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Profit-Mindedness, Capital Appreciation & True Value-added, Part II: In search of the independent beer wholesaler.

This is Part II of an article that began in our September magazine edition. For the purpose of continuity, we have republished the last part of Part I at the beginning of Part II. For readers reading the article as a piece, please note the overlap of the section titled "The Beer Business has come of Age."

THE BEER BUSINESS HAS COME OF AGE.

Things have radically changed since the industry's formative years. Then, the beer industry's distribution tier was a fragmented collection of over 5,000 small, family firms, each for the most part dedicated to investing their money and sweat equity in a single local, regional or national brand family. For beer wholesalers, yesterday was a simpler, nicer time.

Back then, execution of the process and good performance was measured chiefly by hard work, "honest effort" on the street and increases in brand sales in tens of thousands of cases. There were no contract clauses specifying a duty "to get with the program!"

Golden Eagles and Founders Club awards were given for the accomplishment of growing sales by 50 or 75 thousand cases. Awards didn't require a 200-, 400- or 600,000 case increase over a like growth the year before.

An award didn't bring -- along with a flattering inscription on a gilded plaque--tough and tricky new goals of incrementally more aggressive sales and distribution and expensive new CRM applications. Today, as never before, prestigious awards carry a perilous duty to spend equal or greater sums of money to do equally better next year. Heaven knows, back "then", 200,000, 400,000 or 600,000 cases wasn't the yardstick for growth. That was an entire year's sales in a decent year for a decent wholesaler.

Today, even success is a distributor's curse. This year's good execution elevates the need next year for even better execution and greater investment How many times does one hear of the fellow who just finished an up-year. Let's say he's + 15%. Maybe, he's an A-B house that hit a 60 or 65 share.

As a reward he gets only the intense 3rd degree that made Ernest Gallo famous: "Okay, now, since your future depends on your answer, tell me exactly how you intend to improve?"

Only a generation or two ago, 200,000 was the number of dollars a good owner-operator got to take home in a good year. Two hundred thousand and perks wasn't the bottom of the pay scale it takes to head-hunt a decent GM or COO--one of those business school grads trained in finance, logistics and information technology--that you will need to manage a newly consolidated house.

TODAY IS DIFFERENT.

Today is different, because exactly what wholesalers and suppliers wished for, in truth and fact, has come to pass.

Like nearly everyone reading this article, A-B wholesalers wished for volume and share dominance. Well, A-B wholesalers wished for it...And, they got it! And with being top-dogs -- the biggest kids on the block--comes costly impact selling, steeper investment requirements, and the dollars and cents incentives and penalties (punishing rival lines in the house), which bring about the single-minded focus economists label "product exclusivity".

A goal of 100% State of Mind is neither insidious nor necessarily overreaching. I say this putting aside not fully detected proofs that along with the high-end brand spending program and comparable mixed bags of carrots and sticks to reach an "A" rank, comes a strain of favoritism that chokes off rival's competitive product offerings. Arguably, these programs unfairly leverage distributors in a fast changing adult beverage industry.

The elements of 100% State of Mind, meshed with A-B's near impregnable dominance in a number of key markets and their most-efficient distributors' vital need to sustain scale and the "critical mass," (which only a nationally-advertised premium-price flagship can now bring) dubiously block effective access by rivals from all adult beverage categories -- particularly craft brewers, importers and fledgling marketers who'd like to mimic the success of Smirnoff Ice and Mike's Hard Lemonade. The crafts, in particular, have had to shift their focus from revolutionizing the industry to simple survival.

But, 100% Share of Mind and the singular "focus" it generates and exclusionary favoritism it spawns is a logical and sound, if not inevitable, business strategy. Just ask Bill Gates.

Also ask the craft and importer underdogs. Like our nation's high-tech newcomers, they pictured themselves as small innovators "smashing through the barriers and challenging, if not displacing, the established players", as one economist expressed the concept of "creative destruction". Instead, to twist the words of the same Tufts University professor (Paul Vaaler), these small players realized the beer business today is more about being choked off by "incumbents taking a commanding position and putting up long-term barriers to entry."

