I have to admit, when I first read about the same day delivery service I was a bit skeptical. How would it work? Why would I really want it? Could anyone really do it at scale on a sustained basis?
Well, early this morning I was reading the news on my iPhone and received a message from Amazon that all Prime members now had access to same day delivery (1-2 hours from order) through its new service called Prime Now. #PRIMENOW It piqued my interest. Is this real? Can they really pull it off? So I downloaded the Amazon Prime Now app and started browsing. I was amazed at the breadth of offerings from grocery to sports to electronics and more. I’ve been in the market for a luggage rack for my truck and found exactly the type I wanted. I knew we were out of eggs and browsing the groceries made me think about breakfast so I added some free range organic eggs and all natural sausages. Click click click and my order was in process.
They gave me a delivery window of 8-10am (my order was placed around 5:45am). I received my order exactly as expected at 9am and was able to make breakfast before the rest of my day unfolded. The driver told me I was among the first 10 orders in Indy. This was a profoundly positive experience.
Amazon Prime Now is currently available in Atlanta, Baltimore, Chicago, Dallas, Indianapolis, Manhattan and Miami. The service will continue rolling out to additional cities in 2015
What does this mean?
It is a game changer. Not immediately, but with a sustained effort, I believe this could drastically change how consumers (and businesses) think about behave with their purchasing. Home delivery is great and has been around for a long time (think the milkman of old, bottle water delivery etc). We get deliveries from Amazon and tons of other companies all the time. Some of these are next day or 2nd day which is super convenient. We get a weekly grocery delivery of organic and locally grown produce from Green Bean Delivery which is FANTASTIC! We have to plan our order by Monday at noon and receive our delivery of groceries on Wednesday of each week.
All that said, the idea that one can simply run out of something or decide one “needs” (wants) something, almost anything, and make it so two hours later is different. This is what 90% of running errands ends up being. Going to the store for this and that and picking up a few things in between larger shopping trips happens to all of us (or our families) every day. What if we could cut most of that out? What if you need something you simply think it (a couple of swipes is not much work) and it arrives in about the same time it would take you to go out and shop, pick your items, load your car, drive home, unload your car. This requires a different kind of thinking around what is possible, but I don’t think its a that big of a leap for most of us.
- Time – For no extra cost (driver tip cancels out gas you would have used perhaps), it frees up time. How much time in a week do we spend running to the store, shopping and returning? 4 hours? 8 hours? More? What more productive things or fun things can one do with that time. It is big.
- Convenience – No need to plan very far ahead, need something, make it appear with no effort. Wow.
For Small Business
- Time – Same as above, many small businesses buy things by shopping. Eliminate that need and do you eliminate a need for headcount manning the store while someone is out buying supplies?
- Service – out of something? – now you can replenish immediately and provide your customers whatever you were missing in a short time.
- Investment savings – reduce safety stock/inventory on certain items and replenish each day as needed. For many small businesses (and large) space to store inventory is a real issue. What if you could simply replenish as needed? Though this service is focused on consumers, for many small businesses, it could be a better alternative to traditional distribution or running to Costco or Sam’s Club for stuff. I’d expect Amazon to build out this aspect over time.
For Retailers & Distributors
- Increased retail competition – just when you thought it could not get worse for retailers, it is getting worse. Things that one swings in to just grab could be diverted to this. Think of convenience, pharmacies (e.g. Walgreens and CVS), grocery (Walmart, Kroger, Safeway, Publix), electronics (Best Buy, Costco, Walmart, Target), sports equipment (e.g. Dick’s, Sports Authority).
- Increased distributor competition – the businesses that source from traditional distributors could shift some of their purchases to this kind of model. It will create the need for distributors to up their service level to stay competitive which can also drive up their costs.
Overall, I think I just experienced the future today. I’d love to hear your thoughts.
