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We have Evolved! Now What?

We have Evolved! Now What?. Joe Thompson President Independent Beverage Group 843 384-0828 ibg@hargray.com. NBWA 76 th Convention and Trade Show Caesars Palace Las Vegas, NV Oct 1, 2013. We Have Evolved! Now What? Macro Issues Mega Distributors “Stuck In The Middle With You”

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We have Evolved! Now What?

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  1. We have Evolved! Now What? Joe Thompson President Independent Beverage Group 843 384-0828 ibg@hargray.com NBWA 76th Convention and Trade Show Caesars Palace Las Vegas, NV Oct 1, 2013

  2. We Have Evolved! Now What? • Macro Issues • Mega Distributors • “Stuck In The Middle With You” • IBG’s Distribution System Of The Future - Model 2020 • How Will Industry And Consumers Re-act? VI. Summary

  3. I. Macro Issues

  4. A. Declining Beer Industry I. Macro Issues

  5. Total Beer Industry Volume Declining I. Macro Issues 2020 Est based on 1% per year Decline 2014 - 2020

  6. Per Capita Consumption (Gal) – Beer Declining (In Gal) I. Macro Issues Beer losing drinkers and less consumption …6.9% decrease…-2.1 gal

  7. % of Absolute Alcohol I. Macro Issues Beer 12 oz. drink Spirits 1.5 oz. drink Wine 5 oz. drink Distilled Spirits Council

  8. Declining Disposable Income I. Macro Issues Percent Change Source: US Bureau Of Economic. Updated 4/22/13

  9. Distributor Gross Profit Increase Slowing I. Macro Issues Source: NBWA Productivity Report

  10. Distributor Operating Profit Slowing I. Macro Issues Source: NBWA Productivity Report

  11. B. Franchise Laws Are Getting More Attention I. Macro Issues 1. Distributors influence being challenged (See next slide) 2. Original intent of 3-tier system eroding a. Brewers now distributors and retailers b. Distributors now brewers and retailers c. Retailers now brewers and distributors 1). BWW privileged label (Draft – Game Change) 2). CostCo private label (Kirkland) 3. Franchise laws harder to defend

  12. C. Distributors Influence being Challenged1. Distributor Number Equals 90% of Industry Volume 2. Several Hundred “Other” Distributors equal 10% of Industry I. Macro Issues Brewers 2020 ?????????

  13. D. “Dis-unity” Of Distributors I. Macro Issues 1. Multiple state associations 2. Split on “carve out” laws 3. Distributors litigating against each other 4. “Foot print” issues

  14. E. “Big Two” Global Strategy I. Macro Issues Profits +++ Volume Profits Volume ---

  15. II. Mega Distributors

  16. A. Distributors Influence being Challenged1. Distributor Number Equals 90% of Industry Volume 2. Several Hundred “Other” Distributors equal 10% of Industry II. Mega Distributors

  17. B. Characteristics II. Mega Distributors 1. Plus 10M - 15M cases plus 2. Multiple locations 3. Strong financially, often another source of wealth 4. Desire to grow 5. Reasonable good supplier relations 6. Management depth and sophistication 7. Normally in population centers

  18. C. Mega Distributors Numbers II. Mega Distributors 1. 2010 – 25 Mega distributors – 26% of 2010 industry volume. a. ABI. 11 Mega (Counting branches as 1) 1). 338M Ce’s (Total house. Avg 30.7M Ce’s) 2). 297M Ce’s to complete footprint a). Completed: 635M Ce’s. Avg. 57.7M Ce’s) b. MC. 14 Mega (MC volume 60% of total house) 1). 424M Ce’s (Total house . Avg. 30.3M CE) 2). 143M Ce’s to complete footprint a). (Completed: 567M Ce’s. Avg. 40.5M Ce’s) c. IBG estimates most “footprints” completed by 2020 325 Mid level distributors 59% industry vol. and 600 “other” distributors 15% industry vol.

