The Second Tier in U.S. Beer

You’ve seen the trucks pulled up outside a supermarket with their sides rolled up, a guy with his name on his shirt stacking cases of beer on a dolly.

Or maybe he’s outside a restaurant, wheeling in a couple ½ barrel kegs.

He is one of a crew of drivers among many crews of drivers spanning your city, your region—this whole country—getting fresh beer to the shelves for your enjoyment.

But unless one of these sometimes massive trucks gets in your way, chances are you rarely give the whole apparatus of distribution much thought.

Yet, distributors are a central part of the U.S. beer scene. Somewhat literally. Our “3-Tier” system creates a supply chain from brewery to distributor to retailer.

As DJ Spiess tells it, the whole premise of the middle-tier was actually a Prohibition-era attempt, first, to dismantle the power of the big beer companies, and second, to increase the price of beer so that consumers would have a disincentive to drink too much.

Of course, there are all sorts of unintended consequences of such a move, including the sensitive subject of distributors sometimes playing the same kind of oligarchic games the big beer guys used to do. (This isn’t an investigative piece, so I didn’t get into this question on my tour.)

But distributors have also developed new rationale for the value they provide. The big one, for them, is that by building a diverse portfolio of brands, they can level the playing field for all breweries. As long as there are no shady backroom incentive deals happening, at least, a distributor can sell a single account beer from many breweries, not just from their biggest supplier.

The other big value they point to is efficiency. Simply put, having one truck pull up and deliver a dozen brands of beer is more efficient than having a dozen trucks pull up.

Worse than Taken for Granted

As I reported in Craft Brewing Business, the 2016 convention of the National Beer Wholesalers Association featured some 2,500 exhibits and boasted 50,000 attendees from across the country. That’s a respectable convention, there, and that’s only the independent distributors.

It’s a major industry that, frankly, we take for granted. Worse, we prejudice ourselves against them.

We use the phrase “take out the middle man” to mean increasing efficiency by reducing the number of nodes involved in a transport process. There’s something intuitive about that. It’s the concept behind Sam’s Club and Costco, and it’s a concept some startup breweries would like to operate on. They think,Why let a distributor cut into our margin when we could just drive the beer to our accounts ourselves?

Well, I’ve met the middle man, and he’s a hard working guy (yes, they’re mostly guys. In my experience, women are more likely in sales, admin, or management than warehouse or delivery).Say what you will about the law, taxes, or choice, but don’t call distributors inefficient.

This is the story of what it takes for the second-tier to keep you in fresh beer.

A Peek Behind the Scenes

The Chicago Beverage Systems warehouse is off Chicago and Kilbourn in Chicago’s West Garfield Park neighborhood.

On the map it’s almost directly south and just a jog west of me, but getting there proved complicated, because Chicago. But they’re not there for the consumer’s ease of access, anyway.

After second-guessing Waze several times, I found my way to the right place right about on time, and . . . it was a warehouse.

A warehouse is pretty much a warehouse from the outside. Inside, however, the reception and conference rooms were both classy and comfortable. Lots of dark wood in the desk, shelves, chairs, and trim. I had a choice of several beer magazines to page through while waiting for Jim Doney, the president of the company, to come greet me and give me a tour.

It’s not that easy to arrange a tour, by the way. I had to go through the National Beer Wholesalers Association (NBWA), which represents independent U.S. distributors. We emailed back and forth for a couple months trying to find the right warehouse and the right date.

Jim and his director of operations, Mike Scully, were kind enough to give me nearly two hours of their time. They showed me around and answered all my questions, simple as some of them may have been. Sure, you can say they appreciate an opportunity for good press, but you can tell the difference between perfunctory and generous—Jim even gave me advice on the best way to get home.

A Big Operation

Chicago Beverage Systems can boast of having the largest portfolio of beers (and a few other “malt beverages”) in the area, delivering over 8 million cases annually to over 2,200 retail accounts covering roughly the eastern half of Chicago.

That big an operation requires a warehouse of nearly 300,000 square feet to accommodate multiple loading docks, at least two cold-storage rooms, and a fancy pallet-packing machine.

And yet they only keep enough inventory on hand for 18 days’ worth of shipments. They suggested their supplies were a little low due to the season and time of week, but it would still be hard to imagine Chicago going through so much beer in half a year, much less a couple weeks. Their MillerCoors cold storage room alone was pretty mind-boggling, with cases of Miller High Life and Coors stacked thirty or forty feet high (that’s an estimate; I’m sure it was within regulation) in a room several times larger than my house.

A MillerCoors House with a Healthy Dose of Craft

They’re a MillerCoors house, which means they don’t carry AB-InBev brands. It also means that, though AB-InBev is technically the larger company, Chicago Beverage Systems carries the best selling package in Chicago, which is Miller High Life 30-pack cans.