Fortune Magazine published a story by Chris Morris May 14th that is getting a bit of attention, posing the thoughtful question: Is craft beer in a bubble?. The New York Times published Craft Beer Is Booming, but Brewers See Crossroads asking the same question on February 4th. I am now getting this question quite frequently from my friends both inside and outside the industry. I’m in Chicago at the National Restaurant Association Show #NRASHOW and this was a hot topic last night over cocktails.
It is particularly relevant given the amount of new outside money (many of my YPO and friends from other industries are investing in local breweries and increasingly distilleries.) I read the statistic that there is a new brewery opening on average every day in the US this year. In Fortune, they increase this by end of year to every 12 hours. This statistic is a bit alarming on face value, but let us dig a little deeper. To answer the question, one must answer two others:
1. Market Growth: Where is the market going – meaning is the growth in craft share going to continue and to what level?
2. New Capacity: Given the market assumptions from #1, can the size of the market absorb the growth in total capacity?
Market Growth: First, a little perspective: In craft beer boom 1.0 (circa mid 1990s), Chris Miller correctly points out there was a slow down in late 1997 and then flat to low growth for more than a decade before the current much larger boom. My company at the time was actively investing in and building multiple craft beer brands both on the distribution front in Chicago (Goose Island, Sierra Nevada, Pete’s, Bells) as well as regionally/nationally (Goose Island, Rogue). Fortunately, we also had a healthy import business (Grolsch, Staropramen, Tennant’s) that continued to boom during the slowdown. At the start of the current boom, we helped Flat12 start-up in Indianapolis and acquired Napa Smith Brewery in 2009 (sold in late 2012). There is very little comparison this time around from the 1990s. The degree of craft beer penetration into the beer market is fundamentally different. It is much deeper and wider, and is touching every market in some way. That said, the current level of craft sales as a percentage of the beer market is still quite small nationally (11% of volume according to the Brewers Association) vs in select highly developed craft beer markets (Portland, Seattle, San Francisco, Denver). That number has roughly doubled in the past 5 years. I predict craft beer sales will double again and exceed 22% of the US beer market by 2020. This mean approximately 22 million barrels of new craft sales on top of the existing 22 million.
(NOTE: one aside/caveat: craft beer is narrowly defined as independent brewers excluding cross ownership by larger companies in the alcohol industry. This is more political than it is any reality with consumers. Therefore the current share is actually a bit larger than 11%, adding in brands from companies like Goose Island and Craft Brewers Alliance (ABI). My 22% number includes craft taken over by larger brewers).
New Capacity: This is where the “new brewery every 12 hours” statistic is not the most relevant one. The important question is how much new capacity is actually being added to existing breweries combined with new breweries? 95% of the new breweries (and existing breweries) are more like restaurant businesses with a touch of manufacturing, than they are breweries. They will never sell any meaningful volume outside their four walls of the tasting room. There is nothing wrong with a local brewpub being a go-to stop for local people and there is clearly a market for this form of on-premise account. The real question is how much capacity are the production breweries adding and how many of the start-ups actually believe they are going to sell beer outside their four walls. This is where the true competitive dynamic in the marketplace will come into play. Most new breweries that intend to go to market through distribution and retail will fail. This is not because they have bad beer (some might but will die quickly) but rather they cannot make their brand relevant to the consumer in such a crowded field. This lack of differentiation and branding will prevent them from having any meaningful distribution and retail penetration.
The lack of experience in running a full service brewery with a restaurant, attached to a major manufacturing operation, attached to a distribution business, attached to a consumer marketing company will be the downfall of many. Here at the NRA, the 1000’s of operators can attest to the competitive nature of the restaurant aspect alone. There are a lot of smart investors in restaurant companies that have leadership teams with deep experience fighting hard for their share of the consumers’ purchasing dollars. Breweries that want to scale must both run a brew pub that competes with them and figure out how to sell in their beer to a limited number of tap handles available.
