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Managing distributors as off-balance resources in the American brewing industry.

The American brewing industry has changed dramatically during the past 20 years. From a nation of many smaller brewers, we have become a nation of several large brewers, who threaten to engulf the remaining small ones.

What impact will these changes have on the relationships between the brewers and the wholesalers who distribute their products to consumers? What types of punishments and rewards are brewers capable of using to control the actions of their distributors? How do the distributors react (in terms of satisfaction with the relationship and performance) to these uses of power? The answers to these questions provide the focus of this paper. Empirical evidence to support the latter two questions will be presented.

Introduction and Purpose

The brewing industry is an oligopoly and, since 1970, has evidenced growing levels of concentration. Today the industry is dominated by Anheuser-Busch, Miller, Stroh, Coors, and Heileman. In time, industry analysts expect Anheuser-Busch to control over half of the industry (Hemphill 1988).

Channel distributors are "off-balance-sheet resources" that must be managed (Constantin and Lusch 1986). For too long, firms have been myopic, considering only their own resources. They have not realized that every firm in the channel of distribution has resources that affect the distribution of products. Firms at all levels in the channel must begin to strategically consider the other members of its channel of distribution if the channel is to perform effectively and grow. Constantin and Lusch suggest that firms must realize the difference between distributing to another firm and marketing with them.

Another reason that channels typically have not been managed as Constantin and Lusch suggest they should be is fear of anti-trust. Companies are restrained to a great degree by the Federal Trade Commission (FTC). In the beer industry, the significance of this issue is best highlighted by the FTC's 1970s lawsuit against Coors, in which that firm was charged with illegally restricting selected marketing activities of its franchised distributors. Coors responded that it would be forced to "... distribute beer ourselves, which gives us the unalterable right to determine where and to whom Coors beer is to be sold" if it could not maintain control over the wholesalers in its marketing channel system ("Why Coors Will Appeal FTC Decision" 1974, p. 22). Ultimately, the U.S. Supreme Court, on appeal by Coors, let stand the FTC's opinion that Coors' practices were unreasonable and anticompetitive. Thus, the ability of the brewers to control the marketing practices of their distributors was seriously undermined. However, the Continental TV v. GTE Sylvania (1977) decision restored a considerable amount of supplier ability to influence downline distributors when it can be shown that interchannel competition should and can be enhanced (Elzinga 1977).

Today, brewers possess considerable market power and can use this power to influence the marketing and other aspects of their wholesalers' operations. However, attention brought to the industry by the Coors and other brewers' antitrust problems of the '70s, and the extreme concentration in the industry today, make it imperative that channel power be used "judiciously."

While it is fairly obvious that distributors depend on the brewers they represent, the Coors example indicates that the dependence works in both directions. If the distributors did not exist, the brewers would be responsible for moving their product from the breweries onto grocery shelves and into restaurants. Therefore, the brewing industry is characterized by interdependency.

History of the Brewing Industry

The most recent data available shows that Anheuser-Busch controlled 40.4% of the beer market during the first six months of 1989. Miller Brewing Company held 20.7%, with Coors and Stroh a distant third and fourth, with 10.9% and 8.8%, respectively, Heileman accounts for 7.8% of the market (Atchison 1989).

While Anheuser-Busch and Philip Morris' Miller Brewing have outspent and outmarketed their rivals during the past several years, the leaders of the old-line brewing families (Coors and Stroh) have struggled to go it alone. The advertising war between the market leaders has escalated. Anheuser-Busch spent $388 million on media ads in 1988 and millions to promote "Bud Bowl" and "Bud Bowl II" during the 1989 and 1990 Super Bowls. It has been difficult for Miller and Coors to compete; Miller spent $189 million in 1988, primarily emphasizing its "Tastes Great/Less Filling" campaign, while Coors spent $125 million (Siler 1989).

In October of 1989, Anheuser-Busch announced it would match the discounts its rivals were offering in some markets. Many industry analysts felt that Anheuser-Busch was just warning its competitors that they would pay dearly if they continued their price-slashing (Siler 1989). Anheuser had much more room to slash prices, and with generally bigger and more profitable wholesalers, the Anheuser wholesalers were less likely to balk at discounts. Wholesalers for all brewers would be affected by price cutting, since wholesalers usually pay part of the cost of discounts. This is just one area where brewers can influence their distributors' operations.

