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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 randy@goldenbeveragesolutions.com .
February 6, 2012
Local 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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