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« Year-end planning 2... Change the Question | Main | Time to batten down the hatches or turn up the heat? Part 2 »

Time to batten down the hatches or turn up the heat? Part 1

As the media breathlessly announces the possibility of an upcoming recession, driven by sky-high energy prices and the various problems in the housing markets, what is a wholesaler to do?

Many of you have been seeing this slowdown for sometime… generally in the on-premise arena where owners have been talking about soft business for some time now.  Cutting back their employee’s hours, etc.  Now it is moving into the general consciousness.  This is not really surprising.  These high energy costs have got to impact the economy sooner or later - and energy costs are ultimately embedded in every product.  Add in the housing problems and tough times might be racing our way.  And of course in many ways, the macro-economic future is a collective self-fulfilling prophecy… if we collectively believe tough times are a’ coming, then they very likely will.  And many in the political world and their media counterparts are doing everything possible to ensure these tough times come since they perceive it to be to their political advantage... got to love politicians and political partisans, eh?

Some in the media are forecasting that this recession, if it comes, may be the worst in over 20 years.  This is really a bit of scare mongering on their part since there really hasn’t been any serious economic downturn for well over this period of time.  But of course this reality, and our collective economic ignorance tied to a rather unrealistic fat-and-happy attitude opens the door for misguided political mischief as our determined political “leaders” try to solve this problem.  Can you say targeted tax increases to make up for revenue short-falls?  Sin tax movements are popping up all over the country... for revenue reasons, misguided public safety, and my favorite, fairness.  And many are realizing they can’t get these taxes through their state legislatures, so they are going direct to the voters with ballot initiatives.   

Oh wait, I’m not supposed to talk about those things so publicly.  Shh!  No one, especially our enemies will ever be aware of these things unless I write about them ;-)  For those unaware, that’s just a jab back at those who think the various neo-prohibitionists out there are unaware of the many things this industry does unless they read my blog.  They seem to think the enemies of this industry are just too dim-witted and uniformed to ever use our own words and actions against us unless I tell them to do so.  Please.  Underestimating one’s enemies generally doesn’t end well.  I’ll unload on that one with a rant on another day.

Of course many (actually most) of you have had some very good recent years.  Net gross margin mix has been up and a lot of cash has been flowing to the bottom-line, even with the high fuel prices.  In a somewhat unique situation, in many cases the recent times have actually been better for the Miller/Coors guy than the A-B wholesaler.  And this causes additional problems for the A-B folks since they generally have the highest cost structure.  Regardless, hopefully you haven’t allowed your organization to also expand and consume this additional money.  That’s one of the problems with good times, often expenses expand at the same or even quicker pace.  This can cause big time problems because if the good times end, you will very quickly experience financial pain.

An excellent thing to keep in mind is a great saying “Success breeds failure”.  Don’t let it happen to you.

So what, if anything, should a distributor do?  Being a consultant, the first answer is always, “it depends”.  The reason for this isn’t solely that consultants are low-life’s trying to get their hand in your pocket ;-), although in some cases this may be true.  Rather, it is because to give decent advice, you have to have more information to base this advice upon.  That’s the reason anytime someone asks me a consulting question, I first have to ask questions for 5 – 10 minutes before I can give a decent response.  So obviously I can’t give one-size-fits-all advice on a topic of this magnitude.

First there are a number of factors which will determine what, if anything, you should do.

The first one is the reality that the ONLY thing that matters is what is going on in your little corner of the world… the direction you will take depends on what future you think is most likely for your territory.  Forget about the national averages.  The future for your territory may match the larger country exactly, or be at complete odds with it.  I know Benj and Harry spend a lot of time filling their publications with national, and even international information, which might be valuable for national suppliers and entertaining for the rest, but it is really ultimately of little value for wholesalers in the actual operation of their businesses.  In the end, the local world is ALL that matters for distributors of any product.