My conclusion as of today: The market can absorb many more breweries and capacity than exists today. The ones that remain focused on serving their local clientele will have the best chance of success. The ones that enter the fray of production and distribution will enter one of the most competitive and tough businesses that exist. Those that do not bring an experienced team, significant capital, creative and compelling branding and distribution to the table will fail. There is a bubble of inexperienced entrepreneurs combined with inexperienced investors who are entering the market. I look forward to the shake-out and the opportunities it will create for those prepared. In the meantime, I love capitalism at work and entrepreneurial spirit the craft beer market is demonstrating for all to see.
Last week I wrote about Channel Conflict in the 3 tier system of alcohol distribution between wholesalers and Anheuser-Busch Inbev and the craft community. I received quite a few interesting comments from my friends on both sides of the issue. One highly respected industry member commented to me “Very nice job trying to ride the third rail of these issues and explain a complex issue in simple terms.”
Well here goes again with an issue that I get asked about frequently. Another interesting channel conflict is between and among the members of the retail tier. This channel conflict involves questions regarding who (what types of retailers) can sell which types of beverage alcohol and when alcohol can be sold (e.g. Grocery Sales of beer spirits and wine and Sunday Sales). These questions are raging across the country in different states. The conflict pits independent liquor stores (and specialty chain liquor stores depending on the state) against the corporate chains (Costco, Kroger, Publix, Target, Walmart etc). An example of this is the Sunday sales of alcohol at retail in Indiana. After passing out of committee with a “poison pill change” Sunday sales was killed in the Indiana legislature. Sunday Alcohol Sales Meet Familiar Fate.
In a closely related question pertaining to which type of retailer can sell which products, in 2014 Tennessee passed a law allowing grocery stores to sell not only beer, which they already could sell, but also wine. Wine in grocery stores passes; what’s next?
In Florida, Walmart and others are pushing legislation for the right to sell spirits within the same store as groceries and not be required to have a separate stand-alone entrance. Publix, another grocer, does not support the change since they already have stand-alone entrances throughout the state. Beer and wine are treated differently in Florida and groceries are able to sell inside a grocery store. Publix opposes, Walmart backs Florida bill to let grocers sell liquor. Update – More Here: Florida: Spirited Battle Ahead over Florida’s Liquor Separation Law
3/23 Update: Beer bill on tap in Florida House on Tuesday
In some cases, these fights are spilling over into the courts and not just the legislatures. Walmart lawsuit highlights Texas’ surprising alcohol laws. In the case of Texas and Walmart’s litigation, it is about their right to sell products that the specialty retailers currently have a lock on and have created work-arounds for ownership of large-scale chains. UPDATE:
The reality is there are so many new brands, it is hard to keep up with them all, for people in the industry, let alone consumers. This proliferation of new brands is driven by today’s consumer thirst for new things, literally. Generally speaking, I believe more open markets are better for consumers, but taken to extreme can cause massive consolidation and the independent specialty liquor shops and specialty chains find themselves at a significant disadvantage to the corporate chains. Markets like California and Arizona are examples of wide-open sales of beer, spirits and wine. This has been the case for a long time. In these markets the corporate chains dominate the retail landscape. The independent sector is a much smaller portion of the total business. The large specialty chains have also been very successful in these markets (Bevmo! and Total Wine & More).
The relative advantage of full line retailers (grocery) is what is driving the fights over Sunday sales. Liquor stores are not open on Sundays, but the grocery chains are. The groceries of course want to be able to sell alcohol, as they are open, fully staffed and have consumers in their stores who would like to purchase it. The liquor stores would have to man their stores with staff and the thinking among many is the incremental sales on Sunday will simply come out of sales during the week they would get anyway. Their worse fear is that the groceries will end up with a greater share of the incremental business with so many consumers already shopping in their stores on Sunday. The package stores won the recent Indiana fight by taking a quite reasonable position – that all retailers should be under the same sets of laws. In the end, the groceries could not support losing the significant freedoms they currently have just to get Sunday sales.
