Jun 272017

Well now, that did not take long, did it?  On May 9th, this post wrote about the future of the beer industry in conjunction with the major retailer, Amazon.  Now, less than two months later, the industry is on alert as Amazon has announced its purchase of Whole Foods for an incredible $13.7 billion dollars!  In the May 9th blog, the questions were:   How would Amazon secure a foot hold on the alcoholic side of the retail business.  And if Amazon was successful, when would the acquisition occur?  Those two questions have been answered, so we are now aware of at the least the first step of the equation.

As expected, industry pundits have pontificated about their views of the future once Amazon jumped into the mix.  Nobody really knows for sure how Amazon will approach our industry, but one has to believe craft brewers are jumping for joy with the news.  Whole Foods specializes in crafts and imports, they do not sell domestics, so perhaps the ABI and MC might not be concerned.  That being said, a couple of possibilities seem feasible.

First, the craft industry’s on going issues with the middle tier distribution system, and their inability to access markets and the resulting lack of focus on said markets.  We know that. I hear that concern every day.  With Amazon taking over Whole Foods, the possibility of a craft brewer self-distributing and eliminating the wholesaler entirely is now more attractive in states where legal, quality discounts come into play.  Pallet drops to Whole Foods, at prices no other retailer can obtain (e.g., Costco), will enhance the craft brewer’s ability to gain sampling, volume and consumers, thus eliminating the wholesaler.

If, in fact, this model becomes a sizable part of the retail business, which it could over time, the self-distributing craft may focus solely on this model that enables elimination of the middle-tier for off premise volume.  Again, where legal, the craft brewer could appoint a wholesaler for only on-premise distribution, and keep the off-premise in house!  Perhaps, where legal, craft brewers could crave out Whole Foods as a “house account.” A wholesaler could even benefit as Whole Foods and Amazon become the primary means of driving a craft brands’ consumer demand.

In a more traditional model, the wholesaler and vendor have to revisit their contracts.  A number of contracts address a wholesaler selling beer to a retailer, they know will ship their beer out of the wholesalers assigned footprint.  How will that be addressed?

A second model possibility would include when an importer, for example, owned by a European brewer could make a statewide agreement with Whole Foods using Amazon and ship their product directly to their warehouse.  The wholesaler of record could receive a $1.00 per case commission for simply allowing the paper to hit their dock.  No warehousing, no delivery costs and no commissions paid.  Do you not think a wholesaler might find this model attractive? And even if they did not use this model, the wholesaler’s competitor might use this method, thus giving way to further pressure to adopt said model.

No doubt, it will be awhile before it becomes clear how Amazon will operate.  As stated on May 9th, however, Amazon will figure it out. It is only a matter of when….not if.  We just did not realize Amazon would act so quickly.

Compromise works well in this world when you have shared goals.

 Posted by at 6:00 am
Jun 202017

Several years ago this post ran a story on the inception of the Wholesale Beer Distributors of Texas.  While playing golf one afternoon 30 years ago, I ran into the first Pearl Beer distributor for that market. This gentleman had started his distributorship immediately following the end of the prohibition period.

This man told me the story of how, during 1932 to 1938, he lost money with his distributorship despite living in the Pearl warehouse.  In 1938, he, along with a number of other beer wholesalers, raised $60K and lobbied the legislators in Austin which resulted in the passing of a cash law.  Up until this point, beer was sold on consignment.  A wholesaler would drop off a case and come back the next day to collect, only to discover the bar had closed and the beer was gone, along with the owner.  Once the cash law went into effect, this Pearl distributor said he made $1,000 the following year.

This story is very interesting in that it shows what can happen when special interest groups have the money with which to lobby.  It is called buying influence.  This time, the distributors ensured that they would be paid, taxes would be collected and bills paid.  Obviously, this was win/win for the industry.