HOW ELSE DOES ONE STAY KING OF THE HILL?

Recently, I've heard a number of displeased A-B wholesalers, who are very, very upset over a "We versus Them" message increasingly voiced by a few strategically-attuned industry insiders and customarily pro-supplier consolidation consultants. Well, guys: You wished to be King of the Hill, and you got it. Everyone else is multi-line. Everyone else is the underdog.

And everyone else is out to knock you and your brewer off your perch. "Us versus Them"? It comes with the territory.

MERITOCRACY OR CONSENSUS CAPTIALISM?v

And, as expected in a growing industry--notice I said "growing" not "growth" -- nearly every wholesaler reading this opinion piece is not double or triple but likely quadruple their size and scope back in the 70s. That's good, since, in theory, size translates into less risk, higher EBITDA multiples, lower discount rates, and so into greater value and a higher price on exit.

Big is better? Big is best, in good times and bad, for better or worse.... Or is it?

And, there are other big changes. Gone are the days when loyalty meant something. Today, as elsewhere, the beer business is a meritocracy. And in that regard, sadly--and I submit dangerously--it seems wholesalers' ideas about "merit" often don't align with brewers' notions. Brewers expectations of wholesalers, and vice-versa, are precariously out of kilter.

Wholesalers face an odd set of reordered priorities. Sometimes brewers center themselves on how honest, accountable, organized, systematized, well supervised, and meritorious a wholesaler's employees are, as much as, if not more than, how commendable is the company's sales, share and overall performance.

That is the unfortunate teaching of A-B's last two or three incendiary court run-ins with Florida distributors whose accumulated equity the brewer insisted must be completely forfeited as a penalty for the fiddlings of low level employees. These were mere venial sins the consequence of which St. Louis was hardly aware until near the time came for its MIT economists and talented trial lawyers to prepare to defend a termination.

Sometimes the focal point of these reordered priorities don't deal at all with a distributorship's market success or whether it makes money at it. Rather the center of attention is whether and how easily a wholesaler principal foregoes enterprise earnings and value growth. The litmus test is how well the distributor goes along with a supplier's programs, executes its favorite processes, and chooses to spend his or her profits so the bulk of the company's earnings are reinvested.

Gone are days of "consensus capitalism" in the beer business. "Consensus capitalism" once meant when a wholesaler reached consensus with a supplier on an approach, a process or a program, the supplier allowed the distributor to become a capitalist and reap the rewards a capitalist expects.

Today, the meaning is only the brewer/importer is a capitalist, and, a priori, the brewer the prerogative to demand consensus from its distributors. So, the periodic "planning process" isn't what it used to be. Rarely is it a resolution of a wholesaler's progressive proposals and a supplier staff's tinkering and embrace. It's become an adversarial process over the brewer/importer's master plan for the country, region, state and the market.

In periodic planning, today, local goals are crammed down from understandably ambitious forecasts and budgets set above. Those involved only hope the other negotiates in good faith on a few points, before cadres of supplier staff demand consensus. The most common incentive to distributor concession isn't a forecast of internal rates of return on investment, but rather brewer/importer calls reminding a wholesaler of chapter and verse from its distribution agreement.

It is also common for a brewer to insist distributors adopt a single, centralized and integrated view about how things should and will be done. In purpose or effect, incrementally, big brewery/importer practices and programs engender a practical fusion of the two tiers. Progressive front-runners in a distribution network must achieve targeted performance employing "best practices", abiding with woozy notions of "integrated customer relationship management", and by "executing the process."

What in heavens' name does "executing the process" mean? "Executing the process" is the new paradigm for brewer sales administration. This trendy buzz phrase says "even if the distributor gets it done, to be praiseworthy in the brewer's eye, a distributor has to do it the brewer's way."

