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December 2014

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Craft brewers and food trucks

What can craft brewers and food trucks teach us about economics, government policy and freedom?

When the dot.com explosion hit, fueled by the rapid growth of the Internet, few would have thought it would be a boon for the low-tech world of delivery.  Yet FedEx, UPS, and even the good ol’ post office saw incredible delivery growth as all those on-line purchases had to be delivered by somebody.

Did anyone plan this?  Nope.  It just happened.  No government-driven genius, just the marketplace responding to a new world of on-line purchasing.

Much the same has/is happening with the explosion of craft brewers and more specifically their tap rooms - places we used to call bars ;-)

These tap rooms are incredibly popular.  In fact if I were to start a craft brewer today, this is where I’d spend my efforts, not trying to be the next New Belgium.  $6 per beer that has no transportation costs… few if any packaging costs… no sharing of the margin with those greedy distributors or retailers… just one heck of a lot of profit for the folks brewing the stuff.  That’s where I’d stake my claim.  As long as I can fill the place with people, I’m going to make a lot of money.

But in many places around the country these tap rooms are legally required to be just that, places where the craft brewer can sell their product.  Nothing more.  No kitchens providing food… just tap rooms providing beer.

And this is where the wonders of the marketplace again show their abilities.  How did the marketplace … for those who need a definition, the marketplace or capitalism are better described as…

Free people freely interacting with other free people.

So how did the marketplace respond?  With the genius of food trucks.  Although the tap rooms might not have a kitchen, they probably have a food truck parked outside that can provide some yumminess whenever your heart desires.  This wasn’t anyone’s grand plan… no government expert required… just the marketplace responding to a need/opportunity.  A true win-win-win for all involved – the craft brewer, the food truck operator, and the customer.

The craft brewer doesn’t have the expense of running a kitchen (something which they probably have little, if any expertise in) and better yet, they in effect become 7 restaurants in one (in many cases even more).  The tap room has this type of food on Monday, another on Tuesday, another on Wednesday, etc.  Some are actually multiple restaurants in the same day… afternoon we’re this type of restaurant, in the evening we’re this type. 

Most craft brewer’s web sites “sell” the various food trucks that will be at their place.  They can be a strong marketing draw.  It isn’t just the beer that is driving folks to some of these places.  In many cases the lack of a kitchen has actually been turned into a strong positive!

Sure the craft brewer doesn’t get any of these food sale dollars, but they don’t have the headaches and expenses of providing the eating opportunity.

This in turn has driven the food truck industry to new heights.  The quality and variety of food being offered has increased by orders of magnitude.  These ain’t no roach coaches of old.

The food truck operators and the craft brewers act as symbiotic organisms… one’s success/improvement flows to the other and vice versa.  Better food brings more people… the food truck wins and so does the craft brewer.

Better beer/marketing of the tap room brings more people… the craft brewer wins and so does the food truck.

Craft brewers fight to get the best food trucks… the food trucks win and the craft brewer wins.

Poor beer or marketing and/or lousy food hurts both the brewer and the food truck… thus it is quickly punished by fewer people for both.  That symbiotic relationship functions in both directions ;-)

And throughout this beautiful dance, the customer wins every single time.  Win-win-win.

Just a thought this holiday season and one to keep in mind as you fine-tune your political philosophy and think about who to vote for.

And as a last little X-mas present, the next time you hear someone spouting off about the “evils” of capitalism or the marketplace, remember those are just words.  What they are describing is a process of free people freely interacting with other free people, bound by a general set of laws and regulations.  Who could be against that?  ;-)

Why am I on my soap-box?  As the patriot and brewer Sam Adams noted,

It does not take a majority to prevail... but rather an irate, tireless minority, keen on setting brushfires of freedom in the minds of men

This is needed today, perhaps more than at any time in this country’s history.  Please, grab some matches and go set some brushfires of freedom yourself!

From this black-hearted, mercenary… Happy holidays to all!  Now get back to work.

Visions of sugar plums...

There are numbers that just seem to get our attention.  And one billion is one of those numbers… especially if it is one billion dollars.  That’s the purported amount the Reyes’s will pay to acquire Gold Coast distributing down in Florida.

First a tip of the hat to the brothers.  They have been executing an opportunity-driven strategy for a couple decades now and the results are impressive.  As I have noted time and time again, all success begins with good strategy.  They actually walk the walk… far too many wholesalers over the years liked to talk the talk but when it came down to getting a deal done, they fell short. 

Other than a hefty checking account, the Reyes’s don’t bring any magic to the table… they know what they are trying to do, are staffed with high-quality professionals, and simply go out there and get deals done.  Win – win works.

This magic billion dollar payout now has a lot of folks in the industry AGAIN thinking… is now the time to get out?  Heck if I know… what is your STRATEGY?  What do you want to accomplish?  Is this goal obtainable?  With acceptable risk?  And what is Plan B (and C and D)?  Can you live with all of the various possible futures?

Spur of the moment decisions heavily influenced by what the brothers paid for a rather unique distributor that fits into their unique Florida strategy is not the way to do this.  Thinking and planning is the way to do it… whether you plan to run for the exits or batten the hatches in a plan to be around forever.

