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Key Factors Craft Breweries Should Consider Before Hiring a Distributor

07/03/2019

When and How You Could Find a ‘Perfect’ Distributor for Your beers!

For many craft breweries, the initial step in building sales is simply self-distribution. This simply means that you are in charge of all the logistics of getting your beer into restaurants, bars, hospitality venues and retail locations. This may work well at first, but as your craft brewery grows in size, you will inevitably need to turn your attention to finding a possible distributor. Moreover, some states have strict alcohol laws that limit self-distribution, so you may be forced into finding a distributor simply by the regulations of your state.

So what factors should you keep in mind as you look for a distributor? And how should you go about finding the “perfect” distributor for your beers? Keep reading to find answers to these questions, as well as many more.

Pricing

At the outset, one of the biggest issues on your radar will be pricing. The beauty of self-distribution is that you are keeping all of your profits, and can price a product according to what helps you make a profit. However, as soon as you hire a distributor, you will essentially be signing away a portion of your profits to this “middle man” who is getting your product into stores, restaurants and bars. This makes sense, right? The distributor needs to be compensated for the work they are doing.

At the same time, giving distributors a cut of the profits is going to require you to pay much closer attention to pricing. You will need to determine the appropriate price that will maximize profits and margins, while also not pricing yourself out of the market entirely by charging an exorbitant price for your beer that consumers simply will not pay.

As a general rule of thumb, the price to the retailer (PTR) will be a function of the Freight On Board (FOB, or the price that the supplier charges the distributor), the total Freight (i.e. shipping costs), taxes that must be paid to the state, and expected margin. Generally speaking, the PTR = (FOB + Freight + Taxes)/Margin. Thus, at a glance, you can see how adjusting any one of these variables will immediately impact the PTR.

Shipping

How will your beer get from your brewery to the warehouse or storage area of the distributor? The cost of shipping can really impact the final price, so it is important to determine upfront this important question.

Here, you have two basic options. The first option is that the supplier can handle all shipping logistics, and simply build this cost of shipping into the FOB. For smaller-scale suppliers, this is often the preferable choice, because it enables them to increase their margins if they are able to find a very cost-effective shipping option. From the perspective of the distributor, the beer supply from a brewery “magically” shows up at their warehouse without them having to consider how it got there.

The second option is for the distributor to handle the shipping. In this case, a truck or other delivery vehicle would show up at your brewery and load up on beer shipments. This is easier from the perspective of the supplier (no headaches about organizing deliveries of their own) but also acts as a downward force on overall margins because part of the profits that you might have expected to earn from the sale of beer will now need to go to offset those upfront shipping costs.

Territory and coverage area

One major consideration for any craft brewery is the size of the distribution territory that the distributor can offer. The size of this distribution territory can vary widely. For example, it might only cover a few cities or a few counties. Or, it might cover the entire state. In some cases, it might cover multiple states or an entire region.

Obviously, there are pros and cons to choosing both large and small distributors. It can be quite enticing, for example, to sign up the biggest distributor name you can find. But keep in mind – that distributor probably has a large portfolio of beer brands (including many other craft beer brands), so your beer might not be getting the attention it deserves. In fact, at the end of the month, you might be puzzled why your beer sales are much lower than you anticipated. For that reason, a smaller distributor – and especially one with a craft-only focus – might be a better option if you are hiring your first distributor. This will ensure a much closer partnership and more effort on the part of the distributor in getting your beer sold.

Post-sales support

Another big factor to consider is post-sales support. This is a broad term that basically refers to the amount of support that a distributor will give your craft beer brand in order to maximize sales. It includes factors like incentives and promotions. In a best-case scenario, the distributor will be taking active measures to promote and support your brand. Even something as simple as mentioning your craft brewery in a weekly or monthly email newsletter that goes out to accounts can be a huge boost for your brand.

Remember – signing a distributor is all about building a partnership, and it’s unreasonable to expect the distributor to do all the heavy lifting without your involvement. That’s why one form of post-contract interaction that is valued is the “work with,” which is when a member of the craft brewery can head out into the field with a wholesaler’s sales rep. This is a great way to get in front of multiple customers at one time and will enable you to tell your brand story exactly the way you would like it to be told.

And finally, mention needs to be made of the “intangibles” that go into forming any partnership. It’s important to feel that both you and your distributor are on the same page and that they are as vested in this relationship as you are. Before you hire a distributor, it’s worth your time to reach out to other accounts held by the distributor and ask how the relationship is working out. As with any long-term relationship, how you get along on a day-to-day basis can go a long way toward overcoming any short-term financial obstacles or hurdles that you might encounter.

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