Beer Business Unplugged

Philip Morris’ purchase of the Miller Brewing Company in 1970 changed the fabric of beer operations.  The purchase also marked the beginning-of-the-end for WWII and Korean War veterans who were, at that time, running the industry. The purchase simultaneously launched the takeover of the Baby Boomers within the beer industry. AB was hit right between the eyes by Miller’s aggressive marketing and immediately ramped up their efforts by initially hiring young, college-educated individuals, many with MBAs. Beer professionals of the Greatest Generation were not prepared for such a change in the industry. Many retired, while others moved to distributors before wholesalers changed to the pre-sell concept. Numerous distributorships were available to buy, often marketed for sale in the Wall Street Journal.

By the mid-1980s, the Greatest Generation had disappeared from an industry that was now run by Boomers. History, however, does repeat itself as we witness the last of the Boomers nearing retirement. Boomers born in the late 1950s and early 1960s are currently in their early 60s and late 50s; while older Boomers, those born immediately following WWII, have already left the industry, many due to InBev initiated cutbacks following the purchase of AB.

Crafts, often interested in designing their own unique business models, ignored experienced professionals and instead choose to employ young, inexperienced workers. The advent of the Coronavirus and its negative effect on the industry has impacted the craft brewers’ industry. Many crafts have gone out of business with more expected to follow suit. Even larger, more successful brewers have been negatively impacted by the virus in largely unanticipated ways. Brewers with employees in their late 50s and 60s are facing questions regarding the future of operations as the on-premise opens up and chains beginning to reset appointments.

Many older employees, who are considered more susceptible to the Corona virus, are not willing to leave their homes, yet brewers who are under pressure to ramp-up production, need these employees in the market. HR departments at the breweries will support older employees, while younger bosses and younger employees are out and making calls. What brewers could be facing is the fact that older employees might not feel safe until a vaccine becomes available; something which might not occur until next year. If such is the case, will HR departments support the older employees?

Employees in their late 60s could be offered attractive severance and retirement packages, similar to actions taken by InBev did in 2008. Such packages could be considered a win/win for both parties. Those in their late 50s, however, could be in a more precarious position. They may not yet be ready to retire; while at the same time may not be comfortable returning to the marketplace. How will brewers and some wholesalers handle such employees? As more accounts open, it might soon be all hands-on deck.

Even with the closing of the on-premise, many brewers and wholesalers have logged record sales days, weeks, and months. Now, however, brewers are experiencing a serious and unforeseen scenario. How companies deal with their employees will speak volumes.   

I don’t worry about a number; I am fine with aging.

Last week the White House outlined a three-phase process in which the country could reopen after closing due to the worst pandemic of our lives. It is during the second step that bars and restaurants could begin to reopen. There is no set timeline for this reopening, and the White House left the final decisions to the individual state governors.

Some of the states are in a better position to implement the reopening process sooner than others. But given the current status of the virus, it is safe to assume that most of the country is still looking at June before returning to a new normal, a date which is still about six weeks away. Even the PGA tour announced they expect to start their season the week of June 8th in Ft. Worth, although without fans at the games. At least it is a start.

In the recent IRI reports, the off-premise dollars and volume numbers still reflect growth, but not as dramatically as the recent four weeks had shown. Most wholesalers are seeing a slowing of the off-premise volume, but even those increases are not enough to offset the on-premise volume losses. Brewers and wholesalers are now looking into the future and making decisions for the next several months. A number of brewers have either reduced their staff by furloughing or laying off employees. Now, more wholesalers have done, or are considering doing, the same to their teams. Still others have decreased their staff salaries by 25% and implemented a reduced work week. Expect more of these reductions in the coming weeks as the shutdown continues.

The question is: will the real cost of the virus shut-down be the loss of sales or the toll that layoffs, furloughs, and salary reductions have had on those affected employees?  Brewers and wholesalers have worked hard to establish a corporate culture and environment to be able to attract and hold high performing employees. Will those employees who have been impacted by the cost-cutting reductions be as committed as they were prior to the virus? Many employees may be disillusioned and will have lost confidence in their company’s leadership. Expect some employees to transfer to beer companies who supported their employees during this crisis.