  19. C. Mega Distributors Numbers II. Mega Distributors 1. 2020 – IBG estimates 650 a. 30 Mega distributors – 54% of industry volume. 1). ABI. 14 Mega (Counting branches as 1) (Est. Ce’s: 808M) 2). MC. 16 Mega (Est. Ce’s: 648M) 3). Total 30 Mega Distributors = Est. 1.5B Ce’s b. Pace of consolidation will vary based on interest rates Note: In 2020 IBG estimate 5 more Mega distributors - 3 ABI and 2 MC. CE/SOM projections used completed “footprint” avg Ce’s and projected industry vol. declining 1% per year 2014 - 2020 220 Mid level distributors 37% industry vol. and 400 “other” distributors 9% of industry vol.

  20. D. Economics II. Mega Distributors 1. Lower cost due to stronger management and horizontal shared services (14% - 16% Operating Cost as % of Sales) 2. Gross profit is higher (26% - 28%) 3. Profits rise rapidly with improved scale a. 2005 AB Dallas convention - $.55 1). Currently range of $1.25 - $2.00 for Mega 2). 2010 MC Mega @ $1.58 a). $670M profit 3). 2010 ABI Mega @ $1.58 (Est) a). $534M profit

  21. WA ABI ME MT ND VT MN OR X NH MA ABI ID WI NY SD Keith & Don RI WY MI CT ABI PA NJ X IA X NE X NV OH DE IN IL CO UT X ABI ABI Stokes MD WV VA KS MO CA KY Jefferies Hand ABI NC TN ABI AZ Hensley Dobbs OK AR SC NM TX Dormity Ben E. Keith GA AL MS X Nau LA FL Lamantia ABI Mega Distributors

  22. WA CoHo ME MT Taylor ND VT MN OR NH MA ID WI NY SD Clay HoBo RI WY MI Reyes CT PA Ingram NJ IA X NE NV Clay OH Monarch CO DE IN IL UT MC MD WV Reyes VA KS MO CA X X KY AZ NC Goldring / Moffat Reyes TN X Clay OK Glazer AR SC Reyes NM HoBo GA Andrews AL MS X X TX Keg 1 Goldring / Moffat Reyes LA Glazer Taylor FL Gold Coast Andrews MC Mega Distributors

  23. WA ME MT ND Sheehan VT MN OR Sheehan NH MA ID WI Sheehan NY SD RI WY MI CT Sheehan PA NJ IA NE NV OH CO DE IN IL UT Sheehan MD WV Sheehan VA KS MO CA KY Sheehan AZ NC TN OK AR SC NM GA AL MS TX LA FL Craft Mega Distributors

  24. III. “Stuck In The Middle With You”

  25. A. 15% Operating Cost as a % of Sales 1. IBG at Beer Marketers Insights conference 2005 2. ABI/MC cost cutting gave distributors window to reduce costs 3. Rapid growth of SKU’s and brands now adding costs 4. Wine and Spirits/soft drinks and waters/energy drinks now being added to distributors portfoliosa. Distributor attitude - easy way to add revenue 1). Survival tactic for declining distributors III. “Stuck In The Middle With You”

  26. B. Are “Value Added” Benefits Being Provided? 1. “Distributors are just order takers” 2. “All distributors do is deliver beer – 3. “Are we getting what we pay for?” 4. “I keep getting new brands and packages but there are not any more hours in my work day” 5. “My market is different…they don’t understand” 6. “They are not the only supplier I have and besides, they get more time than they deserve” III. “Stuck In The Middle With You”

  27. C. What are “Value Added” Benefits? Selling multiple displays – multiple locations – out of section…… Cross merchandising programs/POS placement – custom localized POS, stimulate senses – sight, sound, smell…… Develop in-store relationships – “mini” business reviews, local industry updates, pitches for incremental cooler space, in-store price features…… “Hand sell” – develop in-store sampling programs Etc, Etc, Etc!!! III. “Stuck In The Middle With You”

  28. D. Challenge: III. “Stuck In The Middle With You” How To Add Complexity, Contain Costs And Provide “Value Added” Benefits Effectively?

  29. E. Complexity May Effect Efficiency1. Time at Retail 2. Dealing With Added Complexity III. “Stuck In The Middle With You” Work Hours Per Week 50 Work Minutes Per Week 3,000 Retail Minutes Per Week (75%) 2,250 Suppliers 45 (220 Brands) Number of Sku’s 650 Number of Stops Per Week 50 Number of Stops Per Day 10 Minutes Per Stop 45 Minutes Per Supplier 1.0 Current structure does not allow sufficient time for selling “value added” benefits efficiently and effectively

  30. F. IBG’s Conclusion: III. “Stuck In The Middle With You” Current Distributor Model Must Be Changed • Suppliers Question Value Added Benefits • Retailers giving Wine and Spirits More Attention • Consumers Drinking Less Beer!