Fast forward 80 years.  The watchdog group, Texans for Public Justice, found that, between 2013 and 2016, state legislatures received more than $11 million in campaign funding from alcohol industry players. And, according to the Texas Tribune, more than three-fourth of the funding came from the beer wholesalers.  Silver Eagle President and CEO, John Nau, gave $2.4 million while serving as Texas Governor Greg Abbott’s campaign treasurer.  During that four-year time period, Abbott received $1.4 million from the beer wholesalers.  Texas Lt. Gov. Dan Patrick and House Speaker Joe Strauss received the second most money, $688,000 and $508,000, respectively.

This information was just published, because a bill is awaiting Abbott’s signature that requires breweries who sell more than 225, 000 bbls. annually, to buy their beer from a wholesaler for consumption on premise at the breweries taproom.  The bill goes into effect on June 18th unless it is vetoed by Abbott.  Furthermore, the bill grandfathers several breweries (Karbach Brewing, Revolver Brewing, and Independence Brewing) who were recently purchased by ABI, MC, and Lagunitas. Each of these breweries will be able to expand to new facilities.

On the other hand, Colorado based Oskar Blues Brewing, which recently built a $6.5 million brewery in Austin last June, is not included among the grandfathered breweries, and will have to purchase beer for their tap room from a distributor!  The Texas Craft Brewers Guild is lobbying Abbott to veto the bill and has petitioned against HB 3287.

By the time you read this, the industry will know how this bill has shaken out, but given the amount of campaign funding the beer wholesalers have donated over the last four years, many would be surprised with a veto.  All craft brewers have known for years what their challenges are in state legislatures.  Craft brewers have, for years also attempted to get laws changed which lean in crafts’ favor, especially against beer wholesalers.

Crafts in Texas are less than 10% of the total business, but if, and when, the day comes that their market share exceeds 20%, you can bet their political influence will equal or exceed that of the influence of the beer wholesalers.  Until that day, it will continue to be an uphill battle for crafts.

If it doesn’t matter who wins or loses, then why do they keep score?

Editors note, the bill became law but was not signed by the Governor.





 Posted by at 6:00 am
Jun 132017

lets have a beerWas anyone really surprised with the recent NFL announcement that spirits can be advertised, with certain restrictions, on their games?  A better question might be; why did it take so long for the NFL to come to this conclusion?

The obvious answer to why the NFL has now decided to allow the advertising of spirts during their games is because the NFL will be receiving much needed revenue to offset its declining viewership.  Once again, with this announcement, many industry publications have jumped in with a myriad of comments and thoughts.  Most believe the decision is negative for the beer industry, however, some believe it might be a positive in that it could be a wakeup call for brewers!

A general consensus exists in the ad industry that spirit advertising, as compared to advertising for beer, is much more effective at getting the message across to the consumer.  No doubt that the spirit ads are more compelling and speak to the consumer, highlighting the key attributes of the product.  Beer, for the most part, does not address such attributes.

Is ineffective advertising the real problem within the beer industry, or is it something else altogether?  The numbers are eye awaking!  Since 2008, MC and ABI have lost over 27 million bbls. in sales!  That is astounding!  Translate that number to market share and MC and ABI have gone from 75% share of the US beer market in 2008, to 66% market share in 2017.  With the current trends continuing, their market share for MC and ABI will be less by the end of the year, with no end in sight.

The industry knows that there are main stream products that are doing well: Ultra, Modelo Especial, Coors, and Stella.  Their advertising is highly acclaimed based on these brands’ sales trends, and for these brands, the sales trends are very good.  Buy why?

Could it be the simple fact that Coors Light, Miller Lite, Bud Light, and Budweiser, along with numerous other brands, are no longer seen by the consumer, regardless of the quality or quantity of the advertising messages, as brands that are in favor.  In other words, could these brands be passé?

As indicated by the number, domestic light beer consumers are moving to hot brands like Ultra, Corona Light, and Tecate Light.  These brands are viewed as favorable to the consumer.  They are hot, the others are not.

