Brewbound Voices: How Distributors are Dealing with SKU-Mageddon (Part I)

bb_voices_d_970

Editor’s Note: Kary Shumway is the founder of Beer Business Finance, an online resource for beer industry professionals. He has worked in the beer industry for over 20 years as a Certified Public Accountant and currently serves as the Chief Financial Officer for Clarke Distributors, Inc. in Keene, New Hampshire. 

Beer Business Finance publishes a weekly beer industry finance newsletter, offers guide books on topics such as sales compensation planning, SKU management and financial literacy, and produces a weekly podcast. The newsletter (with a free six month trial), industry guides and podcast are all available at www.BeerBusinessFinance.com.

In part I of his two-part column for Brewbound Voices, Shumway describes the inner workings of a beer distributor and begins to explain how these organizations are evolving to accommodate an onslaught of new craft SKUs. In part II, which will be published on Dec. 29, Shumway explores the challenges and opportunities of craft beer SKU proliferation, and offers financial tips for distributors looking to more effectively manage their own complex beer portfolios. 

What a time to be a beer drinker. Ten years ago, there were about 1,500 breweries operating throughout the country, a figure that has since swelled to more than 5,000, according to data from industry trade group The Brewers Association.

But that growth hasn’t come without its challenges, especially for distributors. Beer wholesalers that once carried only a few dozen packages are now carrying thousands of different brands — a lot of change in a short period of time.

These days, the opportunity brought about by the growth of craft is clear: an amazing assortment of beers to choose from. Consumers benefit from the variety, as do retailers who draw in eager craft beer consumers. Distributors get to expand their portfolio with higher margin offerings, and craft brewers have a thirsty market for their products.

The challenges of a sharp increase in the number of breweries, brands and SKUs come in many forms and the impact of that swift change can be felt across the entire spectrum of the beer industry. Consumers are blessed with variety, but are faced with an overwhelming number of beer choices. Retailers are struggling to manage their limited shelf space and rotation of beers on draft. Distributors have overwhelmed sales teams and warehouses overflowing with product. Craft breweries, for their part, are working hard just to stand out in a crowded marketplace.

While the craft beer explosion and resulting SKU proliferation has had ripple effects across the industry, perhaps no tier has been more impacted than beer distributors. The wholesaler sits squarely in the middle tier of the three-tier system, acting as a conduit between craft brewers and retailers.

On the surface, the distributor’s role appears simple enough: they buy beer from breweries and deliver beer to retailers. But the best distributors serve as are more than just delivery drivers. And, as the number of beer brands and packages being brought to market increases, the distribution business itself gets more complicated.

craft-beer-grocery

So what challenges do wholesalers face, as the craft beer industry continues to grow? And what are those distribution companies doing to adapt, evolve, and respond to SKU proliferation and the resulting product portfolio complexity?

These questions, and others, are top of mind for many industry professionals. And as 2016 comes to a close, it’s important for distributors to examine how the beer business is evolving and analyze what impact that is having on their financial statements. In other words, what is the cost of change?

But before we tackle these questions, let’s take a closer look at what a beer distributor actually does, in an effort to better understand the business model, the moving parts, and the nuts and bolts that most people don’t see.

Before I came to work for a beer distributor, I was an auditor for a CPA firm. One of our clients was the local beer wholesaler and, at the end of the year, we would visit the warehouse, review the company’s records, ask questions about the business and issue the necessary tax and financial reports.

During my first visit, I didn’t know much about the distribution business. I knew there was a warehouse full of beer, but beyond that I figured a distributor just bought beer from a company like Anheuser-Busch and sold it to retail stores. How complicated could it be, right?

As it turned out, the distribution business is much more complex.

What does a beer distributor do, exactly?

A distributor is a hybrid sales and logistics company. Distributors handle the heavy lifting of warehousing and delivering product to customers, but they also invest a great deal in sales, marketing and relationship building with retail customers.

