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« High Stakes Poker and Consolidation | Main | Leveraging Distribution »

Conspiracy or Just Good Strategy or Just Plain Crazy?

OK… I try to stay away from conspiracy theories as much as is possible, the black helicopter crowd and all.  But as has been noted, you’re not paranoid if they really are after you ;-)

What brings up my conspiracy paranoia?  When things just don’t make sense… and some things coming from ABI just don’t make sense.  I have no idea if the following is correct or not (and haven’t decided if I believe it or not), but it is my feeble attempt to put some meaning to actions I don’t understand…

First of course we have the audacious run at, and purchase of Anheuser-Busch… a fat, bloated cash cow if there ever was one… and one that was simply squandering an internationally known brand name of tremendous value.  The wizards of InBev showed they were better than most at spotting corporate waste and identifying national and international value… in addition to being pretty dang good financiers… and pretty good at strategy. 

Also, I hear the ABI folks are great planners, they have a plan for everything… quite detailed plans for almost every possible action.  They most definitely aren’t shoot-from-the-hip-type guys.

Then Brito lets slip that ABI thinks they could self-distribute at least 50% of their US volume… from ABI’s viewpoint, the independent three-tier system has had its uses but is a rather antiquated concept whose time has come and gone (at least that’s my read on their thinking).  And as they have proved in their past actions, they are pretty good at spotting value and squeezing profits out of a system.  Unfortunately for beer distributors, those profits (and cost savings) they are targeting are YOUR profits.

But how to get them?  Yes “wholesaler margin management” and “distributor profit pool optimization” and “system-wide cost mutualization” will get them a fair share of your profits but is there a bigger play going on here?  One which helps get rid of the entire concept of a mandatory three-tier system?  Allowing all manufacturers of the product to legally distribute if they so choose?

This is where the black helicopters start flying ;-)

First is the Dallas bitch-slap where distributors are told in no uncertain terms that they are to get rid of almost anything that isn’t an ABI product.  As I noted, when I first heard this I thought it was jaw-droppingly stupid.  This country is experiencing a brewing renaissance that is unprecedented anywhere in the world.  The Brewers Association reports

  • Growth of the craft brewing industry in 2011 was 13% by volume and 15% by dollars compared to growth in 2010 of 12% by volume and 15% by dollars.
  • Overall, U.S. beer sales were down an estimated 1.3% by volume in 2010.
  • Imported beer sales were up 1% in 2011 and up 5% in 2010.
  • The craft brewing sales share in 2011 was 5.7% by volume and 9.1% by dollars.
  • Craft brewer retail dollar value in 2011 was an estimated $8.7 billion, up from $7.6 billion in 2010.
  • 1,989 breweries operated for some or all of 2011, the highest total since the 1880s.

With these market dynamics ABI wants “their” distributors to walk away from these products and this exploding marketplace?!  As I noted in my Who’s Your Daddy here and Who’s Your Buddy here pieces, from an ABI distributor perspective this is incredibly stupid… for the MillerCoors folks it’s like finding money on the street.  It also makes it more difficult for the explosion of craft brewers to get to market… more on this later.

But one could argue ABI simply wants “their” distributors to focus solely on their products… and it isn’t new, the old AB under Three Sticks had the same plan under “100% share of mind”.  Although the market dynamics of the craft beer world have changed dramatically since then, one could still make the case… and it still might be a stretch but one could make the logical case for it.

But what I’ve heard over the recent past simply does not make sense.  ABI field personnel are pushing distributors to simply walk away from brands with the argument that these brands will simply exit the marketplace!  And we’re not talking about some minor, never heard of craft beer here; we are talking about some major suppliers who have been around for years.

Now I know of no one in their right mind who knows anything about the distribution business who would state that with a straight face… just walk away from these suppliers and they will exit the marketplace?!  The MillerCoors distributor won’t pick them up (for no cost!)… nope.  The supplier will just meekly accept their departure from the market?  Yep.  Yeah, and I’ve got a bridge to sell you.

None of this makes sense… and thus the conspiracy starts spinning in my head.  What if this is all part of a fiendish (might I say insidious) plan to dismantle the independent three tier system?  What if the market leader decided it was in their best interests to “become” the second tier but couldn’t do so outright (or they didn’t want to take the heat for trying)?  What if they needed cover for their plans and saw a way to use the prettiest-girl-at-the-dance (the craft brewers) as a means to implement their plans?

Put on your tin foil hats and follow me for a while…As Harry pointed out in April, “An estimated 10% of ABI’s total volume (98 million BBls) is sold through their brewery-owned branches or 130 million case equivs........ABI branches sell nearly four times what Boston Beer Co. sells in a year.”  A-B has never owned so much of its own volume. What does it mean?