An example: regardless of how well a wholesaler performs, many suppliers insist distributors' top managers be clones of the brewer's own executives. Alternatively, a preferred recruiting process favors recycling executives who've tired of or been discarded by two or three beverage companies. You know those companies--the iconic soft drink and wine companies with a reputation as good places to learn. No wonder, the rap on beer wholesalers is they live and learn in an echo chamber.

How does a wholesaler principal go about recruiting mirror images of his or her supplier executives? Does one ask a corporate headhunter: Here's a bit of his or her DNA complete with its genome structure, go out and quickly clone me a "Mr. This" or "Ms. That"?

BREWBONICS

The unasked question is whether there are are meaningful parallels between brewery and wholesaler management jobs, albeit both learn to control and delegate through systems.

These days, to have any chance to succeed as a leader and achieve, a wholesaler exec must bring to the job a fluency in "brewbonics".

You won't find "brewbonics" in the American Heritage Dictionary. "Brewbonics", you see, refers to the horde of acronyms that comprise the mother tongue of brewery executives. They relish the chance to pitch ABCs and XYZs and so forth back and forth as enigmatic codes for their company's systems, processes, procedures and plans. But, if such a "must be fluent in brewbonics" specification for recruitment existed in the NFL, we'd never see an All Pro emerging from a trade or free agency. After all, every team's offensive and defensive schemes, play names, blocking assignments, and passing routes are different. Any new system takes getting used to by new hires.

There are other unasked questions. Is it productive for a multi-line distributor to install at the top of its organization a clone from the executive suite of one particular supplier or another? Is it even a good idea? By gum, by golly, by gee, it's obvious other suppliers and the wholesaler's work force will take the clone to be a proxy.

THE WARRIOR PROFIT-MAXIMIZER

Once the essence of the supplier-distributor relationship, past and present good performance no longer is the end-all.

Wholesaler principals who have proved themselves strong on selling skills and long on people-skills--an innate talent to generate worker and customer trust and loyalty--are given short shrift. Likely, they are lost in the cloning process. Indeed, lost, if not "taken", from the business enterprise is the separate, usually non-transferable personal goodwill that attaches to the unique persona and personal efforts of key individuals.

Rugged, brash, individualism and personal accountability for profit and loss fast fade from the management culture of the beer middle-tier. This trend is a striking paradox. Before canned notions of CRM, these principals built their businesses by systematically engaging store owners and buyers on a personal level to better serve their realized and unrealized needs. They were walking data warehouses and data miners and CRM practitioners well before the label was coined.

But, ignoring the truism that edicts can't legislate morality or behavior among sovereign people, big suppliers imagine rigid, top-down systems make human beings more efficient at these chores. So, sadly, at beer industry conventions, we rub shoulders with fewer of those legendary often impolitic, driven, hands-on, no-nonsense, WYSIWYG, personalities of beer's yesteryear.

With these hard-nosed, profit maximizing competitors, what-you-see-is-what-you-get. What you get are self-reliant, tough warriors, the street fighters of this business, with incredible sales skills inextricably tied to a profit-minded sense of pricing.

But, the disrespect, distrust, impatience and sullied reputations these brash, profit maximizing idealists suffer today at the hands of a new crop of brewer/importer professionals is a bleeding shame.

Do they realize as an enterprise shifts from a personal touch to an automated knowledge based organism, intangibles like curiosity, imagination, creativity, ambition and risk-taking innovation become more not less valuable? Don't they realize to idealist entrepreneurs, the Bens and Jerrys, if you will, work isn't just a job but a source of self-expression and validation?

Don't they forget that to smear and snuff the dissents among the beer industry rebels is un-American. "America was born in dissent and its willingness to abide dissenters is a mark of its strength," as a columnist wrote.

In the name of organizational "best practice," supplier professionals risk neglecting the essence of the distributor's role. That essence is: profit maximization.

Wholesalers overall must be highly profitable. They must earn enough to afford reinvestment in programs like "impact selling" (and its variations) and consolidation. No distributor money, no programs.

