Speaker 1:
Welcome to Harvest to Pour: Business of Beverages with your host Matthew Shipp. This is the podcast for all of those who are involved in the agriculture all the way to the distribution of beverages. And now your host, Matthew Shipp.
Matthew Shipp:
Hello and welcome to Harvest to Pour. I'm your host, Matthew Shipp, and today I am here with Jim Harris from Western Computer and today we're going to be talking about beverage distribution and some of the computer solutions involved in that. And it's something I've been really wanting to talk about because a lot of the past businesses I've talked to when I ask, hey, can I get this in my state? They're like, well, no, getting things across the borders is a bit tricky. This is really speaking about spirits and such. And I'm sure we're going to cover some of that and why that is.
Jim, welcome to the show.
Jim Harris:
Thank you, Matt. Nice to be here, Matthew. Looking forward to having this conversation. It's definitely something when your friends ask you why they can't get something, it's a long answer. So I hope I can simplify it a little bit for you guys today.
Matthew Shipp:
Great. We're looking forward to hearing that. But first off, let us know who you are and how you became the specialist in food and beverage distribution.
Jim Harris:
Yeah, so I'm in Nashville, Tennessee and I went to Vanderbilt and I got my MBA and I met a guy there right at the end of, it was the dot-com stage and we really wanted to get into something that we knew was going to grow and have some interest and we wound up with wine and spirits. We created a business around gathering data and reporting on it for wine and spirit distributors and suppliers. And what happened was we wound up selling that company in the '07 and then I done a few other things in the distribution space, but I really found that it's a really complicated industry and that creates a lot of opportunities for smaller players because the bigger guys like a Microsoft or Oracle, it's too small, it's too niche for them.
And so there's a lot of opportunity because every state's different in how it operates to come up with solutions that match the business models of the different distributors and suppliers around the country and creates a nice opportunity. I joined Western computer last year to help with taking our WineTrade product, which is done really well on the Microsoft product stack. So there's a lot of slowness to adapt technology in wine and spirits for whatever reason. But the cloud is here and AI is coming. So I'm really happy to be on a team that has a lot of focus on bringing what I think is the best ERP out there on Microsoft to the wine and spirit industry to help them solve some of these challenges they have.
Matthew Shipp:
All right. And so along the lines of, my show's called Harvest to Pour, so you're definitely on the pour side. They've made their product, they've marketed it, now people want it, but they got to get it to them. How does some of this specialized software help the businesses that want to start moving outside of their local region? What are some of those challenges they're running into?
Jim Harris:
Yeah. It's not just buying, right? Because you have products, you're importing from overseas right now there's tariffs, so that gets complexity. So how do you buy product at a good number in terms of cost? Buy the right amount? There's lead times on importing. We do have some wineries that grow grapes and put it in the bottle too. So from that standpoint, they're harvesting in the fall trying to predict their demand and where they're going to go and what products they should have and what varietal. So there's a lot of complexity when you're growing a product as well as importing it because dealing with the wineries then on the other side or the distilleries. Distilleries obviously have a different... If they're doing white spirits, obviously they can sell it faster, but if it's brown spirits, they're putting it in barrels for multiple years and sometimes even longer, decades, to get their product out.
So there's a lot of, in the background, my focus has really been on the distribution side, like you said, Matthew, I've really focused on, okay, now you have it in your warehouse, how do you get it cost effectively out to the retailers and restaurants out there? How do you get it merchandise correctly and deal with all the complexity of the legal framework? Because every state's got different laws on how you go to market, what you can do, what you can't do, how you can price. There's a lot of different tax layers that are involved. So it creates a lot of complexity for a system to track all that. And what I've found over the years, a lot of people still do things in spreadsheets and that's not really effective systems, it's more of a trade for analysis, but it's not great for systems. So building it all in one place so that you have one source of the truth and you can really track what it costs you to do business.
Matthew Shipp:
So this software also tracks and keeps track of all the local regulations and federal regulations as well?
Jim Harris:
Yeah, so there's reports that the state and local authorities require you to send and we can build those in as standard reports. So at the end of the month you look at, and a lot of them are tied to gallonage, how many gallons you sold of a specific product and what proof it is. So spirits is generally a higher tax rate than wine or beer, which are lower alcohol percentages. Not sure why they did it by alcohol percent, but that's the way it came out of prohibition that that's where the way they were going to tax it. So yeah, you can build reports out. So I was working recently with an importer that sells a lot of stuff to a big chain, a retail chain and they're in 20 markets. So they actually every month have to fill out a gallonage reports in each one of those states even if they didn't sell anything that month. They have to send them something because the state's trying to keep track of all their taxes.
