My take on BUMP’s Most Recent Newsletter and BWC Research

The BWC Monthly Industry Update Letter is always a highlight of insights for our industry, but last week’s was particularly interesting for me given their most recent research piece that dug into expansion and investment trends in the middle-tier. We all know we are in the midst of transformational change in our industry, and this research confirmed many of the things we are seeing in the market every day as we engage with our customers as well as wholesalers looking to join the Encompass network.

Of the many points made in the newsletter, two stood out to me, and again, these are very consistent with our experience in the marketplace.

• Expansion -> Portfolio expansion is on everyone’s mind, especially expansion into new categories, with traditional spirits near the top of the list
• Investment -> Technology and training are at the top of every wholesaler's investment priorities

Not surprisingly, these two themes are connected and driving real changes in the operational landscape along with a wave of technology modernization that is demanded by our new normal of lower growth and the need for operational excellence.

Portfolio Expansion Trends - From the BWC Newsletter…

“A whopping 75%+ of the total Distributor respondents indicated that they have expanded their portfolio into NEW Beverage categories over the P5Y; with half of that group either branching into NA Beverages (Energy, Juice, Waters) and/or RTDs [more on these categories to come] and ~40% indicating that they have gotten into “Traditional” Spirits or THC.”

“On the expansion side, it was “Traditional” Spirits that emerged as the #1 choice among Distributors as a priority for future expansion, with just over half (54%) of respondents citing this category as being on their radar...”

The operational impacts of adopting NA beverages and RTDs are typically relatively straightforward. The category expansions come in cases and cans and can leverage a great deal of the well-proven beer distribution operational SOPs. But spirits is a different animal, and 40% of wholesalers are looking to expand into spirits. And this makes total sense, in a slowing growth environment, unlocking every source of incremental sales is a mandatory strategy, and spirits can provide a new revenue stream to the traditional beer wholesaler, but the operational implications can be a real challenge.

I think the BWC piece catalyzed for me what we have been hearing and seeing over the past 6-9 months as we engage with more and more wholesalers looking to move to Encompass. Consistently, we are hearing that the addition of spirits to the portfolio is breaking their existing systems - to the point that they need to make a change given the need to operationalize an expanded portfolio to unlock every growth opportunity.

Some recent data we received shows that across our Encompass customer base we have a materially larger set of independent W&S wholesalers, as well as beer distributors that have added spirits to their portfolio. I went back to our product team, many of whom have been with Encompass for many years, and asked them to breakdown this dynamic: What is it about Encompass that gives our customers the flexibility to add spirits (and wine) to their portfolios and operationalize on the same Encompass platform? That seems like a big benefit and source of business and operational agility that is more meaningful than ever given the trends in BWC’s data.

Well, it’s a deep discussion, but at its core is the architecture of the Encompass data model (that all of our customers deeply value). Our data model was architected from the start to be scalable and configurable in ways that make it extremely flexible. It was built as best-in-class enterprise software for the beverage industry, rather than software built specifically for the beer industry, which then struggles to be redeployed into more complex use cases (the world of spirits is obviously not as simple as the case-centric world of beer).

This architecture allows us to seamlessly support some of the unique aspects of the world of spirits (and wine). Examples include (and more detail is probably demanded in a follow-up blog):

• Pricing complexities - support for cases, bottles, and “by-the-glass” use cases. Every aspect of pricing is more complex, including margin analysis, unit pricing, and promotional complexities such as mix-and-match deals and split-case fees.
• Depletion allowance accuracy - Integrating supplier promotion participation or depletion allowances into ERP pricing structures presents a major obstacle, particularly for legacy systems. As pricing models grow more intricate, legacy platforms often fail to correctly link promotions to specific invoice transactions. This disconnect hinders a wholesaler's ability to accurately track and audit financial participation, ultimately obscuring the true impact on their bottom line.
• Inventory granularity: Cases, bottles, and pallets - Legacy systems frequently fail to adapt palletization strategies based on specific pick types. In a typical case, when an order includes both a case and an individual bottle of the same item, the system should ideally direct pickers to separate case and bottle locations to fulfill both requirements. Because legacy systems cannot efficiently manage these distinct unit types, many Wine and Spirits wholesalers are forced to implement third-party WMS solutions to bridge the gap, adding more cost and complexity.
• Multi-location logistics - Wine and spirits wholesalers frequently manage inventory across multiple physical sites to better serve their clientele. However, the logistical intricacies of fulfilling orders from several locations often prove too complex for legacy ERP systems to handle effectively.