Brewery executives only have their resumes at risk.   Wholesalers, on the other hand, have a great deal of skin in the game, including their own families’ well-being, in addition to that of their employees and their families. If the wholesaler has a diverse portfolio, including Constellation and/or Heineken, they will well situated, if not, then there is most likely much concern in that house.

Someday these brands will bottom out and could languish for years, eventually coming to life again, similar to the scenario experienced by Pabst, Lone Star or Rainer.  A retro redo.  If that is true, then there is no form of, or amount of advertising content that will positively affect any of these brands, if the consumers continue to reject them.

Spirits being advertised on NFL games will not materially affect beer sales.  The issues with the beer industries are internal, not external.  Status quo is Latin for “the mess we are in.”

 Posted by at 6:00 am
Jun 062017

Beer monopolyThe book, The Beer Monopoly, by Ina Verstl and Ernst Faltermeier, goes into detail regarding how the four largest beer companies, ABI, SABMiller, Heineken, and Carlsberg, landed their current positions. The historical perspective of each company is well detailed, going back to the starting foundations of each organization.

What makes this book even more fascinating is how the authors focus on each company’s long-term business strategy and culture.  In other words, what makes each of the four companies tick!  Being in the industry for a number of years, we are familiar with the history of each of the four companies discussed, yet the book adds additional depth by carefully detailing the formation of each.

ABI’s modus operandi, as we all know, is acquiring companies and cutting out the fat, along with a great deal of bone.  ABI’s business model is not to grow by building brands, as their performance record indicates, but, rather, growing by swallowing companies.  ABI is a highly centralized and controlled company.

SABMiller, now part of ABI globally, and after becoming successful in South Africa, focused on being acquired by InBev. In anticipation of this move, SABMiller relocated their corporate headquarters to London and, for the most part, ran a decentralized model which understood that brands were local, not global.  SABMiller focused on building successful beers, and it worked well for them, having sold to ABI last year.

The Heineken and Carlsberg stories are somewhat more complicated, in that both are privately owned entities, and have different purposes.  Heineken, controlled by a family with many shareholders, was the first brewery to focus globally. They approached this model by identifying breweries, or JVs, with other breweries in multiple key countries. Heineken’s recent acquisition of Femsa, from Mexico, was instrumental in the company’s long term global survival.  Heineken, like ABI, is a highly centralized organization with key markets run by Dutch management.  Heineken’s ownership structure would make it difficult for another company to acquire them.

Carlsberg, unlike Heineken is owned by a foundation that supports a number of individuals.  Also highly centralized, Carlsberg took a risk and focused on owning the Russian market.  Carlsberg invested heavily only to see that country highly tax and regulate the alcoholic industry.  Even though Carlsberg is in control of the beer market share in Russia, overall volume has collapsed. Carlsberg has little focus and presence in North America.  Carlsberg ownership structure is also such that any attempt to acquire it would be very difficult.

The world growth markets, according to The Beer Monopoly, are Africa and China.  The later, however, has not become the volume provider many breweries believed it would. There is, however, hope for Africa.  When looking to the future, globally, it is clear that few, if any, opportunities exist to buy into a country like these four brewing powerhouses have done in the past.  The big boys are simply no longer there.

So the question remains, at least in the short term, will these breweries be focused on the craft segment, and those opportunities flourishing in the industry?  Based on what we have seen from Lagunitas, Ballast Point, Goose Island and others, it is working, just on a smaller base.

The book examines the industry today. Rest assured future chapters will be even more interesting.  The Beer Monopoly, chapter 2……

Editors note;  RIP; James “Jim” Barrett, the last in a long line of Schlitz Gulf Division managers for Texas when it was the largest state Schlitz  had.  Jim served in WWII in the navy and spent his entire professional life with Schlitz.  Jim retired with his wife Barb, to Granbury, Texas shortly after Stroh took over Schlitz in the 1980s.  Jim was 90.


 Posted by at 6:00 am