You know well these heroes of beer wholesaling. They're your fathers, uncles and older brothers and ambitious daughters. For them, success at work equates with self-satisfaction, self-affirmation and self-esteem.

They are the pioneers. They symbolize a bygone era. It was a time when distributors focused on profitability and sensible company growth, accepted a company's moral duty of fairness to loyal employees and suppliers, and weren't bowled over by contrived entreaties to spend more than warranted by foreseeable returns on capital. Their view exudes a sincere belief there is no better use for retained and borrowed capital than to boost the value of the family's ownership interest.

While wholesaler readers might see them as champions, there is too little effort to more deeply understand their passionate independence and refusal to interpret a distribution agreement as an instrument of indenture. From the perspective of the supplier managers ,these men are enigmas, their views obtuse, thickheaded and naive. They would seek to marginalize them. That's a mistake this presentation intends to address and reverse.

They are the magnet personalities, who with native good sense once upon a time just sold beer, and lots of beer, just opened new accounts, and lots of new accounts, just launched untested brands and products, and lots of them, and just made money, lots of money.

They were and remain the real risk-taking talents of our business. They sell beer not just physically distribute it. They run the risk of the market place. At peril is their own money, their own credit, their own time and their self-esteem.

They are among a few good men, who--with almost visceral insight--sensibly price at what a local market can bear. They discount, promote and run sales incentives only where returns promise a profit high enough for reinvestment.

They reinvest profits wisely. These talented wholesalers recycle large parts of their income streams to grow small niche houses into big distributorships. To them, profit maximization equates with growth and value maximization.

These are the brash individualists, who powered our top companies to where they are today. They did so in tough markets. Markets where others failed, often repeatedly failed.

They live by a maxim the pure common sense of which is self evident Only a profit-driven company, a financially sound, strong and deep-pocket wholesaler, has the money and borrowing power to spend the big dollars a supplier can not, is reluctant to or will not spend itself.

They long ago recognized (a wisdom Messrs. Busch evidently recently surmised):

In a mature, intensely competitive industry, it's not volume and share that counts most, it's all money, stupid. Earnings and value growth is the difference between dominance, success, survival, and extinction.

IF NON-CONFORMIST INDIVIDUALITY VANISHES, WHAT IS THE CONSEQUENCE?

Almost intuitively, these non-conformists wholesale managers knew an insatiable appetite for volume and share yields little sustainable profit and is no guarantee of reliable growth in shareholder value. They knew in beer, as in other beverage sectors--absent meaningful brand and price-point differentiation--it's nigh impossible to convert even dominant share into reliable revenue and earnings growth.

Instinctively, they knew, growth in size, scope and reach are checked when profits sufficient for reinvestment play out Absent a reliable and sizable earnings stream and constant earnings growth, there is nothing available for reinvestment.

When profits and capital returns play out there is nothing to spend to grow brands, to modernize and streamline operations, or to carry a company and its owners through slack times.

THE REWARDS OF REGIMENTATION AND ROTE OBEDIENCE

The disappearance of intensely profit minded individuality among distributor managements is a clear and present danger. The danger roots in two developments.

The first is centralized systemization of beer distribution in the name of efficiency. [I'm never sure whose efficiency is most in play.]

Systemization is not confined to variations of CRM and "best practices". Its head pokes out wearing many faces, epitomized by the cookie-cutter controls and comprehensive audit and evaluation techniques contained in the endlessly serialized editions of brewers' performance and operating manuals. In ways, contract standards and performance and operating manuals are remote controls for the suppliers previously described as distant and poles apart from their customers and consumers in local communities.

These one-size fit all instruction books--and the newest guides supplementing distribution agreements--meticulous detail supplier edicts for organizing, financing and running the wholesaler's total business. They are reminiscent of the "how to" books that supply MacDonald's and format franchisees a consistent sameness. But these books go well beyond legitimate concerns, like product quality control, and, now, a shared commitment to curb exposure for negligent marketing.