For many of you the first step is a market valuation.  How can you decide whether to stay or go if you don’t know what your asset is worth?  This could be combined with a few day strategic planning session where we analyze your business from the top-down, including detailed analysis of all M&A possibilities. 

Included in this must be a discussion of the threats and opportunities you and your organization face.  I personally don’t care what decision you make; I just want you to make it with your eyes wide open and with full understanding of what may or may not come your way.

As I’ve noted in past posts… a “good” decision or a “bad” decision are generally determined by what future happens to come down the pike.  The exact same decision might be great under one future, and terrible under another.  So do what you can do… think, analyze, measure, talk, plan, execute… adjust as data/results come back.  Just keep driving towards that strategic goal.

Steve Cook and I do the best valuations and planning in this industry – just saying ;-)  Actually Cook does most of the real work.  I’m more of a soap-box guy ;-)

So if that $1,000,000,000 has got you thinking… stop dreaming of sugar plums and give us a call.  I’m all for sugar plums, let’s just make certain you’ve completely thought the thing through to better ensure you end up actually eating those sugar plums rather than just dreaming about them.

 

Should beer/alcohol/beverage distributors enter the legal marijuana world?

First the news from the elections… Oregon legalized.  Alaska legalized.  DC legalized.  4 states plus DC now have full legal adult marijuana.  Guam approved medical marijuana.  Various cities around the country voted to decriminalize.  In 2016 we will have 10+ states looking to legalize.  Whether one agrees or not, this is a tidal wave that is a’coming.

Now my post…

It seems many are kind of confused about this opportunity.  After my last email I’ve been contacted by quite a few folks who have some interest in exploring the new wild and wooly world of legal marijuana.  I personally am tired of providing free consulting… it really doesn’t pay well ;-) but I thought I’d toss one final freebie out there regarding my thoughts.

Alcohol distributors can safely and easily enter this industry will little fear if they understand a few things… 

  1. I see few synergies between a beer/alcohol/beverage distributor and almost any aspect of the marijuana business.  For those looking to jump into this business for this reason, you’re barking up the wrong tree.  Other than perhaps some technology and backroom stuff, these are very different industries and will operate quite differently.  And for those thinking that perhaps marijuana and alcohol will be available at the same locations… not going to happen in our relevant time frame… and I’m personally not certain it would be a good idea in the first place.
  2. Although this is a regulated market (as it should be), I see no need for an independent distribution tier.  So again, for those thinking they will use their present operations to become the marijuana distributor, ain’t going to happen.  Colorado law forced complete vertical integration for at least the first 10 months (you had to grow at least 70% of what you sold).  And even now, completely integrated operations – from grow to retail – are the norm and I would guess they will likely remain so for at least the near- to mid-term.  Washington outlawed vertical integration… you can either grow or retail, but not both.  How other state’s regulatory structure will take place is anyone’s guess.  They will probably follow one of these two general designs.  But the development of a 3-tier system simply isn’t in the cards.  If that is your hope, don’t waste your money in this industry.
  3. Therefore beer, wine, and spirits distributors should view this simply as an exciting, high-growth (and high risk) investment/business opportunity.  That’s it.  Nothing more.  Nothing less.  It has nothing to do with your present operations (nor should it).  If you have the money and desire, it could very well be the start of something like the dot.com boon at its infancy.  Go back and look at those election results if you need any convincing.
  4. This isn’t a “gray” legal area.  It is black and white.  From a federal perspective, any activity involved in marijuana… and that includes supporting services of ANY type are quite clearly illegal.  As the head of Colorado’s Marijuana Enforcement Division noted at a recent seminar I attended, from the Colorado governor on down… they could all be arrested for violated federal law. Think of it as this analogy… based on federal law, the states of Colorado and Washington have set up a regulatory structure to regulate and tax the mafia’s activity.  They are aiding and abetting the violation of numerous federal laws… and all who knowingly participate are also in violation of these laws.  The accountant to the mob still goes to jail ;-)  As does the advertising agency that knowingly takes their money to help them generate demand for their illegal activity… as does the bank… as does the attorneys… as does all of us.  Now I clearly don’t see this happening (nor do thousands of businesses, some quite large) and I believe the next national election will kind of settle this with a “let the states decide” punt from both major political parties.  But until (if?) federal law changes, this is the reality from the federal perspective.  If this concerns you or if you truly believe a “perp walk” might be in your future, don’t enter this industry.
  5. Thus, any tying of your present federal permit with a marijuana business is freaking stupid!  There are no synergies anyhow, don’t connect the two in any way.  This is quite easily accomplished.   But I hear from far too many who mistake the synergies (which don’t exist) and think about tying the two together.  Don’t.  On the plus side, if you do enter, don’t tie them together and still end up getting grief from the feds, the odds are great they would simply force you to divest yourself of one or the other.  No perp walk in your future ;-)
  6. This also will temporarily break the hearts of those weed merchants who hope for the big cash-out from beer, wine, and spirits suppliers.  Ain’t happening until at least the feds change their perspective on marijuana.
  7. That said, for those willing to jump into a high return/high risk/high growth industry, distributors have the opportunity to leverage their business expertise on distributing controlled consumer goods to build an incredibly profitable stand-alone operation.  The overall level of business expertise in this industry is rather low… you start out way in the lead on this aspect.