The exclusivity stops there, though. They carry several HEINEKEN and Constellation brands, for instance, in addition to many craft beers.

In fact, they showed me a cold storage room full of Boston Beer, Revolution, Half Acre, and other craft brands. “Ten years ago this wouldn’t have been here,” Mike explained. “This is part of our new contracts with some of our craft breweries.”

How to Save Good Beer

It takes a lot of space to store cases and kegs in aisles large enough for forklifts. It takes a lot of space to have loading docks with several bays. They also have three full-time mechanics who work in a niche wide enough to fit a couple truck tractors.

Then there’s a comparatively small “breakage room.” This was a surprise to me, but made sense as soon as they said it. Basically, whenever a package or container breaks, they take the good beer to the breakage room and hang onto it for a little while to see if they can’t eventually complete a new package. They even have branded six-pack baskets other boxes on hand for their highest-volume products.

While, again, this seems like good sense to me, it turns out it’s hard to assess whether the space and time tied up in possibly still selling these products is really worth it. Jim and Mike emphasized that their goal was, in effect, not to need this room very much at all. In fact, they aim for 0.1% loss rate. That’s fewer than one package for every 1,000 they move.

Now, when you’re moving 8 million cases a year, you’re talking about fewer than 800,000 broken packages. Most brewers won’t even produce 800,000 six-packs of beer for years, so you can see how that starts to add up.

A Picky Machine

Another major use of space is their Vertique system (pronounced VER-tih-kyoo). This is getting pretty behind-the-scenes, but I find it pretty fascinating the kinds of machines we’ve created to safely move these bottles and cans around the country.

Vertique is a palletizer, meaning it stacks cases of beer on a pallet, layer by layer, to a regulation height, then wraps it in stretch-wrap and sticks a coded label on it.

The tech behind any palletizer is interesting just because you have to get the machine to turn some of the cases one way, then turn the others the other way, and then to know when the layer is done and to move the pallet down for the next layer. The plastic-wrapper thing usually looks like a little carwash with rolls of film on either side which then either spins the pallet around or spins around the pallet.

What’s different about Vertique is its case picking, which allows you to load each pallet with a custom order of several different brands of beer in varying packages. There’s a whole system of conveyor belts on one end of the warehouse onto which workers load the cases. They drop down on something like a series of offset, broad pinball levers, only very gently, and in a specific order according to package size. They they are carried overhead and down to the actual palletizer.

That may sound like a lot of machine for something seemingly simple, but it means a handful of crew can pack thousands of cases per hour rather than each packing their own pallet one case at a time.

I used to work as a packer in a warehouse, and all I did my whole shift was to pick orders and box them up. I’ll admit that it was more interesting to pick different items for each order rather than just load a machine with one item, but it’s not hard to see how management would appreciate the speed of the Vertique.

Don’t Think Data Doesn’t Play a Big Role

Chicago Beverage is part of Reyes Beverage Group,which is in turn part of Reyes Holdings, the largest independent distributorship in the country. Reyes Holdings has a piece of a lot of food and beverage distributing and have become a pretty big deal in their 40-ish years—their companies distribute McDonald’s and Coca-Cola products, for example.

For the beer producer or consumer, the main interest in this corporate structure comes down to powerful data collection and sales apps. Chicago Beverage sales reps use two apps to help retailers understand the market; one is provided by MillerCoors, the other is a Reyes Beverage Group proprietary platform.

Both these apps allow reps to show clients how that client’s beer lists are performing compared to other Chicago Beverage accounts and to other regional and national accounts.

That means the rep can say, “Look, this brand sold well in this neighborhood in the last few weeks or so, but you’re not carrying it. Maybe you want to order a few cases and see how it does?”

That’s a lot of data and a sophisticated collection and analysis system.

Not “Just” a Middle Man

All these machines, storage rooms, and apps, together with their sales force, all centralized in one company, amount to the case for the middle tier.

I’m not interested in making the case one way or the other, here, but I comment on it because when I asked Jim Doney about the future of distributing, he didn’t talk about data or automation or social media or any of that. Instead, he said, “We need to continue to show our value [as] an efficient tier that provides maximum choice to retailers with an efficient delivery system.”

Mike Scully agreed and emphasized the value of the sales force in knowing local markets and nurturing relationships with retailers: “Every brand has its place in the market,” he said. “It’s our guys’ jobs to find it.”

 

I came away impressed with the sophistication and professionalism of the company, despite it also having a very approachable (i.e., unpretentious) feel. And these guys really do want to do right by their brands. They’re in an industry created by law, but they’re still looking for ways to not just fulfill a function but to provide real value for their suppliers.

That’s something that no one should take for granted.

Miller-Lite truck, Blue Moon truck, forklift, and conveyor belt images courtesy of Chicago Beverage Systems. Three-tier graphic designed by me from sources as attributed. All other images are my own.