The indexes run the full deck from financial, ownership, organization, and personnel profiles right on through sales force compensation and how to answer a simple complaint. About the only guidance left out are explicit instructions to distributors to keep weeds from sprouting in driveway cracks and to patch and paint holes in a wall, along with a warning of dire sanctions for failing to do so.

Almost routinely additional standards, systems, applications, practices and good ideas find their way into the manuals. It seems, each is always crucially significant or instrumental to something or other a supplier wants. At least biannually, it seems, brain trusts at brewer/importer headquarters go about getting a good housekeeping seal on new rules from an impressive committee of admittedly fine distributors.

But missing from the tale is that these new rules and endorsements more often than not uncritically accommodate supplier executives' point of view about what is and isn't consistent with their individual take on industry change and the supplier's own business model. This way suppliers make sure the seeds of "creative destruction" don't root and suffocate growth of their brands, profitability and stockholder value.

These manuals contain page upon page of business school theory and case study about exactly what it takes to do chores street-wise distributors know best Most indulge in two laughingly obsolete academic notions. The first is businesses, business achievement and business people can be "scientifically" classified and judged.

From this premise, contracts and manuals go on to lay out mechanisms by which a brewer will test your execution of the process and, in such detail as to communicate an assumption that wholesalers have little more than a peddler mentality, otherwise tell you how to stay "in good standing." The second premise is: if our canned advice doesn't kill you, our recipe will make you stronger.

On their face, these manuals and guides seem sensible. Some parts are helpful. But.... But, wouldn't it be a better idea if financial, management, operations, and other performance benchmarks weren't shoved down distributors' throats. And even force-fed manuals would be more palatable if so many topics in the table of contents weren't so thinly sliced and diced and compliance wasn't such a consumi.

And, there are plenty of reasons to be suspicious about what motivates reams of measurements, which are long on sanctions and short on incentives. Indeed, the typical groundwork portrays them as simply and only as good ideas, coaching and mere expressions of "the healing art".

The manuals' principal flaw rests in anecdotal evidence that these better mousetraps fail to make selling beer cheaper, faster or easier. It's hard to find objective signs that four-square adherence to one or another supplier's regimen has made more money for a single wholesaler. Has any reader seen the secret studies, which evidence that beer drinkers buy more of brand or buy it more often because the wholesaler has a spanking new fleet of highly-polished Volvo or Mercedes diesels or its offices, warehouse and entry gates compare well to the Taj Mahal?

There are no known signs pointing to proofs that intense focus on and obedience to brewer/importer sales and operating system and process rules insures a particular brand will "sell through" or has made individual wholesalers faster, better and stronger competitors. Indeed, there is no clear sign that obedience to supplier methodology and master planning has helped wholesalers survive or hang on to profitability and value.

On the other hand, sanction-enforced regimentation and standardization offers suppliers an obvious flexibility and administrative lift and likely grease the skids to making them faster, better and more profitable.

Proof lies in a business life simplification. There are only two ways to increase profit earn more or spend less. So, if regimentation of downstream intermediaries prunes marginal costs and results in suppliers spending less, while boosting revenues and profit per barrel, the supplier wins. Can the same be said for wholesalers?

Can and does central-planned, systemized standardization of distribution earn producers more per case, per pallet, per container, or per barrel? Does rote obedience to the manuals in order to remain "in good standing" mean wholesalers expend less energy, suffer less strain and prune their spending? Sounds like a good question for professional and academic study.

Indeed, there is anecdotal evidence contradicting notions that mandated obedience to designer systems, processes and rules materially advances the likelihood a brand will "sell through" or make an individual wholesaler a faster, better and stronger competitor 12 ways. That evidence indicates, despite rigid regimentation and enormous resources, the brewery company stores we call "branches" and other distributorships part-owned or under the thumb of a supplier financial affiliate, often lose money or break-even after full allocation of expenses. Not infrequently, these vertically-integrated units lag behind their independent rivals or counterparts elsewhere, at least when gauged by earned, not "bought," volume, share and growth rates.