This is a regulated product.  That is an important point.  In an independent three-tier system the brewer MUST go through an independent distributor to reach the retailer and consumer.  But what happens when a brewer can’t find a willing distributor?  Short answer, they go out of business.  Now they might have gone out of business for a whole number of reasons… but the forced restriction on distribution is like an intellectual “get out of jail free” card…

“the reason and the only reason my company went belly up is because I couldn’t find a distributor who would willingly carry and sell my product.  How is that fair?”  I could have distributed it and I had willing retailers but this stupid law put me out of business”

This is an easy argument to make and it is very difficult to prove there isn’t at least a little truth to it.  Every failed/failing brewer will make this argument to some degree.

Now the truth about distribution of any consumer products good (or any good for that matter) is that distribution is a bitch to get.  That’s just the way it is.  If many of these brewers instead baked cookies or potato chips they would find distribution extremely difficult to obtain (and many would simply go belly up)… ah, but in the cookie or potato chip aisle they could distribute themselves, assuming they could find any willing retailers  (and they would a few for at least a while).

But since this is a regulated product, that option isn’t open to them and thus they get the intellectual “get out of jail free” card… and work to change the law… because they are a sympathetic lot whose business travails are severely damaged by this mandatory three tier silliness… and the erosion starts. 

I believe every state in the nation presently has some exemption from three tier laws allowing brewers, based solely on amount of brewing output, to operate in the second and sometimes, third tiers… sometimes in all three tiers.

What if the market leader wanted to accelerate this pressure?  Much like water rising behind a dam, sooner or later it will find its way.  In a market duopoly like the US (the two big boys controlling over 80% of the market) the options for distribution are pretty small… what happens if the market leader would cease to be an avenue of distribution for an exploding brewer population?  Sure the MillerCoors distrib would pick up some but market dynamics simply don’t support a single-distributor model anywhere in the real world.  And of course in areas with fairly high population densities a third “craft beer’ distributor can be supported… or of course a wine and spirits distributor.

But it would still put additional pressure on accepting accommodations for brewers… then the latest move, telling distributors to drop some pretty major suppliers and noting they will simply exit the market.  Ahhh, no they won’t.  And if they can’t find distribution they too will join the chorus for second tier accommodations (like the end of the requirement for an independent three tier system… bye bye independent distribution tier).

Sooner or later, either through lawsuit or legislative action, the entire reason for the independent second tier will be questioned. 

“These folks have been self-distributing for years and the sky hasn’t fallen”…

 “equal treatment under the law”…

 “I run a family business, work hard, and my entire business is put at risk because I am forced to go through an independent business for distribution… one who won’t focus on my products… etc” 

 Which all plays into the hands of ABI and their desire to self-distribute… not today, but in the not too distant future.  And it’s a win-win for ABI… forcing distributors to focus solely on ABI products ensures them the maximum effort from distribution… and withholding 50% of the nation’s beer distribution capacity from an explosion of brewers is certain to add pressure on state-by-state accommodations for brewer self-distribution.  Both work to their favor, regardless of how completely successful they are.  And once one accepts the notion of self-distribution (and the sky hasn’t fallen), then the only, and the last battle is solely over the size limitation… sooner or later an easy win.

And unfortunately for the prettiest-girl-at-the-dance (those craft folks), they may find their handsome new supporter doesn’t really have their best interests at heart.  Anyone want a carbonated soft drink?  Most may find they rue the day they thought self-distribution was such a great idea… and thinking they can contain self-distribution based on some arbitrary volume output is most likely wishful thinking (if they’ve even thought that far ahead).  The craft folks won’t know what hit them when ABI (and of course MC) put their tremendous power to work directly at retail.  Instead of a 500 case deal, they will be talking about a 50,000 case deal.  They will own on-premise.  I know the street pretty well and blood will flow… unfortunately most of it will be spilled by the craft brewers.  But that’s a side point. 

Is this ABI’s insidious plan or is the high altitude in Colorado getting to me?  Heck if I know.  I know they are detailed planners.  I know they think strategically.  I know they want to self-distribute a fair amount of their beer.  I know the “alignment” issue (carrying only ABI products) is at best self-serving.  I know attempting to remove 50% of the nation’s beer distribution capacity from any other brewer is certain to add to the pressure from the bottom to allow self-distribution.  I know the erosion has already occurred in every state in the country… some arbitrary size limitation is the only thing stopping full self-distribution in every state in the country.

Are some of these latest moves on simply dropping products a strategy to get one of the mid-sized brewers to make a break for it and attempt to go direct again? (Pabst tried it in California years ago and failed… but the world has changed since then).

Conspiracy or crazy?  You know the best conspiracies are never discovered, that’s why they were the best.  Paranoid?  Not if they are really after you.  Heck if I know if this is the plan… but some of these actions will generate other distant actions which are all aligned with ABI interests.  Isn’t that what a conspiracy (or just good strategy) does?  It sets in motion actions which influence the flow of things… all towards a desired end-point… and all without anyone’s fingerprints on it.  Or I guess it could all be a coincidence… who knows?

Remember, “Just because you are paranoid DOES NOT mean they ARE NOT out to get you!  Now take off the tin foil hats and get back to work ;-)

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