Gavin Hattersley on the importance of the three-tier system

With the National Beer Wholesalers Association annual meeting kicking off in San Diego, we caught up with MillerCoors CEO Gavin Hattersley to talk about three-tier issues. He spoke to the evolution of the MillerCoors network, recent moves by Constellation in California and why he thinks MillerCoors consistently is seen as the brewer most supportive of the three-tier system.

Q: How have you seen the distributor landscape evolve over the years?

A: The distributor landscape, like just about everything in the beer business, is much different from when I started at Miller Brewing Co. more than 15 years ago. Miller had many excellent distributors, but it also had some that were under-capitalized and frankly not very competitive in their markets. Consolidation followed and the MillerCoors system got much stronger.

The creation of MillerCoors brought together distributors who had long been fierce competitors into one system, and as you might expect there were growing pains associated with that on all sides.

All these years later, our distributor network is the strongest it’s ever been. And if there’s one thing that we’ve come to appreciate, it’s that great distributors come in all shapes and sizes. A brewer wants to work with distributors that execute, that are aligned with your strategies and are well-capitalized. We love distributors who service the marketplace, are committed to quality and are in it for the long haul. We are fortunate that our network has large distributors and comparatively smaller distributors that each fit that bill. We have shared houses that are top performers, and we have unconsolidated ones that are as well. I think the diversity of our network makes us stronger.

Q: Recently Constellation has been approaching distributors in Southern California and requesting they sell their Constellation business. What’s your view on that?

A: I don’t know any more about what’s happening than what’s in the press, and I’m obviously not privy to Constellation’s strategy. But I have to admit I have been as surprised by what I’ve read as most others in the industry. It’s tough to have a clear point of view on this from the sidelines, but based on what’s been reported I can tell you this is not an approach we would take. The wine and spirit distribution model doesn’t apply to beer. We value distributors for their local market knowledge, and we appreciate all of their efforts in building our brands. There’s a benefit to us in having more distributors who are ingrained in their communities and committed to our brands.

Q: MillerCoors has made a number of changes in how it works with distributors in recent years. What has been driving this?

A: We need to get on a path to growth and to do that we need to do things differently than we have. That includes how we go to market with distributors. We believe the changes, ultimately, are in our mutual best interest because the best thing we can do for our distributors is to drive sustainable growth for our brands.

So we made some changes. We changed our approach to price promotion so that we could better execute our pricing strategy, and to help manage that transition we reduced our FOBs (freight on board transportation costs) — a significant investment. We introduced distributor performance indicators (DPIs) so that we could better focus on the things that drive our mutual business. And we changed our approach to how we assign new brands in unconsolidated markets, allowing distributors to submit proposals rather than us picking winners and losers.

These are significant changes, no question. We’ve seen some competitive hot spots emerge since we changed our approach to promotion, but most distributors have seen gross profit and gross profit percentage remain stable or increase. We continue to evolve and improve our DPIs based on distributor input, and there is a correlation between service, execution performance and volume trends. And besides being a more fair approach, our new brand assignment approach helps drive results. Just look at Arnold Palmer Spiked Half & Half. Proposal-winning distributors in key unconsolidated markets significantly outperformed the national average in several important distribution and volume launch metrics.

Q: When distributors rank brewers on their support of the three-tier system, MillerCoors consistently comes in first. Why do you think that is?

A: Well first of all, we consider that a great honor. Part of it goes to our roots. Lacking the scale of Anheuser-Busch, both Miller and Coors recognized long ago that they needed to work with our distributors in order to succeed. Giving up that sense of control may have been a bit scary, but I think they quickly recognized the benefit of having entrepreneurial partners. MillerCoors affirmed this commitment in 2011 in the three-tier doctrine, in which we recognized the role of the federal and state governments in overseeing the system and committed to defending that system. So while we own a single distributor, we don’t believe we should be acquiring more branches. That’s why we don’t want to see carve-outs for tap rooms get out of hand. And so on.

Now, that’s not to say that we necessarily agree with distributors on everything. Because we don’t. But, that’s OK. We can disagree and have productive debates. That said, I think that even distributors who might not agree with us on everything still see that we are more committed to upholding the integrity of the three-tier system, through our positions and our actions, than any other major supplier. They know we recognize the importance of the system and the value of sticking with distributors who have helped build our brands over the long haul.

Q: Any thoughts on what’s ahead?

We’re in an exciting and challenging time in our industry. We’re seeing more brewers come online every week even as overall industry volumes decline. And while the economy is growing quite nicely, we’re seeing pressures on costs due to tariffs and the national trucker shortage. We recently announced our freight and fuel costs for 2019 that we share with our distributors. It’s a hard number, and no one is happy about it. In an industry and an environment like this, collaboration is more important than ever. Our differences are vastly outweighed by our common interests. A strong three-tier system has created the most dynamic and exciting beer business in the world and that’s why we are committed to it.