Category: Supply Chain

Soaring Specialty

Are we on the cusp of a new era in beverage distribution? For decades now, the industry has favored mass production, and, as a result, mass distribution of beverage products. The beverage market has until now been dominated by massive beverage companies with huge supply chains and “Billion Dollar Brands.” Up until now, the pendulum has swung in this direction with virtually every major global brewer or soft drink company engaged in one deal or another to grow itself even bigger.

But there are more and more signs that the pendulum has begun to swing back. The meteoric rise of craft beer over the past few years has continued unabated. Consumers can’t get enough of local foods and beverages—the smaller, the more personal, the better. Now, small craft distilleries have begun to pop up all over. And there is a growing interest in locally handcrafted soft drinks, juices, teas and coffees.

What is going on? Some see it as a consumer rebellion against the impersonal “commodity” beverages. In this interconnected Internet era, consumers are eager for personal discoveries they can share.

And they are also clamoring for a return to nature. Negative press about high fructose corn syrup and artificial ingredients is the exact opposite of the positive press directed toward organics and “all-natural,” both of which artisanal products often tout on their labels.

For whichever reason it is, the artisanal beverage trend has pumped new life into entire segments of the beverage business—and many experts say things are just getting started. But can the critical link in the chain—the beverage distributor—manage to keep up? Or could the pace of new products outstrip the ability of beverage distributors to keep up with it, and, as a result, begin to actually choke off future artisanal beverage innovation?

Some industry observers are increasingly worried this could be the case.

“There are more and more small, compelling brands but there are fewer and fewer good distribution choices,” explains Bill Anderson, chairman of the Los Angeles based financial firm First Beverage Group. “We’ve had this tremendous proliferation in SKUs in almost all industry categories but you’re seeing more consolidation in the distribution tier which is resulting in fewer choices for these small brands.”

He continues, “The distribution tier is a funnel that’s getting jammed. There is only so much warehouse space and there are only so many brands that these distributors can take on.”

Challenges and Opportunities
Beverage distributors looking to expand into artisanal distribution are faced with an interesting conundrum. On the one hand, these new products have the potential to boost their profits tremendously because of their higher price points. But in order to reap such rewards, they first have to make room for them in their existing operations. And this can present them with some rather costly choices.

Chet Willey, a supply chain consultant to beverage distributors, says helping his clients adapt their businesses to this newfound era of specialty beverage distribution has become pretty much all he does. “Probably 95 percent of the work I’m doing right now is directly attributable to the explosion of the number of craft SKUs out there because people just don’t know how to handle it,” he says. “It used to be 250, 300 SKUs was a lot for a distributor back five years ago. Now, probably the average I’m seeing out there is around 700.”

For an average distributor expanding into artisanal products, it’s not unusual to see the need for an additional 20,000 square feet of warehouse space over a five-year period, Willey says.

And the very nature of these new artisanal products presents distributors with a series of unique problems. There’s the need to expand their cooler space, for example. Many of the craft beers are not pasteurized and therefore need to be closely temperature controlled. Also, because many craft products are slow-movers, distributors are building new case flow racks for them. Willey says more than 50 percent of the new craft brands coming onto the market fit his qualifications for case flow rack storage: that they move fewer than 40 or 50 cases a month. “Many of them are under 5 or 10 cases a month,” he points out.

And among the biggest warehouse projects being undertaken by beer wholesalers are in the draft areas as they try to manage an explosion in kegs, especially sixth barrels. This is fueled by the rising number of on-premise accounts trying to offer their customers the choice of all the new craft brands coming out.

But many distributors say all of the hassle and cost is worth it to get a piece of the growing—and profitable—craft business. Willey says artisanal brands can offer distributors gross profits well in excess of $5 per case, compared with approximately $3.75 a case for the mainstream brands from the big brewers. He says he personally has been shocked by the profits to be made off of many of these artisanal brands and has gone from issuing a blanket warning against very slow movers, to instead advising clients to do a cost analysis for each SKU. “The profitability of some of these products is approaching that of wine, so if you get into that kind of product, some of these high-end craft beers, the profit margin is so high they can’t afford not to take it,” Willey says.

Another word of advice from Willey to distributors moving into craft distribution:  Form an SKU management task force to ensure there is a formalized method for analyzing which products to take on. It should consist of the CFO, VP of Sales, someone from operations, and maybe the owner.