I look at you all for potential partners with my edibles business since you have the cash to invest and understand how to build brands via DSD.  And rather than having you attempting to learn all about this nascent industry, we provide turnkey for everything.  That’s some significant value on our side of the equation.

This is a “never-before market” so I’m still not certain from our perspective it might not be better to go with established marijuana operations in various states and to teach them both the manufacturing and DSD aspects.  That I’ve got down.  But since I know you all, you get the first shot.  That’s it for free consulting.  If you want to learn more about the marijuana industry, either join our team or go talk to someone else… I’ve got a start-up to get going ;-)

 

 

Marijuana - A prohibition market or a legal state-regulated market?

Legal marijuana is coming to this nation like a tidal wave.  And it is about time.  When one combines the pro-cannabis folks with the “prohibition doesn’t work” folks, a large majority is saying it is time to end the failed war on weed.

Remember the decision isn’t really about “for” or “against” marijuana.  Marijuana is everywhere.  There isn’t a high school kid in this country (or unfortunately many middle schoolers) who couldn’t get some in a matter of minutes.  The decision is whether the present state of prohibition is superior to an adult legal, state-regulated marketplace…  whether a flourishing, illegal, unregulated, “sell-to-anyone” market is better than a legal effective state-regulated market.

To me that decision is a no-brainer.  I would hope the folks in the beverage alcohol business would wholeheartedly agree.  We know it works.  The failed experiment called Prohibition and the 81 years since has proven the effectiveness of state regulation.  This country has the best regulated alcohol industry in the entire world (and at the same time also probably one of the most competitive and dynamic).  We can and should do the same with marijuana.

On the medical side, there is no question marijuana provides medical benefits.  The Washington Post reports on a 2013 survey in the New England Journal of Medicine that found nearly 8-in-10 doctors approved the use of medical marijuana.  You can find that here.  The same article notes that a recent wide-ranging survey in California found medical marijuana patients agree, with 92 percent saying medical marijuana alleviated symptoms of their serious medical conditions.

A recent letter to the editor in The Wall Street Journal from an experienced MD notes that cannabis is well known to provide pain relief for 3 – 7 level pain (on the 1 – 10 pain schedule).  For anyone who has witnessed the tragedy of the very common addition to opiate-based pain pills, cannabis is far superior. 

This explains the pharmaceutical industry’s cynical financial support of anti-legalization efforts around the country… they are THE MAIN financial supporters fighting to keep marijuana illicit and mired in the black market.  As they say, always follow the money.

But on the medical front, the antidotal evidence is overwhelming.  Is this the magic elixir that some claim can solve every malady known to man?  ;-)  Probably not, but the health benefits for many is indisputable.

On the flip side some are concerned about marijuana’s possible neurological effects on young brains.  They completely miss the point.  Whether these effects exist or not are open to serious debate… but the main point is… is prohibition a better means to restrict young folks from consuming or is a legal, state-regulated environment? 

In the 10 months of full legalization in Colorado, the dispensaries have never been cited for selling to an underage individual.  NEVER.  It’s kind of hard to improve on 100%!  ;-)

Again the beverage alcohol industry shows the truth… it is MUCH more difficult for underage people to get beer, wine, or spirits than the so-called “prohibition” of marijuana.  Go ask any high schooler anywhere in the country… what’s easier to get?  Beer or weed?  You’ll get close to 100% saying weed.  So how is this better protecting young minds from marijuana’s supposed neurological effects?  It isn’t.  It works in just the opposite direction.

Milton Friedman, renowned economist and philosopher captured this perfectly in this quote “One of the great mistakes is to judge policies and programs by their intentions rather than their results”

And of course this striking observation… “See, if you look at the drug war from a purely economic point of view, the role of the government is to protect the drug cartel. That's literally true.” 

Prohibition or a legal, state-regulated market… the choice is pretty straightforward… whether one likes this fact or not is irrelevant.

Some anti-cannabis folks will say, “yeah, but a lot of these folks just want to get high”… to which I respond… so what?!  Based on 2013 dollar figures, this country consumes about 42 CASES of beer for every 3.3 BOTTLES of non-alcoholic beer.  While there is non-alcoholic wine, its sales are basically meaningless.  Unless one is the designated driver (or has an alcohol issue), no one goes to bars and orders mock-tails.   And I don’t think this industry or consumers have to apologize for this. 

People consume alcoholic beverages because of the alcohol.  A beer or two (or more!) with friends… a glass of wine while making dinner… a martini to relax with after work… and we don’t have to apologize to anyone. 

The VAST majority of adult alcohol consumers don’t consume to get hammered.  Guess what… although the effect of marijuana is different than alcohol, most present day adult marijuana consumers (whether smoking or edibles) also don’t consume to get wasted. 

Whether it is your personal cup-of-tea is up to you, but I don’t think the fledgling legal state-regulated marijuana industry has to apologize either… whether consumed for medical benefits or simply others.  At least that’s my take.

