The wholesaler is a critical link in the three-tier American alcohol system.
Kegs destined for bars and restaurants are loaded for delivery.
The three-tier American alcohol system is made up of brewers and importers, wholesalers, and retailers. Breweries are tier one, the wholesaler is the second tier, and the bars and stores purchasing your product composes the third tier. The first stage of any brewery’s business, if they’re selling beyond their own doors, is almost always self-distribution. But what happens if you’re ready to take the next step in your brewery’s evolution?
Most breweries will need to hire a distributor at some point. You may need to send beer out of state to a new market; you could have outgrown your state’s self-distribution limit; or you could simply be tired of lugging around all your beer yourself. Whatever the reason, hiring a distributor is a major decision that can change the trajectory of your brewery’s future.
Contracts: Franchise Laws
Your first step is to look into your state’s alcohol/distribution laws. Alcohol is still highly regulated, and those regulations will vary highly from area to area. This is especially important if you’re expanding out of your state into a new state where the distribution laws may be drastically different. It’s important to understand what your rights are and what your future distributor’s rights are. Going in knowing what the laws are and how they work for each party will allow you to more effectively negotiate a contract with your new wholesaler.
It’s also important to learn about Termination Rules. Although you should never enter a partnership with your new wholesaler intending to eventually terminate your contract, it’s always best to be informed for all eventualities. An article published by the Brewer's Association details a basic summary of wholesaler franchise laws and a summary for each state’s basic rules. (Always consult with your legal expert when negotiating a contract.)
As a brewer self-distributing, you’ve been able to sell your kegs at the prevailing price, keeping the entire portion. Once you sign with a wholesaler, you’ll be taking a cut in margin. You can’t suddenly increase your price by 30%. You will alienate your existing customers while making it harder to sell your product.
This is the trade off of hiring a wholesaler. You will take a cut in margin with the goal of selling more beer than you could through self-distribution. The trade off is a smaller margin for increased volume that will more than make up the difference. Additionally, you’ll be saving money on labor and equipment by not delivering your own product. But before we discuss how pricing works at a wholesaler, let’s become familiar with some commonly used terms:
- FOB (Freight on Board or Free on Board): The price of the product when it changes hands from supplier to wholesaler.
- Freight: The added cost of shipping from the supplier to the wholesaler.
- Taxes: Usually paid by the brewery directly to the state when the beer is sold in-state. When beer is shipped to a wholesaler in a different state, the wholesaler pays the taxes, adding the payment to the final price.
- Laid In: FOB + taxes + freight
- PTW: Price to Wholesaler
- PTR: Price to Retailer
- PTC: Price to Consumer
The final price of your product is determined by adding FOB, Freight, plus Taxes then dividing by margin: (FOB+Taxes+Freight)/margin=PTR). For example, if you charge $20 FOB, freight is $4 per case, $0.20 taxes, and the wholesaler operates on a 30% margin; the PTR will be $34.57.
- (20+4+.2)/.7 = 33.57
If you’re unsure what your FOB should be, you can work with the wholesaler based on your desired PTR and then work backward with the above formula. Also realize, if you’re working with package pricing, the PTR may be rounded up or down to hit a specific PTC or Price Off the Shelf.
Shipping your product to the wholesaler is an important step that can seriously alter the final price. Some suppliers like to handle the shipping themselves and will hire out the freight. Or you can just tell your wholesaler their product is ready and let them handle it. It’s entirely up to you and your wholesaler on what works best for both parties. For instance, as the Import and Cider manager at Point Blank Distributing, I have a large variety of suppliers and shipping arrangements. One cidery takes care of shipping 100%. The FOB I’m charged is direct to the warehouse. Of course, the shipping is built into the FOB. For this supplier, they can increase their margin by securing cheaper shipping. However, the vast majority let us arrange shipping
The contract will help designate the territory where your new wholesaler will represent your brand. Territory is also an important consideration when you’re hiring a distributor. Some distributors cover a few cities or counties while others cover an entire state or multiple states. When you’re interviewing your prospective wholesalers, obtain the wholesaler's territory map.
