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Differentiate Now, and then Stay Focused!

While it’s always interesting to look at dynamic new businesses and rapidly growing ones, it can also be quite interesting to look at mature businesses, and observe the things they do to stay competitive. Very often, the choices they make leave the door open for others to capitalize on opportunities they neglect. Consider the business of wine and liquor distribution.

Since the repeal of prohibition in 1933, alcohol sales and distribution have been highly regulated, operating in a “three-tier system,” where large producers and suppliers must sell their goods to distributors (often much smaller and more localized), who then sell to retailers (stores and restaurants).

There has been a trend recently where large national suppliers have mounted efforts, often through the courts, to consolidate distribution by selling through fewer distributors. “Lawsuits involving the country’s largest liquor suppliers began piling up in federal court…in recent months as they seek to end deals with local distributors.”1 The legal battles hinge upon challenging the smaller distributors’ status as franchisees, while the large producers consolidate distribution through fewer “megadistributors.”

In order to stay competitive, the suppliers are desperately trying to reduce cost — by reducing the number of distributors they have to sell to and ship to. It’s the same “super-franchise” approach that many other mature industry companies are employing, from the auto industry to the restaurant business.

Recently, we had interesting discussions with a very small local distributor (they requested anonymity) who sought to enter this mature business — but NOT by competing on price and volume. They recognized that the only way to enter into such a mature business was not to actually enter it at all, but to create a different concept in the field of wine distribution. They saw that the needs of high-end wine buyers had become very much neglected as mature distributors increasingly shaved costs.

So a few years ago, they decided to only offer wines that were high-end, exclusive, difficult-to-find, and that were only available in small quantities. They targeted the top five to ten wines at any venue. They deliberately did not seek to compete on volume. As the plan developed, they trained salespeople to provide a personal approach, offering private wine tastings like a sommelier, delivering partial cases, often on short notice, etc. — all services that the bigger distributors just couldn’t provide (too costly in terms of time and efficiency).

They reconceived the model: while everyone else was cutting price and seeking large volume purchases, they did exactly the opposite. They sourced expensive, reputable wines from small vintners, priced them very high, and salespeople carried premium-looking wine lists with tasting notes as sales tools — while competitors sold from spreadsheet printouts.
Of course, every new concept ultimately grows and matures, too, but hopefully not until after some good success. After a few years, our little wine distributor began to stray from its focused position. Salespeople started begging to offer lower pricing, more accessible wines and larger quantities. The company gradually began slipping from its strong position (on the red curve on the second graph) back up into the mature and more competitive top curve (first graph). Competing on price (and therefore constantly fighting against cost) began to become the focus. The company began to struggle, losing its ability to differentiate, and unable to compete against larger distributors.

Not all of this was easy to see as it was happening — the shift came in very small ways, and slowly over time.

One thing is clear now, though. In many states, wine and liquor distributors are lobbying for legislation that will secure the status of the smaller distributors. Legislators are scrambling to pass laws that will preserve the integrity of the three-tier system. How the new legislation plays out is going to be interesting. If there is a regulatory climate shift favoring the independence of distributors, there will be a great opportunity for our little wine company to re-seize its position as premium wine distributor.

Differentiation is everything. There is a clear distinction between the premium, “top-of-the-list” wine distribution business and that of all other wines. “Get ‘em in cheap, and turn ‘em in volume” is a very different business than “Get the best, be the only one offering them, and sell them at very high prices.” The very fact that the larger distributors can’t see this (remember, their eyes must be turned inward, working to reduce operating costs, all day, every day) means that the opportunity could be ripe for the taking.

So even mature businesses can present exciting opportunities, but the opportunities usually derive from NOT entering into the mature businesses. As businesses mature, they typically cease serving customers' most expensive needs in order to keep costs low enough to stay price competitive.

But by looking with fresh eyes, and seeing unique ways to meet these needs, managers can seize great opportunities for business differentiation. Even then, it takes tremendous discipline and focus not to stray. You can’t be all things to all people, but you must be something specific to someone specific.

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1Lisa Brown, “Major alcohol suppliers, local distributors face off in court,” St. Louis Post-Dispatch, April 14, 2013.



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