Bridging the gap: how suppliers and distributors can improve the "partnering" relationship [or, can't we all just get along?]

Modern Brewery Age, Sept 8, 2003 by Lamont Seckman

The objective of this four-part series has been to advance the dialogue concerning supplier-distributor relations in the U.S. beer industry. The first three parts of the series investigated supplier-distributor relationship issues from a number of perspectives. In this article, I make recommendations for improving this relationship--primarily for the benefit of the non-AB part of the spectrum.

Fundamentally, the distribution of products is a supplier problem. Distribution is traditionally considered a cost of doing business for a product producer. In an ideal world, from a producer's perspective, all customers would simply arrive at the plant and pick up products right from the dock--no hassle, no distribution cost, no sticky relationship issues with product distributors. Of course, in the real world, producers rarely have it so convenient. Beer producers in particular must move their products through as many points of sale as they can in order to maximize revenues. The only question becomes how to develop the most effective [i.e. read "revenue"] and efficient [i.e. read "profit"] distribution system possible within the myriad of economic and regulatory environments impacting beer sales.

In the United States, the distribution structure that has evolved is mostly based on independently-owned beer wholesalers. Producers generally have found that outsourcing the distribution function is an economically justifiable alternative to handling it themselves. Contributing to this argument, of course, is that a separation of duties is legislated in some states.

Keep in mind that for a product producer the use of an independently-owned wholesale system is not necessarily a given. Frito-Lay, as an example, has successfully used a direct-store-delivery (DSD) distribution system in the U.S. that is almost exclusively company-owned. Some beer producers, where legal, certainly have the option of owning their own distribution. Indeed, recent moves by Anheuser-Busch have significantly increased the direct ownership interest it maintains in its own distribution system.

Conversely, non-AB distributors are handling numerous suppliers who have likely never had self-distribution of their own products as a legitimate option. The primary issue for these companies has always concerned the exchange between the value contributed by the outsourced distribution function--and the compensation paid to receive such services.

This article series has considered many trends and developments impacting supplier-distributor relations. As the industry evolves, this value exchange must be constantly scrutinized and elucidated--as never before. The primary reason for this is that the rate of change impacting relations will likely increase. The relative value contribution of major players in the three-tier system is changing as consolidation and other factors contribute to shift leverage from product suppliers to distributors, and, in turn to retailers and consumers. [See Part III of this series for more on this Leverage Shift].

What is Value?

Most often valuation discussions at the brand level seem to end with discussions of gross profits. Of course, multiples of annual gross profits are often used as indicators of brand values during transactions of distribution rights among wholesalers. A deeper analysis is required to understand how value is actually created in a distributor's product portfolio.

We all know that net profits, not gross, is what actually goes to the bank. In addition, value must also consider the risk involved. A supplier providing higher gross-profit cases may provide added value. But what about such factors as inventory DOH requirements, slow-pays on rebates, high market spending requirements, poor support from supplier reps and management? These factors have direct cost implications, and may also impact the risk involved in assessing the long-term brand values to be derived from that supplier. A thorough assessment of gross profits, operating costs, and associated risks involved with brands and suppliers will likely provide an eye-opening experience for product wholesalers. It is often surprising how distributors have high share-of-mind focused on brands and suppliers with relatively low brand value contribution--and relatively little share spent on suppliers contributing relatively high value. Wouldn't it make sense to find value opportunities in your portfolio--and then develop strategies for realizing these values? Many wholesalers could benefit from a realignment of sales resources to better match the value creation/destruction taking place in product portfolios.

The following recommendations are not meant to be criticisms of any particular industry participants or individuals and should be taken in the constructive spirit in which they are offered. They are offered primarily for use in the non-AB part of the spectrum in an attempt to make wholesalers--and their respective suppliers--falling under this umbrella more competitive in the long-term.