Prospective suppliers frequently ask: What territory should I keep for self-distribution? Territory exceptions can be negotiated into the contract, however a wholesaler won’t be that interested in taking on a new supplier if they’re excluded from selling the product in prime areas the supplier wants to retain. One exception tends to be brewpubs. If your brewery has a pub or two, most wholesalers are fine exempting a brewpub or taproom.
You should also ask the wholesaler if they work with any sub-distributors. A sub buys product, usually at laid in plus a small fee, from your wholesaler to sell in their territory. This is an advantageous situation because it allows your brand to reach a bigger area without having to sign multiple contracts. Small distributors in sparsely populated areas might have trouble buying enough product direct from a supplier to make it worth their while. By working with a larger wholesaler, the sub can buy small quantities of multiple brands to supply their small area. This allows your wholesaler to expand their territorial reach without setting up the infrastructure in these areas. As a supplier, it allows your brand to reach even more consumers in an efficient manner with less effort.
When looking for a new distributor, Brian Callahan of Woodiville, Washington’s Elemental Cider finds having a good sub-distributor network to be a huge asset to his cidery: “As I continue to grow my business, I am looking for distributors that can impact a larger market within a given region. I look for distributors that have relationships with other distributors in smaller area markets where they don’t have as much representation. This allows me to enter outlying markets without the need to establish relationships with micro distributors.”
Another area that should be defined in the contract is how to handle samples. As always, you can use samples from your brewery stock. The issue you need to clarify comes when taking stock out of wholesaler’s warehouse.
When the distributor’s stock is used, the supplier will be billed back for the cost of the samples at the laid in cost. How much depends on the who is using the samples. If the wholesaler’s staff is using the samples, the bill back is typically 50/50. This includes when the supplier is performing work with the wholesaler. If the supplier picks up a case from the warehouse for their own use out in the trade, the bill back is typically 100%.
Out-of-date beer is an important concern for retailers, wholesalers, and breweries. You’ll want to explore the wholesaler’s procedures and obligations when handling rotation and out-of-code product. It’s important to understand how the distributor will handle dated product and protect your brand’s reputation in the market. It will also spell out your obligations to the wholesaler.
No wholesaler wants to receive beer that is close to code. This puts an unfair burden on your business partner to move product in a time period that may be too quick and lead to dumped product and lost profits. There will usually be a clause in the contract allowing a distributor to refuse the order if it arrives with too few days of life left on it.
Reports and Sales Numbers
Today’s modern distributor has a host of tools available to record and report sales figures. As a growing brewery, you’ll want to have access to those numbers to track your progress as well as your wholesaler. Most wholesalers will be able to provide basic reports; be sure to ask what software the distributor is using. For instance, if they’re using VIP, the most common beer distribution software, they may offer you a supplier login which will allow you access to a variety of reports anytime you want them. There’s usually a nominal fee associated with this, but if you really want to see what’s happening with your product, it’s worth it.
Large Distributors vs. Small Distributors: Pros and Cons
Larger distributors with larger territories give you access to a larger customer base with only one contract. If you are looking at a larger distributor, you’ll want to make sure you’re ready to sign for their entire territory, although you can plan a staggered rollout. Large wholesalers are notorious for decreasing local focus if you sign with a competitor in a different part of their territory.
Within that territory, they’ll have a deep reach into every channel: Chains, On-Premise, and Convenience. This also means they have a large salesforce to service this territory. The larger the sales force, the better chance of the distributor to have a specialized sales force to focus on various aspects of the business such as non-alcohol or specialty craft beer and cider. However, being part of the specialty team beer focus can narrow your audience and keep your brand from getting more general market attention.
Part of the large distributor’s sizable workforce will include merchandisers. Merchandisers are one of the entry level positions at a wholesaler. They’re responsible for traveling from store to store to unpack orders and restock shelves. If you do get your product approved at a chain, you’ll want to ensure your distributor can support this placement and keep it stocked on the shelf. If it’s stuck in backstock, you can’t make sales.
