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« Plan B - Mergers and Territory Swaps | Main | Another Win-Win Transaction & Beer Wholesaling and Bessie the Cow »

Tough love from the otherside

Let me tell you about the most amazing experience I recently had.  Now as regular readers of this site know, I am a rather hard-headed, cynical son-of-a gun – or at least some type of son ;-)  I don’t go in for mystical mumbo jumbo… I leave that to those blouse-wearing poodle walkers (a useful quote from good ol’ Willy on the Simpsons, aaacch!). 

But to my amazement I had a profound spiritual experience… a channeling experience.  Have you ever heard of channeling?  It’s where a spirit passes information to a channeler (that was me).  And this spirit (I believe it was the ghost of senior brewery personnel… he went by Mr. Spirit, or Mr. S to his friends) strongly desired that I pass along these words of wisdom to beer wholesalers near and far.  I guess he was cruising the nether-world and noticed my piece on the slaughterhouse fable, found here, and decided to make contact.  Who am I to argue with a spirit?!

First, Mr. S wanted me to let you know that over the years the brewers have done an excellent job of getting wholesalers to think like brewers.  That’s great for them, not so much for us.  He recommended you rid yourself of this thinking.  The economics of distribution and the economics of brewing are very different and you need to ensure you are fighting for the right side. 

He thought it was great that we view our suppliers as our partners (as we should) but we also need to be grown up enough about this to understand that when it comes to nut-cutting time (yes a crude analogy but one which might come very close to capturing the reality we face), we are likely on our own… with our only true partners being our fellow distributors.  Their body parts are on the line just like ours.  Don’t blame me that Mr. S is an earthy sort of fellow!

I like to present myself as the black hearted mercenary management consultant, but in all truthfulness I’m probably not as bad as I pretend… but some may disagree.  But I do have the ability to pull back from my current position and to directly and accurately view things from the other person’s perspective.  To be honest – and my usual humble self ;-)  that is one of the reasons I am so effective at helping to drive change throughout organizations and in negotiating either side of a deal.  My empathy quotient is quite high.  I don’t just intellectually understand the other positions, I emotionally understand them too.  Perhaps that is why Mr. S decided to use me as a vessel to speak directly to beer distributors. 

 And that’s also why I am so loud and adamant in my counsel to beer distributors.  You might end up walking up the slaughterhouse chute much sooner than you think.  I can put myself in ABI’s or MillerCoor’s position… or in this case the channeled Mr. S will do so for us all…  But please don’t shoot the messenger... or in this case the channeler ;-)  The truth might hurt but it is better to at least know of the possibility than to be happily blind.  Quit reading this now if you don’t want some tough love from your spiritual guide… this is what Mr. S told me on the night of yore…

First, most brewery personnel think distributors make far more money than the value they bring.  Few would shed many tears if they could take a fair amount of money out of your pockets.  They might not tell you this but I will. 

Most of you have no idea how difficult it is to climb the corporate ladder.  LOTS of competition from a lot of qualified and driven people.  It is not easy to move up in the organization – a lot more people wanting to be promoted than there are positions… and now the competition for the senior positions is international in scope!  It sure isn’t getting any easier.  Long hours, too much travel, too much politics and almost certainly at least a couple relocations (the spouse and kids just LOVE that)… often for a good paycheck, but not a great paycheck.  And with the consolidation of the past 30 years, little to no job security regardless of the job you do.  That’s the life of the people who sit across from you.  You don’t necessarily need to feel any compassion or pity but you should understand where they are coming from.

And all public companies dance to the tune of stock price.  Although in the past the stock market allowed the 3rd (and even the 4th) to run AB like their own little fiefdom, a fact which still amazes Mr. S, those days are long gone.  The major suppliers now think like bankers or financiers… and unfortunately they also act like them.  A useful insight is to think of ABI as investment bankers who happen to own breweries… MillerCoors is right behind them.  This is neither good nor bad, it simply is.  And as public companies they have an obligation to do what is in the best interests of their stockholders.  If this includes taking money out of your pocket or dismantling the present distribution system then so be it.  Read that again… if they think that is in their organization’s best short- and long-term interest, then they have an obligation to make that move.  Beer wholesalers have an obligation to ensure this is never the situation. 

