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« Rising Fuels Costs - What to do? | Main | Creating a Consumer Brand via Distribution »

Is Power Shifting Back to Distributors?

I was recently talking to a wholesaler and in off-hand comment he noted that he thought there is a balance of power shift happening with power shifting back to distributors, away from suppliers.  I have to admit that when he made the comment I somewhat discounted it… just a wholesaler whistling past the graveyard.  Over the past 50 or 60 years it seems the suppliers and retailers have been gaining power, often at the wholesaler’s expense… much has been written about this process and it has in many ways become accepted wisdom.  So (and I hate to admit this) I listened but didn’t really hear, and most certainly didn’t analyze the statement.  Go back to a recent post on change, here for how we sometimes hold onto beliefs… I do it too.  Work at embracing the possibility of change (and no, I’m not an Obama supporter)… it becomes a valuable skill, the ability to consciously cast off old beliefs and analyze new ideas from a completely blank slate.

But the more I thought about it, the more I became convinced he was right on the money.  Now I’m not implying wholesalers are in a dominate position but the flow, the momentum is on the distributor’s side.  And this is a trend which should continue into the foreseeable future.  Now the question is how will wholesalers take advantage of this and can they further accelerate the trend?  My beliefs are they will if they are wise and have the courage to do so.

Some of the power shift is a reflection of the consolidation in the wholesaling world… beer, wine and spirits, soft drinks have all, or are experienced the same thing.  In most markets there are only two distributors left and they are much larger and more sophisticated than ever before.  The capital investment represented by these firms is substantial… warehousing, technology, employment, rolling stock, working capital commitment.  Even a relatively small wholesaler is still going to be a fairly substantial operation in their specific market.  And of course there is physical reality… unless you sell directly to the consumer, without the ability to reach retailers there is no way to reach the ultimate consumer.  You’ve got to have some method to do so.

This reminds me somewhat of the boom of the Internet and Internet-based shopping.  During the height of the Internet boom, when the Internet was going to transform the very foundation of life ;-) much ink was spilled over whether this was going to put the brick and mortar retailers out of business.  In fact many wrote how it was only going to be a matter of time.  Well the brick and mortar folks are still around (unlike almost all of the early pure-play Internet companies) but one of the more significant impacts has been the tremendous increase in volume for shippers… UPS, FedEx, all have seen their businesses increase tremendously.  Well of course this was going to happen, right?  But the reality is that not that many saw it coming.  They were focused on all these Internet companies (trading at multiples ranging to infinity, since none seemed to make any money) who were going to destroy the brick and mortar folks, not so much on the impact of such a dull and mundane thing as distribution and delivery.  I think the same type of situation is occurring in beer distribution.  Suppliers – big and small – won’t just freely give this up but power (and it is a good thing) is flowing back to wholesalers… take advantage of it now.

First though, note that this is a relative power shift from suppliers to distributors… those pesky retailers still continue to build their power – and how do they do this?  By the power of connectivity!!!!  Isn’t that all a chain really is?  They leverage their power with suppliers and distributors by acting as a single entity… and they leverage their power with consumers by presenting a uniform brand image in multiple locations.  They do everything they can to entice the consumer to walk into their accounts and then take ownership of all those eyes and ears (on- or off-premise) and use that power against suppliers and distributors.  You want to reach MY customers?  Then you’ll have to deal with me first.

In many ways the same opportunities present themselves to the wholesaler.  Those retailers you service (and even those you could service) are in effect YOURS.  Of course you aren’t the only one servicing these retailers but you’re one of very few.  And you have unique strengths and abilities you can leverage to your benefit.

Some wholesalers, like the Reyes’ are attempting to leverage their power by growing mega-distributors – in locations throughout the country.  Others through acquisitions or mergers are focused on attempting to control a specific, defensible geographic territory, more like Ben E. Keith.  But every distributor of any size can participate.

How?  If wholesalers want to take their business to another level, they need to leverage their distribution system - rather than letting your primary supplier(s) do it for, or is that to you?  ;-)

Connectivity.  Join hands with other wholesalers… they can be contiguous, they can be sprinkled throughout the state, heck they can even be in other states… but think more like a chain retailer.  The more customers, the more power.  Those customers (the retailers) are YOURS, and if suppliers want them – and they do – then to some degree they have to dance to your tune.

The best way to leverage these connected distribution systems is to, as much as is possible, operated as a single entity (at least from the supplier’s perspective) – the bigger, the larger the scale the better.  The supplier ultimately doesn’t give a damn if these distribution partners are one business, separate business, whatever, as long as they meet their needs.  Does the “machine” do what I need it to do?  Is it the best choice?  And the beauty of this is that none of this requires anyone to relinquish any control, everyone remains completely independent.

Think of it this way… imagine a separate and intangible (but very real) level between suppliers and distributors; let’s call this the distribution power level.  Whoever controls this power level wields great power and influence.  When there were 8,000 independent beer wholesalers there was no question who controlled this power level, the suppliers.  With less than 2,000 wholesalers – each larger, more sophisticated, etc. – a power shift occurred, driven by market realities.  But you don’t have to remain a passive player in this power level – the 4th, Tom, and Leo will gladly “own” it if you let them.  With a little effort and the wisdom and insight to use the power of connectivity, you can grab a significant share of this power level.  When dealing with your main suppliers, do you think you’d have more impact and negotiating power if you “are” a 4 million case operation or a 24 million case operation?  Attractiveness to new suppliers?  Terms from all your suppliers?  The list of power is long.

Obviously state-wide (and multi-state) is best, but if this isn’t in the cards today, talk to other wholesalers in your state with whom you have a good relationship – maybe to start with you only have 3 wholesalers, but 3 are better than one.  Contiguous or not.  For some purposes they don’t even need to be with those who have the same major suppliers.  I know that’s a scandalous thought but why not?  If they aren’t selling to MY retailers, at some level they aren’t my competitors.  Why let a single wholesaler who lacks vision derail your taking control of this power level?

And as a side note, if you are serious about grabbing your share of this power level, or taking it further and even considering a merger or state-wide association… let me help you put it together.  I have recently witnessed a number of heartbreaking attempts at coordinations and mergers go down in flames because the various parties attempted to do it themselves.  They call me when the thing is 99 percent dead and want me to revise it.  Dang tough to do.  This isn’t just me trolling for work.  Without me, each party of course looks out primarily for THEIR interests.  That’s not surprising.  But there is no one looking out for the interests of the coordination or merger or state-wide association… and thus the thing generally doesn’t get put together… even though it probably makes sense for everyone involved and most of the “problems” could have been solved IF there was someone whose goal it was to represent both the proposed coordination (or merger) and protect each party’s interests.  Having me involved greatly increases the chances of success.  This isn’t selling, it is just the truth.

Regardless, do it and you grab a share of this power level.  It becomes a funnel to bring additional brands AND project significant power to your present and future suppliers.  Do nothing and this power level (and remember it DOES exist) remains in someone else’s hands.  Don’t ever forget, they need you as much (or perhaps more?) than you need them.  Do something about it.

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