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August 2018

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« Rising Fuels Costs - The Other Side of the Coin | Main | Anheuser Busch – InBev and Family Businesses »

Don’t Shoot the Messenger

OK, this is the last post on fuel issues for a while.  You can read a few past ones here and here and here.  First, let us acknowledge that rising fuel costs don’t hit all wholesalers the same.  For some of you it is a VERY big deal… for others it is a relatively slight reduction in profitability.  And from the start let us also accept – now don’t shoot the messenger – that this industry may just become less profitable than it has been in the past.  This is not the first industry to see shrinking profits… nor will it be the last.  And often industry-wide profitability is cyclical over the longer-term… perhaps we are now just entering a trough.  As a wholesaler I’m certainly not just going to roll over and passively accept this reduction in profits, but in the end it might just be the nature of the beast.  Please put down the gun.


And in our fight to maintain profitability you certainly don’t want to take any actions which cause long-term harm to your business.  Thinking and acting outside the box is good – in fact it is a key value I bring to my clients – but you don’t want to be penny wise and pound foolish.  Analyze all potential moves from a system-wide perspective… make certain they work in all areas of your business.  This is no time for wishful thinking.  Cutting merchandisers might sound good but what about the reality on the street?  Cutting mid-level and senior management might make a lot more sense.


For those looking for help from your suppliers… they might throw you a bone but I don’t believe you will get any significant assistance.  Kind words?  Sure.  Sympathy and understanding?  Of course.  Cold hard cash?  I have a bridge to sell you.  I don’t want to over-generalize but most suppliers, throughout their organizations, think distributors make far too much money for the value they bring to the table.  Whether this is true or not is irrelevant… they believe it.  And of course they have their own problems with their energy cost and in fact higher costs for almost all of their inputs.  They are your channel partners, not your older brother… do not expect them to save you… not going to happen.  And again, please put down that gun and quit aiming at the messenger.


One of the first things one does in analyzing any situation is to attempt to determine the most likely future(s) you are going to confront.  Then you build your system to address your goals, the market reality as it stands today, and the future environment you expect to operate in.  So what does the energy future look like?


Unless you are in the oil and gas industry, it looks pretty bleak.  $5 per gallon gas before the end of the summer.  Diesel much higher than that.  And no, it’s not driven by some conspiracy but is rather the result of simple supply and demand, made worse by the very weak dollar.  From an energy security view-point, this country should end its stupidity and allow oil and gas drilling… this would lessen the demand on foreign oil but would probably have only a small affect on the price of a barrel of oil… the oil market is a world market and prices are set on a world-wide basis.  Although the psychological affect on the markets of the US getting serious about exploiting our own oil and gas might be significant.  You can hate the ExxonMobil all you want but our oil and gas companies only control about 3% of the world’s oil market… and trust me, 3% isn’t setting any prices.  We could allow oil and gas companies to build new refineries – a new one hasn’t been built in over 30 years.  Do you think the number of vehicles on the road and total fuel usage has gone up just a bit in the past 30 years?  This would help lower prices but I certainly don’t see too many politicians or their “environmentalist” backers willing to accept this simple fact.  You and I are aware of this but far too many simply won’t accept the fact that almost every single product moved across this country is at some time moved by a diesel engine.  Every freaking product there is!


There is a great quote


“Life is tough, and it’s tougher when you’re stupid”


which very nicely sums up this country’s energy policies over the past 40 years, and which we all will pay the price… to say nothing of many other policies which our politicians and judges foist upon the innocent citizens of this great land.  Don’t get me started… in a nut-shell, the near-future is mostly likely one of very high energy costs, probably also driving slower economic growth. 


Worst yet, as I pontificated about a while back here, the Middle East is going to have a very significant impact on your business whether you like it or not.  Western Europe has already accepted that Iran is going to get a nuclear weapon… they just plan to live with it.  Idiots in my opinion… but they have been idiots for some time.  It is highly unlikely Iran will be stopped… and if it is stopped it will involve some serious military action.  I don’t see this helping fuel prices.  If they acquire nuclear arms, this will of course drive a nuclear arms race in one of the most volatile areas on the planet, and until a replacement for oil is discovered, one of the most important.  Again, don’t see this helping fuel prices.  World-wide demand most certainly isn’t going down.  Throw in crazy Hugo and Russia flexing their muscles and it is difficult to see the price of oil lowering anytime soon.  Plan for this.  In fact, since the odds are things will get worse before they get better, have a Plan B for a crisis in the oil markets.  If not you could lose a lot of money in a very short period of time.