And don’t think the smaller craft folks are any different… although they like to think they’re the prettiest girl at the dance.  Many of them have problems with the 3-tier system to begin with.  They have their goals which may or may not coincide with yours.  The vast majority of them are “newbies” as far as beer distribution is concerned and they have no emotional or intellectual commitment to a vibrant 3-tier system... I don’t care what they say in public in front of a room full of beer distributors.  What the heck do you expect them to say?!  Right now they need you… tomorrow?  Who knows.

Both big and small brewers look at the average wholesaler (who they consider themselves to be much smarter than and work harder than) and say… “lucky SOB”… “members of the lucky sperm or egg club”.  Mr S. emphasizes that he doesn’t really care if you agree with this; this is many of their mindsets.  Remember this is tough love folks.

Next Mr. S really went on a rip… So you’re at a 25% to 30% margin… want to know how many other types of distribution industries make these types of margins?  Very freaking few.   Or to look at it another way… so you’re making $1.20 EBITDA per case … why should I as a supplier “allow” you to make this?  What if I took half of this and you made $0.60?  What would you do?  What could you do?  Sure you’d squeal and be unhappy but so what?  Your unhappiness might impact the marketplace short-term, something I don’t desire but it might simply be the way it is.  You could threaten to sell but there are plenty of buyers out there… “there’s the door.”

You could threaten to expand your list of suppliers… you’re doing that now.  In fact I have to listen to you talk about how I “only” keep your doors open, your profit comes from the small guys.  I ONLY keep your doors open?!  Look at that from another perspective… you ONLY exist because of my products.  Try to be a full-service distributor without me… yet I have to listen to how someone whose gross profit dollar contribution is a tiny fraction of mine is where your profit comes from.  Please!  Try servicing your retailers at any acceptable frequency on what they sell.  Try keeping fresh draught product out there with their volume alone.  Don’t talk too loudly about me ONLY keeping your doors open.

You could test the market for other beverages… you’re doing that now.  You could threaten to significantly reduce service… this leads to bad outcomes – read your equity agreement one more time; you’ve made commitments which I can enforce (and those little guys free-ride on)… and remember you’re still making $0.60 per case so pleading poverty won’t cut it.  I’ll take that in front of a jury anytime you want.  If you’re a 4 million case operation you’re still pocketing almost $2.5 million each and every year.  Every person on the jury would GLADLY trade places with you, as would all of your employees.  I’d shift as many costs as I could to your side… can you say sign machines?   It’s either cost shifting or margin reduction… perhaps both!

Sure we’re partners but we think the financial return on activities and actual skills brought to the table are skewed too far in your direction and we’re going to do something about.  And consolidation synergies?  Those will be split… and not to a degree you’re going to like.  All those wishing to sell please form a line… that’s OK with us.  Don’t like this tough love?  Tough.  Tell me where I’m wrong.  I didn’t cross over from the other side to make you happy, I crossed over to help those great and wonderful beer distributors survive and prosper in a world of increasing change.  As the analyst Carlos Laboy stated, “wake up and smell the coffee”… or you may be walking into the slaughterhouse much sooner than you ever thought possible.

 

And in a flash Mr. S left me for the spiritual otherworld.  Although I don’t agree with everything Mr. S stated, he does make some interesting points… and they are difficult to argue with.  Of course since he’s just hanging around in the nether-world he’s got a lot of free time on his hands.

 

Again I repeat… either take your chips off the table and run to the door or prepare your business (and your industry) for long-term survival.  Either one is acceptable… nothing else is.

 

 

 

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