And it is the take of a lot of folks.  The New York Times, Seattle Times, Providence Journal, The Economist, National Review, Denver Post, The Nation, Las Vegas Review Journal, Star-Ledger, The Indianapolis Star, The Orange County Register, The Baltimore Sun, and numerous other editorial boards have all recently endorsed full legalization. 

Five Nobel Prize-winning economists recently released a UN report recommending that countries end their war on drugs.  Travel guru Rick Steves sits on the board of the National Organization for the Reform of Marijuana Laws (NORML) and is a vocal supporter of legal weed.  Right now he’s traveling the state of Oregon trying to ensure passage of their legalization efforts.  The late scientist Carl Sagan and good ol’ Rodney Dangerfield were consumers and supporters. 

As noted above… whether “pro-cannabis” or simply “anti-prohibition”, it sure seems like the time has come for a state-regulated marketplace for legal adult consumption… kind of like the 21st amendment 81 years ago.

 

So what is the state of the burgeoning legal marijuana world?

 

Right now 23 states and DC allow some form of legal marijuana.

Colorado and Washington are presently the only 2 states that have fully legalized adult marijuana consumption.  2014 ballot initiatives in both Alaska and Oregon may make these the next states to implement full legalization.  DC has just approved a 2014 ballot measure which will legalize.  Arizona, California, Maine, Massachusetts, Montana, and Nevada are all on track for 2016 efforts for full legalization. 

Florida, Ohio, and Pennsylvania have pending legislation and/or ballot measures.  One would guess that by the end of 2014, over half of the states will have some form of legal marijuana.  By the time the next administration takes office, we could see 5 – 10 states with full legal adult consumption and well over half with some form of legal consumption.

The Marijuana Policy Institute, an organization which drives legalization efforts, has produced a 48 second video which you can find by clicking on, a new short video where they show the 17 states plus DC that they believe will have full legalization by 2019. 

One expert estimates legalization in California alone will create a $31B market, including all ancillary products and services.  Actually this should be better stated not as “creating” a market, since the market already exists and is in operation now.  These sales are happening now. 

It should be stated that legalization in California (and everywhere) will bring to the surface, and allow effective regulation of the present market… just like the end of prohibition and legal, state regulation did to alcohol 81 years ago.  One hasn’t seen bootleggers hawking illicit alcohol for over 81 years… hopefully soon the days of street-corner dealers hawking marijuana to kids and anyone with the money will be just as ancient history.

Assuming Texas at the same to slightly smaller size, these 17 states alone could represent close to a $100B market; all within 5 years!  To put that in perspective, that’s the size of the total US beer market.  Just California or Florida alone could easily match the dollar sales of the ENTIRE craft beer segment.

 

What has been the Colorado experience?

As of January 1, 2014 Colorado became the first state to fully legalize adult “recreational” marijuana.  In fact, Colorado is the first place in the world to allow full adult consumption via a state-regulated market.  After the first 10 months, one would have to declare this effort an astounding success. 

In fact The Brookings Institute just released a report entitled 'Colorado's Rollout of Legal Marijuana is Succeeding', analyzing the first six months of Colorado's legalized cannabis commerce and taxation policies.  The author calls the implementation of the new Colorado law "a resounding success." He continues, "My research shows that regardless of the merits of the policy itself, Colorado has created a smart regulatory system that balances safety and security with access to legal marijuana."

  • Teen marijuana use has not soared as some feared, in fact it has declined.  This has occurred in other places that have made marijuana more legally available too.
  • Crime is down across the board (although it may be a stretch to attribute this all to legal marijuana)
  • Although the media continues to discuss the dangers of stoned drivers, accidents and fatalities are also down.  A recent report in the Washington Post notes that since legalization, Colorado auto fatalities have reached “near-historic lows”.
  • Marijuana sales in Colorado saw a 10 percent bump in August. The sales of recreational and medical marijuana in Colorado each jumped more than 10 percent from July to August 2014, according to numbers released by the Colorado Department of Revenue.  In August, customers purchased more than $33 million in recreational cannabis — up from $29.7 million in July and $24.7 million in June. Consumers bought more than $32.2 million in medical marijuana in August — up from $28.9 million in July and $28.6 million in June.
  • Thus total sales for August were $65.2 million!  Assuming flat growth (which is very conservative since sales were up 25% last month and 10% in August), this straight lines to an annual projection of $782,000,000.  Not a bad first year for a relatively low population state!  And remember, most of these sales were occurring anyhow; just in the illegal, unregulated, sell-to-anyone market.  This legal, state regulated effort is far superior.
  • The marijuana tax numbers are also adding up. Since Jan. 1, Colorado has brought in more than $45.2 million in taxes, licenses and fees for recreational and medical marijuana.
  • A recent study estimates Colorado market demand to be in excess of 10 tons per month.
  • Edible products have been extremely in demand.  In Colorado it was just reported that edibles make up 45% of all marijuana sales! Some experts predict that in 20 years no one will smoke marijuana, it will all be edibles.  I don’t know about that, but the market for edibles is truly astounding.
  • Pot tourism is larger than most predicted.  This of course will decline as more and more states provide some means of legalization but it does give an indication that demand for legal marijuana is most likely higher than many predicted and crosses a much broader demographic than just “young stoners”.  It also seems many of these new and present recreational and medical users are drawn to edibles over smoking. 

