One of the most important considerations when looking to work with a UK spirits importer and distributor is ‘what is this going to cost’?
With over 2,675 wholesale and distribution businesses in the UK the UK alcohol market is very fragmented. Distributors play a vital role in connecting spirits producers with a ‘route to market’, in other words, enabling access to the key wholesalers who often act as gatekeepers for large swathes of the market.
We’ve talked about why you might want to work with a spirits distributor in a previous post where we outlined the benefits of working with one, and some of the things to look for when choosing a distributor to work with.
The fees distributors charge are quite varied so this post should help you navigate those important commercial decisions when you are looking into which spirits distributor to choose.
What do distributors charge?
Distributor markup is when distributors raise the selling price of their products in order to cover their own costs and make a profit. A distributor margin can be from as low as 5% to as high as 40%. Traditionally distributors would have made their profit in this way, purely on the margin they make buying the product from the producer and selling it on to their customers.
In the standard supply chain of manufacturer to distributor to end customer, the constant challenge for distributors is what margin to make to make a profit, maintaining a consistent shelf price/RRP in the market and staying competitive.
Traditional Margin Based Model
Working on a margin based model works for some distributors who already have large established brands in their portfolio. They will make a significant proportion of their profits through one or two widely distributed brands. This may prove attractive for brands looking to work with a distributor however it should be approached with caution.
As mentioned previously, a new brand entering their portfolio might find their distributor focusing their attention on the darlings of their portfolio. It makes sense for a distributor to focus on brands which deliver the most profit, especially if they own the brands or have a stake in the brands themselves.
The UK spirits market has changed unrecognisably over the past 10 years and so the ways distributors operate has had to reflect this. Competition has squeezed producers and distributors profit margins making this ‘margin only’ model increasingly unviable.
Changing Times
Distributors can’t work on a margin model from day one because with zero sales, income for a distributor is £0. In this situation distributors cannot justify taking all of the risk and investing huge amounts of their time into growing a brand. Companies need to invest in the future of their brand whether that is through employing sales personnel, deploying marketing budgets, or other initiatives, and work alongside the distributor to grow the brand.
So how has spirits distribution changed?
According to Statista.com the revenue from spirits sales in the United Kingdom in 2021 was around £8.99 billion and with around 133,400 licensed on-trade premises in England and Wales (pubs, bars, clubs, hotels, restaurants). Not to mention with the off-trade (retailers) accounting for 70% of all alcohol sales in the UK…. the market is vast.
A Crowded Market
The UK market is also one of the most competitive in the world. As reported in The Independent In January 2022 the number of UK distilleries rose 16% in only 2 years, up from 710 in 2020 to 820 in 2022 according to The Office of National Statistics. This is part of a wider global trend towards craft spirits. As highlighted by the Unleashed Trends for 2022 Report ‘craft distillers are now an important part of the overall industry, as more and more consumers seek out premium beverages, with new, interesting, and organic ingredients’.
London is seen as the shop window of the world when it comes to spirit brands. Most premium brands want to be seen in the top London bars and hotels. This adds even more competition to the already crowded UK market.
Compared to other consumer goods, alcohol is a relatively low value product. It may surprise you that the average price of a 70cl bottle of spirits in the UK in 2020 was £14.85 and as UK excise tax makes up roughly 76% of the average 70cl bottle of spirits this means that distributors are keenly focussed on selling spirits in high volumes. This isn’t always a good thing for producers. If you are trying to build a premium spirits brand then you don’t want to be chasing volume in areas of the market which may cheapen your brand.
The dynamic and exciting UK spirits market is great for consumers but the competition has made generating sales volumes of a new premium product extremely hard and time consuming if you want to build a brand for the long term.
More sales staff and energy into marketing and brand building is required for the distributor to grow visibility and sales of their range. This can no longer be covered with a 10-15% margin, so the distributor has two choices:
- Increase their margins to cover their increased cost of business. This isn’t always practical because products typically have a retail price (RRP) which is set, or a limit the consumer is willing to pay for a 70cl bottle of spirits. Without reductions elsewhere increasing the distributor margin will increase the RRP and make them less competitive against alternative products.
- Charge brands for their services. Many UK spirits distributors have added a paid element to their services. Especially in the premium sector, this allows premium brands to access the services of distributors, allowing them to make a profit when the brand is being established.
What services do distributors offer?
