Wholesale distributors

The industry's hidden hand

by Peter Reid

Who carries cases of your favorite beer into stores? Who hauls the kegs to the taverns? The guys who work for the breweries, right?

Not exactly. Thereâs a vast network of middlemen at work, made up of thousands of wholesale distributors. "Most consumers donât have a clue [about the existence of wholesalers]," said Tom McCormick, a former specialty beer wholesaler and principal of McCormick Distribution and Marketing of Meadow Vista, CA. "They see a Bud truck and they assume itâs operated by the brewery."

Beer delivery trucks may be emblazoned with brewery logos and driver-salesmen may wear brewery livery, but they are employed by beer wholesalers-the independent distributors who have done much to shape the American beer industry. These wholesalers are the middle tier of the so-called three-tier distribution system for alcoholic beverages in the United States.

For the beer industry, the first tier is the brewery, the second the wholesaler, third the retailer. This structure is mandated by an array of state and federal laws. While distribution may not be the most romantic aspect of the brewing industry, wholesalers are crucial in providing consumers with the widest selection of the freshest possible beer.

"The key benefit [of the three-tier system] is fundamental," said Jim Koch, president of Boston Beer Co. "The retailer gets frequent and efficient deliveries. A good distributor with strong brands will be replenishing retailer supply every week."

When a retailer gets frequent deliveries, that means the consumerâs favorite beer will always be in stock, and very fresh. Freshness is key for a perishable product like beer, and the issue has taken on renewed importance with the advent of legible freshness dating. The wholesale reps are expected to keep an eye on all the stock in a given account and keep the oldest stuff moving out the door. If some beer isnât moving in one account, a rep may even replace it with new beer, and shift the older stuff to an account where itâs likely to move faster.

Wholesale reps are on the front lines of the beer wars. They wage a constant battle for shelf space in retail outlets, trying to get more of their brands into key shelf locations. The brands you see at eye level when you walk into a store are the ones that have the most muscle behind them (or sometimes the fastest-talking rep). Wholesale reps also handle the innocuous but necessary merchandising tasks: stacking up case displays and providing point-of-sale materials (those cardboard stand-ups and cooler stickers tacked to every available surface at the package store).

In bars and taverns, the war is one for tap handles. More important, the reps oversee integrity of the draft systems, making sure they operate properly and the lines are clean.

These tactical and service aspects of the wholesale system are important, because brewers donât have the manpower to do what needs to be done, and no one else in the system has the incentive. Even a million-barrel player like Sam Adams, with its sales force of 200, is not large enough to fight every retail battle without some help from distributor allies.

Diversity is another key benefit of the distribution system. "Nowhere else in the world does the consumer have access to such a diverse selection," said Tom McCormick. "Just about everywhere in the United States, you can now get local beers and a pretty good selection of small beers from far away."

Itâs unlikely that such diversity would have come about without the labors of unseen wholesalers, and the beer drinker would be all the poorer for it. "From the consumer standpoint, especially that of the fellow who wants to try new beers," noted Mark Rodman of Beverage Distribution Consultants of Swampscott, MA, "the wholesaler system is working to his benefit.

"The existence of beer distributors allows maximum market coverage," continued Rodman, "and they provide an infrastructure that reduces the costs of bringing new brands to the market. Thereâs no question, for example, that many of the microbrewers of the Pacific Northwest would never have been known outside Oregon, Washington and northern California had independent wholesalers not existed."

Is the three-tier system the best way to go about distributing beer?

"The harshest criticism you can make of regulations that support the three-tier system is that they mandate a single structure for the beer industry and prohibit innovative approaches," said analyst Rodman. "Government, influenced by industry, has mandated that you can only sell beer through one type of organization. But, as an economist, I suspect that competitive forces would eventually shape the industry in exactly the same form. There are just too many benefits to the system."

Still, the existence of a middleman adds something to the final cost of the product. "Letâs say the wholesaler markup is $2 to $2.50 a case," said wholesale consultant Joe Verno, principal of the Denver Management Group. "Obviously, the price at retail is higher as a result of the distributor touching the product. But wholesalers allow a vastly greater number of points of distribution and vastly larger availability. A small brewer distributing his own beer wouldnât have the wherewithal to get it into every little account, and heâd also have higher costs doing it."