Second is an issue which is more philosophical in nature… and even the great and wise Conlin doesn’t have the final answer on this one ;-)  And this great philosophical question is… how much do you think a distributor can actually influence sales?  This is a profound question which far too many wholesalers have never really examined.  It is of utmost importance since it should strongly impact the design and direction of your organization.  Can wholesalers significantly impact consumer choice?  I know many wholesalers who think they alone are responsible for the success of this or that brand…but I’ve never heard one claiming responsibility for the demise of a brand!  ;-) 

But if you examine market shares, you generally find brand shares are pretty close across adjacent distribs.  Not always by any means but quite often.  And often the difference in a state from highest brand share to lowest share is often very narrow (if you want to be number one in your state next year, be in last place this year!)… and since obviously different wholesalers are operating in these different territories, brand success can’t solely be based on any single wholesaler’s performance.  And even in those situations where there is a significant difference in brand shares, quite often (although not always!), it can be rationally explained by differences in the LOCAL territory. 

Many supplier personal – not just their street people but throughout their organizations, will tell you – often after mass quantities of beer - that their opinion is wholesalers don’t influence sales (and generally make far too much money for the value they bring).  For insights into this, please go back and read my last post “Now for Something Completely Stupid” here on the directional nature of stupid.

My beliefs on this subject don’t matter, it matters what your beliefs are. It’s your business. But since you’re all wondering, I believe the ability to ultimately truly impact consumer choice is probably a lot less than many wholesalers believe. But then again, I’m probably not as good looking as I think either ;-)  It is far from zero and there are plenty of success stories but…

A lot comes down to just the basics - gaining distribution, excellent merchandising, clear pricing, displays, displays, displays, strong retailer relations, a good basic order replenishment and delivery system… in a nutshell, excellent execution on what we can control… and ultimately giving the consumer every opportunity to purchase our products.  That’s all we can do.  We can’t force them to drink it… please remember that Philip ;-)

I once worked with a distributor who when I first went to work there told me he had to take me across the state line to show me “the most amazing thing”, this amazing Stroh wholesaler.  As my client and the competing wholesalers would freely admit, this Stroh guy truly kicked everyone’s butt at retail.  We visited a few off-premise accounts and it was amazing.  This guy and his organization out merchandised everybody else… by a lot … with Stroh products!  They owned those stores.  And guess what, even though he was clearly the best at retail execution, he still had to leave the industry.  I’m certain there are similar stories around the country.  Remember, we can only do what we can do.

For those wholesalers who I have just upset with the above analysis, please remember this is not personal nor is it a moral issue, this is simply unemotional analysis.  You must be able to do this to make good business decisions.  I might be wrong.  If so, go out there and make it happen. 

After you have completed the analysis on these two points, looking down the road at a possible economic downturn, what to do?  Obviously doing nothing is always an option.  Sometimes it is even a good choice!  You certainly don’t want to over-respond but neither do you want to take too long to make changes… you can bleed a lot of money in a short period of time.  And even if you choose to do nothing, having a plan B already developed and ready to implement is always a good choice.

And as mentioned above, it depends on your specific situation.  If you are burdened by debt, you probably want to be a little quicker in making adjustments… i.e. you might want to make changes before pain rather than after.  But if you have your foot on your competitor’s throat, why let up? Perhaps bad economic times might be the perfect time to turn up the heat on your competitor… especially if they don’t have the ability to effectively respond.  But don’t try to put your competitor completely out of business, it generally can’t be done… but you can take and keep share if and when they are weak, and in the process keep them weak for years to come.   For many Miller/Coors folks, for the perhaps the first time they are feeling their oats and giving just as good as they are getting… perhaps even giving a little more than they are getting.  Do you want to pull back and give them a chance to breath or keep hitting them while the hittings’ good?  In gambling parlance, do you double down, be happy with what you’ve got, or start cutting the fat right now?  The choices, the choices.

Next post – the analysis continues


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