The 3-tier system needs more beer distributors
Although I don’t necessarily try to be a contrarian, I do try to follow where the facts lead… regardless of whether I like the path or not. And for the 3-tier system I believe the pendulum has swung too far regarding the number of beer distributors in the country. Yeah that’s right; I think the conventional wisdom on the “need” for continued wholesaler consolidation is wrong headed and actually counter-productive for Brand Beer… and all the players along the way.
Anyone in this industry has heard it time and time again. It is a mantra repeated over and over again until no one even thinks to question the foundation of the belief. Exactly WHY is continued wholesaler consolidation “required”?
The tried and true response is for cost savings… to remain competitive. Really? Margins, both % and $$, are generally at all-time highs. What has happened to all those folks preaching about how wholesalers MUST learn to operate on razor-thin margins?
Although folks only whisper it, many (most?) wholesalers are making record profits… all while unit sales are down!... all this in some of the toughest economic times the country has faced in decades. My gosh, how would things look if the industry volumes were up?! I look all around and I don’t see any economic pain in the beer distribution business.
I hear how ABI and then MC are going to rape beer distributors… heck I’ve even written things in this vein… but I sure don’t see it happening.
If ABI and MC (and others) are trying to do this they must be incredibly incompetent. I mean record wholesale percent margins… record wholesale dollar margins… and record wholesale profits. If that is being raped by your primary suppliers then I know of a lot of industries that would gladly take some of that.
But still the mantra… consolidation WILL happen. Consolidation MUST happen. It is pre-ordained that consolidation is the way of the future. Why? Based on what facts?
From my observations, as beer distributors become larger and larger they become more wholesale logistics entities and less wholesale sales entities. They can be very efficient on the distribution logistics… the nuts-and-bolts of receiving, warehousing, and delivery but they seem to be less and less sales entities.
In fact some of the best known management and M&A consultants in the industry have preached for years that this is the preferred path for beer distributors. Forget that “sales stuff”, let the suppliers take care of that and you can simply be a warehousing and distribution business. Sadly, the industry followed their advice and now the vast majority of the beer a wholesaler distributes is already sold for them; they are simply replenishing the stock at retail. I question whether putting up shelf strips, static stickers and building pre-sold displays are really the marks of a “brand building” industry.
Is some of the softness in Brand Beer (especially the national stuff) simply the logical consequence of losing the local market feel that a smaller distributor had? Is Brand Beer getting its butt kicked by the spirits folks in part because beer distributors are becoming more and more like the large wine and spirits distributors? Especially in their relationship with retail? The special sauce that helped make beer such a powerhouse at both retail and consumer was (is?) perhaps based on their close relationship to retail. A relationship which is weakened each time a distributor gets larger and larger.
I’ve heard this many times from beer folks. I was just talking to one of the best beer guys I know and he noted he was far more intimately aware of his market when he was one million cases versus the six million he now is… and he’s still the beer guy he always was… he didn’t put in the clutch, it’s just that it is next to impossible to match local market knowledge and execution with a smaller distributor versus a mega-distributor. That’s just the way it is.
I don’t think it is good for Brand Beer in general or brewers and beer distributors in specific to continue to chase this supposed necessity to consolidate. Craft brewers, craft distillers, consumer product manufacturers of all stripes are seeing a mad rush to local. Brand Beer and big brewers and distributors ignore and/or fight this trend at their own peril.
If brewers want/need a larger footprint, then form larger associations of local beer distributors. Long ago I gave away this wisdom and I’ve yet to see a state really run with it. Lots of opportunity if distributors can just check their egos and the need to be the boss at the door… and of course get over the need to try to eat all the other distributors in the state ;-)
I understand operational synergies as well as anyone but one would think that at some point, the cost at retail to an ABI or MC of reducing their distributor base will far exceed the benefits of having one less warehouse out there to ship to… of course there’s always the issue of having one less beer wholesaler’s family (and senior management team) to support ;-). Is consolidation being driven primarily by this fact alone?
Remember that beer isn’t wine or spirits. The requirements at retail for beer are MUCH different than spirits. A case of 1.75’s is one heck of a lot more drinks than a case of beer… and it doesn’t have a product-life of only around 3 months. I won’t even bother bringing up the retail realities of draught product.
Soft drinks are much different too. Beer distributors aren’t doing the manufacturing on-site. This leads to different economics when considering warehouses (or plants) required. This drives one to far fewer plants in any specific area vis-à-vis a beer distributor. Beer warehouses are operationally cheap by comparison.
And one can only take the operational savings of closing warehouses so far. You still have a very high retail service frequency and thus miles and additional drivers and trucks very quickly equal lots more dollars. At some point in time it is cheaper to keep a warehouse open than it is to run the delivery operations from a distant location. I know, I’ve done that analysis many times. And with higher fuel prices, this distance shrinks for every fuel $ increase.
And what about everyone’s favorite darling, social media? Social media for beer folks is the essence of local.
Throw these all in the mix and it becomes evident that beer operations simply won’t consolidate down to the level of the pop or wine and spirits folks. Not going to happen. Include the overall general trend of the strength of local and it becomes evident that this inexorable march to consolidation is based on false pretenses. Just because it is repeated often does not make it so.
Obviously in major urban markets more consolidation is possible because of limited distances and high population density… but those same features are what allow for less consolidation in these exact areas!
Is some of the softness in Brand Beer due to wholesaler consolidation and the corresponding loss of the local relationship? I’d have to guess yes. I don’t think one or two mega-distributors per state are good for Brand Beer or the brewers… big, small, or in-between. And it most certainly isn't good for the foundation of the 3-tier system. And I don’t think it’s going to happen regardless of what someone keeps repeating.
On a completely different subject… do you know of anyone who sold out in the last 25 years who did so out of financial necessity? Or who really wanted to leave? I know of none. They only left because someone drove a dump truck full of cash to their front porch. They left because someone was willing to pay them 20 years of after-tax income in one lump sum. This is the ONLY thing driving consolidation in this industry. It’s not need… it is someone else’s money. I think this is rotting this industry from its core.
In addition, think of that… in at least 25 years not a single entity (or very freaking few) faced financial pain that demanded they close up shop. No one has gone out of business in this industry in decades. Other than government, I can’t think of a single industry in the entire country that can say the same. Amazing. Is this a forever thing or simply a sweet-spot that is going to end sooner or later? More on this point in future posts and articles. 2014 is going to be an interesting year for the beer distribution business… I guarantee it! ;-)