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Distribution 101
A short course in distribution basics

by Tom McCormick

Distribution has become one of the most important yet overlooked components in the operation and success of running a microbrewery. 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 up to the distributors. This is not the case as beer wholesalers are primarily a delivery mechanism; most do little actual selling and promoting of the brands in their portfolio. Hence, it is imperative that the microbrewer know and understand the second tier of the business to ensure their products are adequately marketed and handled after leaving the caring hands of the brewer.

Self-distribution

One avenue that brewers have to ensure good distribution is self-distribution. 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 100 mile radius of the brewery to maintain cost efficiencies. Your 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 can not give to most of their products given the extent of their portfolios. The disadvantages to self-distribution are the time and resources involved in running a company within a company. 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

But eventually the microbrewer must take the step in selecting and securing distributors. In any given market there are a number of distributors to choose from. Each market will normally contain two to three major brand "houses" (distributors are often referred to as a "house"), one each for Anheiser-Busch, Miller and Coors or a Coors/Miller combination. Rarely will Coors or Miller be sold under the same house as A/B. Major brand houses are the largest, most dominant beer distributor within the territory. They have very high levels of service, are in all retail licensed accounts and are aggressively competitive. They have excellent contacts within the retail trade including important chain store buyers. The disadvantage is that the microbrewer is the small fish in a very large pond. First and foremost, these distributors are selling their main brand. They often have a hard time dealing with small breweries and the many line extensions and seasonals, and don't understand the time intensive, hand-selling technique required of craft beer products. Main brand houses are also very selective in choosing new brands.

Most markets may also contain one or two specialty or miscellaneous brand houses. A miscellaneous brand house 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 main brand house, they have a very good level of service and can be a good home for a small brewer. They typically have very large portfolios and it is easy to get "lost" in the pricesheet. Some markets also contain a specialty distributor or "micro-distributor" who sells only hand crafted, authentic products, usually imports in addition to microbrewed domestics. Some of these distributors may be an extension of a small brewery that started self-distributing, and then later added additional brands. Micro-distributors typically offer great enthusiasm, sales staff that know and care about beer, and are very good at taking the time to hand sell your products. However, they are often understaffed and have a tendency to highlight the account base.

Liquor/wine distributors are also an option. Wine distributors will usually cover a much broader territory; usually state-wide, where beer distributors more commonly confine themselves within a single metropolitan area. Wine distributors are good at product knowledge and hand selling but have a very large portfolio, larger than any other type of beverage wholesaler. They are normally very strong on-premise and tend to be weak off-premise, especially the within the large chain stores. Because of the slow pull-through of wine and liquor products, they may call on most accounts only every two weeks unlike a major house that will call on a high volume account as often as 5-6 times per week. Specialty houses have a call frequency somewhere in between. Many liquor/wine house don't carry draft products.

Selecting a distributor

Because it is often difficult to terminate a brewery/distributor agreement, when shopping for a distributor, choose one that not only suits your needs now but also one that will be appropriate in five or even 10 years from now. Spending time in the marketplace in which you are searching for distribution is the most effective way of selecting a distributor best suited for 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 as well. Find out which distributor seems to put up the most POS (point-of-sale) material, has the most draft handles and best shelf positioning for craft beers. Also try calling other craft brewers in that market to get their opinion from the supplier side.

Once you have narrowed down two to three distributors you feel would best handle your products, call each one and set up an appointment to show them your products. Distributors are approached constantly by various suppliers looking for distribution, so it is important to sell yourself even on the first call. Depending on the market, many distributors are very selective in looking at new brands. Make sure you have a convincing proposal, business plan and objectives when meeting with the distributor. You will need to know your pricing and shipping costs, who pays for shipping, what your advertising and promotion plans are, post-off programs and in what way you will assist the distributor in selling the brand. One question the distributor will almost certainly ask of you is what are your sales expectations. You can either have your projections with you and review those with the distributor, or ask them what they think would be reasonable sales goals for your brand given your pricing, marketing plan and imagery (the "look and feel" of your packaging and POS). 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 things to answer in your own mind are whether or not they know craft beers and how to sell them, do they carry other specialty brands and what has their success been? Will they assign 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 and do they seem financially strong?

Try to also get a commitment on pricing. Although, as independent business people, you can not dictate to a distributor what they will sell your beer for, you can get an understanding prior to signing a contract what margins the distributor will be working on. Typically, distributors work on a 25% gross margin for craft beers, although that margin is beginning to creep upward as the cost of doing business increases.

It is also 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 that you can trust and feel confident that you can build a lasting, mutually beneficial relationship.

Once you have chosen a distributor who is willing to carry your products, be sure to have your attorney draft a contract agreement. It is the responsibility of the supplier 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 sales staff of your wholesalers are essentially the sales staff of the brewery, 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. The sales staff of any distributor has lots of other brands to sell, so in your presentation, give them the tools and the story they will need to sell your beers at retail.

In today's competitive craft beer market, it is essential to keep in touch with each distributor. Many small brewers fail to realize how much time and effort this requires. Depending on the size and intentions of your brewery, you should budget sales people to work directly within the distribution network. Each distributor should be contacted on nearly a weekly basis to make sure they have adequate POS and are using it, to monitor inventory levels and ordering projections, discuss key accounts, etc. It is a common practice for the brewery sales representative to do "riders" with the distributor staff where they will spend a day with one sales person on their daily route and help present and discuss your products to the retailers. It is also very helpful for brewery reps. to spend time in the market, independent of the distributor sales staff, to make new placements and generally promote the brand.

Remember that distributors have many brands to sell. Be respectful of their other brands when in the market place. One of the most difficult tasks is to maintain "mind share" from your distributor. If your brand only accounts for perhaps 2% of the distributors revenue, it is very difficult to get more than 2% of their time. Staying in touch with the principles of the company and spending time with the sales managers and staff in addition to your own time in the market, will help assure that your brand is adequately represented.

Rules and regulations

The rules and regulations pertaining to the distribution and advertising of beer products are many and complex. They are and are enacted and enforced on the state level. Therefore, each state has its own set of laws that the brewer is responsible for knowing and abiding by. It is incumbent on the brewery to know the specifics of each state your products are sold in. Generally, most states do not allow the brewer to give any items of value (T-shirts, mirrors, glassware, etc.) to a retailer or consumer. There are often regulations as to what a brewer may supply to the distributor, payment terms between brewer and distributor and very specific, and 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.

Summary

The beer distribution industry is an industry much different than the beer industry. It has it's own personality, language and terms. As important as distribution is to the success of a brewer, it is very important to learn this industry so that you are comfortable and knowledgeable enough to make it work for you. You can brew the very best of products, with great packaging and pricing, but without good distribution, it will be not be enjoyed by the end consumer.

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