Chain access is where larger distributors really excel. The largest distributors will have a department of people who are dedicated to working the large chains like Krogers/Fred Meyers, Safeway, Whole Foods, etc. Their entire focus is to sell in new product to large chains and help them create advantageous product sets that will help the product sell better.
Creative craft beer displays encourage consumer purchasing.
While large distributors have a lot to offer, there are also some cons. Large distributors are large because they represent very large brands. This means that your small brand might be a long way down on the priority list of a large distributor. Not only will you be competing with larger domestic brands, you’ll also be competing with a wide variety of craft brands.
The worst thing that can happen is running into a brand collecting wholesaler. These are wholesalers who will snap up more brands than they can handle in order to keep their competition from signing new brands that can be used to take the collector’s business. Collected brands will be relegated to bottom tier of focus. Then when you ask why your sales are so low, you’ll be told that’s all the territory can actually sell, which certainly may not be true. While this is an unlikely situation, it’s worth keeping in mind. Most distributors, especially in light of the huge expansion of the craft beer and cider segment, enter into negotiations in good faith seeking to find good brands that compliment their current book and that they can grow.
If you’re nervous about signing with a larger distributor, there are usually smaller options, especially as new craft focused wholesalers pop up taking advantage of the growth of the industry. However, you’ll want to take a close look at the territory they cover. Sometimes the legal area you can sign with is larger than the distributor’s practical coverage area. They may cover a certain county, but only send in a sales rep once a month for instance.
The biggest advantage you’ll get with a smaller distributor is focus. They’ll have fewer brands and fewer large brands which means they’ll be hungry to get your brand out there and grow it. This kind of partnership is very attractive for a newer craft brand. You can build a long term partnership that allows your brand to grow and develop at the same time as your wholesaler.
A small, hungry new wholesaler may prove to be a good choice. What starts as a small three-person operation that covers one city may someday grow into a thriving medium sized company that can provide craft focus for an entire state. This energy can be vital to the success of your brand.
While your brand may be a high focus priority, a small distributor does have some downsides due to the the very thing that makes them appealing. Their smaller size means they’ll have fewer employees to represent your brand, although those employees may be selling to the accounts your brand is best suited for.
Chain support is the area where the small distributors’ biggest weakness lies. The brands represented by the small wholesaler, for the most part, may not be large enough to sell to a chain. A chain isn’t going to want to give shelf space to a brand that can’t meet their volume demands. If you think your brand trajectory includes getting into some of the larger chains in your area, you’ll want to ensure your new distributor can help you gain that access and support it. I’m not saying you should avoid small distributors if this is your goal, you just need to make sure their business plan includes chain development.
A word of warning: investigate the laws and pending legislation regarding brewery ownership of wholesalers in your state. In states where brewers are allowed to own wholesalers, craft brands have found themselves without a home when Anheuser-Busch InBev (ABI) buys their wholesaler. ABI is notorious for releasing non-ABI craft brands when they take over an independent ABI wholesaler. You don’t want to find your brand out in the cold with stalled growth while you scramble to hire a new partner.
Practical Considerations: Point of Sale & Storage
Glassware, tap handles, and other point of sale items can be vital tools to help build brand recognition. You will want to investigate whether the wholesaler is willing to split costs on the items you send to their warehouse and how they intend to use them. Also, this is an area that is often regulated by the state’s alcohol laws, be sure to know the legalities in this area when talking with your distributor candidates.
Another practical consideration is product storage. How will the distributor handle your product on a day to day basis? You’ll want to investigate their cold storage vs. dry storage space along with their rotation procedures. Ensuring your product is handled properly will go a long way to building a quality reputation in your market.
Tap handles help build brand recognition.
Post Contract Interaction
After the ink is dry, your work is only beginning. You’ll want to find out how your potential new wholesaler wants you to interact with them. You’ll want to investigate their practices in regards to work-withs, incentives, and promotions.
Wholesalers love a supplier that is active in the market and wants to work with them regularly. A successful brand keeps themselves active in their market and with their wholesaler. Don’t expect to sign a contract then turn over your brand growth entirely to your new distributor. The key word here is “partnership.” Brian of Elemental Cider believes in working side by side with his distributor partners: “Many producers believe that it is the duty of the distributor to sell products without support; in reality it is the responsibility of each producer to drive sales of their brand. As a small producer that is a tough reality, although a distributor can create brand awareness producers still have to keep customers interested in products. Customers want to have a personal connection with the brands they buy, so it is up to producers to be involved in the markets they are represented.”
