Wholesalers Proposing "Sea Change" in Packaged Beverage Distribution

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Wholesalers Proposing "Sea Change" in Packaged Beverage Distribution

Two of the leading wholesalers to the convenience store industry are planning to institute new "pricing models" for the fast-growing packaged beverages category in an effort to cover their burgeoning logistics costs for these relatively high-volume, bulky products.

The result could be higher prices for bottled water, isotonics, energy drinks and carbonated beverages for retailers and consumers alike. However, the entire situation appears to be in flux.

In a letter to packaged beverages suppliers, McLane Co. merchandising vice president Tony Frankenberger points out the tremendous growth and expansion of the packaged goods category and the impact that growth has had on distributor costs.

"As the category has grown, however, convenience wholesalers' traditional pricing model of a 'market basket' approach has proven ineffective in compensating wholesalers fairly for the ever-increasing distribution costs of these relatively large-volume, heavy-weight items," wrote Frankenberger. "McLane Company and others have undertaken extensive activity-based costing models to determine the costs of ordering, receiving, warehousing, selecting, loading and delivering this category, and have concluded that a new pricing model is necessary and appropriate."

According to the letter, sent to suppliers on Jan. 19, the Temple, Texas-based wholesale distributor will no longer charge its customers any mark-ups on the case-cost for packaged beverages, effective April 1. Instead, any packaged beverage supplier who wishes McLane to continue distributing its products must pay McLane a standard distribution fee based on McLane's distribution costs. According to the letter, which was sent to Convenience Store News by a retailer who asked to remain anonymous, McLane is establishing a fee at the rate of .095 cents per pound, with a minimum of $2.50 per case. In addition, McLane will require that any items tendered to it for distribution must meet minimum specified standards to ensure that those products, including any outer packaging, will withstand the normal distribution processes without breakage, leakage or other failures.

Frankenberger, in the letter, points out how the new model is fairer to wholesalers after examining all the costs involved in ordering, receiving, warehousing, selecting, loading and delivering this category. While acknowledging that the new approach represents something of a "sea change" in the beverage logistics model, Frankenberger notes that the shift should come as no surprise to many beverage vendors because "we have discussed this situation with the vendor community repeatedly in the past with no successful conclusion."

It's too early to tell if manufacturers will go along with McLane's new pricing model or if they will seek alternative modes of distribution. Neither PepsiCo, which sells Gatorade and Tropicana through wholesalers, nor Nestle Waters, the leading bottled water supplier, returned phone calls in time for this article.

"At this point, there is no way for us to know because the manufacturers are still discussing and negotiating with McLane," said John Miller, president of Colonial Pantry, an 11-store chain based in Champaign, Ill., and a McLane customer. "I understand what McLane is doing. They need to make money just like anybody else does. If it costs them more to distribute it to us, it's up to the manufacturers to see if they want to use them or deliver directly. Either one is okay with us."

Coca-Cola and other direct-store-delivery (DSD) vendors would, of course, not be affected.

Miller told CSNews that Naperville, Ill.-based Eby-Brown, the third largest wholesaler, also plans to change its pricing model for packaged beverages and that he thinks other wholesalers will likely follow suit. Ron Coppel, vice president, business development, for Eby-Brown, declined to be interviewed for this article.

There's no denying Frankenberger's assertions about the skyrocketing growth of the packaged beverage category. For example, in the 2006 CSNews Industry Report, packaged beverages increased by 11.5 percent in 2005, almost three times the increase seen in 2004. The recently concluded CSNews Forecast Study is calling for a third straight year of double-digit growth in per store sales for packaged beverages, with a 10.5 percent increase estimated for 2006 and an 11.9 percent gain projected for 2007.