Here are a couple anecdotal-but-likely truths: very few people care how their beer arrives in their glass, and even fewer have an awareness how it actually happens.
Enthusiastic beer fans may be aware of industry three-tier laws, and maybe even know the names of some of the companies that distribute their favorite brands. But the vast majority of shoppers walking down a beer aisle are likely to never to give a second thought to what brought their chosen six pack to rest in a cooler—or, god forbid, on a warm shelf.
None of that belittles what happens in beer’s middle tier, of course. As growth slows, breweries control own-premise sales for higher profits, and consolidation becomes a viable option for business across the tiers, industry forces are encouraging adaptation for companies known for resisting change. An ongoing list of legislative battles from Texas to North Carolina to Maryland, often backed by loads of wholesaler money, is one tangible reaction to the difficulties these companies face.
“I already see a lot of distributors out there that will never grow. Ever,” says Kimberly Clements, former owner and CEO of Arizona’s Golden Eagle Distributors. Clements now serves as managing partner for PINTS LLC, a consultancy business for craft brewers and wholesalers. Instead of evolving and finding new ways to succeed through improved logistics or high-end beverages, many businesses are waiting for a game-changing brand to come to them, Clements adds.
“What happens in the meantime?” she asks. “They wait. They lose sales.”
Whether they like it or not, distributors may soon need to reassess their role in a constantly changing business.
A core challenge pulling distributors in new directions is a mixture of changes in gross profit, volume, and costs, at least by one analysis by Beer Marketer’s Insights. As volume has slowed, price increases haven’t been a panacea, creating a “dynamic starting to affect everything from deal flow to bank covenants to competitive capabilities to long-term objectives.” The TL;DR is that it’s a “shift in the landscape,” the publication concludes.
Part of this may have been driven by the volume of brands entering the market in recent years. According to data from Consumer Edge Research and reported by MillerCoors, the number of active beer stock-keeping units (SKUs) hit a high of 13,238 in 2016, more than double the number (6,388) from five years prior. During this same timeframe, almost 3,300 breweries opened in the U.S.—all while the overall beer category continues to stagnate.
That record high of SKUs is slowly declining, however, down to 12,786 in August 2017. A reason for the decline, according to reporting by Peter Frost, was from “non-productive SKUs” being removed from retail.
Clements says a shift in sales tactics can be viewed as simple math because distributor profitability gets eaten up quickly. “Distributors work in pennies,” she explains. “Plus, a salesperson can only handle so much at once. When a salesperson has to sell a lot of different items, they are generally going to pick what they like, who they like, what is easiest, and what is going to make them the most money the fastest.”
This reality is reflected by the “tied’ nature of distribution, as companies align themselves with Anheuser-Busch InBev (often called the “red house” in wholesaler parlance) or MillerCoors (the “blue house”). That in itself has led to something of a duopoly, creating less competition and more consolidation. In the past 40 years, the number of wholesalers has been cut nearly in half, from 4,600 to a little under 3,000 today. In most local markets, according to The New York Times, 90% of beer sold is controlled by distributors tied to ABI or MillerCoors.
The situation is made more complicated by rising business costs and declining volumes. Clements points to a common reaction by distributors to craft's growth, which was to add more staff. That became problematic—and expensive—in recent years when there are "four or five people going into these accounts every week" between sales reps, drivers, line cleaners, and more. This has led to some scaling back, as seen in examples like ABI's decision to realign their High End staffing.
Still, Collin Castore, founder of Columbus, Ohio's Seventh Son Brewing Co., has kept a crew of brand reps to maintain weekly contact with distributor staff at Superior Beverage Group. With the number of packaged brands his business makes available, it helps Seventh Son maintain a symbiotic relationship where Superior's reps are educated on what the brewery is selling.
Portfolios can easily grow too broad for distributors to keep tabs on everything, Castore says, so it can become a shared responsibility to keep them up to date. "Even if you have great beer and great branding, you still need to work pretty hard to stay in tune with distributors and have a healthy relationship,” he adds.
That kind of back-and-forth showcases unique challenges of growth—for both distributors and breweries. It’s one more thing for both businesses to monitor as distributors face an array of challenges. It all can become compounded for the middle tier, especially when taking into account the growing number of self-distributed brands. In a recent Brewers Association “Power Hour” webinar, consultant Bump Williams said the three most common questions he hears at points of retail are about what’s selling for new brands, new local breweries, and new seasonal offerings.
As states update decades old laws to allow own-premise sales and self-distribution, those can eat into retailer interest as well as time spent with distributor company reps. This was on full display during a 2016 GBH In Residence at Chicago’s Longman & Eagle, where Michael Kiser surveyed a beer tasting session with staff. At one point, the Longman team is doubling up on tastings to accommodate brewery and distributor reps.
“The tangle of brewery reps and distributor reps selling the same accounts the same beer is something we saw in our distro ride-along, but today we’re seeing it in spades,” Kiser wrote. “Some handle the overlap better than others, but for some, they can get off their game.”
It was then that Longman’s Phil Olson chimed in: “This one guy gets pissed every time a brewery rep shows up unannounced. He really doesn’t like it.”
What needs to happen for distributors to truly adapt alongside the rest of the industry? That exploration starts tomorrow in part two of this story.
—Bryan Roth
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Distress in Delivery, Pt. 1 — Why Distributors Need to Adapt
Distress in Delivery, Pt. 2 — Craft Comes for the Middle Tier
Distress in Delivery, Pt. 3 — The Future of Beer Distribution