Mark H. Rodman is back for the second round
Mark H. Rodman, the principal of Beverage Distribution Consultants of Swampscott, MA, has been immersed in the legal and commercial aspects of the beer industry for much of his career. A former general counsel to the National Beer Wholesalers Association, Mr. Rodman has become a controversial figure in the beer business for his unsettling predictions and sometimes startling pronouncements. In our July issue, we began an interview with Mr. Rodman, and unleashed him on the issues confronting the beer industry today. The results speak for themselves, as those who mastered Part I can attest. Mr. Rodman views events in our industry through a keen legal and commercial prism, and his volubility is legend. So we bring you part II of our interview with Mr. Rodman. In Part I, Mr. Rodman had begun to address the nature of change in the beer wholesaling tier. In part II, Mr. Rodman discusses the challenges facing survival of the the three-tier system in a wired world.
Modern Brewery Age: Mark, we continue with the question at hand. How different will the wholesale tier look in 3-5 years?
Mark H. Rodman: In practical and legal terms the implications of a change from independent wholesaler to an agent for suppliers --hired for a fixed fee-- are enormous and worth a few comments. The functional change means no longer will a distributor credibly be able to say "that is my account, I found it, opened it, built it maintained its business for this or that brand". And that makes it evident we face more than merely a name change, since the financial implications are momentous. In the food and beverage business, manufacturers' "agents" and "reps" earn 8-10% on sales, not 16-25%. Even if The New Beer Economy distributor can earn another 3% "fee" for contracted merchandising services, the fair market value of the individual business and assets of distributors plummet from even the modest and likely regressive real-price levels we see being paid for these businesses in the consolidation programs going down today.
Indeed, the brand business in an outlet served by a warehouse and delivery agent belongs to the supplier. The process from getting from here to there is called "vertical integration". And, in most jurisdictions, the process is entirely lawful In that it arises from a brewer's strident exercise of an excruciating level of downstream control, the controls and options it reserves to itself in its distribution contracts. Integration of this sort is not necessarily accomplished by reason of an ownership stake a supplier takes in a middle-tier member.
Economists describe the process as "vertical integration by contract as compared to vertical integration by ownership" In both cases the operative words are not "by ownership" or "by contract", the key word is "integration", which means purely and simply "control".
Over the next half-decade there will also be concerted integration efforts from below, as power retailers will try to upward integrate and obtain "most favored" or "better-than-most-favored" status from distributors and their supplier-marketer.
Finally, there is a value-driven change In the character and role of distributors. It is the outcome of all of the three factors I have described:
* Changed attitudes, which prioritize reinvestment and execution driven by "value managers"
* Deregulation
* The influence of the fast consolidating power buyers.
The combination of these factors signals that today's territorial consolidation programs, which putatively aim narrowly at downsizing of the number of wholesalers, to enhance the survivors' profitability-- has at least two additional steps to go. The goal of consolidation policies may not be as narrow as many have been led to believe.
A next impending step, likely will reflect a shift in the gross margin pool to a major supplier or two as they switch increasing amounts of their support for distributors to the support of retailers. In the process we'll see a drastic upstreaming of the survivors' bigger profits to the suppliers.
Then, likely by the end of the next half-decade, anticipate a fresh second round of consolidation to favor only those of the larger wholesalers who don't object to and are compliant with the reallocation of wholesaler profits to the suppliers' side of the ledger. The fact that this three-step reflects a template used by one tobacco manufacturer to redesign the tobacco distributors supports my view that the industry will head in this direction. Just as Phillip Morris had to confront RJR, Miller and Coors have to more openly confront Anheuser-Busch.
A quick aside as we close on this question. The conversion by the major brewers from a supply chain of independent wholesalers to one consisting of a large number of warehouse and delivery agencies or "hybrid" distributorships selling one way down-the-street and another way to the chains likely is a development that the typical undercapitalized small brewer-importer can't afford.
I've suggested a solution by way of a collaborative cross-distribution program that, like the major dominant players, also adopts the agency model. But budget constraints and the time-cost of money for carrying retail accounts on its own books will be prohibitive for most small players. Simply stated: the functional change I describe yields the rich major players a competitive advantage. Professor Michael Porter would be proud.
The picture you paint seems to depend on the assumption of deregulation by the states, courts and Congress. This is a controversial premise.
A lot of people in this industry persist in denying a scaling-back of state regulatory policies --a process my firm has dubbed "calibrated deregulation". Those naysayers, I fear, are fugitives from reality. To them, nothing I say and nothing they see and hear will change their minds. So be it, this old curmudgeon has been right before, and wrong before. But wrong not as many times as right on the mark.
But let me add a few items. First, I remind the naysayers that history teaches that the Constitution is a living document and state law protections provide no safe harbor to these 70-year-old legal institutions. As time and attitudes and public policy priorities change, barriers that delay, hamper or even temper the dynamics of change, always will be overcome or skirted.
Next, if and when territorial and state borders are erased or blurred by a combination of supplier fiat, technological change, or deregulation in the name of free interstate and international commerce, even if only with interstate chain accounts, we'll be seeing decades of intensifying producer-tier market power come home to roost.
What the wholesale tier is watching going down today in terms of attacks on the three-tier system and state regulation of what is truly a national and global business can be expected to replicate what we've watched for the last three decades. Market-by-market, a few giant players have gained the power to squash their competitors in all retail channels and stymie and squelch the ambitions and efficient market access of hundreds and hundreds of small brewers Legal and constitutional issues aside, from purely business standpoint, what's happen. lag is nothing new. It's deja vu all over again.
In sum, the next 5 years will see deregulation and consolidation come together, because each is the flip side of the other. If anything, what is different this time around is that more and more combative, farsighted distributors regard the expansion and growth due to consolidation not as their nemesis, but rather an impetus to learn, adapt, innovate and reshape themselves.
We can expect many to reengineer and restructure themselves by testing old assumptions as to the size and product diversity of their markets and unmet retailer and consumer needs. They will turn themselves into multi-beverage powerhouses without borders. These aggressive, enlightened beer distributors, like their peers among the top liquor distributors, will become disciples of robust interstate growth and rapid change. Consolidation and deregulation give them the opportunity.
I see an advance guard of beer, wine and liquor wholesalers rejecting conventional wisdom that says, "without protective state legislation, wholesalers can't compete, grow and profit beyond now limited expectations." Soon the irrelevance of such state rules will turn a lot of alcoholic beverage distributors into "all beverage" predators, searching the nooks and crannies for acquisitions. To those who lollygag on the sidelines in the misplaced hope there is a safe harbor under the shield of an inviolate 21st Amendment, I say, beware.
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