004 | Cracking the Drinks Value Chain: debunking the myth of bypassing the links of the chain | Part 2/3 of the Interview with Ilias Mastrogiannis from the Distillery Nation Podcast (Seattle, WA, USA)

We we touched a little bit again. What are your thoughts about direct to consumer? You know, for smaller brands, you know, on premise is very important. But I think DTC, where where it's allowed you know, not everywhere it's allowed.

But Yes. Yes.

For DTC, what what are your thoughts, and how do how do we make that part of our core strategy to perhaps reach consumers to build the demand so the on premise maybe captures it there? So what what are your thoughts and direction or or tips that you might have for D2C brands?

I mean, in the D2C, it's it's still like a bit of an unknown beast for me. I mean, for for for many, I guess. But also for myself. The way I look at D2C is, of course, as you said, wherever it's legal. I think The US is much more advanced into this than most of the European countries.

But it's again about building the demand first. And let's say, think I wrote a post like some time ago about people going to Ellis Island. I mean, it's very applicable to all of us. We all have, from a European background, you know, people coming by ship to The US. And I read a quote there that was when I went to Ellis Island, it was like, heard back in Italy, I heard that the streets were paved in gold, and that's why I came here.

And when I arrived, I realized that there was no gold and actually there were no streets. Like, the streets were not paved at all. They were dusty, and I was supposed to pave them. And I like this, and I mean, I'm getting shiver now on my back. I mean, you see my love for history here.

And digital in general, it's very similar to that quote for me. So it's like, D2C is mistakenly thought of as an easy, quick, silver bullet path to get sales. And it's like, oh, I'm gonna go on whatever Amazon or whatever the channel is. And they don't realize that it's not that you're bypassing an importer or you're bypassing a wholesaler and staying with your margin, because D2C takes margins anyway. And you need to invest in marketing to have, you know, it's not anymore like, you know, the first people that went D2C, then was easy because there were not enough brands and everybody was getting visibility.

But now if you want be up in the list or in the search, you need to pay for marketing, And whatever you want to call then of course, like taxes and margins and so on. And are the margins calculated before tax or after tax? And how much margins are you actually going to give out to that player? And maybe you thought of going D2C because you wanted to skip the margins of an importer. I'm talking to the European brands for now.

And so for me, it's more like be careful what you wish for. So I compare the D2C very much to the off trade and retail. So it's like you can do it, but it's big effort and there is very much hidden charges in it that you may not see. You know, you don't focus on just like thinking about the big volume that are going to come up for it, but you need to build those volume and you need to be cash strong to be able to satisfy that request. Because if you have started in selling in your own backyard for now, if you do like this and then they place huge orders, then it's going to be troubles for you, you know, from a cash flow perspective as well.

Yeah. Yeah. That's that's an interesting take, honestly. So what do you think between the the relationship or the distribution between a brand having DTC and then perhaps a traditional distributor model, at least in The US, when we talk about, you know, The US, you mostly have to have a distributor to to either go cross state or forage within the state, you know, because you can't really hit every single account. So what are your thoughts about the the percentage and perhaps maybe making the the distributor happy too?

Because if they see that you're perhaps undercutting them or if you're trying to do something that might not be to their best interest because, you know, they're they're there to pay their bills too. So what are your thoughts around that aspect and ratio of trying to do D2C versus and at the same time also balancing your distribution network?

I think I think, I mean, this of course, like when you're starting as a brand, then it's a, you know, you need to I think there is an acknowledgment from the industry that also from distributors that if you're a small player, they're not interested in you.

That's right.

So you are probably going to start with D2C anyway. And by D2C, you know, you can also put in, you know, services like Park Street, for example, no? Like in a way, you know, it's like it's a three tier compliance systems that enable you to ship to on trade players as well. So there is an element of which, of course, by growing, you need to acknowledge that. And no distributor will complain about that because they wouldn't be interested in you anyway.

And you need to get to that traction. Then there is a moment, there is like a kind of like a glass ceiling, let's call it, like, after which you need if you want to scale, you need to go with a big, big player. And then you always should look at things, the way I see it is, as an ecosystem. So I always like to think about the drinks ecosystem. It's like you cannot really bypass people.

It's like it's a zero sum game in the end. You know, there's importers, distributors, retail, you know, there's You need to be able to maneuver all those players in a way that you make everyone happy to sell your brand. Because otherwise, it's a small industry in the end. If you start trying to find silver bullets and shortcuts, you're going to make somebody unhappy and then that's going to backfire on you. So for me, it's more like, start small, learn, but always think of an ecosystem.

So it's like, there's no like bars or retail and so on. So for me, I would do it as a, I'm building the demand for my brand. And I don't mind if it's a buyer of Costco or an on trade manager or a D2C consumer. For me, I'm talking about that message about building my brand and why you should have my own whiskey and my own bourbon and tequila. So for me, it's more like different, let's say, phases of the same coin kind of thing and play and grow.

Don't don't kinda like jump the

Yeah. You know

what I mean?

As you said, yeah, don't don't try to undercut because, yeah, you gotta the the way that I see it is in what you explained is you gotta build either that margin or that cost for all the players Exactly. Equally. Exactly. You know? Build the cost, the COGS, and your margins for

Exactly.

The big Costco or the big distributor or the small distributor or the DDC. Kinda have it equally across the the board. So that way, your core message is the same, and whoever buys, buys based on that demand that you Exactly.

