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« Changing View of Competition | Main | Consolidation? A contrarian view. »

The Price Wars of 2010

“I love the smell of napalm in the morning”… a classic line from the movie Apocalypse Now.  I don’t know about napalm but I detect the odor of gasoline and folks are beginning to play with matches… this doesn’t generally end well.

 

Many wholesalers across the country had a horrendous January, a pretty bad February and the near-term outlook doesn’t seem too rosy.  Many ABI folks have been hit hard… the economic downturn… their over-indexing in c-stores, which are taking a beating… and to be politically incorrect, the disappearance of many illegal immigrants who have headed back home (who also often over-index to ABI and those c-stores) – those who work the street know this is true in many parts of the country.  This reverse immigration has also hit the Corona numbers hard in these same parts of the country.  The MillerCoors folks have taken the same hits, but in many situations not to the same degree.

 

When you’re down double digits in volume, a certain panic can set in.  First let’s pause and look at the reality we find on the ground.  Many wholesalers ended 2009 with down volumes but fairly flat profitability (more than a few up).  That’s a pretty good thing when you consider the economic conditions (and fear) of 2009.  2010 isn’t starting off like gangbusters but why should it?  With the position of the Super Bowl, you’ll really have to combine February and January to get a true read on the start of the year.

 

I still won’t be surprise to discover that volumes are tough in 2010.  It is difficult to see how the economy will be rocking-and-rolling… but remember this isn’t ultimately about volume, it is about profitability.  Now is not the time to throw away hard earned price increases to chase the fleeting ghost of short-term volume.  Have we so soon forgotten the price wars of 2005?

 

And if we have the price wars of 2010, they will be even worse.  Why?  Whether you remember it or not, the economy was doing pretty dang good in 2005.  Nationwide unemployment was running just a tad above 5%.  Today it is around 10% (that’s a 100% increase!), 17% if you include those who have simply quit looking for work.  The economic situation is tremendously different today and the damage done by crazy price promotions will be much worse and longer lasting.

 

Even in good economic times, look at how long it took for you to recover from the 2005 price wars… how long it took to re-set in the consumer’s mind what a case of premium beer “should” cost.  If we as an industry go down in this economy, we risk re-setting this price in the consumers mind at a level which will be extremely difficult to change.  If we go down in an undisciplined manner, be prepared for the price to remain there for A LONG time.  Once this price is re-set… in today’s economy it will be staying there… count on it.

 

Whether you’re an ABI or MillerCoors distributor, you have a full range of products which cover the gamut in styles, flavor profiles, packaging, AND price.  You are already offering that value-focused consumer a wide assortment of products and packages.  You don’t need to drop your drawers.  One of the worst things one can do in business (or for that matter in your personal life) is to pay twice for the same thing… especially when the price is high.  You have already gone through the pain of the recent price increases… why give them up and then have to re-live the pain again when someday you try to get these prices back up?  

 

I have seen this in failed attempts at re-organizations… whether because of poor design and execution or just the normal friction of change… once some flak starts flying the company retreats… they take all the pain and give back whatever gain they had hoped for.  When they sooner or later attempt the change again… the pay the price AGAIN… often times it’s even higher.  You already paid once… and your bottom-line thanks you… don’t give it back.

 

If you find yourself in a tough situation, focus on containing your costs and retail execution, NOT on trying to purchase volume.  Focus on company-wide execution.  Focus on building a high-performance organization.  These will serve you well today, tomorrow and well into the future.  Generally purchasing short-term volume only leads to pain.  Yes, in addition to helping with mergers and acquisitions Steve Cook and I help companies change and become this type of organization… that’s why our services are superior for both ;-)  Use our services or don’t… but in these times it is FAR wiser to focus on your organization than on short-term volume gains which often leads to long-term problems.

 

Yes the smell of gasoline is in the air… so is the smell of fear.  Put those matches away.  Otherwise it generally ends in burns, pain and scar tissue which won’t quickly disappear.  Remember… I warned you.  Please feel free to forward this to all of your supplier friends ;-)  They often have a strange fetish for flame.

 

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Comments

John---good reminder...and good advise..I do not see any signs of a price war in florida..We all learned our lesson in 2005 with the Coupon war.....Besides both AB and M/C distributors have debt to repay from their purchases--if EBITDA drops we go out of bank covenants and then the world caves in. The banks have us all scared. They are waiting for us to stub a toe and some of the good financing we negotiated before the recession..so they can come in and dictate new terms and interest rates..I also think that both AB and M/C are worried about debt and cannot stomach a price war..

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