A short course in distribution basics
by Tom McCormick
Distribution is one of the most important, yet commonly overlooked components in the operation and success of a craft brewery. A common misconception by those entering the craft beer industry is that once the beer is brewed, packaged, and shipped to a wholesaler, the brewer can essentially forget about it, leaving the sales, marketing and promotion to the wholesaler. This is not the case, since beer distributors function primarily as a delivery and warehousing mechanism. Most distributors do little, if any, selling and promotion of the beers in their portfolio, with the exception of the top selling two to three brands. Hence, it is imperative that the craft brewer know and understand the second tier of the business – distribution – in order to ensure their products are adequately marketed.
One option brewers have available to ensure good distribution is to distribute themselves. This practice is not allowed in some states and is only practical within the local market area. Self-distribution should be limited to within about a one-hundred-mile radius of the brewery (depending on market density) in order to maintain cost efficiencies. The local market is both your most important market and also the easiest to gain recognition and retail placements because of the “local appeal.” Self-distribution has the advantage of personal, hands-on selling that beer distributors cannot give to most products, given the extent of their product portfolios. The disadvantages are the time and resources involved in running a company within a company. Distributing yourself requires a focus from management, additional personnel and equipment and an investment in time and money.
Some small brewers have initiated self-distribution for the first few years to gain good product representation and placement, and then turned the distribution over to a beer wholesaler to further penetrate the marketplace.
Selecting the right distributor
Eventually it is necessary for the craft brewer to select and secure distributors. In any given market there are a number of distributors to choose from. Normally, each market will contain two to three major brand houses (distributors are often referred to as a “house”), one each for Anheuser-Busch, Miller and/or Coors. Major brand houses are the largest and most dominant beer distributors. They have a very high level of service, do business with virtually all licensed retail accounts, and are aggressively competitive. They have excellent contacts within the retail trade, including important chain store buyers. The disadvantage for the craft brewer is that he or she is a small fish in a very large pond. First and foremost, these distributors are selling their primary brand and are therefore often unwilling to provide much attention to the smaller brands in their portfolio. Major brand houses are also very selective in choosing new brands.
Many markets may also contain a miscellaneous brand house. A miscellaneous brand distributor carries many products other than one of the big three such as regional breweries, popular imports, and non-alcoholics. Although they do not dominate the marketplace like a major brand house, they usually have a high level of service and can be a good home to the small brewer.
Also present in some markets are small specialty distributors who specialize specifically in handcrafted, authentic beers – usually imports as well as domestic craft. These small distributors typically offer great enthusiasm, have a sales staff that knows and cares about beer in general and will take the time to hand-sell your products. The downside is that these small distributors may be understaffed and usually tend to highlight the account base, only servicing the “A” account base.
Liquor/wine distributors can also offer an option to small brewers. Wine distributors will customarily cover a much broader territory – often statewide – while beer distributors commonly confine themselves to a metropolitan area. Wine distributors are good at product knowledge and hand selling but have very large portfolios, and their main focus and interest is in high margin wine and spirits. Because of the slow pull-through of wine and liquor products compared to beer, they may call on retail accounts only every two weeks, whereas a major brand house may call on a high-volume account as often as five to six times per week. Specialty houses ordinarily have a call frequency somewhere in between.
Due to franchise laws imposed in most states, it is often very difficult to terminate a brewery/distributor agreement. Once you enter an agreement with a distributor, franchise laws protect the distributor from suppliers terminating at will. When shopping for a distributor, choose one that not only suits your needs now, but that will also be appropriate in five or even ten years. Spending time in the marketplace in which you are searching for distribution is the most effective way of selecting a distributor best suited to your needs. Obtain a price sheet from each wholesaler so you know which distributors carry the various brands in the market. Talk to retailers to gain insight into which distributor they prefer dealing with. Ask questions about call frequency, draft service, product knowledge, enthusiasm of the salespeople and which distributor understands and sells craft beers the best. Look around the retail accounts to find out which distributor seems to put up the most POS, has the most draft handles and best shelf positioning for craft beers. Talk with other craft brewers in that market to get their opinion from the supplier side.
