meal isn’t working, then stop that and instead look at them as your next partner. This can profoundly change the competitive landscape, forever. Just because a fellow wholesaler says no to selling, that can’t be the end of your business planning. It can’t be the end of the fight… the fight continues if you want to grow your business. This is true whether you like it or not.
As a beer/beverage distributor you can only do what you can do. You can only control what you can control. And the only thing you can completely control is the operation of your business. Is it executing at maximum efficiency? Are you getting the biggest bang for every dollar you spend? Is there no wasted energy?
Mike’s ultimate point about the single distributor model (I think) is that there is going to be some erosion of the three-tier system. The only question is the degree… and that can’t really be determined at this point in time. None of us has any way of knowing this. We might have our beliefs but we won’t really know until that time gets here. And long-term predictions are probably fairly meaningless since many things can happen between here and there. One big event can change the entire landscape tremendously and there simply is no way of knowing what this event will be. These things are not predictable.
Since it is impossible to determine the degree of erosion in the three-tier system, in your corporate planning you should examine various degrees of erosion… perhaps a little, some, and a lot. Of course the first step here would be to determine exactly what these words even mean. What does a little erosion of the three-tier system actually mean? A lot? After these are defined, then examine what impact they would have on your business and possible courses of action you might take if they did come to fruition.
As I have freely admitted, I am biased towards selling in this industry (even though this advice goes directly against my personal business best interests). I think if you add up the various risks this industry faces, the present sales and gross profit picture, and the present tax situation (which is certain to change in a negative fashion), toss them in a bowl with a premium price, and what pops out is that now is a great time to exit this industry. Let me emphasize that I’m a seller at a premium price. But 3+ times (and even 4+ times) gross profit deals are being done. Trust me, give me 4 times gross profit for my total house and I’m running towards the door. I don’t need to see your financial statements to know this is true.
If you are not going to sell, and most of you won’t, look at your business. Squeeze everything you can out of it (I’m talking performance here, not draining the company for the owner’s short-term gain). Make your business a better designed system. As an analogy, you don’t make a V-6 engine by taking a V-8 and pulling a couple spark plug wires. This just gives you the worst of both worlds. A poor performing, low-energy engine. If you want a V-6, build it from the ground up as such and you can create a high-performance, high-energy monster – which provides better performance at a lower cost than what you had before. The only way you get there is by building new systems. And yes, that is a shameless ploy for my services since building new systems is what I do (but it is also the truth… which is always the best sell). And I always provide a rather amazing ROI.
Forget the single distributor model, here’s the future I see…
· Continued erosion of the three tier system… to what degree? Can’t say. Continued legal and legislative assaults at both state and federal level.
· More brand deals being done at the supplier level. Impact at distribution level? It depends.
· The divisions between alcohol beverages will continue to blur – beer, wine, and spirits have already joined at both the supplier and distributor level. I see nothing on the horizon that will slow or stop this process. It will probably become even more important, especially in the distribution tier. To some degree you will probably become more of a beverage alcohol distributor (or even full-line beverage distributor) rather than ‘just” a beer distributor. This is one of the reasons I’m such a strong proponent of forming state-wide associations to enter the wine and spirits worlds (and using this same structure for beer and NAs). If you really want to grow your businesses, this one is the best bet. Even in control states. This vision of the future is orders of magnitude more likely to occur than the single distributor model. This model still functions in a direct shipping world. In fact it functions in almost any world. It makes you more stable, leverages what you already have, and gives you a defensible market position taking advantage of your many strengths.
· Continued consolidation – both distributor and supplier level.
· The globalization of the beverage alcohol industry will continue to be a primary driver of change… impacting domestic distribution in unforeseen ways.
How’s that for a long rant?! Do half the stuff I’ve just recommended and it is a guarantee your business will be stronger. Next post we get back to year-end corporate planning.