I believe other states will experience much the same as Colorado, further fueling the drive towards legalization in all states and the Feds, i.e “the sky hasn’t fallen” and the benefits are proven by the facts on the ground.  The reality is this product(s) is being sold in the black, “sell-to-anyone” market today; some sort of legalization via a state-regulated market is clearly becoming a better solution than the failed policies of prohibition.

Should you jump into this new world?  That depends.  It’s not for the faint of heart and everything regarding marijuana is more difficult… and will probably continue to be so at least until the federal and state laws get in sync.  But of course this is also the reason there is such an incredible opportunity in this burgeoning industry. 

Can you be fired for doing a legal act outside of the workplace?

Can an employee be fired for doing a legal activity outside of work hours?  One would hope the beer and alcohol industry would strongly support a person’s right to legal activities outside of the workplace… without workplace retribution. 

If not what happens when employers, with the goal of keeping health care costs down and looking out for the health of their workers, demand workers not drink alcohol… period?  Sure testing might be an issue but the point is a larger one… if I as your employer discovers you are drinking in the evenings or on the weekend, can I fire you?  I would hope most in this industry would respond with a resounding, NO!

Welcome to the wonderful world of legal marijuana.  A world where for now, laws at various levels of government simply aren’t in sync with each other. 

First a summary of the lay of the land…

At the federal level, marijuana is still categorized as a Schedule 1 drug, defined as…

Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. Schedule I drugs are the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence. Some examples of Schedule I drugs are:

heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), 3,4-methylenedioxymethamphetamine (ecstasy), methaqualone, and peyote

We can talk about that stupidity later, but that is the position of the federal government.  Oh but wait, is it?  The Department of Justice (DOJ), the highest law enforcement office of the land, has another take.  They have basically said they’ll step back and let the states handle this.  They laid out their 8 priorities in a memo… basically if these 8 things aren’t violated, the DOJ will take no action and they recommend attorneys general follow this same guidance.

According to the guidance, DOJ will still prosecute individuals or entities to prevent:

  1. The distribution of marijuana to minors
  2. Revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels
  3. The diversion of marijuana from states where it is legal under state law in some form to other states
  4. State-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity
  5. Violence and the use of firearms in the cultivation and distribution of marijuana
  6. Drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use
  7. Growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands
  8. Preventing marijuana possession or use on federal property

That last one is really a laugh… All of the Colorado ski resorts operate with leases on federal property.  If you’ve ridden many chair lifts or skied upon some “smoke shacks”, you know what I’m talking about.  But back to our larger point…

But Colorado and Washington both have legal adult consumption.  Oregon and Alaska are voting on the same in less than a month.  In Oregon, that travel guru Rick Steves is even traveling the state trying to ensure the passage (he did the same 2 years ago in Washington).  He sits on the board of NORML (National Organization for the Reform of Marijuana Laws) and is consumer of, and strong supporter of legal weed.

23 states and DC already have some form of legal marijuana. Arizona, California, Maine, Massachusetts, Montana, and Nevada are all on track for 2016 efforts for full legalization. 

Florida, Ohio, and Pennsylvania have pending legislation and/or ballot measures.  By the time the next administration takes office, more than half of the states will have some variety of legal marijuana and 5 to 7 states (perhaps more) will have full legal adult consumption.

Which circles us back to the point of this post… can an employer fire an employee for legal activity during non-work hours?

The Colorado Supreme Court recently heard an argument on this very subject.  A brief synopsis follows (you can find the original here):

Brandon Coats was partially paralyzed in a car crash as a teenager, using a wheelchair, and has been a medical marijuana patient since 2010 when he discovered that using pot helped calm violent seizures and muscle spasms. Coats was a telephone call-center operator with Dish Network for three years before he failed a cheek-swab random drug test in 2010 and was fired. Dish Network has a zero-tolerance policy against using illegal drugs.

On Tuesday, the Colorado Supreme Court heard oral arguments in Brandon Coats’ case that may have major impact on marijuana and the workplace. Colorado voters first approved a constitutional amendment authorizing the use of medical marijuana in 2000. Marijuana for recreational use was approved by voters in 2012 and started being sold in retail shops in Colorado on April 1, 2014.

Twenty-three states and the District of Columbia now have medical marijuana laws. Washington and Colorado laws specifically state that employers do not have to accommodate employees’ marijuana use. But other states such as Arizona, Nevada, New York, Minnesota, and Delaware grant various levels of protections to medical marijuana card holders from discrimination.

Additionally, the Supreme Courts for the states of California, Washington, and Montana have all ruled that an employer has no duty to accommodate the use of an “illegal drug” such as marijuana. The fact that marijuana remains a schedule one “illegal drug” under federal law has been critical in each ruling for the employer.