In the early 1980s, I was the owner and president of the seventh largest Schlitz Distributorship, geographically located in the southern-most point of Texas (The Valley), bordering Mexico.  During this period, the market was hit with a magnitude of issues: the devaluation of the Mexican peso, an oil embargo, the coldest winter in 100 years which resulted in devastation to the Valley’s citrus industry, and all while facing a 50% unemployment rate in The Valley.  I implemented a 10% across-the-board reduction in pay, and personally took a 20% salary reduction. That one decision, to reduce the pay of our staff, might have been the worst business decision of my career as employees lived from paycheck to paycheck.  There were not necessarily interested in the overall picture of the situation as much as they were in ensuring their ability to put food on their families’ table.  

While President of Warsteiner, the European economy was experiencing a 1.5 to 1 exchange rate with the euro, but Warsteiner itself was riding the largest third quarter in the company’s history from both a profit and volume view.  It was at this time that the owners decided to raise their price by four price points, slashed marketing in half, and laid off one-third of Warsteiner’s employees. This resulted in the Warsteiner U.S.A. losing 39% of its volume. Six months after these changes were instituted, the brewery admitted that it had made a mistake and requested that the prices be revised.  Twelve years later, their business still has not returned to those levels.

Those breweries and wholesalers that are able to keep their staff employed could see that commitment payoff for many years into the future. The companies that have no options, but apply their payroll reduction across the board, might also benefit if the companies apply for and receive support through the PPP government program and make those affected employees whole again.

As with the actions of the federal and state governments, when the virus is eliminated the second guessing game will begin and both breweries and wholesalers will be questioning their decisions. Thousands of people have been affected, but sadly, the worst may be yet to come.

Without loyalty, you won’t accomplish anything.

We can all agree that the Corona virus has turned the world upside down. But perhaps a more accurate explanation is that the medical and political response to the virus has turned the world upside down. While the effects of the virus are uncertain, one thing is certain: it will be awhile before we know the full impact of the Corona virus… what it has done to our world, our nation, and what will be the repercussions of the decisions made in response to the virus.

We know that many business models developed by other CPG companies failed to perform in the early days of the virus. The highly acclaimed just-in-time business model supported by the made-to-order inventories collapsed under the public’s panic buying. What did work, and what was the most effective delivery model, was beer distribution. With the on-premise accounts closed, most distributors adjusted their off-premise teams by adding merchandising and delivery workers. The results were evident in the number of record sales produced. Many wholesalers had all-time record weeks, not seasonal records, company records.

Going forward, many wholesalers believe their all-time sales highs will slow as consumers begin to realize that grocery, liquor, and c-stores will remain open and well stocked. Once again, wholesalers proved their value to retailers and consumers. If sales begin to slow, however, expect wholesalers to being lay-offs.

While the world and the beer industry are working to get through this crisis, the next question is: what will the world look like when the virus ceases?  What will be the new reality? First, it is almost certain that we will experience a recession during the last half of the year. Unemployment numbers are already massive, with more to come.  The newly passed Congressional bill may convince many workers to stay home, as they may make more money not working than being employed.  This will leave restaurants, bars, and even craft breweries who survived the downturn, scrambling for workers.

Expect to see states with self-imposed shutdowns to become cash-strapped and begin to look for revenue streams. New or increased state taxes may come in the form of income taxes, sales taxes, property taxes, etc. States that have resisted legalized gambling may decide that such a revenue-producing stream might not look so bad after all. Consider how many direct and indirect jobs could be created from casinos. Sports booking could raise its head in every state. And the big one, marijuana sales, could be legalized nationwide. Even raising taxes on beer could become a reality. States will be strapped, and everything is on the table. Expect brewers and distributors to take a long hard look at their go-to market model. A 1990s video made about the Spanish Flu pandemic of 1918, which killed over 30 million people, suggested that those who survived did not even feel comfortable going back to church until 1922.

Consumers, too, will view the on-premise differently, but to what degree? Wholesalers may make the on-premise sales virtual, thereby reducing their sales teams, and putting more pressure on the brewers’ sales teams to become the in-market sales function. Expect brewers of all sizes to ramp up their chain departments. In the future, expect that off-premise will be the major battleground. Of course, online marketing and home delivery will become the big opportunity.

Consumers and retailers now know that the antiqued liquor and beer restrictions are irrelevant. This pandemic has made that fact crystal clear. And consumers will not put up with old laws. Most states have suspended restrictions for on-premise accounts to help them survive the current crisis. Look for the possibility of states permanently changing the laws once the reality of an increased revenue stream from beer sales tax sinks in.

