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« More on Rising Fuel Prices | Main | Don’t Shoot the Messenger »

Rising Fuels Costs - The Other Side of the Coin

Let us think for a moment about the other side of the higher fuel issue.  First, remember an organization is an integrated and complete system.  You shouldn’t just look at a single line item and let it drive all of your actions.  Of course you should examine all your expenses to assure only an acceptable level of fat remains.  What is this level?  That is for you and your management team to determine based on your individual and corporate goals and the market and competitive state of affairs.

But your organization doesn’t function on expenses alone… there is the other side of the coin… those wonderful things called sales and gross profit dollars.  Don’t forget these as fuel prices skyrocket.  In the distribution business, the primary driver of your profitability is average gross profit dollars per delivery stop.  That’s why a 70 share distributor is soooooo much more profitable than a 30 share distributor.  Their fuel, trucks, insurance, electricity, workers, etc. all cost about the same.  But if on average one distributor rolls in 70 cases on every delivery versus 30 cases for their competitor… the gross profit dollars on those 40 additional cases adds up rather quickly.  Of course this assumes the average dollar gross profit per case is basically the same for both distribs… this may or may not be the case. 

These two factors,

·                    Average dollar gross profit per case – remember you pay your bills with dollars, not percentages.

·                    Average cases (or units) per delivery stop

are ultimately what drives your profitability.  Add them together and you get gross profit dollars per delivery stop.

So if you want to increase your profitability and combat the bottom-line hit of higher fuel costs, focus on these.  How?

1.                  Routing and service levels… obviously if you can reduce the number of weekly delivery stops without negatively impacting sales, average cases per delivery stop MUST increase.  It is a mathematical certainty.  This is also the easiest and quickest method to increase profitability.  Unfortunately, most of you have already taken all the slack out of this rope.  If you haven’t, jump on this right now.  Today.

2.                  Selling more of what you already have… maximizing the sales of products you presently distribute.  Again, most of you are already attempting to do this.  And of course a distributor has some impact on consumer demand but at some point there’s nothing more you can do to impact this.  You can’t force them to drink the stuff… although I know a few out there who give it a darn good shot.

3.                  Consciously impacting the mix of the product you sell… moving the average dollar gross profit per case higher and higher.  Again, only so much you can do but you should examine strategies to impact this at least annually.

4.                  Selling more of what you don’t have to your present account base… acquiring new products to run through your present sales and distribution system.  As long as the additional costs – both tangible and intangible - don’t exceed the increased gross profit, this always works.  Of course everyone and his dog is out there looking for the next hot brand.

a.       Beer – odds are you’re aggressively going after these brands every day.  Even suppliers are aggressively in this game.  Coordinating a state-wide push can be very effective, like the TennesseeA-B distribs did in getting Yuengling, and just last week New Belgium for the entire state.  I can’t emphasize enough how using the power of connectivity can be a truly transformational event for a wholesaler.  You just need someone to get the thing up and running… give me a call and let me help.

b.      Wine and/or spirits – I like beer distributors taking on these products (in most states) since they are almost a perfect account-base match… and you are already experts in dealing with regulated product.  In addition, beer distributors provide much higher levels of service than any wine or spirits wholesaler.  You can leverage your strengths and the wine and spirits competition have very few available responses.  Only one catch… if you truly want to be a significant player in these markets you MUST provide state-wide distribution.  If you don’t, I don’t think it works nearly as well.  And to provide state-wide distribution you will have to form a state-wide association.  That’s just the nature of the beast.  But from my analysis, the potential benefits FAR exceed the minor costs of building the association.

c.       Other non-alcoholic beverages – These can be a mixed bag.  Monster is driving a lot of cash to many A-B wholesalers.  Red Bull the same.  But it is tough to pick the winners from the losers and in many cases the supplier wants you to expand your account base to non-licensed retailers.  If you can cherry pick this can work but if you have to greatly expand your account base, your average cases per delivery stop will go down rather than up.

5.                  Selling more of what you already have to new accounts – otherwise known as acquiring additional territory.  Again, everyone and his dog is looking to purchase and few want to sell.  This might or might not have any impact on the two factors discussed above, but it will allow you to spread your fixed costs over more cases… thereby lowering the overhead per case for your entire operation.  How much?  That depends on the economies of scale and efficiencies you can wring out of the acquisition.  And of course the price paid.

6.                  Simply raising your prices – Obviously this has an immediate impact on average gross profit dollars per case, as long as the impact on sales volume is less than the increase in price.  Of course there are those pesky little things like reach-backs, extremely unhappy suppliers, and uniform chain pricing issues.  You are all aware of these and other issues that unilateral price increases generate.  Never forget that brewers and distributors have economies of scale that are in somewhat opposite directions… all other things being equal, for the brewer, volume is profit.  For the distributor, volume is cost.  It is of course a little more complicated than that but this reality generates a certain amount of friction between these distribution partners, and it is simply the nature of the beast.  He who has the most power (and is willing to use it) wins.  Such is life.

As higher fuel prices slap you along side the head on a daily basis, don’t get overly focused on this single expense line-item… and a line-item over which you have almost no control.  Keep a system-wide focus as you steer your organization into the future.

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