For Virginia brewers, self-distribution is on tap

There’s major competition brewing in the craft beer market.

Back in October, Anheuser-Busch InBev acquired SAB Miller for $104 billion, creating a megabrewer that’s set to control around one-third of the world’s beer market. The merger is driving up competition across the industry – especially for craft breweries, which today represent 19.3 percent of the industry.

Craft beer’s surging popularity — and its value to the overall market — hasn’t been lost on AB InBev. Two months after announcing the merger, the beer giant added three craft brewers to the four it already owned. (On April 12, it announced plans to acquire Nelson County-based Devils Backbone Brewing Co.) With AB InBev making inroads in craft brewing, competition within the sector is set to reach new heights.

To keep pace in a rapidly growing and highly competitive market, some craft brewers are turning to self-distribution models. But self-distribution presents significant challenges for small brewers, especially when it comes to business vehicle management. Craft brewers need to adopt a strategic approach to self-distribution in order to remain competitive – particularly in Virginia, where the craft beer industry is already rife with competition.

Competitive craft market fuels push for self-distribution

In Virginia, the pressure on craft brewers to evolve their business models doesn’t just stem from industry giants like AB InBev; it also comes from other local brewers. Over the past few years the state’s craft beer market has nearly tripled in size, growing from 48 craft breweries in 2012 to 135 as of November.

This significant industry growth is largely due to the 2012 passage of a Virginia state senate bill that allowed breweries to sell beer for on-premise consumption. Before that, only brewpubs had on-premise selling options, while breweries could just give out samples or sell beer to-go. The legislation also eased the requirements for earning a brewery license. Microbrewers’ ability to sell beer on-site increased their status as a customer destination, while the relaxed license requirements opened up the market to more startups. It was a recipe for a flourishing and competitive industry.  

Then, last October, AB InBev merged with SAB Miller, and the beer monolith soon began growing its craft beer portfolio. It also rolled out a plan that incentivized distribution of the company’s brands. In Virginia, AB InBev’s craft deals and distribution incentives have added another layer of difficulty to an already highly competitive marketplace. With AB InBev increasing its pull with distributors, some Virginia craft brewers are looking beyond wholesale contracts to self-distribution. But that comes with hurdles that require a strategic approach.

The recipe for successful self-distribution

Virginia microbrewers that adopt a self-distribution model can reap significant benefits, including closer relationships with retailers; broader direct market access (Virginia law allows self-distributing breweries to sell outside of the state); faster time-to-market; and better product quality and brand image control. These advantages can give craft brewers the competitive edge in a crowded industry. However, not all brewers considering self-distribution have a strategy to manage adoption. Here are some of the key challenges associated with self-distribution – as well as possible solutions:

● Challenge: Establishing a fleet. One of the main reasons small brewers rely on third-party distributors is because of the risks and costs associated with establishing a business vehicle fleet. First, the average fleet vehicle will have to be replaced every five years – a frequent and significant expenditure for small businesses. Second, fleet vehicles create scalability hurdles for companies, particularly those with seasonally-dependent vehicle needs. Employee turnover – which is statistically high in field positions – also presents a concern. For companies with a large vehicle fleet, high personnel turnover creates issues with vehicle provisioning and deprovisioning. And often, fleet vehicles will end up either out of use or even completely unaccounted for.

Liability issues are also a significant concern. According to the National Highway Traffic Safety Administration, 64.5 percent of vehicle fatalities don’t happen during average business hours. However, businesses are liable for all accidents that take place in fleet vehicles. This means that any accident involving an employee in a company car (regardless of whether the employee is using the vehicle for business or personal use) is the business’ responsibility. This liability risk is the biggest and potentially most expensive challenge that companies with fleets face.

Solution: When possible, have employees use their own vehicles. There are situations where it may not be feasible for employees to use their own vehicles – for example, if large kegs need to be transported. Most of the time, however, a personal vehicle approach is a viable and low-risk alternative to a fleet. In addition to eliminating vehicle replacement expenditures, turnover-related costs, and scalability concerns, employee vehicle programs shift most of the incident liability to drivers. However, in order to have a successful employee vehicle strategy, businesses need to take a fair and accurate approach to reimbursement.

● Challenge: Managing employee vehicle reimbursement. Mileage reimbursement costs are often an organization’s number one distribution-related expense. Within the food and beverage industry, there’s not a uniform approach to handling this. Some organizations use a flat-fee approach (i.e. giving employees a set monthly allowance to cover gas and wear-and-tear), while others use a cents-per-mile program based on the IRS Safe Harbor or a customized per-mile rate. But a flat-fee approach creates an employer payroll tax liability, while a cents-per-mile program is best suited for shorter distance drivers, and both options lead to reimbursement inequities.

Solution: Fixed and variable rate reimbursement programs. FAVR allows employees who drive their own vehicles to be reimbursed tax-free for expenses that are both fixed and variable. Not only is this the most equitable reimbursement method for business drivers, it’s also the biggest cost saver for companies; the typical organization relying on a FAVR program can yield savings of up to $2,000 per driver.

One key advantage of the FAVR model is that it provides geographically sensitive reimbursements. This is particularly beneficial for Virginia, since the state’s vehicle insurance and gas costs are relatively low compared to other regions. In terms of vehicle insurance, the average annual insurance rate for a midsize domestic sedan is $1,342 in Richmond, Virginia. This is low compared to other cities like Chicago ($2,067, 54 percent higher) and Boston ($2,406, 79 percent higher). And as of February 2, Virginia’s average gas price was $1.657, below the national average of $1.790. Virginia has maintained comparable gas cost efficiency compared to the national average for the past year.

● Challenge: Managing expenses for traveling employees. For a traveling workforce, there are other expenses beyond fuel costs. From dining expenses – which average roughly $84 a day in Richmond, for instance – to meetings between company sales and prospects, there are a host of on-the-road costs that self-distributing brewers need to account for. Without a robust approach to expenses, organizations will end up sacrificing time and money to disorganized, overly complex legacy processes.

Solution: Implement expense management solutions. Expense management software simplifies travel reimbursement, reduces processing time, and provides businesses timely spend visibility stats that can help them budget better. Expense solutions are particularly critical for smaller brewery operations, many of which won’t have a dedicated team in place to process reimbursements. 

In Virginia, the booming craft market and the expansion of AB InBev should lead brewers to consider the benefits of strategic self-distribution. By implementing an employee vehicle program, managing travel expenses with FAVR, and deploying expense management solutions, Virginia craft brewers can maximize their self-distribution potential and retain a competitive edge in a crowded industry.

Donna Koppensteiner is senior vice president of business development at Runzheimer, a business vehicle, relocation information and expense management services provider located in Waterford, Wisconsin..