Once you narrow it down to two or three distributors who you feel might best suit your needs, call each one and set up an appointment to present your products. Most distributors are very selective in looking at new brands. Make sure you are well prepared and have a convincing proposal when meeting with the distributor for the first time. You should know your pricing, shipping costs and arrangements, what your advertising and promotion plans and budget will be, post-off and/or incentive programs, and demonstrate how you will assist the distributor in selling the brand.
Be sure to take samples of both product and POS into the interview. Try to also gain some insight about the distributor during the interview. Some questions to ask are: Do they know craft beers and how to sell them? Do they carry other specialty brands, and what has their success been with those? Do they have a brand manager or specific person responsible for your product line? Are they willing to carry all of your line extensions and draft? Do they have refrigeration space for your brand? Do they have good draft support and service? Do they seem financially strong?
It is also important to discuss pricing. Although you cannot dictate to a distributor what they will sell your beer for, you can get an understanding of what margins the distributor will be working on prior to signing a contract. Typically, distributors work on a 25 to 28 percent gross margin for craft beers. Additionally, it is very important to choose a distributor that you feel comfortable with. The “comfort factor” should be high on your list when you make the final decision. Each beer wholesaler has its own personality, and you will want a company you can trust and feel confident with so that a lasting, mutually beneficial relationship is built.
Once you have chosen a distributor willing to carry your products, be sure to have your attorney draft a contract agreement. As the product supplier, it is your responsibility to provide such a contract.
Working with the distributor
It is now time to work closely with the wholesaler in rolling out the product. The wholesaler’s sales staff is essentially the brewery’s sales staff, so it is imperative that they are excited and educated about your brand. You should hold a “kick-off” meeting with the sales staff and tell them the story behind your brands, how they are made, how they are unique and different, and how to sell them. Remember that the sales staff has a lot of other brands to sell so it is vital that you communicate how your brand will provide value to the retailer and why your brand will sell once it is placed in the account.
In today’s competitive craft-beer market it is essential to keep in touch with each of your distributors on a regular basis. Many small brewers fail to realize how much time and effort this requires. Each distributor should be contacted on nearly a weekly basis to make sure they have adequate POS, discuss inventory levels and ordering projections, progress in key accounts, etc. It is common practice for the brewery sales representative to do “riders” with the distributor staff, where they spend a day with one salesperson on their daily route to help present and discuss your products to the retailers. It is also very helpful for brewery representatives to spend time in the market independent of the distributor’s sales staff, to make new placements and generally promote the brand.
One of the most difficult tasks is to maintain appropriate “mind share” from your distributor. If your brand only accounts for perhaps 2 percent of the distributor’s revenue, it is very difficult to get more than 2 percent of their time. By staying in touch with the principles of the company, spending time with the sales managers and staff, and spending ample time in the market yourself, you will help ensure adequate representation of your brand.
State by state regulations
The rules and regulations pertaining to the distribution and advertising of beer products are highly regulated and are enacted and enforced at the state level. Therefore, each state has its own set of laws in which the brewer is responsible for knowing and abiding by. It is incumbent on you, the brewer, to know the specific regulations of each state in which you sell. There are often regulations as to what a brewer may or may not supply to both retailers and distributors, payment terms between brewer and distributor, and very specific, often restrictive terms for terminating a distributor. Contact the state regulatory agency and beer wholesaler trade organization for the specific laws before doing business in that state.
Beer distribution – with its own personality, language, and terms – is very different from the brewing business. It is, however, intrinsic to the beer industry. As essential as distribution is to the success of a brewery, it is important to learn this unique industry so that you are comfortable and knowledgeable enough to make it work for you. You can brew the very best of products and have great packaging, but without good distribution, it will be not be enjoyed by the end consumer.