Another problem with the unassailable wisdom of comprehensive standards is supplier managers responsible for them and their enforcement come to hold inordinate power over distributors. So enforcement of mandated processes, procedures and systems steps into a perilous intersection where the brewer's business and profit goals, the persuasive arts, and distributor accountability and self-determination converge. Brewers need to heed a caution signal, because cramped, self-serving interpretations of rules, bullying and overreaching is easy, intentional or not.

Big brewer managers also have no incentive to move either their own or the distributors businesses in new, different, exciting and innovative directions. The business model that masterminds a manual becomes the best and only model for the wholesaler to follow, without regard to innovations, options and unique local situations. It doesn't bother brewery managers that the overriding emphasis of their assessment models is the goal of productivity growth the supplier sets for itself. These managers are paid to keep their eye on the franchise, that is, the existing way of doing things and exploiting the franchise to make money for their own company.

COLD FUSION OF TWO TIERS

And, there's another instructive shocker. Well, it's not really a surprise. When making a pitch to retailers on category management schematics, and feature displays, brewery officials push fact based profit stories. They go to great lengths to compute with arithmetic accuracy how much more the retailer makes if only he or she accepts the brewer's lead. But, ironically, with their loyal wholesale customers, brewers/importers abstain from tangible numbers talk. As they plug the rewards to wholesalers of rote adherence to contract standards and operations and performance manuals, supplier scripts don't offer distributors even puff about efficiency gains, productivity, profits and greater shareholder value. This dichotomy gives new meaning to the concept of leveraging an installed customer base.

The benefit of doubts to suppliers, the case for strict obedience to rigid supplier-designed benchmarks is ill-supported. There is no compelling proof I know of that these mastermind benchmarks laid down in the open-ended manuals or incorporated in distribution agreements in reality achieve for compliant wholesalers higher levels of efficiency and rates of productivity for compliant distributors.

Neither are there readily available fact-based profit stories to make a compelling case for cram-down regimentation by central-planners in supplier headquarters. We really know little about the results and whether regimentation and inherently subjective, performance testing consistently produce materially improved wholesaler profit and valuation outcomes.

Greater profit and capital value, after all, is the desired end. What else warrants a wholesaler trading away independence, other than improved returns and enterprise value growth? And that is precisely what these one-size-fits-all diktats demand, a trade-off of essential independence.

Simply, supplier regimentation of process, procedure and performance testing interferes with a local business owner's autonomy. Regimentation is antithetical to the exercise of independent judgment by an autonomous company. That's the trade off. Well, almost When suppliers and intermediaries both enviously eye the profit pool they share, there is no end point for regimentation of performance and systemized testing of execution short of a vertical integration fusing producer and distributor.

THE COMPULSION OF "RANK AND YANK"

So, reasonable suspicions abound that the manuals and the financial, operating and performance standards in a new genre of "accordion-like" contracts camouflage a nifty "rank and yank" process. After all, in a decent comprehensive audit and evaluation, any time, any where, any wholesaler can be found out of compliance with the terms of many standards.

Intensifying this suspicion is recent accentuated press coverage of Ford Motor Company's executive grading scheme. The scheme obscured a preplanned Ford downsizing in a rite of annual evaluations, followed by the dumping of the least capable 10% of managers, each year and every year.

In addition, wariness about the plausibility of a "rank and yank" program finds implicit justification in the so-called "Adkins study" document It came to light in the press on the Mans family's antitrust suit.

Pointing out that, unlike GE's and other's grading systems, which measurably maintain quality and performance improvement, syndicated national op-ed columnists vilified Ford's scheme to ease and mask a force reduction. Oddly, such scorn eludes commentary on the Adkins study or its methodology. While it is impossible to know what an A-B strategic plan looks like, the Adkins study looks like a window into a divisive forced-ranking program.