Coats brought his lawsuit against Dish under Colorado’s lawful off-duty activities law, which specifically says employers cannot fire people for doing something legal on their own time. Originally the law was enacted to protect cigarette smokers and multiple states have similar laws. Both the trial judge and Colorado Court of Appeals have already ruled against Coats “legal use” argument holding that as long as marijuana is illegal under federal law the state law does not apply.

During the Tuesday Colorado Supreme Court hearing the justices did little to telegraph how they may vote. A ruling may be months away.

I think the betting money is on the “get-out-of-jail-free” card based on the fact that weed is still an “illegal drug”, per the Feds.  Thus you will still be able to fire folks for consuming marijuana even if the activity was legal, at least for a while.

But what happens once this situation changes?  And the betting money is on it changing at the federal level.  As it stands now, the governors of both Colorado and Washington could be arrested and easily convicted for violating various federal laws… as could every government employee who works in marijuana enforcement.  The accountant for the mob still goes to jail too ;-) and from the federal law perspective, these folks are all part of a criminal conspiracy involving illegal drugs and money laundering.

And of course the thousands (10,000 or so in Colorado alone) of folks who work in the marijuana industry… in addition to all of the consumers.  Those 23 states and DC with some version of legal weed?  Anyone associated with it (starting with the governors), whether through regulation, employment, or consumption… all could be arrested and easily convicted.

Is that going to happen or are the Feds going to start changing in an effort to get these laws in sync with one another?  That I believe is a no-brainer but it probably won’t happen until the next administration.  I don’t expect this to occur via a federal-level “let’s legalize it” effort but rather through a “let the states decide” movement… and anything that furthers the efforts of state’s rights can’t be all wrong ;-)

Of course the Colorado Supreme Court could surprise everybody and rule for Mr. Coats.  If that happens, employment law is going to be turned on its head for quite some time.  But this tide is already well past turning.

The FBI has a policy of no-marijuana use for the past 3 years for new applicants (even this is an admission of the prevalence of marijuana consumption in the US), but in just the past couple weeks FBI Director Comey said apply… even if you’re lighting up on the drive to the job interview!  You see the FBI needs talented, tech folks… white collar hackers… and the reality is a lot of these folks consume weed.

“I have to hire a great work force to compete with those cyber criminals and some of those kids want to smoke weed on the way to the interview,” Comey said.  The FBI could possibly amend those strict rules soon. Comey told the conference the bureau is “grappling with the question right now” of how to change the drug policy without scaring off the cream of the hacking crop.

I’ve talked to many folks in many industries and a lot are taking the same path… loosening the strict zero tolerance rules for the simple fact they can’t staff their businesses without it.  Craft brewers would die on the vine if they attempted to enforce a no-use policy!  And their drinkers would abandon them in droves in protest.  That’s just the reality on the street.

So… should an employer be able to fire a worker for legal activity outside of the work place?  I think the beverage alcohol industry should think long and hard about this one… a poor choice might come back and bite real hard.  You don’t have to be “pro-pot” (but I think anti-prohibition is a very righteous position)… just pro-individual rights.  Or at least that’s my take on it.  Let me know yours.

 

Insights into SABMiller, Heineken and ABI

Rather than attempting to simply restate what others have written, I offer below a pretty good summary of the dance of the giants… and even some half-giants… thank you Hagrid ;-) and thank you Tara for a pretty good summary... followed by another one from The Economist.

You can find the full article here or simply continue reading.  This is from the Independent Online from South Africa.  This really is an international deal ;-) 

Also please note that nowhere in the story does it mention the impact of this deal on the US market.  Why?  ‘Cause that ain’t what’s driving this thing… as noted in the last post, the US market is simply something that will have to be managed, it in no significant way will determine whether these deals happen or not.

SABMiller’s choice: lift bid for Heineken or marry AB InBev

September 17 2014 at 08:00am

Tara Lachapelle

IF SABMiller wants to avoid getting bought, its best bet may be to make Heineken an offer it cannot refuse. SABMiller is looking to make a large enough acquisition that will shield it from being acquired by growth-hungry Anheuser-Busch InBev (AB InBev) , the largest brewer.

London-based SABMiller had bet that $45 billion (R495.9bn) for Heineken would be the answer, only to have its takeover offer turned down by the company’s founding family earlier this week.

Even though shares of both Carlsberg and Diageo rose on Monday on speculation they could be alternative targets for SABMiller, Heineken is still the most appealing option, according to Morningstar’s Philip Gorham.

Persuading the Dutch brewer to sell might require a bid within the upper e70 (R999) a share range – about a 30 percent premium – as well as making concessions such as giving the family board seats and adding Heineken to the combined company’s name, Gorham said.

“I suspect that as vocal as Heineken has been about not wanting to sell, everything has its price,” Gorham said. “SABMiller could come back to Heineken. It’s the number one choice. If they don’t get that, anything else is suboptimal.”

Richard Farnsworth, a spokesman for SABMiller, declined to comment on whether it would make another attempt to buy Heineken or other companies.

Vulnerable giant

Heineken confirmed in a statement that it had rejected SABMiller, saying the proposal was “non-actionable” and that the Heineken family intended to keep the company independent. The founding family controls the brewer via another publicly traded vehicle, Heineken Holding, which owns 50 percent of the 150-year-old business.

