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How Small Distillers are Changing the Dynamic of the Industry

logoAs you know, the US alcoholic beverage industry is complex and highly regulated. This presents a challenge to many of the growing craft distillers who started their businesses with stars in their eyes. Often times they’re not equipped to handle their own back-office logistics, compliance, or distribution networks. That’s where companies like Park Street come in. Founded in 2003, Park Street offers small and medium-sized alcoholic beverage companies importing, distribution, consulting services as well as trade financing. They have worked with dozens of brands, including the likes of Atlantico Rum, Whyte & Mackay’s portfolio, Aviation Gin, Chicken Cock Whiskey and several more wines and spirits.


Park Street chief Harry Kohlmann is a 17-year veteran of the alcoholic beverage sector and has advised some of the leading global beverage companies including Bacardi, E&J Gallo and Coca Cola. Needless to say, he has his finger on the pulse of the industry. WSD recently sat down with Harry to discuss the role of small distillers and how they’re changing the dynamics of the industry.


Wine & Spirits Daily: What’s your view on the role of small and medium-sized brands when it comes to innovation in the spirits industry?


Harry Kohlmann: My view is that over the last 10-15 years, the players in the innovation game have changed. The top players in the industry used to invest heavily in new brand development, and I think over time, they realized that it’s not a high return on investment business for them. As a result, they shifted a lot of their innovation capacity from new brand development towards new product development.


Basically, the mandate shifted from “How do we build new brands?” to “How do we effectively extend existing brands?”  The main driver of this shift was that large players would create new brands and push them through their distribution network, but then wouldn’t be able to give them enough time to survive in their overall system. While the new brands might have been great ideas and would have had the potential to survive in an entrepreneurial setup, in a large company setup, they just die and are written off.


Where new brand development has been most successful is with entrepreneurs in entrepreneurial environments. [They] have been successful building new brands by bringing all types of innovation: everything from packaging and usage to provenance, formulation, production methodology and more. These entrepreneurs are attracted to this industry by the breakout success stories–for instance, Grey Goose, Eppa, and St. Germain. Every year, there are a couple of new brand exits that are basically the benchmarks.


WSD: Do you think the majority of them are entering this industry with a goal of selling like Grey Goose, Eppa and St. Germain?


Harry: My sense is that not everybody enters with the objective “Okay, I’ve got to sell and that’s my plan.” I think new entrants want to create compelling brands built on great products, but they also appreciate an exit channel in case they want it.  Essentially, if someone, most likely a larger strategic player, offers them an attractive price for the brand they built, they don’t have to take it, but it’s great to have the option.


WSD: A lot of small and medium-sized suppliers have told us that distribution is their biggest challenge. How do you view the relationship between small suppliers and distributors right now?


Harry: Distribution is a big challenge and there is nobody really to blame because each one of the players that is involved in this discussion is just acting in its own interest. A pivotal point in history was the time when Diageo started its Next Generation Growth program (NGG) in 2001. With this program, Diageo decided to take bigger control of their distribution system and demanded more from their distributors. With Diageo demanding more, distributors had to make accommodations, and as a result, they had to make adjustments throughout their system to recoup what they had just given up to Diageo and then subsequently to other large suppliers, who launched their own versions of NGG.


With distributors accommodating the larger suppliers and giving them essentially their fair share of attention, the small suppliers were faced with this challenge of “Am I really going to get in and if I get in, what can I do to get attention? Do I have to pay more?  Or what type of other incentives can I provide? ”


I think the mindset that might have been there many, many years ago for small brands when they thought they just needed to get distribution and then they were all set, that the distributor would build the brand by getting it widespread distribution in all target accounts without any major involvement by the brand owner — that mindset is out the door because now, if somebody is lucky enough to get distribution, they would be requested or required by the distributor to put their own resources on the ground to basically help with account openings, to service the accounts, to educate store owners, gatekeepers and distributor sales people and more. Without an in-market infrastructure that provides attention to smaller brands, it is going to be a big challenge to make the brand prosper.


It is a complicated problem for smaller brands. I think you will see a market reaction by a larger number of smaller distributors entering the market that will service smaller brands in more tightly defined areas . But even these smaller distributors will require the brand owner to deploy in-market resources in order to make the business work for both sides. The challenge for small distributors will be to keep brands once they show traction. Larger distributors have economies of scale and scope and are in a much better position to drive rapid growth acceleration.


WSD: So basically, the smaller distributors will be like incubators.


Harry: In a way, yes and to a certain degree. Small distributors would have to be smart to scale up with the success of their brands to become a big distributor themselves. This is going to be very difficult, but I’m sure we will see some of the small distributors succeed. From the supplier side, I think you will see the emergence of sales networks. In the current environment, local level broker networks represent brands to support the distributors for small brand owners. Once a brand becomes successful, brand owners want to scale up and brokers might lose the brand.


I think moving forward, you will see the emergence of companies that will maintain a larger platform to provide sales and distributor support on a regional or national level. This support includes selling into a distributor, programming a distributor and even selling into retail. BlackHeath Beverage Group is one of the companies that has done this successfully on a national level, and I’m sure there will be others that will be emerging overtime.


Stay tuned for Part II of our conversation with Harry Kohlmann.


Until tomorrow, Emily


“Don’t do it for the money. Don’t do it for no money.”

– Oliver Reichenstein


Source: Wine & Spirits Daily