Piece that together with other A-B grading programs. Connect those points to the Mans controversy. What is indicated is a gambit to make breaking up easier, while insulating higher ups from the decision to terminate with prejudice. What I see is a brilliantly-conceived process to enhance the brewer's freedom to rid itself of members of its distribution force, practically at will or at least on a subjective basis, at constrained and preferably fire sale prices, and a dazzling design to outwit the regulatory, franchise and antitrust bar. Come to your own conclusions.

Of course, misgivings would abate if the measuring system AB land others employ) more resembled the "up-or-out" attorney retention systems common in large law firms. To do so the brewers must take three steps.

*First, openly install instant rewards for those whose test scores show stardom.

*Second, openly offer attractive downsizing-buyout incentives for the companies suppliers desire or need to weed out -be they fiscally flabby or plain slackers -- in the form of "equity agreement" premiums (rather than threats of forfeiture).

*Lastly, with deeds not words, brewers must do more to convince wholesalers distribution contracts provide safe harbor for their ongoing investments, including abstention from profit maximization, and a certitude, on exit, the majority in the middle of the Bell Curve will get a fair market value for their distribution or enterprise equity.

A fear I also share with clients--even ones who wilt when asked to sign on to brewer/importer regimentation-- is these manuals of business science benchmarks and forced ranking systems are primarily designed to manipulate wholesalers to focus, reinvest and spend more when and where their own independent judgments are to the contrary. Consider this: Other than a compulsion inborn in "high end spending programs," why would a free thinking A-B wholesaler spend for local broadcast media, stadium signage, outdoor posters, sponsorships and "focus days" for a reconstituted, repositioned Michelob, for fledgling Dec Otis, Tequiza, Killarney's and for the niche Alliance brands at the same dollar levels the wholesaler spends on exploding high-end brands like Heineken, Guinness, Beck's, Newcastle or Sierra Nevada? Prudent? Definitely! Profit maximizing? Doubtful.

Taking the logic of "high-end spending programs" to conclusion turns merchants' prevailing wisdom on its head. The flaw is its unrelenting insistence wholesalers plan to and do annually invest in slow moving secondary labels in dollar-for-dollar parity with the wholesalers' spending on rapid turnover, high-margin movers. Category management principles instruct merchants to profit maximize scare shelf and facilities assets and reject such a concept.

The same principles apply to wholesalers' finite resources and so make highly problematic a contention that such an illogical, profit-defeating systematically-imposed resource allocation is reasonable in any consumer goods industry or rationally related to any legitimate business interest of a producer.

CYNICS OF BREWER EVALUATIONS MAY HAVE A POINT

Some say, the brewer/importer standards and best practices manuals and audit and evaluation techniques are window dressing, merely slip covers intended to avoid staining the removal of any distributor a brewer/importer decides isn't up to the task, can't execute or won't get with the program. This point of view regards the design of standards and ranking systems as a premeditated shift and anonymous device to impress judges and juries of a supplier's imagined objectivity after it unceremoniously culls laggards or undesirables from its ranks.

These cynics may have a point The design hitch in so-called "objective" wholesaler assessment systems is lack of transparency. In the process, a distributor is without practical protection against getting caught in a crossfire of hostile personal biases, internal debate about management techniques and protocol within a supplier's organization, or middle manager schemes to soup up shipments or meet budgets and so to assure performance-based incentive bonuses. Neither do we find assurances the graders aren't trying simply to protect their jobs by masking their own miscues, shortcomings or reprisals.

Indeed, obscured by the noise of the ostensible objectivity is the identity of the supplier exec or committee who pass ultimate judgment Worse, despite the elaborate paper trail of evaluation team input, most corporate records indicting a distributor for such as "failure to execute" typically pay very little attention to how evaluators and the ultimate decision maker actually conduct their reviews and choose to stamp "urgency" on a problem.

