Liquor logistics lowdown
Suppliers and wholesalers grapple with consolidation, regulatory hurdles.
By Jon Ross
In early March, word trickled out that executives at the world’s biggest liquor supplier, U.K.-based Diageo, had taken a long look at the company’s supply chain and were hoping to drain off excess expenses.
Refocusing its supply chain, an effort that could cost upwards of $150 million, would eventually save the company about $90 million a year and help it refocus its efforts in new markets around the world.
In the liquor supply chain, Diageo stands with Pernod Ricard and Bacardi Ltd. as the largest wines and spirits suppliers in the world. In the last half of 2012, Diageo reported sales of $9.26 billion, up from $7.78 billion in the second half of 2011. In the first half of fiscal year 2012-2013, Pernod turned in sales of $7.52 billion, a 6-percent growth rate, year over year.
The relationship of these top suppliers to their wholesalers is changing, noted Geoff Giovanneti, managing director of the Wine and Spirits Shippers Association. Large suppliers are growing even bigger and are looking to reduce their reliance on the middle tier in the three-tier liquor supply chain, taking a more active approach with their own supply chains.
“As the suppliers become larger and larger, they tend to take more and more control over the complete distribution cycle,” said Giovanneti, who also serves on the American Shipper editorial board. “The dynamics of the freight decisions have been changing as the major suppliers have been taking control over their freight decisions.”
He added suppliers are also looking to reduce the number of companies in their chain, consolidating wholesaling duties, where applicable, with a few large wholesalers.
The multinational liquor companies continue to grow larger, and wholesalers must also expand to keep up, but Giovanneti said there is still room for specialized, niche companies in the business. That’s where the Wine and Spirits Shippers Association comes in. The association, which was founded in the 1970s, groups the buying power of a number of wholesalers together to secure favorable ocean freight rates from liner carriers. When the upper tiers of the system expand, however, that leaves a smaller piece of the market for the smaller companies.
“As the volume that our members control becomes more controlled by their suppliers that, of course, leaves less in our basket,” he said.
These niche wholesalers, however, pick up the slack by concentrating on liquor that the larger companies see as too small of a market to directly manage.
“Although it might appear to be more fragmented, there are vehicles available to the smaller wholesalers to make sure that they are competing on more or less a level playing field,” he said.
In the middle tier of that three-tier system, Southern Wine & Spirits of America, the largest wholesaler in the United States, distributes alcoholic beverages from the supplier (distiller, winery, brewer or importer) to retailers big and small. While Giovanneti has seen a shift in the dynamic between manufacturer and retailer, Ward Chaplin, Southern’s senior director of supply chain management, doesn’t see this as a detrimental issue. Chaplin points out the wholesaler’s obligation is to provide value, support the supplier partner and ensure all retailers from Big Box stores, to the corner bar do not miss out on the hands-on-service aspect wholesaled distribution brings to supply chain. “At Southern it’s providing a value base relationship for both retailer and supplier,” he said.
Any competent logistics group can deliver a truckload, but Chaplin said wholesalers must make sure they maintain representation and product availability for suppliers, while simultaneously servicing the needs of this diverse retail trade.
Chaplin’s example was that the wholesaler must plan for St. Patrick’s Day with suppliers as early as December or January, and even work with retailers to consider how best to market this holiday while the shelves are still promoting Valentine’s Day.
A large part of keeping up service levels to 36 markets around the country that Southern serves is constantly making sure the supply chain is efficient, Chaplin said. Recently, the company started planning on the second of its robotic warehouses, adding a location in Northern California to its existing facility in the southern part of the state. These updated facilities will allow company officials to grow through greater density, while minimizing its DC footprint.
“We actually have a full team of people that are charged with keeping up with the latest technological advancements,” Chaplin said. “We’re going to take advantage of robotics, so we can make sure we’re getting efficiency out of our space.”
Regulations are another omnipresent issue in the liquor supply chain in the United States that impacts every level of the three-tier system. In addition to standard import regulations, companies have to deal with rules administered by federal agencies, such as the Food and Drug Administration and Bureau of Alcohol, Tobacco, Firearms and Explosives. Once inside the United States, nearly every state has a different law regarding how, when and where liquor can be distributed and sold.
“When prohibition was repealed, it wasn’t really repealed. In true politician’s form, they just kicked it down the road to the states to figure out what to do with it,” Giovanetti said. “For an overseas producer, it’s like dealing with 50-some odd separate countries as far as various regulations are concerned.”
Chaplin also sees how trucking regulatory issues on the horizon might lead to a few challenges for the company. When the new hours of service rule passes, carriers that deliver product to Southern, as well as the company’s own drivers on long-haul runs, might see their routes adjusted. The change will have minimal impact on short-haul route drivers who carry product from a distribution center to local retailers.
“Southern Wine is heavily vested in our own delivery system. We have warehouses throughout the country, own trucks, own delivery staff,” Chaplin said. “We’re planning for (regulation change). We’re making sure we have the right kind of equipment and people so that should we have an hours of service issue, we can be backed up with enough layers.”