How Are Beverage Alcohol Companies Coping With Higher ...

[Pages:4]finding efficiencies in shipping

How Are Beverage Alcohol Companies Coping With Higher

Transportation Costs?

By Garrett Peck

R ichard Shaffer recently got a great, big surprise from UPS. The owner of Israeli Wine Direct, a company that imports wine from Israel and sells it directly to consumers, restaurants and retailers, received UPS's rate card that showed a 30% increase in shipping costs. Fuel prices are directly impacting the nation's shippers and they are passing those costs along to businesses and consumers. "It has the potential to eat your business from the inside out," Shaffer remarks.

This year, the price of diesel fuel swung violently from $2 to $5.50 a gallon, then crashed back down again recently. While we may be enjoying a temporary reprieve, unfortunately, higher energy prices are inevitable.

Unquestionably, alcohol is heavy-- both from the liquid and the glass containers. Yet businesses in the industry have adopted the best practices to cope with higher transportation costs while shortening the global supply chain. They have found that sustainable solutions not only lower costs, but also protect the environment.

Stepping Back From the Edge

Although alcohol is more recession-proof than other goods, that doesn't mean the industry hasn't suffered. Delivery companies resorted to surcharges to pay for the rising cost of gasoline. "Everything comes in with a fuel charge now," laments Phyllis Valenti of Georgi Vodka. "The glass, the liquor. I just think that all product categories are going to have to go up next year."

Distributors carry the highest shipping costs, as they have to move the product from producer to market. "A lot of the costs are the costs of the distributor," remarks William Terlato, president and CEO of Terlato Wines International. "Mostly what they're doing is passing along delivery surcharges, passing that along in the sale of the product or the delivery of the account."

Lisa Laird Dunn, VP of public relations at Laird & Company, maker of Applejack, notes how much the distiller has been im-

pacted by higher costs: "The main increases effecting Laird are natural gas, diesel, corn and the weak dollar. Unfortunately, it is not possible to mitigate. We are only able to offset by raising prices." The company has raised prices, but also absorbed some of the cost. It constantly checks shipping rates among freight carriers to find the best deal.

Fuel prices have likewise impacted Southern Wine & Spirits, the nation's largest distributor. "In most markets across the country, we have purposefully avoided arbitrary price increases in favor of modest fuel surcharges that can be tempered as fuel pricing conditions change," says CEO Wayne Chaplin.

Distance is Money

It's simple: the farther the product is from the market, the more it costs to ship. Freight charges have a big impact on prices. For example, a product bottled in New Jersey and shipped to California will be much more expensive because of shipping.

As fuel prices spiked last summer, businesses began looking at alternatives to shipping their products to market. The trucking industry came under heavy pressure, making it difficult to justify long-haul transportation via truck. The railroads are seeing a boon as transportation shifts to them. Railroads have a significant advantage in fuel cost, as they can transport goods for one-third the fuel as a semi. Even the nation's canal system, including the Erie Canal, is seeing a strong rise in traffic, as they cost far less to transport goods. Goods shipped by barge can cost less than

half of that by rail. Companies that ship long distance by rail simply use trucks to provide the short haul or last mile.

Chaplin notes that his company ships 40% of its merchandise by container ship, 40% by truck and 20% by rail. That ratio is beginning to shift. "Rail ? which can offer great efficiencies for bulk shipments ? is becoming a growing segment of our inbound shipments," he adds.

A checklist to efficiency

Southern Wine & Spirits is the largest distributor in the country and operates a large fleet of delivery trucks. How is the company dealing with higher transportation expenses? "We have pursued several fuel cost containment and efficiency measures across our network," says CEO Wayne Chaplin. "The majority of these efforts relate to our delivery truck fleet and include the following":

Reducing truck idle times to five minutes or less

Reducing maximum truck speeds to 60 mph

Piloting lighter weight vehicles and smaller footprint vehicles to reduce drag and improve MPG

Replacing older, manual transmission fleet units with more efficient automatic ones

Improving driver training and behavior patterns which will deliver better MPG and fuel efficiency

Outfitting trucks with telemetric devices that monitor engine function and report on vehicle and driver performance with an eye toward fuel reduction

Piloting bio-fuel and hybrid trucks

However, rail doesn't work for everyone. Jim Koch, founder of Boston Beer Co., has its main breweries in Boston, Ohio and Pennsylvania. "That gives us lower freight," he says. He notes that not all distributors can handle rail freight, so he often ships Sam Adams by piggyback. "Rail is trickier with a perishable product. It's not a perfect substitute."