Consultant McCormick agrees: "Even if you had no distribution regulations, and there was no second tier, the price of the beer to the consumer wouldnât be any different. There are costs involved in distribution, regardless of who does it."

But itâs care, not cost, that some brewers worry about. There is a feeling that beer wholesalers view a case of beer as a commodity, a "box," rather than a specialty product, and that isnât the way small specialty brewers and importers want their beers handled.

"My feeling is that beer distributors donât do their homework," said Jeff Coleman, president of Paulaner-North America, an Englewood, CO, based beer importer. "A brand like Budweiser is a quality product, but distributors donât need to sell it, the advertising does it for them.

"We had a major brand distributor here in Colorado that lost 18 percent of our distribution in the 13 months they had our products. After six months, many of their salespeople still couldnât pronounce the name ÎPaulaner.â We had a tasting and I noticed that some of them werenât even trying the product. I asked one of them why, and he told me, ÎI donât like dark beer.â Itâs a whole different mentality."

But consultant Rodman defends the wholesaler: "The customary complaint by the producer is that the distributor is nothing but an Îorder-takerâ," he said. "I think those guys have not adequately planned for merchandising costs, and they misunderstand what a distributor does. The major players talk about distributors as partners, and they share costs and functions. The smaller producers believe that their product is good enough to sell itself, so they donât take merchandising responsibility, and they blame the wholesaler."

And into this turbulent system, a new distribution bottleneck has come to the fore-growing consolidation in the wholesale tier. Bigger players are buying out smaller fry, leaving fewer distribution houses to serve the market. This has already begun to limit options for new brands, particularly since Anheuser-Busch has started demanding ever greater focus from its wholesaler network.

The Anheuser-Busch network includes many of the top distribution houses in the country, an elite corps with shiny trucks and clean, white Budweiser uniforms. Their success is elemental: almost one out of every four beers bought in this country is a Budweiser; one of the remaining three is likely as not another A-B brew.

"Itâs an excellent network," said consultant Joe Verno. "They have a limited number of SKUs (Stock Keeping Units, meaning a specific brand or type of packaging) and they know how to execute."

Recently, A-B found that many of its wholesalers have been spending time selling competing brands like Samuel Adams and Heineken. These brands gave the distributors the high-margin beers that they lacked as the Michelob brand declined in share. In a dramatic and controversial move last year, Anheuser called for "100 percent share-of-mind" from its wholesalers.

The "share-of-mind" mandate is ostensibly voluntary, but the brewer has instituted a rating system for wholesalers that makes compliance almost mandatory. Those Anheuser distributors who toe the line, and focus all their efforts on

A-B brands, get an "A." Those who have a lot of outside brands get lower letter grades.

Why do grown-up wholesalers care about grades? With many wholesalers consolidating into larger entities, it helps to have friends in high places, and St. Louis is a very high place. An Anheuser "A" grade gets wholesalers access to a broad range of "incentives." Perhaps most important in a consolidating industry, those incentives can include the financing to make deals work. For those A-B wholesalers who want to survive, compliance is advisable. For those who want to move up to the next level, itâs mandatory.

This policy makes an already competitive wholesale tier almost cut-throat. "Anheuser-Busch wholesalers handle about half the beer in the country," said Boston Beerâs Jim Koch, "so half the distribution network is now closed to everyone but Anheuser-Busch, and those brewers that have become part of the A-B family, like Redhook. It means that the rest of the brands get crowded through the remaining half of the network."

Other brewers have also eyed this development warily. "Weâre not in too many Bud houses [distributorships]," said Fred Matt, marketing director for the Matt Brewing Co. of Utica, NY, "but we believe that itâs a serious issue. Our concern is that Miller and Coors might start similar programs. Are they strong enough to do that? Maybe in some markets."

Tom McCormick has also noted that possibility: "A lot of Miller and Coors houses are being more selective and shedding brands," he said, "but right now that seems to be a result of simple economics and not pressure from Milwaukee or Golden."

The Anheuser-Busch share-of-mind mandate is not a welcome one to the hundreds of start-up brewers that have joined the industry in recent years. The distribution system is becoming clogged with specialty brands, and itâs getting harder to channel brands to the equally choked retail outlets.