Matthew Shipp:
All right. So take us kind of through what's really involved between, you have your beverage in the warehouse, your spirit in the warehouse and somebody buys it. So you have warehouse, the buyer and then the distribution. What are they running into as far as the challenges and what are some of the solutions people are looking for to streamline when it comes to doing this?
Jim Harris:
Yeah, great question. There's just way too many products right now. There's so many wines and spirits. It's amazing when I see a new ready to drink, RTD, can come out with some rosé or something. It's amazing the barriers to entry to start in the alcohol beverage space or pretty small. You can blend something, get a co-packer to build it or buy wine in bulk and put it in a bottle. There's lots of ways to do it. The next tier up though, when you want to scale is really hard because stores only have so many slots on their shelves. Same with retail chains like Kroger and Albertsons. And then on the restaurant side, they have pretty limited menus.
And I would say, from what I'm seeing after COVID, a lot of the menus got smaller because they realized, hey, if I'm selling 15 wines, why do I need 50 that I'm carrying? I have cash that's tied up in the back room holding onto these bottles that I'm selling these other 10 things or 15 things really well. Why do I need to give that biggest selection? So I think it's getting harder on the wine side.
Spirits still has the back bar, still has the wine list, the well. But yeah, those spades are really hard to get and it takes a lot of touches. So it's a very interesting process. So the big brands obviously have distributors that are very well suited to going to every store and restaurant in the state and getting distribution. The smaller guys usually try to pick off top 200 restaurants, top 50 retailers. They're just trying to get where the traffic is and not concerning themselves so much about getting everywhere.
Matthew Shipp:
So if you're not trying to get everywhere, you're just trying to get in these specific places, I'm sure tracking all of this is very important to your business where purchases are coming from, where distribution needs to go to. Is that another piece where the software does help?
Jim Harris:
Oh, totally. Yeah. So for a distributor, when they're sending products out, obviously we're tracking the invoices, the customer's paying and all those details. But what's really interesting about the wine and spirit business is because if you make a product, you can't sell it directly to the store or restaurant. That was one of the prohibition rules from the 1930s. Distributors share their information or who they sold it to and how much with their suppliers. So a winery can get data on who's buying it, where they're buying it and how much. It's a double-edged sword.
It's great for the winery or the liquor company to know that the problem is that you're distributor, they're coming down and you say, hey, it's middle of the month, we're behind on our numbers that we thought we were going to get. And so they get a lot of pressure as a distributor from their suppliers to ramp up their sales. And the distributors also got the retailers and restaurants asking them for favors and special agreements and all those things. So it's really interesting business and there's a lot of balance of power. But honestly, Matthew, you hit on the right thing. Data is where it's all at. Who controls the data matters the most.
Matthew Shipp:
Okay. So let's go into that a little bit. So you were talking about it gets really challenging when you're trying to scale, and I'm assuming when you say scale, you're trying to get outside of your region with your distribution. Take us through some of those challenges you run into and how knowing your data can actually help speed that up.
Jim Harris:
Well, because a lot of smaller companies think about their costs, so they get it, they build a line or they make this still product, whatever the product is, they get it there and they go, okay, it costs me a $1.50 per unit. And they go, well, I want to make $3 per unit. But they don't realize when they sell it to distributors should we wants to make... They have to ship it to them. So you got your shipping costs, you got taxes, so that adds 20% and the distributor wants to make 30% and now you sell it to the retailer and they want to make 30%. So now all of a sudden there's no room. You can't sell it for $3, you've got to sell it for four or five.
And then when it actually gets on a shelf, you still have to tell the consumer about it. You still have to do events. You still have money that you have to spend in that market to get the consumers to be aware of the products so they buy it. So there's a lot of expense that people think once they build the product, they're done. And that's really just getting started. And even when they get into a distributor like, oh, I'm happy I got a distributor. Distributor has no incentive to sell your product, they have 10,000 items in their warehouse or 5,000, you're just one of them. You have to show that the consumers are going to pull it.