Shortening the Supply Chain

Every company has to ask this fundamental question: What can we do to shorten the supply chain? Companies are starting to produce their goods much closer to the final destination. Companies with regional production, such as Anheuser-Busch InBev with its 12 breweries nationwide, benefit from lower transportation costs, as its products are closer to consumers.

As the world's largest brewer, A-B's energy bill is high. Tim Armstrong, vice president of the Transportation & Logistics Divi-

This truck-based system offers a cost-effective alternative to "brick and mortar" warehouse distribution operations.

Figure A. Multiple Fixed location warehouse distribution operations Figure B. Single-warehouse hub and spoke-style distribution operation

from Demountable Concepts, Inc.

Anheuser-Busch, Inc.'s Bio-Energy Recovery System

sion, points out how the company is working to reduce load weights on trucks. "As a way to get the maximum amount of beer on our trucks, we are reducing load weights by using plastic pallets, which are 10 pounds lighter than wood pallets. For a truck with 24 pallets this gives us a load with 240 pounds more of beer," he explains. The company is also using more trucks with "super single tires," which have 10 tires rather than 18, saving about 800 pounds and improving fuel efficiency by three percent.

ITW Hi-Cone designs packaging systems for beverage companies, including brewers. Because many customers demand a quick turnaround, rail isn't always an option, but the company still has found efficiencies in shipping. "We took a hard look at how our products are packaged for shipment and optimized the number of units on a pallet," says marketing manager George McClory. "As a result, Hi-Cone will ship fewer trucks in 2008, saving fuel and reducing emissions." By optimizing pallet loads, the company expects to reduce shipments by 20%. The company also utilizes a freight management company to support logistics and negotiate lower rates.

Small companies don't usually have the same bargaining power as large compa-

nies, but they can also be more nimble in responding to market changes. First Vine is a Washington, DC-based importer of French wines. Co-owner Tom Natan is paying a 25% fuel surcharge between the port of Philadelphia and his DC warehouse. Natan notes that his shipment cost is as much as $1.85 per bottle of wine. "Somewhere in the supply chain, people are just going to eat the cost," he says. "Retailers are going to want to keep that edge."

Still in his first year as an importer, Israeli Wine Direct's Richard Shaffer is already retooling his distribution model. Currently his wine is kept in a warehouse in Benicia, CA, and it is mailed there to customers around the country. However, with the new shipping rates, that is becoming prohibitive, especially since many of his customers are in Illinois and New York. Shaffer is shifting half of his inventory to St. Louis. This will put the wine closer to his customers and reduce his shipping costs. He's considering leaving part of the wine in Albany, NY to bring it even closer to East Coast customers.

Terlato is looking into possibly shipping imported wine in bulk, then bottling it here. That is one way to cut the weight, and thus the shipping costs. On the other hand, bulk wine is known more for mass

market products, and Terlato is still uncertain if its high-end wineries will accept shipping in bulk.

Innovation in Shipping

Detroit is still years away from producing fuel cell technology. Even then, companies will have to gradually replace their fleets with new trucks. That may revolutionize transportation one day, but until then, the internal combustion engine is what we've got. Diesel is certainly more fuel efficient than gasoline powered engines.

In an era when companies are trying to decentralize operations, reducing warehouses might seem counterintuitive, especially for distributors. But that's what Demounted Concepts proposes. Their idea is to consolidate regional wholesaler warehouses into one facility, then use semis to distribute in-region. These trucks carry several specially designed bodies; at the regional distribution center, they are offloaded onto smaller delivery trucks, while the semi can be reloaded with empty bottles for the trip back. It becomes literally a "Warehouse on Wheels."