The impartiality, detachment and subjectivity of "rank, yank and in the tank" distributor assessment techniques are reasonably questioned. Absent from most is a justly neutral some one somewhere, who is so pragmatically impartial as to represent a safe harbor for the "poor working slob" slapped with an unsatisfactory rank or a deficiency notice. A true ombudsman is missing from the programs to assess decisions and the urgency of a remedy or penalty or to censor the picayune, the overzealous, and the sometimes harshly personal attacks of supplier managers with chutzpah, attitude or, worse, a financial interest.

As a distributor's autonomy vanishes so does "value." But there is a profoundly greater dollars and cents danger for distributors.

The fixed plans, processes, systems and grading programs now popular in performance and operations manuals are antithetical to the exercise of independent judgment. They withdraw from wholesaler officials key decisions about when, where and how a distributor is permitted to run "the risk of the marketplace"

And, here, it is vital to understand that who bears the "normal risks of the marketplace" is the decisive, defining element in the economic and legal determination of who is and who isn't considered a truly "independent" business person.

He or she who bears normal market risks is the only one economists and lawyers (and careful thinking policy makers) say is entitled to the key reward of risk-taking, namely the wealth gained by leveraging profitability into capital appreciation and ultimately capital gain.

Remove a distributor's decision-making and risk-taking autonomy from the calculus we call the supplier-distributor relationship, and, in effect, a supplier pulls the legs out from under distributors' otherwise powerful claim they are entitled to be paid market-driven fair value for "distribution rights."

More distressing about a wholesaler limply conceding and lifelessly condescending to canned financial, administration, performance and operating is a consequent loss of the company's prospective premium value to would-be purchasers.

By relinquishing decision-making authority to a fixed plan designed by others, there is a diminution of the autonomy usually attaching to ownership and a shift in control and economic value in favor of a supplier or a customer. This is self-evident in that "value" rests in the ability to use control to obtain or assure economic benefits.

Every brewer and importer knows this. They're acutely aware that ceding even a modicum of their right to manage and control their own business endangers their brand and enterprise "value."

Proof positive is found in absolutely every distribution agreement, which, say one lawyer's words or another what the new Pabst contract says in a bit of overkill: "Pabst brewery reserves the unqualified right to manage and conduct its business in all respects and shall be free at all times...[alter products taste, look and feel of the beverages, to determine "other terms on which it sells" to discontinue sales anywhere or to discontinue or liquidate its business operations and] to make all (other) decisions concerning the conduct of [its] business."

So, whether by contract, practice or reticence to object, when an owner cedes to a supplier the capacity to decide when and how to use his/her control to cash in on a company's economic benefits--by boosting profits available for distribution to equity stakeholders or by cashing out entirely--or to use that control otherwise to increase an economic advantage, correspondingly lessened is any premium value of the enterprise to purchasers.

To oversimplify, "value" is driven not by the theoretical control of a right of self-determination. Value only attaches to the right to actually exploit control to one's own economic advantage. The current genre of detailed performance and operating standards, which beer wholesalers unwisely or unwittingly accept without a second thought, in fact, suppress and routinely are employed to oppress those key ownership and control rights, and so to devalue the business the moment an wholesaler principal wilts and signs on.

So what are independent distributors to do? That is the subject of the future part of this presentation. Examined there are remedial proposals for the independent beer distributor of the 21st Century and for brewers and importers seeking strategic competitive advantage. These proposals rest on two premises:

1. "Free and independent business people don't freely relinquish their right to decide to things for themselves", and:

2. "In the tug-of-war between supplier-wholesaler 'partners' over profits and capital value, suppliers shouldn't ask for such a concession of a distributors unqualified right to manage and conduct its business just so one can make a living and maybe become wealthy, unless...."

Mark H. Rodman is the principal of Beverage Distribution Consultants of Swampscott, MA. He is a former general counsel of the National Beer Wholesalers Association.
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Author:Rodman, Mark H.
Publication:Modern Brewery Age
Date:Nov 12, 2001
Words:6046
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