The Heineken statement “was very clear”, company spokesman John Clarke wrote on Monday.

The rejection leaves SABMiller more vulnerable to being acquired by AB InBev, the maker of Budweiser and Stella Artois. The ball is in the Belgian company’s court to move forward with the long-speculated merger – unless SABMiller can persuade Heineken’s family to sell.

“It’s just very difficult in those sorts of family circumstances where there’s more than money involved, there’s emotions,” Wyn Ellis, an analyst for Numis Securities, said. “From what Heineken said, it looks to me that the definitive answer is no.”

SABMiller had “sensible people, so I guess they would not have made the approach unless they felt there was a chance of certain success”, Ellis said.

While the price that SABMiller offered has not been made public, Heineken shares climbed 1.3 percent to e60.18 on Monday, valuing the company at almost 11 times this year’s estimated earnings before interest, tax, depreciation and amortisation (Ebitda).

SABMiller, valued at $98bn after gaining nearly 10 percent in London on Monday on talk of an AB InBev approach, could justify paying an Ebitda multiple in the “low teens” given the opportunity it would have to expand the Heineken brand in Asia, one of the faster-growing beer markets, Gorham said.

“It leaves some room to go higher” from Monday’s closing level, he said. “I wouldn’t rule out a high 70s takeout price.”

If SABMiller were to pay e78 a share for Heineken entirely in cash, it would result in a 16 percent increase to next year’s earnings, data show.

Lesser alternatives

SABMiller may have other options should Heineken continue to resist, though they also appear flawed. One was to pursue a deal with Carlsberg, the Danish brewer that was valued at $15bn on Monday after rising 2.7 percent, except it was controlled by a foundation that also might not be willing to sell, Ellis said.

Carlsberg’s brands were less appealing than Heineken’s, and its biggest developing market was eastern Europe, which was not growing as quickly as other developing regions, Gorham said.

While Heineken and AB InBev’s brands ranked among last year’s top 10 beers by volume, none of Carlsberg’s beers made the list, according to Bloomberg Intelligence.

Another idea was to buy Groupe Castel’s African beer operations, in which SABMiller already has a 20 percent stake, although that might not provide enough scale, he said.

There is also Diageo, which surged 2.2 percent on Monday, its biggest gain since April. The $76bn company focuses on liquors such as Johnnie Walker whisky and Smirnoff vodka and is unlikely to be interested in merging with SABMiller or selling its Guinness beer brand, according to Ian Shackleton and Edward Mundy from Nomura International.

“That SABMiller’s inorganic options have been so publicly lessened puts AB InBev in an even stronger position, should it choose to make a move on SABMiller,” Eddy Hargreaves, an analyst at Canaccord Genuity Group, wrote in a note on Monday. “SABMiller shareholders may be even more likely now to welcome a bid.”

Perhaps management would be, too, said Bryan Keane, a money manager at Alpine Woods Capital Investors, which owns AB InBev stock.

Being rebuffed by Heineken “may make SABMiller change their position and be more open to discussing a deal with AB InBev”, Keane said from New York. “They’re very complementary businesses.” – Bloomberg

 

The Economist also had a good summary...  which you can find here or you can just keep reading.

Foamy war

SABMiller may be swallowed up by its main rival, AB InBev

Sep 20th 2014 | From the print edition of The Economist

THE world’s biggest brewer, AB InBev (ABI), is also the most frugal. There are no company cars for senior executives. Carlos Brito, the boss, flies economy class. That is one reason why, with 18% of global beer sales, ABI has a third of the profits.

This will matter in the wary manoeuvres now taking place among the giants of global brewing. On September 14th Heineken, the number three by volume (see chart), said it had rejected a takeover proposal from SABMiller, the number two. SAB seems to have been trying to defend itself against a possible takeover by ABI, which was said to be talking to bankers about raising £75 billion ($121 billion) to buy its rival. That was little more than a rumour, but industry-watchers suspect something big is indeed brewing, in brewing. And the chances are that ever-thirsty ABI, maker of Budweiser and Stella Artois, will swallow SAB.

The beer behemoth has few other ways to grow. In rich countries, consumption of beer has stopped rising. In America, ABI’s Anheuser-Busch division is suffering growing competition from small makers of “craft beer”. The number of American breweries has jumped from fewer than 100 in 1983 to more than 3,000 today. ABI has its roots in Brazil, but there drinkers are suffering from a sluggish economy and post-World Cup blues. This leaves ABI with two options, says Andrew Holland, an analyst at Société Générale: give its cash back to shareholders or buy something.

SAB is a tempting target. Though based in London, its origins are in South Africa; it has breweries and bottling plants in 15 African countries, where people still mainly guzzle moonshine. It has stakes in 21 others through an alliance with Castel, a French drinks company. Nearly 70% of SAB’s sales are in emerging markets, many of which are still developing a taste for beer. Last year its sales by volume expanded by 3% (not counting growth from acquisitions). ABI’s, in contrast, dropped 2%.

