IT’S FRACTIONALIZATION
By
SAM BOYER
Fractionalization: A 17-letter word that will be heard more and
more in the beer industry. The dictionary definition of fractionalization
is the “breaking apart of a society (industry) into smaller parts”. We
all are well aware of the current consolidation trend at the wholesale
level with its effect of reducing the number of distributors. Now
distributor consolidation will be joined by fractionalization at the
supplier level.
Fractionalization in an industry is the increase in the number of
significant suppliers. It is evolving as the next major change coming to
the beer industry. Fractionalization at the supplier level will create an
industry that is vibrant and growing with 7 to 10 significant suppliers.
It will be different than the current stagnant industry now dominated by
three primary suppliers.
Fractionalization occurred in the auto industry; in the 1960’s
General Motors had 60 percent market share, Ford and Chrysler were in
distance 2nd and 3rd places. By the 1990’s General Motors controlled
only half the market share they once held, but Ford and Chrysler did not
grown significantly. Toyota, Nissan, Honda, Volkswagen, Mazda, and others
are now significant suppliers in the auto industry. Over the past 30 years
the auto industry has fractionalized into approximately 10 significant
entities.
Is this to say the beer industry will fractionalize into 7 to 10
significant entities over the next 30 years? Not exactly: the purchase of
a family car is far more involved than the purchase of a case of beer for
the weekend. It is likely the fractionalization at the supplier level of
the beer industry will happen at an accelerated rate between now and 2010.
Changing the family vehicle from a Chevrolet to a Honda took the
American public three decades. Changing the “usual” brand of beer in
America’s refrigerators from Bud Light to Samuel Adams or Heineken or
Corona will only take a few years; actually, it has already started. What
will happen to Miller and Coors? Probably very little; they are the
Ford’s and Chrysler’s. With market shares of approximately 20 and 10
percent respectively, several other suppliers of similar size will join
them at Anheuser-Busch’s expense.
Unfortunately, Anheuser-Busch will have very little control over these
events. The industry is changing due to outside influences; their great
marketing expertise and financial muscle will not be able to stop this
change.
Anheuser-Busch may very well be the beer industry leader of the future,
but with a significantly lower market share. Additionally, they will have
to compete more aggressively with Heineken, Corona, Miller, Coors,
Interbrew, Diageo, and others yet to be identified (or formed). Each of
these suppliers will have enough market share to be an economically
feasible business model.
Look at the success of Smiroff Ice and Mike’s Hard Lemonade in 2001.
These “malt alternatives” came out of nowhere to take market share
from the domestic brewers. Their phenomenal success combined with the
double-digit growth of Corona, Heineken, and other imports is a sure sign
fractionalization is underway at the supplier level of the beer industry.
Innovation and growth within the auto industry did not come from the
“Big 3”. It came from start-ups and imports that had to be different
(and better) than the stale product mix that was being presented to the
American public in the 1960’s. The current state of affairs at the beer
supplier level today is not significantly different than the auto industry
of the past.
The beer “Big 3” have left themselves open to new market entrants
that are different and have an immediate appeal to the buying public. The
new entrants identified a void in the market and moved quickly to fill it.
When it comes to marketing a consumer product the hare will always beat
the tortoise and “me too” products from the beer “Big 3” will be
ignored by the consuming public.
This trend is something the beer “Big 3” will not be able to stop.
They are too plodding and predictable in their marketing. The public has
developed a taste for products beyond regular premium, light, and
sub-premium beers. The importers, marketing companies, malt alternatives,
and to a lesser extent regional and micro-breweries have filled the voids
left open by the beer ‘Big 3”. And they have just begun.
New malt alternative beverages or beer brands will not be limited to
just start-ups or intros from existing suppliers. The next major entrant
into the beer supplier level of the industry could very well be one of the
major soft drink companies. Imagine Coca-Cola or Pepsi-Cola introducing a
malt alternative (or acquiring a Mike’s or Smirnoff Ice) and
distributing it through the existing 3-tier beer system.
Coca-Cola and/or Pepsi’s marketing expertise and financial strength
when focused on a new malt alternative could easily capture several market
share points in a short time. The “Big 3” domestic brewers would be
the primary market share losers. The bigger their current market share the
bigger the loss, an unfortunate situation for Anheuser-Busch.
Do not discount this possibility; the soft drink industry is looking
for growth opportunities and the marketing of an alcoholic beverage has to
be on more than one board of director’s agenda.
What does fractionalization mean to the wholesale level of the beer
industry? Lots; it will be a great opportunity for multi-brand
distributors and a not-so-great situation for exclusive distributors.
Exclusive distributors will have a tough time in the years ahead, even
without fractionalization. Beer is generational; it is an established
fact. The beer drinkers of today do not drink their father’s (or
mother’s) beer (i.e. Miller Lite in Texas, Old Milwaukee in Minnesota,
or Old Style in Chicago).
The next generation of beer drinkers will not drink the brands popular
today. The generational change is in progress and with the entrance of
several new significant suppliers staying exclusive will certainly limit
growth. Staying exclusive will most likely ensure struggling
distributorships, perhaps similar to the plight of the exclusive Schlitz
distributors in the 1970’s.
