Selling Brands to Several Distributors Growing Trend

FILED JULY 8, 2011

Dear Client:

One million case (mas o menos) Coors/all other distributor Elder Distributing in Victoria, Texas, has letters of intent to sell to a mixed bag of distributors, according to sources. Miller distributor Hartman Distributing to get Coors and Dos Equis (already has Heineken). Nearby A-B distributors LaMantia's L&F Distributing and Del Papa Distributing likely to get Crown and, interestingly, perhaps Pabst. Gambrinus, Boston, Red Bull, and Mike's are still up in the air, we're told, but all or some could end up in the red system as well. Employees and suppliers have been notified.

This is the latest example of distributors splitting up their brands amongst Blue/Silver, and Red systems as more A-B distributors get aggressive in brand acquisitions. It certainly shakes up the game and likely increases brand valuations. But it also makes it tricky with the MillerCoors contract, because they get first negotiating rights for 90 days for all the brands. As one competing brewery exec said, "you don't know what you don't know", because you don't know what the brand is worth to somebody until it's offered. Regardless, splitting up brands among many distributors is a trend that clearly is taking hold.

WALMART SUPERCENTERS SUFFERING

That's the take-away from a Bernstein lunch in New York with Kantar Retail senior vp Leon Nicholas. "Part of the problem seems to be an incremental shift away from SuperCenters among consumers: Walmart U.S. has experienced gradually decelerating same store sales growth since 2000, and the near term outlook does not look promising. Some CPG companies have reported pullbacks on ordering, and product turns are under pressure," writes Bernstein. There are 2,907 SuperCenters in the U.S. representing 87% of Walmart's U.S. sales excluding Sam's Club. What's the problem here? A few items:

-Shoppers are conducting more fill-in trips, i.e. shopping trips to buy a limited number of items as opposed to big stock-up trips for which Walmart SuperCenters are optimal. Lower income households can't afford big stock up trips, so they go to discounters to fill in, like Dollar Tree, Family Dollar, and now Walgreens.

-Walmart is not attracting the highest growth consumer segments e.g. the higher income shopper, and Generation Y. That's is Target's domain. "During the recession, Walmart saw a surge in traffic from the 'Volvo mom' with a household income of greater than $100k, though now she is returning to her core stomping grounds of the traditional grocery stores, Target and Costco, in part driven by Walmart's return to the cluttered feel of the extra promotions in Action Alley."

Recall that Walmart backtracked on its clean store policy this time last year. In fact, we applauded them on it, writing:

"This was predictable. Clean store policies rarely work, at least not in beer. And yet retailer chains still cling to the notion. Why? Because their customers tell them to. This is a classic example of listening to your customers tell you what they think they want, not what they actually want. Self-reflection is the last trait you can expect in the average Walmart customer. Walmart asked its shoppers if they would prefer to have less clutter in the aisles and more lines of sight to the end of aisles. Well, duh, of course they would say yes to that. But in actuality, having more displays, signage, and yes, clutter, often distracts people so that they purchase things they didn't think they need, but of course they need. Displays and POS and buff awaken the animal spirits in people, gets the adrenaline going, so that they will pull that 12 pack off a display that blocks their way and toss it in the basket. Clean stores -- which have clear aisles that resemble a hall in any hospital -- provide no such inspiration. If you want people to stick strictly to their grocery lists, provide a clean store. If you want people to buy impulsively and conspicuously, tart it up."

That drives soccer moms away. But then again, they don't drive beer sales.

Walmart is also suffering as the average size of families decline, and Walmart has not captured the imagination of Generation Y. They are fickle, they are upscale, and they are brand-conscious. Target and Costco better fit their bill.

To address issues with the SuperCenter, management is shifting its focus to other store formats and testing using stores as 'distribution points'. "Management is delaying the conversion of discount stores to SuperCenters and is looking with fresh eyes at other formats e.g. Walmart Express, Walmart On-Campus, Walmart.com, and the newly-badged Walmart Market," writes Bernstein. Walmart is also reaching out to CPG suppliers to convince them to create special products and packages exclusive to Walmart. Look for more of that in the future.

THOMPSON: "CONCERNS" OVER STATE OF THREE-TIER, ALTERNATIVE MODELS OUT THERE

In a report issued to distributors, consolidation consultant Joe Thompson of IBG writes that he has concerns about the future of the beer distribution system. While he believes it is still "better than other systems in terms of its ability to sell, deliver, nurture and care for products. Beer distributors are and have always been more consistent at merchandising, pull-up, rotation, local events, local marketing and overall service," it is not focused too much on cost-cutting and "moving away from being value-added and becoming more like low cost logistics companies."

And he warns that there are other models who do logistics better:

"Warren Buffet (Berkshire Hathaway) owns McClane Trucking, Burlington Northern Railroad and Empire Distributing. We do not think these events are unrelated. IBG thinks some very smart people are trying to figure out a more efficient method of getting bulky beverages from supplier to consumer. Coke and Pepsi are looking to add anything, except competitive soft drinks to their trucks in order to improve bottler profitability. If you are Pepsi would you rather share warehousing and delivery with beer or a competitive soft drink? Several craft brewers are looking to self distribute or adjust franchise laws so they can change distributors more easily. Ask yourself why and then calculate the amount of time your salespeople have per week, per account, per sku to "sell and develop" a brand. Retailers, specifically 7-11 and Costco, are constantly seeking changes to beverage distribution. Keep in mind that ABI, MC, and Pabst all have extensive experience with direct sales, either here or abroad. We are not suggesting that they would go direct, only that they know how. Our three-tier model has more competition than most realize."

While Joe concludes that "we need an honest self appraisal about what we offer for the future. The historical three-tier business model may not be broken but it could use a tune-up."


PIPING ALL HANDS: TWO QUESTIONS

Two questions for you, faithful readers. 1. I'm hearing rumblings of an A-B price increase in October to the tune of 80 cents a case on premiums, though I haven't seen a letter yet. Anybody heard the same? 2. How were your Independence Day volumes? The weather seemed like it was pretty good in most parts of the country, and the Fourth fell on a Monday this year (on a Sunday last year). Ping me at hs@beernet.com.

CORRECTION: Yesterday we referred to Newcastle as a flavored malt beverage, which obviously it and its line extensions are not. HUSA does not market a FMB. My apologies for the error.

Until tomorrow, Harry

"Intellectual growth should commence at birth and cease only at death." -Albert Einstein


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