You’ll often hear that distributors are in the “relationship business.” Building relationships with suppliers, retailers, and consumers are all critical to the success of their business. Many distributors are third or fourth generation family-owned businesses, and the owners and employees have lived in the same town for their entire lives.

The distributor’s role is to make the market — to provide a clear path for the sales and service to retail accounts. A relationship with a store owner leads to displays, more shelf space or product promotions. A good relationship with a store owner is the difference between success and failure.

Distributors are the last mile of transportation for our beer. A brewery in California can ship its beer to New Hampshire, and the local beer distributor will deliver it that last mile to a retailer. In a rural market like New Hampshire, that ‘last mile’ can often be the last 100 miles.

distribution_graphic_update

The Many Roles (and costs) of a Distributor

The role of a distributor as hybrid sales and logistics company requires a lot of coordination. There are many departments working together to deliver service to its customers – both retail customers and brewery partners.

To better understand exactly how the craft industry’s rapid growth has impacted distributors, and how they are adapting, it helps to know what tasks every department within a beer distributor is responsible for accomplishing.

Sales: The sales team is generally comprised of a sales manager, team leaders and route sales people. They have direct contact with the retailer, and their role is to sell and service the accounts. They present new products and educate the retailer on the benefits of placement in their store. A route salesperson typically has 10 to 20 account calls per day, and may be responsible for building displays, merchandising accounts, or delivering the occasional keg.

Sign making and POS: Many distributors have an in-house person or team of people who produce point-of-sale materials for retail accounts. These people are technically trained, and the shop requires specialized printers and equipment to produce high quality materials.

Merchandising: Over the years, the responsibility for merchandising store shelves has shifted to the distributor. When you see someone stocking the shelf in the beer aisle, it is likely a beer distributor employee.

Draft maintenance: Where legal to do so, distributors may provide draft line cleaning and installation services. These services may be provided at a charge to the retailer to cover some or all of the distributor cost. In Vermont, for example, draft line cleaning is allowed and distributors must charge an amount at least equal to their cost for the service.

ab-truck

Warehousing: When you think of a beer distributor, the first thought that comes to mind is a warehouse full of beer. In many cases, the warehouse is temperature controlled with cooling systems and keg rooms to maintain the freshness of the product. Standard product racking, and more recently carton-flow or gravity-fed racking, is installed to maximize utilization of the warehouse space. Many distributors have an IT warehouse management system to track, manage and safeguard product.

Night loading: Beer distributors typically run a 24-hour operation. Hours vary by distributor, but the night loading team typically arrives in the late afternoon to early evening, and loads the trucks with orders that were sold earlier in the day by the sales team. Orders are picked from the racks, loaded onto trucks, and made ready for the driver team to deliver the following morning. Many distributors use a sophisticated voice-picking system to ensure the accuracy and productivity of selecting products and loading trucks.

Delivery: Trucks are loaded with product, and the driver team delivers the goods to retailers. Many distributors use GPS tracking to ensure routes are run safely and efficiently. Drivers deliver full pallets, single cases and kegs to retailers. They will often pick up empty barrels, pallets and damaged or distressed product and return them to the warehouse.

Administration: Customer service, human resources, information technology and of course finance and accounting are functions of the admin team. As with most businesses, these duties are needed to keep the wheels turning and ensure the phones are answered, employees are taken care of, and that business transactions are properly recorded.

About Brewbound Voices:

Brewbound Voices was created with the goal of providing readers valuable insight into areas like finance, investment, branding, marketing, sales, and distribution. The column serves as an avenue for experts to contribute their knowledge to our readership. Interesting in writing for Brewbound Voices? Email pitches to news@brewbound.com.

Brewbound Job Board

The leading job board for the beer industry. Featuring hundreds of jobs from leading breweries and associated companies.


Brewbound Live Winter 2018

Santa Monica, CA ● Nov. 27+28, 2018

Register Now
Brewbound Podcast

The Brewbound Podcast features interviews with beer industry executives and entrepreneurs, along with highlights and commentary from the weekly news. New episodes every Thursday.