7-Eleven Puts Distributors on Heels

FILED OCTOBER 29, 2009

Dear Client:

It seems you can't turn on the TV these days without seeing the great Army ad featuring none other than 7-Eleven ceo Joe DePinto. And many distributors can't open their mail without getting a questionnaire, sent via consultant Bump Williams who is friendly to the distribution tier, basically quizzing distributors about their knowledge of 7-Eleven's Consolidated Distribution Center Initiative (CDC), if they are against it, and if so, exactly what about it is problematic?

Sample questions from the questionnaire, obtained by BBD through the Truth Squad, include: Can you explain the concepts of the CDC Initiative from 7-11? What do you think the motives are behind 7-11's CDC Initiative? What are your greatest assets relative to serving the Retailer Community? What are the strengths/weaknesses of the 7-11 Initiative? Why do you think it will 'fail'? If you had to rewrite the 7-11 CDC Initiative, what would you do to strengthen it to ensure success? Can you outline the strengths within the 3-tier system? How will consolidation impact your ability to deliver Beer to all stores efficiently and cost effectively? What are the strengths and weaknesses in the 3-tier system across trade channels (Convenience, Grocery, Club, and Liquor)? Is one more efficient than another, and if so, please explain? What is 7-11 missing in their understanding of the 3-Tier system that prevents them from changing the CDC proposal? What supporting evidence or proof does 7-11 need to supply you with to convince you that their CDC initiative will be successful? Provide for me in detail, all of the costs that are involved with delivering Beer to your stores? Warehousing (labor/storage), delivery (labor/vehicles/fuel), sales (salaries/vehicles/fuel) and administration (insurance/taxes/benefits). Is a drop of Beer to a C-Store more or less expensive than other outlets? How do you avoid the issue of having multiple trucks in 7-11's parking lot during peak business hours? etc.

Pretty intense stuff. The questionnaire is smartly written, because it puts the onus on the distributor as to why they think the CDC initiative wouldn't work, and engages the distributor. Plus it was smart for the chain to use a distributor-friendly consultant as the messenger. So what's this all about?

To refresh your memory, 7-Eleven's CDC initiative is a part of their Logistics Transformation project, which seeks to streamline delivery of goods to their stores in inobtrusive ways and at a better cost to the c-store chain. It includes implementing electronic ordering, EFT, delivery scheduling at night, more frequent delivery if needed, and reduced product costs, among other goals. Part of that initiative is their heavy liquids CDC initiative, which seeks to use a licensed third party central warehouse (operated by Exel or Genesis Logistics or some other firm) to which beer distributors, cola bottlers, energy drink companies, etc. would deliver their goods, which would then be consolidated on pallets and delivered at night to each 7-Eleven outlet using third party delivery trucks. The title to the product would be transfered to the chain when the product left the central warehouse. 7-Eleven is currently testing this concept with Gallo wines in Northern California.

You will recall that 7-Eleven approached brewers and SoCal distributors last year to test this concept and ran into several issues, not the least of which were how to handle exclusive territories, tied house concerns, price posting, licensing issues, how to handle old beer, and distributor-brewer agreements, among others. (see BBD here and here ). Following state distributor association push-back and work behind the scenes, and an adverse opinion by the ABC, A-B and then MillerCoors pulled out of the test and it faded, until now.

It seems as if 7-Eleven is gearing up to take another look at it, and this time they are attempting to engage distributors' concerns about it first. Aside from their stated reasons for wanting to tackle this, it remains that 7-Eleven is disgruntled by the fact that in states which allow quantity discounts, supermarkets and big boxes often get a better price. Also, supermarkets, because of their size and spacious back door delivery areas, don't get the front-of-store congestion that c-store chains must deal with. Recall that A-B's Dave Peacock has repeatedly called on his distributors to work to change laws and try to delivery to c-stores at nigth to alleviate that problem.

Indeed, when you look at 7-Eleven's Logistics Transformation project, many of the goals they set could be addressed in one way or another using good ole' direct store delivery. To me, I just don't see that they have the store density or beverage market share to make this work without raising prices. Sure it works in their home base of Japan, where they have a population of 128 million souls on an island the size of the state of Montana, and a higher market share to boot. But the U.S. is a place of magnificent distances. Particularly in LA. Plus, many of today's larger distributors are sorting loads via expensive Vertique racks and picking using robots: can Exel really do it better?

But regardless, they do have some leverage: they are the largest c-store chain, and c-stores are the largest channel for beer. The brewers will be under intense pressure to cooperate, you can bet.

SETTING THE RECORD STRAIGHT IN CALIFORNIA

We should clarify that MillerCoors didn't "pull out" of the California Beer and Beverage Distributors association (see BBD 10/28/09 ), they merely didn't pay their annual dues, which happens often with associate brewer and vendor members, says CBBD's Victoria Horton to BBD. (Still, as one Squader pointed out, is that smart when CBBD has helped hold the line on excise taxes in a state with the worst budget crisis in history?) And while DBI presumably pulled out because of the CBBD's amicus brief in the DBI/Maita case, Victoria says the association actually only disagreed with both MillerCoors' and Maita's interpretation of a particular part of California's distributor statute, and felt compelled to set the record straight and defend the law. Indeed, in that Amicus Brief, CBBD says it "has no interest in the outcome of the merits of this case, and does not intend to opine on how it should be resolved on the facts. Nor did CBBD take its decision to voice its views as a 'friend of the Court' lightly. CBBD's only interest in the pending motion practice is to protect the integrity of the legislation it helped pass which, in CBBD's view, benefits its members and helps facilitate an orderly market for the sale and distribution of beer in California."

As for MillerCoors, their communications chief Nehl Horton told BBD, regarding not paying CBBD's dues, "We will always work closely with MillerCoors distributors in California on issues of mutual interest, but it doesn't make sense for us to buy matches for people who seem bent on burning our house down."


BEER BRIEFS:

FEMSA'S export business up over 12% in the third quarter despite a tough comp of 10% last year. "Most Interesting Man" campaign continues to have legs, apparently. And get this, revenues per hecto (price and mix) were up 6.7% due to price increases on Tecate and mix shift.

HEINEKEN AMERICAS volume was down nearly 10% in Q3 though U.S. STRs were improved due to Mexican brands and Dutch brands slightly stabilizing but still down in high single digits. HUSA is "deliberately" raising prices. But economy is having its effect. More later....

Until tomorrow, Harry

"I'm an idealist. I don't know where I'm going, but I'm on my way."
-Carl Sandburg

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