There is a very realistic chance that the worst is yet to come. Regardless of that, the beer industry will adapt, improvise, and overcome. It will never be the same…that is the reality.

Now I am trying to decide:  ponytail or man bun? Barbers are going to be in high demand.

This is the age of disruption.

The long-anticipated expansion of Coors into central and South Texas in 1976 had retailers chopping at the bit. The Coors Brewing Co. appointment process was highly published and hundreds of individuals applied for franchises. As the distributorships were awarded, the media jumped all over those announcements and people were excitedly anticipating the rollout. Coors rolled out in San Antonio in March 1976. The largest chain at the time was Handy Andy, and when the Coors arrived at their stores, space had already been allocated in the box next to Schlitz, the market leader and giant. There was no paperwork, no scanning, no presentations, no spreadsheets, no resets and no round tables. All the retailer expected the driver to do was to price the six packs and stock the beer.  It should be noted that the few chains that existed during the 70s did not participated in the annual reviews and resets which are common today.  Annually, there were few, if any, new products or packages and since all sales were Diver Sales, it was incumbent upon the driver to sell the products. Fortunately, such sales were relatively easy. 

In 2020, the industry is looking at the spring resets for all chains including seltzers, which, of course, are on fire. To put things into historical perspective, one must consider that just HEB alone, one of the larger chains, has approved 509 new SKUs this spring! 509! How does one handle 509 new SKU’s? Did 509 old SKU’s get replaced?

While most vendors and distributors anticipate the upcoming resets, AB and their wholesalers’ rollout of Bud Light Seltzer was nothing short of remarkable. AB, aired a TV spot for the Seltzer during this year’s Super Bowl, used that spot and their wholesaler network to take Bud Light Seltzer to market. This led to obtaining a place in the market where within three weeks and Bud Light Seltzer recorded just over 10% share of the seltzer segment.  This is remarkable and shows the industry how effective the AB system is when all the components come together. It also illustrates the frustration the remainder of the industry, especially the crafts; have in getting their beer to retail. Crafts, historically have not, or will not, invest in experienced chain personnel or financially support chains, thus creating a level of frustration with the execution of the AB and MC networks.

The industry awaits the beginning of the spring resets while AB and their wholesalers benefit from their ability to move and execute. It will be interesting to follow the success/failure this spring and summer of the 509 new SKUs. And it is a safe bet that AB will have something to say about those 509 SKUs and that success.

Execution beats strategy for lunch.

When traveling either within the U.S. or outside the country, I typically look for which brands of beer are sold in the area, as I’m sure others in the beer industry do likewise. Call it a habit, but brands particular to an area characteristically tell a story of that region’s beer industry.

Several weeks ago, I visited the Dead Sea in Israel. While there I encountered the “Lowest Bar in the World,” (honestly, the name of the bar) which was located 420 meters below sea level. The Dead Sea is visited annually by tens of thousands of people from all over the world. This bar, the only one located at the Dead Sea, offered two styles of Israel’s Gold Star beer, in addition to Stella, Heineken, and Weihenstephaner. The bar also offered Corona, Tistango, Carlsberg, and Paulaner in bottles. Obviously, visitors to the Dead Sea were coming from all parts of the world, so this selection of global beers made sense…beers from all over the world for the people from all over the world. 

Such was typical of our trip to Israel: massive crowds of tourists lined up at every historical and religious site. At times, it felt like the Super Bowl on steroids. At each site we visited, and at the hotels where we stayed, the restaurants served multiple brands of beer, with the lead offerings provided by Gold Star’s two brands, followed by Heineken and Stella, all of which were on draft. 

A majority of the tourists were Americans; however, one could not find a single American beer! No Budweiser, no Coors, and no Miller, much less any other brand. The question is: why would such global companies, including ABInBev and MolsonCoors, not have beer in Israel considering the international tourism? The simple answer might be that these global breweries look at countries such as Israel as a second-tier market. When one reviews the global markets in the media, most articles deal directly with China. It seems many breweries have their eye on China and that country’s massive population. And if the focus is not on China, then it is on India, Africa, or South America. If a global brewery was intent on expanding or building their flagship brand, it would seem the international visitors to Israel would be a natural go-to place. At least the Europeans seem to see it that way.

Traveling around the world is one thing, but to be home is something special.