Attention to Detail
But it is not just physical changes that distributors are being forced to contend with as a result of this new era of artisanal products. More and more, they are realizing they need to change their whole mindset as well. Generally speaking, taking on craft products, distributors say, means transitioning from a mass market, commodity mindset to one based on the attention to the minutest of details about the brands they carry.

The organic tequila craft brand Dulce Vida, is a good example. This artisanal spirit’s unique method of production—what it terms its “Maquila approach” —is central to its story. The company is involved in every detail of the drink’s production in Mexico, from plant selection through fermentation, distillation and aging. “Our approach to the market has been a grass roots, one case at a time approach,” explains Richard Sorensen, founder & CEO, of Dulce Vida Organic Tequila. “What we’ve found to be to our benefit is significant product distinctions that set us apart from the ‘other guys,’ so to speak. Absent significant distinctions, success would be elusive.” A company like that expects its distributor to be able to understand its unique story and help communicate it to retailers and consumers.

One distributor that understands the importance of such brand stories is Powers Distributing, in Orion, Mich., which opened a specialty beverage division in late 2003. Gary Thompson, the company’s COO, says the experience has caused him to take a step back and note some interesting observations about the current state of beverage distribution. “Over the course of time,” he says, “a lot of us beer wholesalers had a key skill that had atrophied and that key skill was marketing on a local basis. That came from the major suppliers like Anheuser-Busch, Miller-Coors being focused for a number of years on making the most out of their national and international spend for the building of their brands. And so they came to wholesalers and they really wanted us to focus on executing the marketing plans they had. They didn’t want us to be great local marketers. They wanted us to be great local executors.”

So, Thompson says, “the first challenge for all of us wholesalers is to rip ourselves out of that level of thinking, that we just get the beer from point A to point B, to shifting back to a mindset of taking ownership of marketing those brands on a local basis.”

As Thompson explains, many of the smaller craft brands today just don’t have the resources to spend on marketing, a service they rely on their distributors to provide. As an example Thompson points to the Craft Brewhouse that Powers set up a couple of years ago at the Palace of Auburn Hills arena, home of the Detroit Pistons, to showcase some of the newest craft brews (see photo).

For Powers, the company’s specialty beverage division exists side by side with the company’s mainstream beverage distribution operation with both divisions feeding off each other.

But there is another trend also arising from all of the new artisanal products—that of the pure craft distributor.
One such company, the Kent, Washington-based Click Wholesale Distributing, specializes in distributing craft beer, spirits and wine. Rick Steckler, the company’s president & COO, describes his mid-sized distributorship’s mission as: “Keeping the passion and knowledge of the station wagon distributor but incorporating it into the systems, the professionalism and the execution of the larger distributor.”

“When Rick and I first started off, basically beer wholesalers were built around a Bud house or a Coors house or a Miller House, and then built a portfolio around that,” explains Jim Florio, Click’s chairman and CEO. “We did not want one supplier to really control the ship and we actually looked to partner up with the craft breweries and fine wine producers across the board so they all had share of mind.” In 10 years of business, Click has grown from the initial year’s sales of $1.8 million to 2012 sales of $44.6 million. Steckler and Florio have two managing partners, Terry Nichols and Josh Davis, in their Spokane, Wash.-based Click Distributing East, the division of their organization that services Eastern Washington and North Idaho. Click is unique in Washington as the only statewide distributor that has a significant stake in each of the alcohol beverage categories of spirits, wine, beer and cider.

You might think hiring would be a challenge for craft distributors, given the deep knowledge of the brands required for their salesforce. But interestingly, the distributors report that enthusiasm for craft beer, spirits and wine is so high these days that it is not as much of a challenge as it may seem. “Yes and no,” says Steckler. “It’s hard to find them but there is so much excitement and interest from the consumer level up to the retail buyer level in cool, artisanal craft brands that the knowledge level out there is increasing. People are getting on the internet. They’re learning on their own. They’re tasting. They’re self-educating. And there’s a very, very passionate consumer base out there and retail base.”

The attention to smaller craft spirits brands Click can provide its customers was crucial for Orlin Sorensen, founder of the three-year old Woodinville Whiskey Co., the largest volume craft spirits producer in Washington. When Washington State privatized its spirits distribution last year, Woodinville chose to go with Click. “They’ve been nothing short of amazing,” he says. “Distribution can be one of the most challenging things for a craft brand. But I think what spoke to us was Click’s reputation in the craft beer industry in Washington State. They have most of the top craft brands and we are a very craft beer state. They clearly understood what it took to sell craft product and then they just invested heavily in educating themselves on the spirits side of the world and hired some very smart people in our local industry to mentor their team and get everybody geared up on the difference between beer, wine and spirits.”