I get beat up every time I state this but… if you are not a long-term player in the beer distribution business – and this is determined by the market, not solely your desires – then you should sell your business for a premium today... this instant.  Please take your finger off the trigger.  And for the purchasers, this isn’t the time to try to get things on the cheap… it is the time to make strategic moves which ensure your long-term viability.  Being cheap but not getting any deals done is not the definition of success.  Look at the successful acquirers in this industry… they act quickly, fairly, and pay very fair prices.  They don’t miss deals because they’re stepping over dollars to pick up a few pennies.  They are not a pain to deal with.  If you have to pay more to make a significant strategic move, then do it.  Often passing on these strategic moves means the only other long-term choice will be to someday sell your business.


Looking at the industry from a strictly economic viewpoint, you can cry all you want about your profitability but there are still many more people who want in this industry than want out… this is a sign that whatever profitability exists, it is still high enough to attract willing market participants.  You might not be happy with where this profitability is headed or with where it finally bottoms out, but that too is irrelevant.  The cold, hard, impartial hand of the marketplace will determine this… as it has everyday in the past… it is just that in the past you (and at least the remaining wholesalers) were happy where this market-level profitability was… now not so much.  This is simply macro-economics 101.  Please release the trigger and back away from the weapon.  And remember all those small wholesalers who left the industry… do you really think they all went voluntarily?


So the “solution” is in one of three places (probably some from each)…

1.                  Cut costs where you can.  Mostly this equates to a lower head-count.  That’s just the way it is.  But there are market realities which you cannot ignore.  Re-structure, re-route, and build a more efficient organization. Yes, you can do it by yourself... but together we can do it better.  That is an absolute guarantee.   Make it as flat as is possible… if you must reduce head-count, many times it is best to look to middle and senior management.  How bad do you want (need?) savings?  In these posts I paint with a broad brush, if this doesn’t apply to you, don’t get angry with me, just ignore it.  Remember when you hire a mercenary (that’s me), you get a mercenary.  You pay me to tell you the truth as I see it, and that’s what I will do… whether you want to hear it or not.  Almost no one else in your entire world will do that for you… it is very valuable.  Don’t cry about your bottom-line when you are not willing to actively do something about it… and canning the janitor isn’t generally the solution.  Please take the laser sight off my chest.

2.                  Build and run a more efficient organization.  This is a necessary by-product of the first point.  This requires better design, better planning, and better execution throughout the organization.  Look at each employee’s actually activity… not what their job description says but what they actually do on a day-to-day basis.  Do you have high paid employees doing low level work?  Look at every management position you have… it that person didn’t show up for 3 months, what would be the day-to-day impact on your organization.  If the answer is “little to none”, why do you have that position in the first place?  Throughout your organization… top-to-bottom… this philosophy equates to “fewer but better”.  A fundamental requirement is better planning and flawless execution. 

3.                  The above two points can only be taken so far.  Sooner or later you will have cut as much as you can… and sooner or later you will have the most efficient organization you can build.  The long-term solution to increased costs is to increase your average gross profit dollars per stop.  Read that again.  More products, different products, gaining market share… this is why I am such an advocate for using the power of connectivity to leverage your distribution systems.  State-wide associations!!!  If not that, then 3 or 4 wholesalers acting as one on certain aspects of their businesses.  In the same state or across state lines.  I’m not talking shared services (although they make sense), I’m talking about using what you already have as a magnet to attract brands and products… building a superior funnel to better supply you with additional products.  You need to do something since these cost increases are hitting the wine and spirits folks and other beverage distributors just as hard as they are hitting you.  You would be wise to expand your concept of who your competitors are for new and existing brands.  The same economics that apply to you, also apply to them. 


Don’t just react to the market, set your course and determine the future.  Make the future you want… don’t just wait and hope it happens.  A great quote from hockey legend Wayne Gretzky says it nicely…


When asked by a reporter what made him such a great player, Gretzky responded that he didn’t skate to where the puck was, instead he focused on skating to where the puck was going to be.


Something to keep in mind.  Now aren’t you glad you didn’t shoot the messenger?


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