It was the growing concentration of this industry and the increase in power of the larger brewers over their wholesalers that prompted this study. Despite the interdependency between the two channel members, we wanted to find out what kinds of power sources the brewers had and what types they used to control their distributors' actions. An analysis of the behavioral aspects of this channel should enable us to understand channel members' behaviors in various industries. A better understanding should then enable the brewers to manage their distributors as "off-balance-sheet resources."

Study of Beer Distributors


A four page questionnaire was mailed to 1,503 beer distributors throughout the U.S. after a pilot study was completed. The sample was chosen from the National Beverage Marketing Directory 1988. The survey instrument was sent to the president, marketing vice president, sales manager, or other key executive listed in the directory. This person was asked to consider and refer to the distributorship's relations with its largest supplier (in terms of percentage of sales) when completing the survey.

The response rate for the study (including the pilot) was 22.8% (370/1622). However, since we asked the respondent to consider the relationship with the largest supplier, we had to delete those firms whose largest supplier was not a beer producer. Therefore, the number of usable responses generated was 324.

Most of the sample respondents held top management positions in their firms. Twenty-one (21.0) percent of the respondents were presidents of their companies, while 26.7% indicated they were vice presidents (of marketing or some other area). Sales managers and general managers accounted for another 45% of the respondents, while the remaining 7.3% positions were held by operations managers, financial officers, or other types of managers.

The average respondent is a 41-year-old male, with three years of college completed. Respondents' experience was mostly in the area of sales management (8 years), but with some experience, on average, in warehouse management (4.75 years), route sales (5.19 years), and purchasing (5.39 years). In general, the sample evidences considerable experience in the industry and top management positions. Therefore, they were considered well qualified to address the issues in this study.

All areas of the U.S. were represented. Respondents from southeastern states accounted for 27.2% of the sample, while western respondents contributed 22.6%. The remainder of the responses were as follows: Great Lake states--19.5%, northeastern states--13.0%, and midwestern states--12.6%. One respondent's state was unknown.


The focal issues of this study are supplier power sources, the actual use of power sources by the supplier, distributor satisfaction, and distributor performance. From a managerial perspective, each of these is critical to the long-term relationship between supplier and distributor in any industry.

Power sources were dichotomized as coercive and noncoercive. Coercive sources are defined as "negative" forces that the supplier may use to gain distributor compliance (e.g., punishments), while noncoercive sources of power are "positive" forces that the supplier may use (e.g., rewards or assistances). The distributor was asked to indicate how much capability its major supplier had to take each of the following actions at this time. A number of items composed both the coercive and noncoercive power sources scales.

The use of power sources, or the actual granting of punishments or rewards, focused on the same areas as the power sources. To measure use of power, however, the respondent was asked to indicate whether they agreed or disagreed that the statements accurately described their major supplier's actions.

To determine the distributor's happiness with the relationship, the respondent was asked to indicate how satisfied the distributor was with its major supplier in 14 different areas.

The degree to which a distributor's relationship with a supplier contributed to the fulfillment of the distributor's objectives (Gaski and Nevin 1985), as well as the supplier's objectives, delineated distributor performance. The distributor was asked how he thought the supplier would rate his performance. He was also asked to rate his firm's performance relative to the average profitability of firms similar to his in the industry.


Respondents reported that suppliers had little or no ability to change their sales territory, deliver large quantities of unwanted products, or intentionally delay delivery of products. The suppliers did have a lot of ability to require particular warehousing characteristics, provide helpful training for the sales force, offer sound inventory management guidelines, and provide market information. Each of the items for which the respondents reported the suppliers to have little capability are coercive items. The four items for which suppliers had much capability to perform TABULAR DATA OMITTED are marketing assistances.

Respondents reported that their suppliers did not use their abilities to change the respondents' sales territories, delay delivery of products, or deliver unwanted products 2). This is not surprising, since the respondents indicated that the suppliers did not have strong capabilities to do these things. The respondents also noted that the suppliers did not provide high levels of business financing, which they indicated the suppliers had some limited ability to do.

The distributors also indicated that their suppliers required particular warehousing characteristics, provided training for the sales force, furnished quality market research information, and offered inventory management guidelines. All of these were areas in which the respondents said the suppliers had much capability.