  31. IV. IBG’s Distribution System Of The Future – Model 2020

  32. IV. IBG’s Distribution System Of The Future – Model 2020 • Multi-Category – Add Revenue Per Stop • Suppliers, retailers and consumers constantly evolving • a. The pace of change is accelerating • Distributors will diversify portfolios • Beer – energy drinks – water – soft drinks -wine – spirits • health drinks • 3. Adds significant complexity

  33. B. More Effective (E-Commerce) 1. Replenishment function (order taking) must change. Transition “order taking” from pre-sales person to retailers thru technology a. Web based b. Tell-sell c. Twitter/e-mail/fax, etc IV. IBG’s Distribution System Of The Future – Model 2020 (IBG puts order replenishments at 50 – 60% of pre-sales time in the account)

  34. C. More Efficient 1. 48 hour delivery 2. Automated warehouse functionsa. Computerized “picking system” IV. IBG’s Distribution System Of The Future – Model 2020

  35. D. “Gigantic” Attitude Adjustment 1. Current attitude for most is “Our job (distributor) is to get the product on the shelf. Your job (supplier) is to get it off the shelf” 2. New model focuses on “retailization”. In-outlet marketing of a consumer product. a. New account manager is responsible for creating a dynamic purchase environment that emphasizes brand development… including “pull”! 1). Extensive time and training 2). Most current pre-sales people will not make the cut! 3. Account managers become exclusively “value added” IV. IBG’s Distribution System Of The Future – Model 2020

  36. V. How Will Industry and Consumers Re-act

  37. V. How Will Industry and Consumers Re-act A. Suppliers 1. Initially, most will be apprehensive and cynical 2. Will slowly begin to embrace change as they see results 3. Will need to adjust their model to succeed in a more dynamic, fast paced, sophisticated distributor network 4. May have to subsidize distributors willing to change but with insufficient resources – manpower, facilities, “back room” systems, etc. – to handle the change 5. Will have to patiently work with distributors that are reluctant to change

  38. V. How Will Industry and Consumers Re-act • B. Distributors 1. 75% of distributors (by vol) will embrace change 2. Mega distributors will lead the charge. Will set “best practice” benchmarks • a. “Best in class” management • b. Strong financial commitment • 3. Some Distributors will embrace the change but face resource obstacles • a. Management limitations • b. Financial limitations 4. Some distributors will do nothing but complain. “It’s not the way we used to do it!” • 5. Some distributors will sell

  39. C. Retailers 1. Retailers will prefer new method of ordering, selling and delivery (After adjustment period) a. Retailers believe distributors sell too much, too little or the wrong item b. Retailers look at current pre-sale people as “over paid” labor c. Retailers will respect account managers that enhance their customers shopping experience D. Increased respect = increased confidence = increased “share of store” (increased brands/sku’s/space/programs) = increased sales V. How Will Industry and Consumers Re-act

  40. D. Consumers 1. Consumers will re-act positively to an enhanced shopping experience 2. Consumers will be attracted to “localized” in-store activities created by a local rep with knowledge of local events and other social (beer drinking) occasions 3. Consumers will respond to invitations to try products delivered in an interesting, creative, informative and interactive way 4. Beer will once again be an exciting, creative, cool , cutting edge, fun beverage of moderation! V. How Will Industry and Consumers Re-act

  41. VI. Summary: We have Evolved! Now What? Associations Suppliers Mega Distributors Retail Consultants NBWA Craft Brewers Assoc. State Associations Steve Hindy Jim Koch Dave Casinelli Tom Cardella Bill Hackett Don Johnson Meritage Ben E. Keith ReyesGoldring Honickman Byron Trott David Ingram Bump Williams Guest Metrics

  42. VI. Summary We Will Become What We Overcome Aging Mega Brands Focus On Cost Cutting Less Disposable Income Reduced Competition = Complacency Weather Ineffective Marketing Tax Increases Consolidation Wine and Spirits Growing Stop bitching about the weather and do something “different”!

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