To people (consumers) who live in both more “open” or “closed” states, these fights seem strange indeed. There has been a long-term trend to more liberalization of alcohol laws on a state-by-state basis. But this liberalization has been gradual and certainly not continuous. As the large grocery/mass retailers have shifted their attention to gaining share of the increasingly important beverage alcohol market and Total Wine continuing their massive expansion around the country, the independent sector will continue to be under pressure and where organized, able to continue to slow the pace of change through state legislatures and regulations. That said, the most strategic of the independents and specialty chains are innovating and investing
in their ability to serve their customers and compete effectively with the other retail sectors. Walmart and most other full service retailers will never have the specialized staff that a focused specialty retailer of alcohol can have (There are exceptions on a store level, but this is true overall). This high level of knowledge and service with customers is what will keep consumers coming back. I think the bigger fear is a large specialty retailer (Total Wine) that has it all – scale ($1.5 million in alcohol sales) and low pricing, product depth (10,000 skus typically) and highly knowledgeable employees. They are very strong.
The wholesalers and most of the suppliers all try to stay out of these arguments, since both sets of retailers are their customers. DISCUS (Distilled Spirits Council Of The United States) though has a long-standing policy to fight against anything that disadvantages spirits to other types of alcohol. They have been quite effective on this front in many markets. The craft (beer, spirits and wine) producers definitely benefit from a thriving independent market as they get more opportunities for their smaller or new brands than in the corporate chains, but they also benefit by having a more open market with multiple channels for consumers to buy alcohol. It’s a tough balance to maintain with many competing interests, but in the end the market will drive it, albeit more slowly than many consumers want with the local legislation and regulations market by market.
I’d love to hear you thoughts on these issues and other examples in your state.
The headlines and press statements around some of the latest beverage alcohol industry channel conflict are extraordinary and gaining attention across the country.
A new craft brewery is opening up every day, adding to the over 3,000 currently operating in the USA (Brewers Association). There are 100s of new craft distilleries that have opened up over the past few years with many more in the works (American Distilling Institute). There are more than 7,000 wineries as well (Wines & Vines).
All this growth in new entrants is the result of renewed consumer interest in trying new things. The Millennials have driven much of the new growth and vibrancy. It’s an exciting time in the beverage industry. That said, every large-scale established consumer brand across multiple industries is trying to figure out what to do and how to keep their base, grow it and remain relevant. Anheuser-Busch Inbev was roundly criticized for their “anti-craft” beer advertisement for Budweise
r during the Super Bowl. As I wrote about, this was them playing the hand they hold and making the best for a giant brand in decline.
These issues are a lot more complex than they appear and have interesting and changing industry alliances. I am constantly asked (last night included) why the laws are the way they are, by consumers and business people who are not from the industry. Here is a brief explanation:
The simple answer is the current legal and regulatory framework in the US is the result of two Constitutional Amendments. The first one was to ban all alcohol aka Prohibition (18th Amendment in 1919). The second one was to repeal Prohibition (21st Amendment 1933). To pass a Constitutional Amendment the Congress must pass it with a 2/3 majority vote in both houses and then it goes to the 50 states and must pass ¾ of the statehouses to become ratified. A very high bar indeed. Prohibition was a national disaster of epic proportions. However, it was created in response to some significant excesses by the industry and public. A lot of the excesses were blamed on what is known as “Tied-Houses”, whereby the brewers owned the taverns. The drunken excess of many in the public was attributed to the brewers have a direct interest in selling as much beer as possible and controlling the point of consumption. The saying “There is no such thing as a free lunch” came from this era. The brewers would give away free sandwiches at the taverns they owned. Sounds good, but they would salt these sandwiches excessively so that the patrons would drink more beer.
