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Nick Gillett: Wholesale at a crossroads – which way now?

Published:  10 February, 2023

We’re now at a crossroads in the UK. I don’t mean economically or politically. I will leave others to comment on that. Having worked previously for a wholesaler and now as a distributor, it’s the changing wholesale drinks market I want to discuss.

Evolution within the market is happening and continues to gather pace. This will really affect how we do business and how brands make decisions regarding accessing the market; and ultimately impact the most important person, the customer.

The drinks wholesale business in the UK is big business. Those clever guys at IBIS World reckon that the UK alcohol wholesale industry market is worth £15.8bn in 2023.

And despite all the news of the past few years – Covid-19 and Brexit – this market has grown 1.8% every year since 2018.

What does good look like?

At a very simple level a wholesaler acts as a consolidator. It allows outlets to have one point of contact and one delivery from multiple producers and suppliers – it simplifies their operations. The great wholesalers have the smoothest logistics operations, making business seamless for their customers.

What is it that makes a good wholesaler from a customer perspective? It is the range and quality of products, obviously price competitiveness and the service levels – a fine yet heady mix.

Wholesalers’ salesforces cover a whole range of products, typically around 5,000 strong. These may be across a number of categories requiring a wide knowledge base, or specialists who focus on one particular category or a technological solution to help disseminate key information around product qualities.

From a customer perspective, the best ones are those that I can call late at night and the problem is sorted the next day. Or those that deliver the right stock at the right time for their end customers, like the bars in the manic run-up to Christmas.

However, it’s changing. I hate to say, “in my day, it was better”. I don’t think it is better or worse, but it isn’t the same.

So what’s happening?

Wholesaler margins have been under pressure as consolidation and market share have dominated; their markets are intense and the competition fierce. This drives a search for additional revenue streams and value.

Some wholesalers are evolving on what they do and who they are and looking to represent products and become their own importers and distributors. This is where the identity crisis begins.

Wholesalers can’t stock every single product in the market, they physically don’t have the space, it ties up too much capital and they are there to service customer demands not create brand markets.

Distributors and agencies are single minded and focused on creating customer demand and would love to work with every wholesaler getting the product delivered to the end user. So, when wholesalers take on brands, they have a focus – a preferred status if you like – and whilst this can help brands initially, they can only ever grow their brand within their own customer universe. Even the very biggest don’t supply everyone.

At best, your focus and pressure exists on wholesaler sales forces to push certain brands. At worst, the attempted switching of business or refusal to carry brands distorts the market, and in an instant, a brand’s route to market is shut down. Closed off. Blocked. Gone.

Whilst I understand the logic and the attraction of bigger margins, this could be the beginning of the downfall of the wholesalers. If you take a look over the pond in the US, you can see what’s happened there. There are only two or three national wholesale players. With their vast portfolios, many have preferred brand status. Quite often, smaller challenger brands and new entrants have given up on the wholesale model and the market has begun to dream up ways of getting round that.

This all means brands are setting up their own distribution companies and finding new channels to bypass these massive wholesalers. The UK is the same. The number of brands selling direct to customers has grown exponentially. The emergence of consolidators and virtual wholesalers have all found willing brand partners who have been put off by listing fees, disappointing sales, lack of focus or closed doors from the established wholesalers.

This trickle is a mix of brands who really believe in themselves and smaller brands that are struggling to get their route to market sorted through the wholesalers. You can see examples of high profile brands that have shown this approach can work, but they are a tiny minority that have demonstrated it can be done.

I think wholesalers should be cautious. This could become a flood and will inevitably be led by the more premium, on trend brands that ironically would deliver more interest and margin to the wholesaler.

How does this affect the market?

Ultimately, this affects you. Not just you as a business, but the ‘you’ that you see each morning in the mirror that goes out for a drink. Yes, you!

It will affect your business as it means your great new brand can’t find a way to the bar or restaurant. And it will affect you too as it means the choice you get as a customer on a Friday or Saturday night out will be far less. Not good news for either of you.

My utopia is that all wholesalers would list every product that has demand. They make their margin by selling cases alone, and they are a truly neutral route to market, competing on service.

This means they don’t have any preferred brand status. They don’t have any side deals or funny volume related rebates and they don’t charge huge listing fees and make huge commercial demands which may influence their behaviour in a way that isn’t necessarily in the best interest of their customer.

The best news is those that are doing it well are thriving. They’re growing at a huge rate of knots, both in terms of volume but also margin. By teaming up with the sales teams of distributors and brands, they multiply their sales teams many times over and they present brands with a huge amount of in-depth knowledge. But it tends to be on a regional basis – maybe as their size allows them to be more flexible or perhaps the demands from their customers are different to the national behemoths.

Which way at the crossroads?

So which way does the market turn at these crossroads? Wholesalers need to make margin, but do they try to be all things to all people or do they specialise in one essential discipline?

I suspect we might see a split in the market with the smaller, more agile wholesalers becoming ever more focused on service and interesting products, with the biggest players trying to be importers, distributors and wholesalers, but focusing on the biggest customers and brands as they want both efficiencies and scale. It gets more challenging with fuel costs and congestion charges, as you need big fleets and a lot of warehouse space now to deliver to the nationals. So, everyone has to specialise a little bit more.

Looking into my crystal ball, I reckon we will see two things. At one level, I think we could see some market consolidation. But then, perversely, we might see some of the bigger players break-up their businesses into different divisions.

There is a great future ahead. If wholesalers return to being profitable, neutral logistics platforms that can add value by giving advice, I think they have the chance to grow. With that, they can then support the industry to become even more competitive.

If they don’t… well, I suspect technology and the rise of the smaller regional firms could make the market look very different. The small wholesalers who work locally and know what they are and specialise will succeed.