Because there is a little bit of, like, just to close the loop, like, there's a bit of a misconception about distributors and wholesalers. Like, I'm working a lot with, you know, with brands that need them and how to understand how to work with them. Because it's not that they are taking margins off your brand. It's like they're giving you a service. Of course, if they well.

And for example, like I've had several discussions about this, like some bars, they may have like this, I'm talking more from a European perspective now. Like they will a bar will buy brands from two or three wholesalers only. So if you go there by yourself to sell, you are nuisance to them because they're making three big orders from vegetables to whiskey with two or three players, two or three invoices every week. And they don't want to have Elias sending an invoice for a few $100, you know? So when you give your margins to one of those wholesalers, it's actually like making sure that you're available in their range so that this guy is making three orders.

In one of the three orders, there is also your case. You know? So that's the price to pay for a service. So it's a little bit like with rents. It's like, oh, you're wasting money if you're renting.

Yeah, but I want to live in a city center and I can't afford buying a house or a flat in a city center, so I'm renting. And it's not that the owner, the landlord is stealing money from me.

You know, if you think it's it,

it's worth it. So I like to think about it in this sense and then learn how to work with those people. Because I've seen like in big companies where I've worked and also clients, big clients, like there's a tendency to change importer, change distributor. But you know, it's just like those people that divorce three times, and then it's always the wife's or the husband's fault, you know? And it's like, yeah, but hang on a minute.

Like, it's the fourth marriage that you do in that market with a different distributorimporter. Can it be that there's something wrong from your end as well? And how do you work out that relationship?

Yeah. I really I I've been thinking about that too. You know, when you approach a bar, you know, they they don't have time to do 10 different invoices, as you said to your point. They they want simplicity from their side. They wanna place an order with one, two clicks, not deal with your QuickBooks invoice and, you know, email.

So I think that's a great insight where, yes, you're giving up margins, but you're getting placed into that stream for bars to Exactly. Quickly get to you versus, as you said, if you would approach them otherwise, they'd most likely say no because it's a hustle for them to

Exactly.

To deal with you for one case.

Exactly. And then it's up to you to make up that share of mind Yeah. With the sales guys at the distributor to say, I want them to sell my whiskey instead of a competitor whiskey that they are stocking as well.

Yeah. That's a great point. Okay. One side question as you were talking is with distributors in that marriage portion, you know, you know, as you said, the bigger distributors might not look at you right away because, you know, the the demand is not there. You're not the hottest tequila or whiskey right now.

You so you might go with smaller distributors. Is that something that you advise? And maybe go with a beer distributor that it's local within your area to begin with versus, you know, the the the big Diageo ones or the the southern ones or whatever the the company would be. Is that something that you advise for smaller companies to begin with?

So on that one, I've I've changed my mind many times, to be honest. And because there's no right answer on that one. Like, what I've come up with as an answer is that there are three levels. And on this one, I'm gonna steal, like, some wording from actually from Paul Letko from Few Spirits, because in one of the club vows when we met, like, was mentioning this, and I'm quoting him and I don't know if it's the right word, but basically he said something like, you have to be emotionally relevant or strategically relevant or financially relevant. And the way I look at this is it's a bit of a ladder kind of thing.

So it's like the emotional relevance is that I love Elias. He's a great guy. I'm gonna stock his bottle because, you know, I'm not even sure if I particularly love his whiskey, but he's a great guy, always on time. I love his passion. I'm gonna award him.

And he's a friend of mine now. Then that hits the glass ceiling because then it's like, yeah, but you you you are like, I mean, I've got 15 other whiskeys. So when you come to me and ask me to sell more, I'm going to say, Elias, you know, you should be thankful that you're in my back bar because I can't do anything. But if you're strategically relevant on top of emotionally relevant, then it becomes like, okay, actually it's the only whiskey from Washington State, and I want to stock it because of X, Y, and Z. And then the other issue, the other glass ceiling comes when it's like, yes, but then there's another whiskey from Washington state that costs $20 less, And now I'm in trouble because what am I going to ask what am I going to tell Elias?

So that comes the financial irrelevance. Because it's like, okay, now, like, is Elias giving me enough margins to justify the rotation? And again, in margins, there's no crazy formula. It's just like, it's a matrix of price and volume. Know, it's like, if you want to earn per bottle this much, you're going to have this much volume.

And if you want to get if you want to reduce your margins, you can extend that volume because this person is going to sell more. So And that goes for bars and that goes for distributors, for importers and so on. Because if you're not relevant for them, they may take advantage of the brand for a short while. Not take advantage. I mean, I said it wrong, but you know what I mean.

Yeah. Yeah. Essentially, you're not hitting those three notes. So, yes, you might you might get a little bit of maybe a menu placement because, you know, Chris, for example, I'll put you for two weeks in a cocktail menu. But then after that, I'm going to pull you because the margin was not good.

I'm losing money as an establishment. So as you said, you got to hit all those three ones, which is a very I love that.

And And it's then how do you work out the messaging? Because that's also like the selling story on the margin, the recommended pricing story is part of the messaging, because you may be able to extend that thing. Maybe a boulevardier with your brand is going to cost $5 more than with my brand, but you need to be able to justify that to consumers. And if you build that demand first, then I wanna have your whiskey because I know that it's worth more to pay for. But if if there's no demand, then you're just another bot sold there.

And then it's like, well, why should I pay $5 more for that one? Like, you know, give me the cheap one.

Mhmm.

It's it's good anyway.

Yeah. Yeah. It's good enough. So, yeah, that's that's gold right there. I think that's a very good answer.

So thank you for that.