Another example of the level of expertise required for craft beer distribution can be found at the Chicago-based Louis Glunz and its two craft and specialty import brand managers Lincoln Anderson and Anthony Norkus. Norkus was the only person in this role at the company for six years, and was joined by Anderson just a few months ago.

Norkus sees their job as providing customers with product knowledge and helping them to understand styles. “And as the American craft breweries come up with new styles and create new beers, someone like myself, who’s tried the beer from the brewery, can explain to the retailer, ‘This is the flavor profile, this is the format it comes in, this is the kind of consumer that’s going to be drawn to it. Helping them make decisions about what to bring in is a big part of it,” Norkus explains.

Adds Lincoln Anderson, “It’s gotten to the point where it’s not just getting more sales and more points of distribution, the shift with craft beer that people need to understand is that the focus becomes getting the right beer in the right account—whereas traditional distribution methodology was ‘let’s get as many points of distribution as we can and that will drive velocity.’ That only works to a certain extent for craft beer. But more important than anything is stepping away from that viewpoint and saying, ‘ok, let’s look at where this beer fits in. Where is this best going to be highlighted,’ so when that brewery has other product it’s built its reputation amongst the right consumers.

“I think that’s the most interesting part of the job and the kind of cerebral challenge that you can’t really quantify that is just kind of like a puzzle everyday when you go to work. Which is why I think a distributor our size and with our portfolio needs to have craft brand managers to focus on putting those pieces of the puzzle in the right position.”

For other distributors, like the Indiana-based Monarch Beverage Co., the popularity of artisanal beverages has resulted in the company also significantly building up its wine business. “As the category shits from domestic beer to more craft beer and wine we certainly try to round out our portfolio on both those levels,” says Ben Francis, director of wine sales for Monarch. “Wine has proven to be a profitable business, a growing business. The alcohol beverage consumer continues to shift more and more within the United States towards that choice of pairing quality and taste instead of tonnage.” Monarch has seen the wine share of its business grow from 11.9 percent in 2008 to 14.6 percent in 2012.

On the craft beer front, Monarch is the founding member of the World Class Beer Network of independent, craft oriented beer wholesalers and covers Indiana for the network.

Weak Links in the Chain?
Given the extra challenges associated with specialty beverage distribution, therefore, it’s probably no surprise that the industry is racing to keep up with demand. For now, it’s a good thing. How many other consumer products are experiencing such demand?

But there are also warnings out there. Sometimes things can move too fast—and then suddenly come to a halt. Could consumers suddenly lose their passion for artisanal beverages leaving distributors with overbuilt warehouses filled of slow-moving products? “With all newer products, there is always some risk,” says Steckler. “But at least for now, that doesn’t seem to be much of a problem for the craft products. People have been expecting the growth in craft to level off at some point, but it just doesn’t look like it’s going to be any time soon. And if you look historically at some of the swings in the beer market, they take place over decades or even over a century or more. We don’t expect craft to all of a sudden drop off. But at the same time I think it’s extremely important that everybody, our staff, and the producers, remember to keep an eye on quality. As soon as brands lose the focus on quality, then there could be some real trouble.”

He then adds, “And we view ourselves and our ‘Click brand’ the same way. If we don’t keep a close eye on quality—in our brands and in how we go to market—then we can get into some problems where our brands could suffer too. We also have to be smart and put some limits on how many new brands we bring on board, how many new SKUs we bring on board.”

Along those lines, Bill Anderson of First Beverage Group, worries about whether the distribution arm of the industry can keep up with the demand for craft products—if the funnel he spoke of earlier will eventually clog shut. Signs of this are already happening. “The overall net result is they’re having a harder time finding good distributor options in key metro markets,” he says.

Could this eventually also choke off innovation, as newer brands can’t get the distribution they need to survive? “I don’t think it’s there yet,” he says. “But I think that’s certainly a risk.”

But the result may also be a positive for the industry, with more companies like Click starting up, he says.
“I think you’re going to see some small distributors start up in key markets—and  you’ve already seen it—that are focused on these small, artisanal brands,” says Anderson. “There has to be a wave of smaller distributors created, I think, to help serve these smaller emerging brands. Retailers are doing a good job of giving them shelf space. It’s just will they all be able to find the right distribution platforms? I think that’s the bigger question.”

Photo Credit: Meryl Schenker

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