The future is bright for the distributors that are now multi-branded
and whose only competitor is exclusive. But success is not going to be
automatic. Having 7 to 10 primary suppliers will have its management
challenges. The multi-brand distributor of the future will have to satisfy
the demands of competing suppliers. Now multi-brand distributors satisfy
Miller and/or Coors; and all the other suppliers get only secondary
attention, if any at all.
That will have to change. The beer distributor of the future will have
7 to 10 suppliers of approximately equal size each with its own demands on
management time, sales staff attention, and operating assets. Being a
distributor for 7 to 10 primary suppliers with effective marketing
programs will positively impact distributor profits, if professional
management skills, programs, systems, and techniques are present.
Significant changes to current multi-brand distributor operations will
need to be made to accommodate the fractionalized supply level. Among the
changes that can be expected are:
 | Order planning and inventory control will be critical at the
distributor level. The costs associated with out-of-stocks and dated
product will have to be eliminated. A full-time order planning
position will become a necessity even in at 1 million case
distributor. Just-in-time inventory techniques may very well become an
important part of beer distribution. Lower days-on-hand, higher turns,
and cash flow will be even more critical than they are today.
|
| A typical malt beverage distributor will order, warehouse, sell,
deliver, and merchandise a minimum of 500 SKU’s. This level of
SKU’s is already seen in some multi-brand distributors. Professional
management will be essential to support the sales and marketing of so
many brands and packages.
|
| Brand management will become more than lip service. Brand management
will become a full-time professional position for all distributors.
With 7 to 10 significant suppliers brand management may involve
multiple individuals in the larger operations.
|
| In-market execution will be a primary demand from all suppliers;
samplings, POS installation, shelf sets, merchandising, and
consultative selling will have to be expanded to meet supplier
demands. Again, more professionalism on the distributor level will be
a necessity.
|
| Aggressive in-field sales management will be required. Very few
owners and managers in the future will be or can afford to be
office-bound. They will have to be part of the “feet on the
street” to be successful. Those distributors wanting the security
blanket of a large desk and office will have limited success.
Face-to-face contact between distributor principle and key account
managers/owners will be required.
|
| Warehouse management, space allocation, order picking, and delivery
truck loading will be more complex. The loading of a full pallet of
product onto a side-load delivery truck may become a rarity. Expect to
invest heavily in warehouse facilities, equipment, systems, and
staffing.
|
| Fractionalization at the supplier level may be a counter balance to
the growing strength of powerful retailers. With 7 to 10 significant
suppliers in the industry, it will be more difficult to play one
against the other as happens now with the current 3-supplier
situation.
|
| However, retailers will demand even more merchandising support. Gone
are the days of building one large display in a store. Expect multiple
but smaller displays representing multiple suppliers within each store
and spread throughout the store; a demand requiring more merchandising
staff from the distributor.
|
| Scan data will become even more powerful. This is the information
age and the scan data will determine success or failure. The suppliers
will have to be effective marketers or they will be gone from the
retailer’s shelf set. Distributors will have to be effective
operators or face termination by one or more suppliers.
|
| Distributor terminations will become more prevalent. The current
distributor consolidation trend is facilitating this. With fewer and
fewer distributors, state associations are losing political muscle.
This will result in less friendly legislatures and courts. In the
future expect the legal position of “franchise rights” to be
questioned in every state by every supplier.
|
| Distributors will have to expect to operate in an atmosphere of
performance or face termination. A situation similar to the current
atmosphere for wine and spirits distributors in some states and
typical in non-alcohol distribution operations.
|
| Consumer loyalty will be gone. With 7 to 10 significant suppliers
effectively marketing their products to the American public those
distributors that have enough “feet on the street” to react will
benefit. The rest may face termination from one or more suppliers.
Distributors must have the staff, systems, and financial assets to
support their supplier’s agendas; this will not be optional.
|
| Price increases will be difficult. Without a clear-cut leader in the
industry, distributors will see price increases followed by rollbacks
(a situation similar to the fractionalized airline industry with seven
significant entities). This will impact margins; and if the
distributor does not manage effectively, the bottom line will shrink.
Already there is pricing pressure as the American economy slows.
Beverage analysts are warning of a loss of pricing power for those
beverage companies with a large exposure to the American market.
Fractionalization will only magnify this problem |
Will fractionalization hurt the beer industry? Not necessarily! In fact,
it should make it a more vibrant and evolving industry. Great things can
happen within an industry that is fractionalized. Innovation and new
products never before even dreamed of emerge.
Look back to the auto industry since 1960. We now have mini-vans,
SUV’s, greatly improved fuel economy, safer cars, improved quality, and
longer lasting cars than ever before. Not to mention a much broader
selection of vehicles.
Some entities within the supplier level of the beer industry will be
hurt by fractionalization and others will become (or remain) stagnant. But
others will grow with double and even triple digit velocity. They are the
new entrants and industry leaders of the future. They are the ones
providing the malt beverage products desired by the American public. And
they are the ones to benefit from the generational change that is already
being seen in the beer/malt consumption habits of Americans.
Those distributors that begin now to install management and operational
systems capable of taking advantage of fractionalization and the
generational change will grow and prosper. The distributors that do not
recognize the changing industry or refuse to adapt will struggle, and
their long-term survival will be in question. |
