Delivery minimums

Modern Brewery Age, March 13, 1995 by Joseph J. Verno

Distribution economics in the beverage industry have changed dramatically over the past five years. The wholesaler is faced with a challenging and vital dilemma that revolves around two key issues. The first issue is the proliferation of packages and the desire of all suppliers to have their products in every possible account. Wholesalers must recognize the marketing value of all accounts and find a method to meet supplier and retailer needs across the entire account base.

Second, costs of distribution are increasing and margins are decreasing or flat, at best. The wholesaler is trying to figure out how to better utilize his sales and delivery resources and save costs wherever possible.

One of the obvious strategies to deal with this dilemma is to take resources from the smaller accounts and invest them in larger accounts. The methodology used to execute this strategy depends on the wholesaler's sense of need and urgency, as well as the culture of the company and anticipated responses by the competition.

Over the past few years, wholesalers have taken steps to improve the order-taking process. Some have implemented tel-sell to save sales time and provide consistent sales service to smaller accounts. Other wholesalers have decided to driver-sell smaller accounts. Both of these strategies have been very effective methods of saving sales resources while improving sales presence in the smaller accounts. The next step in improving the profitability of the smaller accounts is to attack the cost of delivery and not just the sales order-taking cost.

Cost Per Stop

Before the wholesaler can realistically develop strategies to improve the profitability of the smaller accounts, he or she must determine cost per stop and breakeven cases per stop. Cost per stop is determined by taking total direct sales and delivery cost for the period and dividing that sum by the number of deliveries made during the same period.

Breakeven cases per stop is calculated by taking the average gross profit per case and dividing that number into the average direct cost per stop.

For example, if the direct cost per stop is $31.50 and the average margin per case is $2.25, then the breakeven point is 14 cases per stop ($31.50/$2.25 = 14 cases).

If the wholesaler in this example makes a delivery of less than 14 cases, the account does not generate enough gross margin dollars to cover the direct costs associated with the stop. If the wholesalers' total costs are included (warehouse, administration, executive, etc.), the total cost per stop and cases required to break even usually will double. In this case, breakeven would jump to 28 cases.

(For a detailed list of expenses to include in the calculation of cost per stop and simple formulas to calculate breakeven per stop, contact Denver Management directly).

Does this mean that the wholesaler should not make any delivery below 14 cases? Does it mean that the wholesaler should get rid of accounts that don't have the volume capacity to purchase an average of 14 cases per delivery?

The answer to both questions is no. But the example brings up realities that must be factored into the decision of how to service smaller accounts. If the average market share wholesaler reviews his or her account rankings, it becomes clear that the bottom 30% or 40% of accounts probably generates less than 10% of the company's volume. In many cases, 20% to 30% of the actual deliveries made do not generate enough gross margin dollars to cover the direct cost per stop. With the exception of large share wholesalers (i.e., 50% market share), managing service to smaller accounts is one of the most impactful determinants of profitability and market performance.

Delivery Minimums

The idea of delivery minimums triggers different impressions in different people. Some people feel delivery minimums are poor service and bad business. While others feel they are a natural part of doing business and are, in fact, long overdue in the beverage business.

For perspective, let's review some common minimums in other distribution businesses, as well as typical minimums we have learned to live with in our everyday life.

The softdrink business often deals with the small account through the pricing mechanism. The price of less than 10 cases is usually considerably higher than the discounted price offered when 10 cases are purchased. This pricing differential causes a couple of reactions from retailers. The retailer may order less frequently, not placing an order until they need a full 10 cases. Thus, the account that sells three cases a week will order every three or four weeks. Another way the small account can make a small-volume purchase at a discount price is to buy from a mass merchandiser who offers a lower price than the softdrink bottler.

Using price to control order size and frequency is not an option for the vast majority of alcoholic beverage distributors. A meaningful point of comparison should be recognized here. In the softdrink business, the small retailer receives and accepts a different level of service from the supplier than larger volume accounts. Beer, wine and spirits wholesalers should be more willing to alter service to smaller accounts to help offset the negative profit contribution these accounts provide. This strategy is already in use by softdrink bottlers and distributors, and implementation should not be impossible if handled correctly.