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February 29, 2012

3 Tier

I had originally thought of writing this month’s blog about the private label issue within the alcoholic beverage world but after giving that some thought I realized that this issue should be about the three tier system and how the private label conundrum violates this system.  While I have written in the past about the 21st amendment to the constitution and the establishment of the three tier system (brewery, distributor and retailer) all operating independently, this system is under attack every day.  These attacks can be directly tied to the desire of a select few to improve their profits.  The proliferation of private label products by select retailers has not only muddied the water in the cooler and on the shelf but I believe does a disservice to those brewers, distillers, importers and distributors who work diligently to build brands.

It is a well-known practice within the industry that select retailers have sourced products from bulk brewers, vintners and distillers to create brands that replicate successful brands in each category.  These actions result in the retailer enhancing their margins on the private label items and impacting the sales volume of those brands they are replicating.   While recent cases regarding the Winery Exchange filed by Corona, Heineken, and Bell’s seem to point to the obvious efforts being made to leach off of someone else’s reputation this type of activity is rampant in the wine and spirits categories.  It is not uncommon in Texas that large retailers will have 30-40% of their wine selection in private labels.  Sure there are laws that should prevent one retailer from owning a brand but they always seem to find a second tier wholesaler who is willing to take considerably lower margin and make token sales to small accounts to prevent the exclusivity issue arising.  In addition to wine, the spirits industry has seen an increase in private label efforts to capitalize on the success of other brands.  During the last several years entrepreneurs have developed vodkas, whiskeys, and specialty spirits that are marketed as being from Texas.  These brands have become successful but are under attack by generically developed brands with the Texas name in it.  It is a shame that those who have worked very hard to develop a brand have to face these types of attacks from inferior products.  

I believe that this type of private label proliferation is damaging to the entire alcoholic beverage industry.  The infusion of more SKUs with items that are generally inferior to those replicated is confusing to the consumer.  The retail merchandising of these products also does a disservice to those wholesalers who have invested a considerable amount of time and financial resources to service the retailer.  Retailers who prioritize their private labels over building those brands carried by distributors are doing so because of their desire to garner the wholesaler’s part of the profit pool.  While I fully understand that everyone has to make their share of the profits why should the supplier and wholesaler suffer as they invest more into their brands so that all aspects of the system can benefit.  I feel confident that the majority of consumers do not know the difference between private label brands and those nationally or regionally distributed.  Thus there is a great risk that the consumer is being cheated by drinking inferior products in comparison to some of the great beers, wines and spirits currently being offered by the vintners, brewers and distillers.   
Finally, I believe this effort by retailers to capture more of the alcoholic beverage margin pool is circumventing the three tier system.  Because the retailer is not only controlling their end of the system they are also stipulating the distributors margins and dictating to the supplier what they want.  I think one of the most telling comments recently appeared in the Beer Business Daily, where my friend Harry Schuhmacher has covered this private label issue.  In his February 10th edition Harry quoted the COO of the Winery Exchange in saying they that “their focus will remain developing and providing their retail partners and consumers with brands.”   What struck me is that there was no mention of the distributor.  Surely this points to the obvious issue with private label brands and their producers and that their focus is only on giving the retailer brands and not worrying about who they infringe upon.  There are thousands of great brands out there who are supported by suppliers who care and delivered by wholesalers who coddle them to the shelf.  I hope we all recognize this and educate the consumer. I have always believed you get what you pay for.   I would enjoy hearing your opinion about this issue.  Please email me at .         
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February 6, 2012

Happy New Year to all and I trust your holidays were enjoyable.  I was tempted to write this month’s blog recapping the beer industry for 2011 and offer my set of projections for 2012.  I have decided to leave making any prognostications up to those who enjoy this type of exercise and focus on what has made many breweries and distributors successful.   Running a successful business takes great leadership but sustaining that business over time requires a keen business sense as well as being involved with your local community.  Through my years I have seen distributorships excel above their competitors because of their close ties to the community. Creating a positive image for your products and organization in your local community creates a competitive advantage that augments your service and employees.  

I recently spoke with a young entrepreneur who is building his business based on being a local brewer in the Dallas market.  Wim Bens is currently building a brewery in the Dallas area called Lakewood Brewery and is counting on his local ties in the community for his success.  Wim has already been speaking with local accounts and has sampled some of his beers with those in the Lakewood area.  Based on the press coverage he has received so far and the reaction by the retailers I think Wim is on the right track.  While time will tell if Lakewood Brewery is successful, I think it is intriguing that Wim has reached back and captured an element of what has made many breweries and distributors successful.  Having local ties creates a connection to your retailers as well as the consumer and has historically created a loyalty to brands and distributorships.  Distributors have always been called on to connect with both the consumer and retailer at the local level.  These relationships are necessary to excel in a highly competitive beer industry.

In today’s world of larger distributors with multiple locations, do we stand to lose that critical local connection?  Building a business that captures all of the synergies with a larger footprint is important in today’s environment. Doing so without remaining engaged in the local communities you serve could be a mistake. It is easy to focus only on your operational priorities without insuring you stay involved with the community you serve.  It is critical that the leadership (principal, GM, etc) in each location of a warehouse or territory remains visible with those community leaders, legislators and retailers who are the influencers.  Being known as a leader who is involved politically and willing to support your community gives you a decided advantage when decisions impacting your business are made.  

Many suppliers are willing to support their brands for community events but there remains an expectation that the distributor should build a positive corporate image of their own. Local activities are great vehicles to entertain retailers as well as your employees.   Being visible in your community also gives your employees a greater sense of pride in the company they work for.   I believe consolidation to larger more efficient operations is inevitable, but we do not have to leave the local involvement of the distributor behind.  An invaluable aspect of the beer business has always been relationships.  Building a community presence for a brand cannot be done without the relationships a distributor has with that community.
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