Beer Business Unplugged

My first four and a half years in the beer business were spent on delivery trucks, first as a helper, then as a salesman, and finally as a route supervisor.  Remember, during this time beer was sold DSD and both the salesmen and helpers were paid with a base and commission established on what they sold.  Commission rates varied from three cents with Coors, to 10 cents with Falstaff.  We all loved those hundred case drops.

Since these were commission based sales jobs, the driver’s biggest concerns ranged from losing accounts to the company adding new routes.  Most distributors had only one or two brands, and when one brand started to grow, distributors started looking into adding additional routes.  Once that decision was made, the distributor took accounts from other routes to make up the new route.  No sales person ever wanted to lose accounts, especially good ones, but every single time that I saw a route added, sales trends increased over the old trends.  Even the salesmen who lost accounts saw their overall sales increase as they were able to focus more on their existing accounts.

Likewise, when a distributor who had a brand that was declining cut a route, the opposite happened.  At first it would take a while, but soon, the decline of the brand accelerated and sometimes the decline off-sets the expenses gained as a result of the lay-off.  No one won in that case.

Breweries, not unlike distributors, go through periods of down turns and pear back with cuts and lay-offs.  The personification of this type of business action, with the exception of going out of business, was when InBev took over AB and the resulting thousands of employees who either retired or were laid off.

Recently, MillerCoors announced that they would begin lay-offs affecting about 200 sales and marketing people.  In addition, numerous production workers would be also losing their positions at the same time.  Since 2008, both ABI and MC have lost millions of barrels in sales.  Some of that lost volume is attributed to the recession and tax increases, however, the question should be, how much of that lost volume comes from the reduction in talent?

Those employees who lost their positions were highly trained and educated.  In the case of ABI, many of those who left were long time employees with over 20 years with the brewery.  While cutting out these salaries and expenses may look good on the company’s income statement, there will be, and is, a negative effect to sales.  No company can lose that type of experience and not have its overall performance negatively affected.

So the question is what is happening to all this available beer talent?  Many of these highly experienced beer people are finding new careers in crafts and small importers.  Once a craft brewery is established, there becomes a time when it must get to the next level in its life cycle.  The brewery needs experienced beer talent and thanks to both MC and ABI, the talent is available.

The challenge for the crafts is just how to maintain its culture, yet be able to grow and obtain the talent it needs.  Established breweries such as Sierra Nevada and New Belgium have learned to do this, others such as Founders are just figuring it out.  Those professionals from ABI and MC who are joining these companies bring experience and valuable relationship skills to the craft culture and the industry is seeing the results.  Craft volumes are flying.

The craft industry should thank MC and ABI, as those two breweries must believe that the risk of doing nothing is the greatest risk of all!

In my efforts to build the beer portfolio for Glazer’s, during my time there as the Corporate Director of Malts, I contacted Dogfish Head in Delaware.  As this was over 10 years ago, Dogfish had not achieved the status it now holds in the craft world.  I flew to the brewery and met with Sam Calagione who was a great host.  We visited the restaurant and toured his small brewery.  By the time I left, we both agreed that Glazer’s would distribute his products in Texas, rolling them out in the first quarter of the following year.

That agreement was confirmed at the NBWA later that year when Sam and I met with the Texas Glazer’s beer team.  That fall, Dogfish began asking for volume commitments and minimum orders.  A minimum commitment is difficult for any distributor, especially if a brand has limited consumer awareness, which was the case for Dogfish in Texas at that time.  By the first of the year, communication between Glazer’s and Dogfish had disappeared so I contacted Sam only to learn that Dogfish had instead appointed CR Goodman distributor for the state.  Goodman had committed to the brewery’s request of minimum orders.  Needless to say I was disappointed on how this was handled.

New Belgium’s recent appointment of an Ohio distributor, and the fact that the distributor agreed to pay NB 3X, or $18 a case, to distribute the brand, has changed how the industry works.  Industry observers have weighed in on just how NB’s actions will affect the industry going forward, but regardless, distributors have to be concerned.

The beer industry in the US is contracting; there are some who say that the overall industry volume will be below 200 million barrels in the next year or so.  Premiums, sub-premiums, and lights are declining, some at an alarming rate.  Imports overall are flat as a category.  Crafts, as we all know, are on fire.  The craft category is over 7% of the total market and growing.  There are thousands of craft breweries and currently one new craft brewery opens every day.  Going forward, just how large will the craft industry grow?

Much has been written about attempts by the craft brewers to change or modify state beer statutes.  Craft brewers will become stronger and more influential as the category grows and laws will change.  But until that happens crafts will look to ways to manage the franchise protection that distributors currently enjoy.

If trends continue, crafts could become 40% of the industry volume and over 50% of the dollar volume.  Of course, it will be fragmented between many suppliers, not the oligopoly we currently have with domestics.  To grow and survive, will distributors with franchise protection wave their state franchise rights to forgo upfront payments for brands and sign performance and time bound agreements? Such a movement will resemble spirit contracts.  The distributor gets the brands for free and makes money off the brands, while the vendor can measure performance against agreed upon goals.  The contract ends and either it is renewed or the brand moves.  If the brand moves, and it has some volume, more than likely another brewer will leave the acquiring distributor and move to the losing distributor, as is the case for wine and spirits.  Brown Foreman and Diageo are always in competing operations.

This pattern is already beginning in the craft world.  Founders and Bell’s compete against each other and avoid the same warehouse.  This will happen more often in the coming years especially if more distributors open up and specialize in crafts/imports.

There is a paradigm happening in the beer industry at the middle tier and unless distributors work with brewers on these major issues, crafts will find another way to achieve their goals.  For distributors, if you see a bandwagon, it’s too late!