Of course, no software is perfect, and we are constantly working with our wholesalers to refine use-case support, but our architecture and partnership with our customer base have enabled us to provide substantial support for the realities and complexities of Wine and Spirits. As the trends BWC continue to accelerate, one of the clear advantages of the Encompass platform is the operational flexibility to expand your portfolio at speed and take advantage of every sales opportunity you see in your territory.

Investment Trends - From the BWC Newsletter…

“In fact, ~85% of the Distributors we surveyed noted making investments into MORE software/technology/automation or MORE insights/business intelligence/training to support their expanded portfolio.”

“These investments into Tools, Training and People are all becoming increasingly necessary as Distributors simply try to maintain (or regain) momentum in an increasingly challenging landscape with rising complexities and unpredictable behaviors.”

As I said, these two trends are highly correlated. Increased complexity drives the need for more technology as traditional manual processes break and/or cannot scale. I have commented in past blog posts that post the Fall 2024 NBWA, when the new normal of slowing growth was universally declared, we have seen this wave of increased business/technology spend here at Encompass.

Encouraging for the industry (and us) is that this trend seems to be gaining momentum according to the BWC data. Sure, it is good for us, but why is it good for the industry? For the foreseeable future, we are all going to be chasing every dollar of growth and every dollar of margin. Our industry is rapidly maturing into the connected virtual supply chain that people have speculated about for years.

Market conditions are driving demand for deeper coordination between tiers. We hear it every day, suppliers wanting to collaborate more deeply with wholesalers and vice versa. This collaboration and ultimately integration is the need to unlock every growth and efficiency lever. There is frankly no going back, this coordination is what we see in other industries and will make us a stronger industry, and it is happening fast - BWCs data (and ours) shows it.

BWC is 100% on point with this statement:

"It’s all about looking at the Future – 1-3-5-10 years out and setting yourself up to remain, or become, a power broker in your territory vs. sitting stuck in a holding pattern and instead finding yourself face to face with a competitor that wants the world, and everything in it."

BTW, technology spend is going up not just in beverage, but across all industries. This is from a recent Gartner report - software spending is going up and AI as a percentage of the growth is increasing.

‍"Gartner forecasts global IT spending at $6.08 trillion in 2026 — up 9.8%, the first time we’ve broken through the $6 trillion barrier. Software alone grows 15.2%. By the end of this year, we will spend more on software with AI in it than software without it. That shift happened in four years."

I don’t think BWC has the underlying data, but my guess is that the 85% of wholesalers looking to increase technology investments have not yet factored the AI lever into their thinking. Let me tell you, it is coming and AI investment is going to be real, and have a major impact in our industry. We are all getting on the modernization wave at a time when AI is a force multiplier in technology - this is only going to transition the modernization wave into a modernization tsunami that is going to be a massive transformation for the better for our entire industry - but we all need to buckle up 🙂

In the context of overall IT spend, I can also validate this observation from Redpoint in every conversation we are having with customers and prospects.

‍"Redpoint’s CIO survey data adds the buyer perspective: CIOs are actively evaluating which vendors to replace, by category, right now. The vendors getting replaced share a common characteristic — they don’t have a credible AI story that delivers measurable ROI."

Our strategy, driven by our Customer Council, is clear. We are absorbing traditional point solutions (e.g., mileage reimbursement, merchandising, AP automation, etc.) into our platform to rationalize/lower overall spend and give wholesaler employees a common user experience that makes their lives easier. But as we lower that spend, and move more data into our platform, we are unlocking the AI flywheel. Our customers can take those savings and redeploy them into AI initiatives that are fueled by richer and richer data sets - the engine for AI.

Look, I also appreciate, as I have heard from our customers, that this all represents a lot of technology and a lot of change for organizations, but the reality is, our industry needs it, wholesalers need it, and it will make us a stronger industry and supply chain that is positioned for the next 10 years in Beverage. Exciting times, lots of change, but we all have no choice but to lean in.

See you all at BevAge in a month, it will be one to remember!