The basic services of a distributor are:
- Assisting with the growth of spirits sales by introducing a brand to their existing customer base through their sales team
- Access to key wholesalers and retailers
- Advising on the best ‘go to market’ strategy
- Setting the price value chain for the market
- Arrange the importation and logistics of getting your products into the UK, storing the stock locally (under bond) and then delivering to customers
- Paying duty once stock is sold
- Manage stock inventory, placing and receiving orders,
- Manage accounts payable with customers
- Reporting back to brands
If you are looking for a more bespoke service to help grow your brand then some distributors offer services like:
- Brand marketing
- Brand ambassadorial services
- Amazon management
- Digital marketing.
Working with a distributor in these areas can be a good option for a brand as you access their expertise with the costs shared across multiple brands rather than taking on the financial obligation yourselves.
So what can I expect to pay for spirits distribution?
As indicated above there are many variables which may impact how much a distributor might charge to distribute a spirits brand. Distributors need to cover their overheads and make a profit. Generally speaking in the UK there is an element of fixed fees to work with a distributor to cover some of their basic costs. This can be as little as a few hundred pounds a month to a few thousand depending on the level of service .
Distributors may consider a ‘margin only’ model depending on the level of existing sales. Some of the things a distributor will asses before quoting you on the cost of their services and the margin they will require are:
- Is your brand already available in the market and what volumes is the brand currently doing? Distributors will look at your volumes to determine potential income from existing sales. This is of course very much dependent on point 2 below….
- What is the pricing value chain and what margin can be made? If the product is already in the market then to some degree the pricing is already set to customers and there is a price expectation from consumers. A distributor will work through the price value chain to assess what margin they can make without impacting the market.
- What are the brand owner / suppliers expectations? If the brand is new and they want aggressive expansion, then that will require significant manpower to drive sales and building awareness.
- Existing team and UK resources. If there is already a local team in place to assist with growing volumes that will be perceived positively.
- What marketing budgets does the brand have to invest? All brands will need to have some commitment towards marketing and growing brand awareness. An understanding of what the brand is already doing, what it plans to do and the levels of investment available to support these ambitions will give the distributor confidence in the brand, as it will feed into awareness and sales growth.
Should I pay a spirits distributor to launch a spirits brand?
As competition grows in the UK spirits market, working with a respected distributor has never been more important. A professional distributor can really open doors to key customer segments that are quite often completely closed off to self-distributed brands. The proliferation of distilleries opening up in the UK has made buyers particularly strict on opening accounts with new suppliers. Coupled with economic uncertainty and the ‘permacrisis’ of 2022 many customers are extremely cautious about taking on new products and holding excessive inventory.
A distributor can also help overcome many of the regulatory and logistical barriers to entry into the UK alcohol market and support the sales growth of an independent spirits brand in a market where consolidation is becoming a growing trend.
A distributor can also help overcome many of the regulatory and logistical barriers to entry into the UK. They will support the sales growth of an independent spirits brand in a market where consolidation is becoming a growing trend.
Also, a distributor supports spirits brands commercially in simple but hugely valuable ways. Purchasing under bond saves the producer on upfront duty payments and they have the ability to store and distribute large amounts of inventory.
The ancillary services which distributors offer should not be overlooked. Investing into working with a distributor can realise significant cost savings by paying a fraction of the cost of a full member of staff to look after things like wholesaler management, brand ambassadorial services, Amazon management or digital marketing. We’ve discussed the potential downsides of working with a distributor in this previous post.
CONCLUSION
If you are a spirits producer it’s impossible to quote an exact amount for what it will cost you to work with a distributor. However, if you factor in a conservative margin of around 20% plus a contribution to cover their overheads then this would be a sensible place to start. As mentioned previously, if your product is already selling significant volumes in the UK, or you can convince a distributor there is huge potential for your brand then this will certainly be viewed positively by a potential distribution partner.
Do yourself a favour though… when approaching a distributor make sure you have the pertinent information they’ll need, readily available to share with them. You can read more on this on this post. They will definitely appreciate it and it will kick off the relationship in a positive light. They’ll be looking for things like:
- Whats unique and interesting about your products
- Your target audience and purchase occasion
- Evidence of existing volumes or previous sales, ideally by customer and segment
- The margin potential
- The support available (marketing budgets, support for sampling, point of sale, marketing, advertising support and market work support)
- Payment Terms (can you offer better payment terms than they provide to their customers?)
- Evidence of quality brand assets e.g. ‘sell sheets’, lifestyle images and any other promotional material
- Being proactive, responsive and organised will also really help to demonstrate you mean business!
We hope you found this info document an informative and rewarding read. After reading this we hope your interactions with your future distribution partner will be more productive and meaningful. If you are considering bbb drinks then we look forward to assisting you with the development of your brand and Phil Harding (bbb drinks Founder) would be delighted to hear from you via the form below.
Good luck!