Beer Business Unplugged

Last week, while visiting an account in the Texas Hill Country, I along with the other customers in a local restaurant noticed that our phone emails had crashed.  In addition, we were unable to use our credit cards to pay for our purchases because all the terminals in the restaurant also were also down.  This was somewhat odd because the TVs and the electricity were working in this particular restaurant and throughout the town.

When I returned to my hotel, however, I discovered that this particular hotel’s TVs were down and there was no internet.  Throughout the Hill Country, AT&T phones were out, including my hotel’s landlines!  I borrowed a phone connected to Verizon and called home to inform my family of my situation.  Even the local Walmart had lines of customers extending out into their parking lot as the retailer could only accept cash given that their credit card terminals were also down.

At 3 AM, my phone started going off.  After eight hours, AT&T had gotten their system up and running again. I later discovered that someone had plowed their vehicle into an AT&T tower some 25 miles away, resulting in a 70-mile outage.

That eight-hour interval with no internet service illustrated quite clearly how dependent we have become on the internet.  If you are under the age of forty, you have never lived without the internet.  Those over the age of fifty can remember when, as young beer salespeople, we had to find landlines to call our offices.  All our weekly reports were sent to the home office by snail mail typed out on a typewriter.

It was not until the 1990s that all of this changed. Gambrinus provided their field staff with laptops and a VMX system for calls.  This voice message system predominantly enabled directives to the field for projects.  In 1996, Gambrinus set up AOL account, their first email system.  Even with all of this, we still did not have cell phones and all correspondence to wholesalers had to be delivered by snail-mail.

Even before cell phones, which at first, were bolted into your car, we had pagers.  Of course, we all lived through the fax machine days using that old wax style paper that always seemed to curl and smell.

Today, cell phones are more advanced and powerful than computers of fifty years ago.  Probably more than any one thing, the internet had as much to do with the growth of the craft beer segment as anything.  Today social media is the marketing focus for the craft beers.

The recent internet outage was a reminder of just how the industry and the world have changed in the last twenty years. Most of us are lost without internet connectivity.  Industry pundits continue to refer to the Millennials as the change agent in the industry, when in reality, the change is due to the technology that has been embraced by a generation who knows no other form of communication.

The internet, man, is a beautiful thing.

When Krombacher decided to export to the U.S., their target markets were New York, Chicago and LA.  After appointing a New York distributor in 2011, and working through the necessary details, the brand was launched with some small success.  As with many imports from other countries, the plan was to first acquire distribution in the low hanging fruit areas, (e.g. German accounts and the major liquor and chain stores).

During the rollout period, Krombacher was notified about the existence of a key retailer who owned four pub/sports bars, three of which were located on Long Island and one in Manhattan.  The account featured over 40 brands on draft, mostly imports and crafts, with a number of packages.  The account was one that any brewer would have loved to have had representation in.

The owner made it very clear that he was interested in putting Krombacher on tap in all four of his accounts.  Not because Krombacher was Germany’s top selling beer, but because the retailer wanted new outdoor patio furniture for all of this accounts. If Krombacher so agreed, payment for the furniture would have been made payable to the retailer’s marketing company. In return, the beer would stay on draft for one year in all four accounts.

This was an example of a classic retailer pay-to-play scenario.  One must wonder, with the number of other brands on tap, what this retailer charged other breweries for putting their beer in his accounts.  By leveraging such keg boxes, glassware, furniture, cash, etc. this retailer could have put himself in business by leveraging the breweries.

This is just one example of a retailer leveraging his bars against brewers who are willing to do whatever it takes to gain distribution and exposure.  As the industry knows, this type of deal-making is in all states, and given the number of crafts and imports, retailers are saying “why not take advantage of these opportunities?”

For several months the TTB, along with the state of Florida, has been investigating illegal activity by brewers and importers in that state.  While there has yet been no official announcement, one medium-size importer was fined by the TTB for buying-off retailers in that state.  The initial fine was in excess of seven figures.  Lawyers are working to negotiate the amount of the fine and the industry will soon know.

The TTB continues to expand their investigations into other states as well.  The agency is teaming up with state agencies in California, Colorado, Nevada and New York. In the coming months, the TTB plans to announce all fines and offending companies involved. It has been rumored; however, that prior to mitigation, the total amount of the fines could be more than $30 million.

It is a good bet that those companies who are fined range from small crafts to much larger breweries.  It is also a good bet that the fines leveraged will be sizably substantial to ensure violators are served up as examples of these unethical and illegal business actions.  Given the difficulty of obtaining distribution, crafts and importers will continue to work around the system using whatever means they can to gain distribution.  Retailers know this and will use that knowledge for their own interests.

Perhaps the TTB or the CBC leadership should speak to this issue at the upcoming convention. But will it make any difference if they do voice their concerns?

If you are not cheating, you are not trying…

As discussed in past articles, when I took over the Schlitz operation in 1981, the territory included a number of counties in far south Texas. Three of these counties did 95% of the volume.  In those counties, I had nine wholesalers competing within the same area: one Budweiser, one Miller, two Coors, two Lone Star, one Pearl/Imports, one Hamm’s/imports, and Glazers, who only had Heineken.

In the early 1980s, Schlitz held a +40% share of the volume which created a great deal of competition for the remaining 60% of the business.  Economic setbacks which occurred during the period made for an even more challenging marketplace.  Mexico had a major peso devaluation, oil embargos devastated the area, a region-wide freeze literally killed the citrus industry, and finally, Stroh’s purchased Schlitz.  The entire South Texas market shrank as unemployment rocked to 50%, all of which combined to drive distributor consolidation at a much-accelerated rate as compared to other U.S. markets.

Fast forward to early 2000, and there were only two distributors left in the South Texas market: the AB house, which now has a number of other brands and the MC house, now owned by Glazer’s beer division.  There is also a small craft distributor operation owned by Ben E. Keith.

Those key brands distributed by nine different wholesalers in the 80s are now housed in only two distributors.  This scenario is similar to other areas of the U.S., as brewery consolidation, along with the need for wholesalers to eliminate costs, has driven the industry in this position of consolidation.

Craft breweries have, for years, been upset at their inability to get to market in addition to the lack of focus by the distributors on their products.  Yet every year the industry continues to lose volume. Pundits target ineffective marketing, changes in demographics and aggressive marketing by the wine and spirit industries as reasons for the decline in beer sales.  In last week’s post, we noted the industry’s use of dollar growth as a major performance measurement versus volume growth as a measurement, which has been the standard in the past.

Pundits purport that for a craft to grow and survive the craft has to remain local and concentrate their resources in their backyard, and not expand into other states. Such pundits site lack of resources by small breweries and their need to concentrate their business locally.  These decisions are controllable by the small breweries.

A case can be made, however, that all of the industry consolidations have created a lack of in- market competition.  Consolations, along with the elimination of a vendor assigning brands to several wholesalers (example: how G. Heileman operated in the 1980s) necessitates that in order for a brewery to grow, said brewery must create a model which forces it to fulfill the role of a wholesaler’s sales team. In reality, this drains resources that could be used for marketing and above-the-line media spending.

For a wine and spirit wholesaler to grow without franchise protection, those companies have to execute against specific goals.  For breweries to grow, the brand building falls on the breweries shoulders’ to survive, something that is easier with a brewery taproom as its anchor.

Consolidation to the point of monopoly has never served the consumer – ever.