Though rumored for some time, news of a potential merger between Anheuser-Busch InBev and SABMiller nevertheless sent a tremor through my beverage world while it’s nearly inconceivable a potential deal would result in the A-B and MillerCoors distribution networks turning into a single system, it revved anxiety over potential rapid consolidation in the DSD environment. So it’s a good time to offer one of my periodic assessments of distribution in the non-alcoholic beverage segment.
The general recollection among beverage veterans is that a couple of decades ago, DSD distributors truly were brand builders rather than a delivery fleet for brands whose owners are expected to undertake the work of winning retailer authorizations and building awareness. Today’s collective perception is that DSD guys grab a hefty chunk of your margin while offering little value creation, because promising new brands are snapped up by the big soda and bottled water players at earlier stages. So while distributors’ businesses get increasingly tenuous, their routes shrink and their ability to execute erodes. Some brand owners now wonder whether conventional DSD wholesalers are the right solution.
As I said, there’s some truth to that line of argument, but I’ll rebut it with a thought I’ve written often: it’s hard to name any shelf-stable brands of broad appeal that have broken out without the use of DSD. Like democracy, DSD is sloppy and inefficient, but nobody has found a better way so far. Yes, you need to exercise due diligence before making a commitment to a particular shop (talk to its past and present suppliers!), and unless you have vast financial resources and solid confidence that your brand proposition works, be wary of undertaking a national “landgrab” via DSD. Better to start with a small footprint, preferably close to your backyard, and check the fit, while experimenting with broadliners and other alternatives elsewhere.
Still, there’s no questioning concerns over the erosion of the independent DSD tier. Key early-adopter markets like South Florida offer limited coverage these days, and the exit of Buckeye from Ohio was a blow to marketers there. So where are new options going to come from? I feel there are grounds for guarded optimism.
In key markets like New York and Los Angeles, we’ve seen newcomers under names like Preferred, Drink King and L.A. Distributing, and there’s hope some of them will be sustainable, despite other well-publicized failures. Never underestimate the power of a single breakout brand to provide the resources for a distributor to buttress its route structure, staff and logistics, much as Vitaminwater did a decade ago. A near-equivalent these days has been Talking Rain’s Sparkling Ice, which has made a steadfast commitment to DSD for all channels; company CEO Kevin Klock speaks openly of launching or acquiring other brands that would serve to further fortify the independent DSD network.
Further, burgeoning refrigerated categories like cold-pressed juice, cold-brewed coffee and kombucha are empowering another subset of DSD distributors to expand their portfolios to include both refrigerated and ambient brands. Some are dairy houses that already had been hedging against their declining milk sales with Greek yogurts, hummuses and other categories.
In recent years, independent Coca-Cola and PepsiCo bottlers also seem to have become more willing to embrace outside brands – the Pepsi network in the Pacific Northwest, for one, has a reputation as agile and committed, even as its members make sure not to neglect their core brands. Dr Pepper Snapple Group seems willing to take on brands like Vita Coco for distribution without a serious thought of buying them. Red Bull North America is also continuing a limited experiment with Evian. Early-stage brands also are learning to take a broader view of what DSD entails, sometimes assembling coverage in a given market from a matrix of Korean distributors, candy houses and Bic lighter distributors. Consultancy Cascadia Managing Brands claims to have a roster of hundreds of these alternative DSD options to service its clients when conventional DSD options prove elusive or too costly.
Then there are the beer houses. Currently, there’s infatuation with craft beer, which, at many shops, has squeezed out any thought to building NA portfolios. But as that market gets saturated and private-equity-fueled expansions accelerate, a shakeout seems inevitable; wholesalers may look to rebalance. As for the prospect of an ABI/SAB deal, most experts believe that antitrust authorities would demand the combined entity spin off the MillerCoors piece in the U.S., preserving two separate networks. While consolidation certainly will continue, we shouldn’t worry about seeing a vital network suddenly vanish.
And at the risk of being naïve, I sometimes look at two other doors that may open in beer. One is that formidable array of MillerCoors houses marshaled by the Reyes family, whose technical mastery is an object of broad admiration within the business. Over the years the Reyes’ made no secret of its disdain for non-alcoholic brands: to them, it’s an array of undercapitalized brands with fly-by-night owners and slender margins that, if successful, are likely to flee to one of the major soft drink systems for a paltry buyout. That’s weak tea, compared with options on the alcohol side.
What’s changed lately is the Reyes’ recent plunge into the NA pool as Coca-Cola’s new franchisee in the Chicago area. That’s no philosophical contradiction: they’re latching onto a well-developed, deeply penetrated group of brands with complete franchise protection, which should fit their executional strengths. A positive experience may offer grounds for a broader rethinking of the role of NAs.
Another pocket of untapped opportunity is the growing network of Bud houses owned and operated by Anheuser-Busch itself. So far, A-B has shown little wavering in dictating that these houses carry only A-B and allied brands. At some point, though, you have to wonder whether A-B executives will conclude that the 100 percent focus is outweighed by the spectacle of lucrative, fast-growing brands going cross-town to rival MillerCoors houses.
Down the road, some industry experts – including respected soft drink veteran Honickman Group COO Bob Brockway – view it as inevitable that beer and beverages will ride the same trucks. That would truly transform the distribution landscape. In the meantime, though, there seem to be enough bright spots to foster the hope that deserving NA brands will continue to find their way to retail.
Longtime beverage-watcher Gerry Khermouch is executive editor of Beverage Business Insights, a twice-weekly e-newsletter covering the nonalcoholic beverage sector.