"We're getting a lot more requests because of high fuel costs," notes president Rustin Cassway. Distributors that once dispatched three trucks can consolidate on one truck with three bodies attached. The distributor saves money by economizing on fuel and needing fewer drivers. In addition, Warehouse on Wheels can eliminate crossdocking at intermediate warehouses. This further streamlines the delivery chain, eliminating one more step in getting the product to market, and thus reducing cost.

Southern Wine & Spirits "has worked within its own network to reduce or eliminate the storage of products across multiple facilities in a particular market," says Chaplin. "This reduces the amount of secondary and tertiary moves between facilities." The company is now taking delivery of product directly from manufacturing plants to eliminate intermediate storage.

Save a Can, Save a Planet

Consumers are becoming more mindful where their products come from. Pollster John Zogby pointed out in The Way We'll Be that today's young generation is "the first to bring a consistently global perspective to

Fetzer's study uses a holistic approach to break down the entire life cycle of its bottles:

everything from foreign policy to environmental issues to the coffee they buy, the music they listen to and the clothes they wear." Adopting sustainable energy business practices is not only sound for the environment, it's a necessity for reducing costs while also appealing to the values of consumers.

Anheuser-Busch InBev is one of the world's largest recyclers of aluminum. Since the program began in 1978, the company estimates it has recycled more than 460 billion cans. Megan Daum of the Can Manufacturers Institute points out that this saves a tremendous amount of energy: "Using recycled material in new aluminum beverage cans uses 95% less energy and produces 95% less greenhouse gas emissions than making cans from virgin materials. Americans could save $3 billion worth of energy each year by recycling cans."

Over five years, A-B has reduced water usage by seven percent, saving 4.7 billion liters of water. Its Bio-Energy Recovery System (BERS) pulls biogas from wastewater, and then coverts this into energy for use at the brewery. This provides an estimated 15% of a brewery's power. The company has also launched a new website, , to help communities develop their own recycling programs.

Other companies are finding ways to generate their own energy. Constellation

Brands, the world's largest wine company, is installing a solar power system at its Gonzalez Winery in Monterey, CA that will generate half of the winery's energy needs. Terlato is likewise considering building a wind farm over its vineyards in Santa Barbara. One

site is too windy to grow grapes, but it may generate electricity to power the winery. "We need to take advantage of the natural advantages we have," remarks Bill Terlato. Packaging is at the forefront of a trend to reduce energy consumption and lower shipping costs. Some retailers are even introducing scorecards to force their suppliers to use less packaging, according to Minal Mistry of the Sustainable Packaging Coalition. "This type of an approach can be dual edged ? there

may be greater product damage when the primary package for a product is reduced, thus requiring more secondary packaging for shipping," Mistry comments.

Fetzer Winery, owned by Brown-Forman, introduced a bottle in October 2008 that is 14% lighter than its earlier bottles. It weighs 15.5 ounces when empty, and as Fetzer ships 23 million bottles each year, this saves 2,200 tons of glass and reduces its shipping costs. Watch for additional wineries to follow suit.

Like it or not, we are stuck with high energy prices going forward. Gas prices did come down in fall 2008, but that is only temporary: China and India have emerging middle classes who want cars, and there's just too much demand worldwide for the existing oil supply. Prices will rise once the global economy starts growing again ? count on it. If the gas tax is raised, or a carbon cap-and-trade system is ever developed ? and there is a growing political will behind both ? then expect energy prices to go much higher.

Americans are resourceful. We'll find new ways to conserve and be more efficient, and over time we'll find new sources of energy. If there is a positive to this crisis, it is that Americans are seizing the opportunity to adapt, and we're open to new ideas. Given high transportation costs, enterprises must adjust their global supply chains to reduce costs and energy use. Wise businesses will plan accordingly.

Garrett Peck is the author of The Prohibition Hangover, coming soon from Rutgers University Press. For more information, go to:

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