Whether you agree or not that “tied houses” were the root of all evil, this was the majority view when in 1933 the nation’s failed experiment in Prohibition came to an end. Even though it was clear to most that this government intrusion into industry was a disaster, there were still large numbers of anti-alcohol constituents throughout the land. The compromise to get the 21st Amendment passed was to allow each state the absolute right to regulate the sale and distribution of alcohol within its boarders. The 21st Amendment does not have an opinion on tied houses or any other aspect of how the industry does business. The Federal Alcohol Administration Act did spell out specifics on regulations of the industry to insure the revenue and to protect consumers. It did not however, spell out any specifics regarding a “3 tier system”, but rather defers to the 21st Amendment that in turn defers to the states.
Each state proceeded to set up its own set of laws and regulations. There are 50 states and 50 sets of laws that while some may resemble each other, none are identical. Layered onto the specific statutes and regulations are the interpretations by alcohol boards or chairmen and the courts. The most common way in which the states addressed the tied house issue was to legislate a middle tier (wholesaler) to be a buffer between the suppliers and the retailers. This is what is commonly referred to as the 3 tier system. There have always been some states that allowed brewers to own wholesalers, though this was the exception.
In the case of Kentucky’s new law, Anheuser-Busch Inbev has owned distributors there for more than 40 years and had attempted to buy a 3rd. That prompted the wholesalers to attempt to stop them and when other means failed, it ended with this new legislation not only not allowing them to buy the new distributor, but also forcing them to sell their existing businesses. I have no idea of how the courts will view this, but from the sound of it, ABI will not go quietly.
I can’t help but think the latest turn in the 3 tier beverage alcohol industry channel conflict is an example of overreaction that will do nothing but cause further escalation. When one considers all the new brands that have launched and keep launching in beer, spirits and wine and the need for each to find ways to market, it is clear that broad based full line distributors provide a viable route to market for many. All of the main distributors have giant books of brands now, and they serve some very large suppliers and many smaller ones well. In many cases they serve these needs of smaller brands by creating specialty sales divisions. They do not serve every brand well, nor can they. This has created market conditions in most states where a new crop of smaller start up distributors have emerged, primarily handling specialty or craft brands. Where specialty/craft distributors have emerged, they have become a necessary escape valve for small and new brands getting distribution to retail. In markets that allow it, and many states have provisions up to a certain size, craft breweries can self distribute. This is expensive but a necessary option in cases where there are no viable distributors to carry a new brand. Stone Brewery in San Diego and Sun King in Indiana seem to be examples of self-distribution that has been successful. I wonder if this will become more prevalent with spirits as the number of craft distilleries grows.
The current approach, though ugly at times, has worked to provide a route to market for a thriving craft community. The pressure to get new brands to market is only going to increase. It is unclear to me where the craft community will end up better off – with strict laws that don’t allow suppliers to own distribution (of any size) or with looser laws that give options. I tend to think most small/new brand will end up supporting a more flexible system, but the bigger brands, that are doing well in the traditional 3 tier system, will support the stricter system.
It may be that there are simply too many competing interests to work out viable solutions to everyone’s satisfaction on these issues. It would certainly be better for the industry if there were agreement as opposed to legal or legislative fights. ABI is a powerful entity as are all the major suppliers. Poking them in the eye with a local legislative win, may end up being a case of winning the battle but losing the war in some ways. It is unclear to me that the KY law actually helps craft brewers or simply hurts ABI or it it even does that. ABI can still control largely the activities of an independent distributor, as they have been able to do, in many other states. What is clear is that this KY battle is not the end to this fight.
It will be interesting to see how this continues to play out. Love to hear your comments or questions. Cheers! Smoke
Smoke has worked in all 3 tiers of the industry, built beer wine and spirits distributors, owned a craft brewery, a winery, and multiple craft spirits brands. He built the leading technology for pricing between suppliers, distributors and retailers. He also represented the WSWA as Chairman & President and the Brewers Association on the Government Affairs Committee.
Modern Distillery Age covered Taliera’s launch of Sugar Skull Rum… Cool…