Many specialty brewers and smaller importers have embraced wine and liquor distributors as an alternative. On the plus side, wine sellers know all about expensive specialty products; on the down side, many of them wouldnât know which end of a tap the beer comes out of.

"We are primarily in wine houses," said Larry Bell, president of Michiganâs Kalamazoo Brewing Co., "and in general they have been great. But Iâm starting to get a little worried about them, because theyâre starting to get greedier on markups, and just at a time when weâre facing dramatically increased competition. Weâre getting eaten alive on price."

And some analysts wonder whether wine distributors can adapt to handling beer. "The nature of the service levels is so different," Tom McCormick pointed out. "There is much higher call frequency, and more value added: draft, more sell- through, more deliveries, higher sales. Itâs very different from wine."

Denver Managementâs Joe Verno agreed: "Major imports and micros will eventually switch out of wine houses," he asserted. "Micros arenât high volume, and there isnât a lot of gross profit in them. A wine guy makes $15.00 on a case of wine, and $3.00 on a case of beer. Heâs also not used to merchandising, and he doesnât go into convenience stores. Most important, he doesnât do well with draft. Itâs a home of last resort, but I donât see that marriage working over the long run."

Nevertheless, many high-end brewers and importers have found niches with wine houses. "Weâve gone towards wine and spirits distributors," said Jeff Coleman of Paulaner-North America. "They have more experience selling diverse, high margin products. They also have very knowledgeable sales people. In addition, most of them are getting up to speed with handling draft. Theyâre also statewide in many cases, so we donât need as many. In Colorado, we went from 17 beer houses to one wine house."

As the number of available distributors dwindles through consolidation and exclusivity, there is another potential avenue: the specialty beer distributor. Surprisingly, there are few such outfits operating in the United States right now, but that may change. The Craft Brewers Guild of Brooklyn, NY, founded by Brooklyn Lager brewers Steve Hindy and Tom Potter, offers hope that this model can succeed.

"Weâre a middle-sized distributor," Potter said, "and in many markets a medium-sized distributor is usually not really profitable. The difference is, we donât handle any cheap beer. We donât even sell an average-priced beer. We only carry only expensive brands, and we get volume out of them. Weâre buying [1000-case shipping] containers of Chimay and moving it. An important part of it is that weâre in New York City, and itâs a big place."

Tom McCormick used to run his own specialty distributorship in Sacramento, CA, before selling to a larger, major brand house. Now heâs a consultant, but heâs working on a new San Francisco Bay area distribution startup as well. "There could be a niche for a small distributor," he said, "but itâs dependent upon a few factors: the existing competition and demographics, for two. But in some markets there may be the proper ingredients for success."

Small new brewers are probably hopeful that those ingredients come together, because a choked distribution tier could put the brakes on the entire micro boom. Many experts believe thatâs already happening.

"There are not enough avenues of distribution to absorb whatâs in the market," McCormick observed, "let alone what the future holds. Itâs getting harder and harder to get distribution, and new brewers will have to downsize their ambitions as a result. Theyâll have to stay closer to home, and weâll see fewer national expansions. Thatâs going to lead to some attrition and fewer startups. The industry has to go through some paring down."

And Jim Koch noted, "There were probably several thousand new brands introduced last year; the distribution system canât accommodate all of them. Itâs starting to look like the distribution for imports, with consolidation around stronger brands."

Fred Matt concurred. "For startups, and some of the guys who started a year or two ago, itâs the witching hour. The people who survive will be those who give their brands advertising and sales support."

Given that support, wholesalers will do their part for their brewer partners. And many wholesalers are building stronger distribution capabilities to meet the competitive demands of todayâs market.

"The distributors that are going to be around are making tremendous investments in their organizations," Matt said, "in computer systems, personnel and management."

Thatâs good news, for the three-tier system, mandated by a great weight of state law, is likely here to stay. Made up of largely independent wholesalers, the distribution system does a creditable job of getting good beer into the hands of thirsty consumers. Ultimately, thatâs what matters.

This story originally appeared in the May 1997 issue of All About Beer Magazine.