You’ll want to find out how to set up work-withs with your new partner.Simply put, a work-with is a day where you head out into the market with one of your wholesaler’s sales reps. That day will be a focus day in which you can get in front of multiple customers to present and sell your brand. It’s also a day where you have a captive audience with your wholesaler’s employee. By selling the brand to that employee and building loyalty with the sales staff, you get a brand ambassador who pitches your brand when you’re not around.
Larger distributors tend to be very regimented, requiring notice well ahead of time before setting up a work-with. Additionally, you may only be allowed to have work-withs during an officially designated “focus month.” Smaller wholesalers tend to be much more friendly with short notice, non-focus month work-withs. Be sure you’re clear on the wholesaler’s policies in this area.
You’ll also want to find out who your brand manager will be and the other pertinent contacts at the wholesaler. Accounts Payable, Warehouse Manager, and Sales Manager are three people/departments that you’ll need to interact with regularly.
Incentives and promotions are a good way to build brand support and growth with a wholesaler’s sales team. Incentives are programs where the sales team gets something extra for selling your brand. It can be a cash payout per keg or new placement sold. It could be a trip to your brewery for a fun tour and a beer dinner. It really can be anything. Your wholesaler can help you design effective programs that will work for all parties. Typically, the costs of incentives are split 50/50 between the wholesaler and the supplier.
Post offs are another tool used by wholesalers and suppliers to increase sales and market presence. A post off is a discount offered to retailers for a set period of time. The goal of a post off is to spur an increase in sales by getting a retailer to place a sales tag on your product while increasing their on-hand stock. This draws consumers’ attention and encourages them to buy the product. This works as a great way to entice new consumers into trying your brand. The long term goals of a post off are to increase sales statistics with a store so they keep your brand on the shelf as well as to encourage consumers to try your product and get them to come back to it when it’s not on post off. Like incentives, post offs are typically split 50/50. You’ll need to check the laws regarding special pricing promotions in your area; this is another area typically regulated by the state’s alcohol commission.
Finally, you’ll want to investigate the wholesaler’s reputation. Reach out to the top accounts in the wholesaler’s territory, many of which you may already be working with as a self-distributed brewery, and ask them how they like working with the wholesaler. You can get a good idea of the day to day working relationship a wholesaler has with their accounts by talking to the buyers and owners. You’ll want to ensure that the people you’re turning your business over to have a good reputation and relationship with their accounts.
Another good source of information will be other breweries. If you have friends at other breweries, ask them if they like their wholesaler and if they’d recommend them. Good advice from your peers can go a long way to informing your decision. Brian Callahan has this advice: “As a small business, I want to have a firm connection with the people that distribute our products. I have never been interested in the distributor that represents an entire industry sector, what incentives do sales staff have to truly represent my brand and my products versus a national brand? I enjoy doing business with people that I would invite into my home.”
And don’t forget to trust your intuition. How you feel about the interactions you’ve had with the wholesalers as your meeting with them can be the deciding factor when you’re finally ready to sign the paperwork. A “good feeling” coupled with a lot of good research can lead to you picking the right wholesaler to meet your needs. Don’t let a slick presentation override your gut feelings. Sometimes if it sounds too good to be true, it is.
Signing the Right Distributor
There is a lot to consider when deciding to sign a wholesaler. You’ll want to investigate the associated laws and regulations before you make this choice. The more information you have about your rights and responsibilities will only help you when it comes time to sit down with a prospective distributor. Whether you sign with a big wholesaler or a smaller one, you’ll want to make sure you’ve investigated all aspects of their business so that you can make the right choice to meet your long term goals as a brewery or cidery. Time and effort negotiating with your wholesaler now can lead to a long and fruitful partnership and help you avoid an acrimonious relationship that has to be severed at great expense and potential brand damage at a later date.
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