And that's why I've seen a lot of them move to private label. A lot of the big retail stores are buying product that are unique to them that no one else buys. They put a label on it, they buy it, they put it in, they get it at a better price so they can get more margin on it and they promote it. And so they have incentive because they own the brand. You can't go down to another store down the street and buy it. So seeing a lot of move to that. If you look at Total Wine & More, one of the biggest retailers in the United States for they sell almost a huge majority of their volume is their own brands.
Matthew Shipp:
Oh, is it now? Okay. Just white label is from somebody else?
Jim Harris:
They bring it in for Tito's and they sell you Tower Vodka, it's right next to it, at $2 cheaper. And they have really good salespeople, so they buy some nice wines that are brand name, but right next to it are something from Sonoma that's the same everything except $2, $5 cheaper and it's there-
Matthew Shipp:
Different label. Wow.
Jim Harris:
You got to really think about what the incentives are. Retailers have to make money. It's a hard business, it's very competitive. Everyone's got to make money. So as a brand owner, you really have to look through the whole process and figure out what your true cost is going to be and then figure out if it's worth it. I'm seeing more brands get smart instead of going wide and go 3, 4, 5, 10 states, they just try to do one or two states to just go get full coverage. And that makes more sense. And then also you don't need 20 SKUs. I mean, look at Tito's Vodka, what a great growth story over the last 30 years. They only have four or five SKUs. They got one brand, no flavors, just a couple different bottle sizes and they have really taken over the vodka aisle because of that.
Matthew Shipp:
And just because they simplified down, they were able to go nationally much easier?
Jim Harris:
Yeah. I think if you're a distributor or retailer, it's a lot easier to carry them because when you look back in the late '90s, early 2000s, there was a bunch of flavors out to vodka and the shelves faced for flavored vodka and there was like know marshmallow, watermelon.
Matthew Shipp:
Oh geez. Okay, yeah.
Jim Harris:
Who needs all these? But they were all on the shelf. And so created these massive things and vodka was a really hot commodity there for the flavors because when you mix it with something there's a flavor there, it tastes better or it has a unique thing, but it also creates a ton of complexity. Because you have a 750, you have a 175, so you have small, medium, they have the smaller, the airplane bottle. So how many different SKUs do you have? It creates a lot of complexity in the warehouse and ties up a lot of cash. You got to build those things out. You got to put them in a warehouse. So accounting for all those, understanding the market for them, getting the shelf space. Yeah, it's not for the faint of heart, this industry.
Matthew Shipp:
Interesting. And now a word from our sponsors.
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That brings up an interesting question. So since now, like I said, the RTDs and the beverages in this market, there's so many of them, you stated that right at the beginning. And now the system is sort of set like who's national is national. Who's local stays local. Is it becoming more of a patchwork pattern like that? Or is everybody's goal to go national again with their product? Or is the trend more now pull back, go regional, go into your neighboring states and you're still going to be just as successful as somebody going national, just because they're already at that stage?
Jim Harris:
Yeah, I think a lot of it's really tied together with how much money you can raise and money's gotten so much more expensive that it's very hard to get enough money to go national now. I think it makes more sense to grow more organically, put some money into the markets that you can control, put the right feet on the streets so that you can get pull through by the consumer. So you look at a brand like Surfside, which is not in that many states, but it's one of the top-selling RTDs for spirit based RTD. It's done a great job. They're not in that many states. There's a couple of brands like that that have really been much more methodical about their rollout and not worry as much about national.
I'll be honest with you, I mean I've worked with a lot of distributors out in California over the years and suppliers, people are like, I got to be in California. It's the biggest market. It's also a really hard market to do business in. It's really expensive. It's enormous in size. Just to get that reach there's so many complexities to it. You might be better in Ohio or better in Iowa trying to build a brand where you don't have as much competition and the costs aren't as high. So I think people have seen that in places like Texas and Florida. And I'd say New York's pretty tough too because of how dense it is and it's expensive to deliver there. But lots of people doing it, a lot of people are making some decent money on it and it's going to keep changing, that's for sure.
Matthew Shipp:
Interesting. So if you're wanting to now go multi-state, so your neighboring states, what is one thing a company can do for themselves right now before they go all in to say they're going to do this? What things do they need to self-evaluate?
Jim Harris:
Obviously the demand for that market or their go-to-market strategy in that. But from my perspective, they really have to figure out their software. I mean a lot of people start businesses on QuickBooks and that's fine for bookkeeping or doing a business