First, my apologies at the length of this, but we learned so many things at the show. It was incredible. The Craft Brewers Convention in San Diego was a great time! We enjoyed the company of the many fantastic members of the association and all of the hospitality of our local hosts. We were able to see other suppliers in the industry, though surprisingly few other software companies. There was a message in this lack of competition.
First, we learned that some of the breweries engage in self-distribution. Some do not. The difference between those that do and those that don’t is about 30%. Not 30% of members doing this, but 30% of PROFIT! Yes, it eats about 30% of profit to use an outside distributor (remember, this is just a ballpark from talking to many people at the show…actual numbers vary based on individual deals and contracts between supplier and distributor.)
Now, I’m not saying distributors are good or bad (after all, most of our clients are distributors.) I’m just saying that there are distinct costs and benefits from using a distributor that should be considered if you are a small brewery (or any other small, production based business.)
Some breweries do not want to deal with maintaining a fleet of vehicles, paying salaries for drivers, etc. Those breweries are often small enough and have a largely local distribution range that they can either put product into the back of one of their own personal vehicles, or they contract with a local distributor to get their product out to market.
The other level of brewery is the one like we toured at the show. Stone Brewing, for example, after a humble beginning in the Southern California market, now has a national reach with their products. Yet locally, they self-distribute with a fleet of large trucks. They recognized that giving up 30% was not a trade-off that they were willing to make. When considering their volume in that local market, that 30% covers those costs of doing self-distribution and makes them a profit.
The question to ask yourself if you are considering self-distribution is, will the cost of doing it in-house be equaled to or less than what you will pay to a distributor? One of the most frequent arguments we heard against self-distribution wasn’t this basic financial point, but more along the lines of “it’s too much to manage.”
It’s that way of thinking that misses the point. Technology such as handheld devices to improve the field experience and route and DSD software back in the office allow for ease of management. This makes the task simple enough that it can be handled internally. The only factor that should matter is if it makes financial sense to do self-distribution, not whether it is perceived as difficult. Technology makes our lives, and jobs, easier for the most part and taking a complicated task like route management and reducing it to a few clicks of the mouse and some simple steps makes financial sense.
Now, how did a company like Stone rise from a small company to one with what I admiringly called “The Disneyland of breweries”? They did it by handling their own product (along with a great overall company strategy, but even some things software can’t do for you!) Every company has to decide whether their corporate future is about growth or simply creating a great product for all of their friends to enjoy. The rest, as they say, is in the details.
Of course there were a number of distributors at the show as well. To them I say, you bear the burden of managing the fleets, the salaries of drivers, salespeople, the marketing, and all of the other components that cost money as part of your business. Most of you are dealing with older, expensive legacy systems that come with a high price tag to maintain and operate. Your challenges come from an equally narrow margin.
So why should a distributor move into a newer system? To save money in operating, labor, and hardware expenses and to increase flexibility in both reporting and management. Most distributors have systems that they put into place decades ago. Back then route and DSD systems were big ticket purchases and that investment continues in cost for distributors in order to keep them running.
Newer systems are now a fraction of the cost, take less manpower to maintain, and give the flexibility to integrate to multiple accounting systems (meaning you are not anchored to one back office system), as well offering greater reporting than ever before. Why spend all of that time and money keeping an old system alive when your margins are thin enough as it is?
Finally, what did the lack of other software companies at the show mean? The only major competitor of ours is one of those expensive legacy systems that requires specialty hardware and a staff just to run it. They weren’t at the show to meet small breweries or distributors and help the market grow. They were there merely as a way to keep their name in the game.
And those others that didn’t even show up? I mean, really, there were suppliers there with a half dozen types of fermentation tanks, pump systems, separators, malts, hops, and every other type of supply to make and package beer. And only two software companies. Draw your own conclusions from that statistic.
Cheers,
Michael