On the whole, respondents reported high levels of s satisfaction with their suppliers(See Table 3). The greatest amounts of satisfaction were reported for product quality, available product line assortment, and the stability of the relationship with the supplier. The least amount of satisfaction was reported for lead times for products ordered from the supplier.

In terms of performance issues, the distributors perceive themselves to be above average performers. Relative to other firms in the industry, they report themselves to be slightly above average in terms of profitability.
Descriptive Statistics for Satisfaction
Item Mean S.D.
a. Sales assistance provided to you 3.90 1.03
b. Handling your complaints 3.42 1.09
c. Advertising/promotion help 4.06 1.05
d. On-time product delivery 3.95 1.03
e. Image among consumers in your area 4.20 1.01
f. Product line profitability for your firm 3.98 .93
g. Product quality 4.76 .57
h. Product line assortment that is available 4.50 .73
i. Returns policy 3.79 1.02
j. Sales training assistance 3.89 1.08
k. Lead times 3.53 1.04
l. Consistent/reliable delivery 3.97 .96
m. Access to person handling your account 4.29 .83
n. Stability of relationship with supplier 4.31 .88
where 1 = very dissatisfied, 5 = very satisfied


Respondents to the survey reported high levels of satisfaction and also thought of themselves as above average performers compared with other wholesalers. The fact that the distributors were happy and performed well, in their eyes, may very well provide a halo effect for the remainder of the results. Discussions with industry executives after compiling the study results indicate that the findings TABULAR DATA OMITTED regarding satisfaction and performance were not at all unusual.

Brewers see their distributors as key ingredients to their successes. Distributors who are not good performers do not last very long in this industry, and good performances are defined fairly loosely. The channel is as strong as its weakest link, and brewers do not tolerate weak links among the distributors. One industry executive told about a distributor who was dropped after one warning to remove outdated beer from a retailer's shelves. The beer was removed after the warning, but the brewer's representative went back to the same store several weeks later and again found outdated beer on the shelves. The distributor's license was revoked within days.

The brewers, then, do tend to consider their distributors as off-balance resources. As Constantin and Lusch (1976) suggest, this industry has realized the difference between distributing to and marketing with a downline firm in the channel. As reported by the distributors, the suppliers can and do specify warehousing characteristics, assist in training salesforces, provide market research, and insist on sound inventory management. Obviously, the brewers care about what happens to their products after they leave the brewers' possession. The suppliers do not harm the wholesalers; they do not change the sales territories, delay delivery of products, or deliver unwanted products.

In general, the brewing industry is one in which the nature of channel relationships is positive. Poor performances by distributors will not be tolerated, so the majority of distributors are good performers and are satisfied with the relationship. Brewers and distributors see themselves working hand in hand to achieve their multi-faceted goals. Mutual interdependence is key. The brewers must listen to their distributors who are their eyes and ears in the marketplace, but the distributors would not have a product without the brewers.


Atchison, Sandra D. (1989), "Coors May Take a Gulp of A Rival Brew," Business Week (August 21), 70.

Constantin, James A. and Robert F. Lusch (1986), "Discover the Resources in Your Marketing Channel," Business (July-September), 19-26.

"Continental TV, Inc. v. GTE Sylvania, Inc." (1977), 433 U.S., 36.

Elzinga, Kenneth G. (1977), "The Beer Industry," The Structure of American Industry, Walter Adams, ed., New York: Macmillan, 221-249.

Gaski, John F. and John R. Nevin (1985), "The Differential Effects of Exercised and Unexercised Power Sources in a Marketing Channel," Journal of Marketing Research, 22 (May), 130-142.

Hemphill, Gary A. (1988), "Another Flat Year for Beer," Beverage Industry (January), 1, 26.

National Beverage Marketing Directory 1988 (1987), Mingo Junction, Ohio: Beverage Marketing Corporation.

Siler, Julia Flynn (1989), "A Warning Shot from the King of Beers," Business Week (December 18), 124.

"Why Coors Will Appeal" (1974), Modern Brewery Age (October 21), 22.
COPYRIGHT 1992 Society for the Advancement of Management
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Article Details
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Author:Richardson, Lynne D.; Robicheaux, Robert A.
Publication:SAM Advanced Management Journal
Date:Mar 22, 1992
Previous Article:Resuscitating the comatose firm: changing management responsibilities under Chapter 11.
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