Beer Business Unplugged

Back in the early 80’s, on a hot summer afternoon, I was getting in a quick 9 when an elderly man drove up in his cart wanted to play in with me. We started talking, and I learned he had been the first Pearl beer distributor in the Texas Rio Grande Valley after prohibition. At the time, I had the Pearl brand, so we continued to visit. The elderly gentleman mentioned that his business had lost money every year through 1938. Then, all the Texas distributors came together and raised $60K to lobby the state legislature to pass the “cash law.” In 1939, he stated, he made $1,000. The WBDT had become a force in politics as have many other state associations.

In recent years, consultants including IBG and others, have championed wholesaler consolidation in an effort to eliminate costs from their operations. Over the years, the result of the consolidations and political activity have created a beer model that resembles an hour-glass. The top being the breweries, and the middle, the wholesalers, and the retailers, the bottom. Today the sands in the top are overflowing. Breweries cannot sift through to the bottom as the wholesalers are now so clogged that little moves through to the retailers.

When Beer Marketeers’ Insights started in the 70’s, the articles were almost all sales and marketing.  Today when you look at these publications, all we read about are law suits; legal actions; legislative issues and problems; three-tier attacks; and of course, the ongoing franchise disagreements between wholesalers and suppliers. So the question should be, why can’t we get by these disagreements and grow the business?

Business models, like products, have life cycles, and whether or not you agree, the current model for beer is outdated. When I purchased the Schlitz operation in the Texas Rio Grande Valley in the early 80’s, there were nine companies selling beer. Until just recently there were now only two, and a third has opened in the past year. How can consumers find the brands they see on the internet? How can new products get to market? How can retailers get competitive pricing and the service they want?

Consolidation, state franchise protection, and national associations have all contributed to this “hour-glass” model which is choking the three-tier system. When awarding Krombacher in Florida, I had a wholesaler tell me he wanted language in the agreement which would have had the brewery pay him three times the value of the brand if he went out of business, even if he lost his license. His position was that he had invested in trucks, warehousing, personnel, inventory, etc. and should be compensated for his effort. I reminded him of “our skin in the game,” that breweries were not cheap, to consider the costs of kettles, packaging lines, cooperage, etc.. and that he was not paying for the brand and was making a nice GP off each case. This was not an isolated situation as these comments are more common than you may realize.

As this is being written, the NBWA is going on and I’m sure this topic will be one of the major issues being discussed. Will anything come of these discussions? Nope, I doubt it. What we can plan on, however, is more attacks, more legislation, more lawsuits, and more negative press on the system. The model is broken, and if it doesn’t change soon, there will be no three-tier system as we now know it. There are none so blind as those who will not see!

Back in the early 80’s, two of the largest and most successful brands changed their packaging and labels in an effort to change their negative sales trends. In spite of these changes, Schlitz and Coors continued to decline. In fact, the CEO of Schlitz at that time, went on TV and said he had come to Schlitz (AB background) to “make the best” beer, when in fact, all this did was to give the consumer(s), who had supported the brand for years, a reason to switch. During this time, many regional brands attempted a similar strategy.  In Texas, two of them were Lone Star and Pearl. None of these package changes worked. What I find ironic, is that now you can buy “heritage” Coors cans (and Miller High Life bottles), which feature various can designs over the years in specially marked packaging. It seems to be working as the brand is now growing. In fact, the current can is very similar to the cans of the 60’s and 70’s. Schlitz is trying to make a comeback by featuring a package that highlights the “original liquid,” the retro label from those days, and some 60’s posters. Then there is the retro winner, Pabst Blue Ribbon.

Since 1946, Heineken, the second largest selling import, has had the same bottle. Now does anyone out there really think this change will reverse sales trends? History says no.

The CEO of Warsteiner commented to me that he could send a German to the States head up their US operation. I asked him, in his opinion, “Just how successful I would be if I went to Germany to establish an American beer?” He told me, “ You would fail.” So what’s the difference between a US beer professional trying to tell a European how to run their business, and a European telling a US company how to run their business?

I have never seen a more episodic and complete marketing program then Heineken had 10 years ago. They really understood their consumer and how to relate to them. Heineken knew what they wanted and they got it. So what has really changed? Crafts? Perhaps, but could it be that a centralized business model has slowed down the brand? How long is the learning curve when the head of the US operation comes to this country and attempts to in-grain their home countries culture?

If you go back four years and look at how the European breweries addressed the US recession, and the decline in the exchange rate of the dollar, you can see how Heineken, along with other importers, reacted and are now are dealing with the results of their reactions. The decision to raise prices (dramatically), reduce marketing, and cut field staff, along with the growing interest in US crafts, might just be why Heineken is in their current position.

Or maybe not? Remember, ABI in the last year changed the Budweiser label, arguably one of the most, if not the most recognizable consumer label in the world, in an effort to change their sales trends! I guess soon we’ll see a “heritage” collection of Budweiser cans on the shelf, too? So look for a similar 12 pack from Heineken in the future! Once you’re in the hole, it’s hard to stop digging!