If ABI gets hold of SAB it will no doubt try to repeat tricks that have worked well since AmBev of Brazil merged with Interbrew of Belgium a decade ago and then pushed out its American boss: squeeze costs and use the new acquisition as a platform to spread its brands. That was the formula after the merged group bought Anheuser-Busch, the maker of Budweiser, in 2008. Grupo Modelo, a Mexican brewer which makes Corona and has been part of ABI since last year, is now undergoing the same rigours.

SAB would be a more difficult undertaking. For one thing, notes Mr Holland, it is more tightly managed than “fat and lazy” Anheuser-Busch was, so there is less scope for cutting costs. SAB is bigger and more complex than anything else ABI has taken on. A knack for cost-cutting may not serve it as well in fast-growing markets. Another problem is that in some countries the two giants’ combined businesses would be too big. In America Anheuser-Busch and SAB’s joint venture with Molson Coors, another rival, would together have three-quarters of the beer market. In China the two would have more than a third. These are not insurmountable problems. In America, for example, the stake in the joint venture could be sold to Molson Coors.

Despite the obstacles, a merger of the leading two beer companies looks the likeliest of the potential huge deals. Heineken, which is controlled by the Heineken family even though it owns just 23% of the company’s equity, has now given notice that it does not want to be bought (though that could change if SAB boosted its offer). Carlsberg, the smallest of the big four, is controlled by a foundation. So the parsimonious Mr Brito may well get his hands on SAB if he wants it enough. Teaching Africans to like Budweiser, however, may prove somewhat harder.

Holy Guacamole! The giants are dancing again.

Interesting news over the weekend… SABMiller made a “hey, let’s get together” offer for Heineken and ABI might be lining up financing to make a run for SABMiller. 

I had planned for this post to be more about the Monster move… but that will have to wait… although Monster offers a painful lesson in the realities of big business and the strength of things like “I thought”… and “I was told”… and “I assumed”… and “they promised”.  Value of those things?  About zero.  Something to keep in mind as this all plays out.

But what about the renewed dance of the giants?  Many have noted how life is often just like a country music song… or is it the other way around? ;-)… but this is better described by a song from a one-hit-wonder band, The Georgia Satellites… Keep Your Hands to Yourself.  To enlighten my younger readers… here are the lyrics

 I got a little change in my pocket going ching-a-ling-a-ling

Wanna call you on the telephone, baby, give you a ring

But each time we talk, I get the same old thing

Always, "No huggee, no kissee until I get a wedding ring"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

 

Ooh, baby, baby, baby, why you gonna treat me this way?

You know I'm still your loverboy, I still feel the same way

That's when she told me a story 'bout free milk and a cow

And said, "No huggee, no kissee until I get a wedding vow"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

 

You see, I wanted her real bad and I was about to give in

That's when she started talking about true love, started talking about sin

I said, "Honey, I'll live with you for the rest of my life"

She said, "No huggee, no kissee until you make me a wife"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

The song can be seen at https://www.youtube.com/watch?v=PdpAop7gp0w if you really want to get the feel.  I have to admit I get this silly image of Brito, Boxmeer, and Clark filling out the various (and changing) roles in this music video. 

But back to my tale… both ABI and SABMiller have a little change in their pocket, and I assume it’s going ching-a-ling-a-ling.  I assume all currency, regardless of its type, makes the standard ching-a-ling-a-ling sound.

SABMiller decides they want to get a little action – if you know what I mean ;-)… or do they just want to run from ABI and their love of Heineken is of a temporary, yet urgent nature?  Regardless, they give Heineken a ring and plead, “my honey, my baby, don’t put my love upon no shelf”… But Heineken gives them the cold shoulder with a strong, “don’t hand me no lines and keep your hands to yourself.”

Now SABMiller, who fear ABI is going to grab them by the hair and drag them into the nearest cave, respond with a “Ooh, baby, baby, baby, why you gonna treat me this way?  You know I'm still your loverboy, I still feel the same way”.

Much like the old serial movies, stay tuned to see if the spurned lover can overcome his sweetheart’s admonition to keep your hands to yourself.  A bigger and bigger diamond ring can melt even the most reluctant business heart… just ask AB shareholders ;-).  And more importantly, the senior management at AB.

And onto ABI… why does SABMiller fear their loving embrace?  Don’t they too have that loving feeling? – OK, too many song references will only burden this so far delightful little post.

From my cynical observation of large public companies, they are run solely with 2 goals in mind… first to enrich the present senior management (the folks who set around the table and make the big decisions) and second, to keep the stock price up.  The second’s sole goal being to ensure the first goal can be obtained.   Sorry, but that’s it. 

Most large organizations; public companies, unions, government, whatever, end up being operated for the benefit of those who run the place… not necessarily the same as those that own the place… or the members of the organization.  These poison pill maneuvers reek of a senior management self-protection racket.  Of course all wrapped in motherhood, apple pie and doing what’s good for the shareholders… yeah, right.

Does SABMiller want to purchase Heineken for the sole purpose of becoming “too large” for ABI to swallow?  To whose benefit is this?  AB tried the same thing when InBev was pleading for them to not “put my love upon a shelf”.

How did InBev overcome this reluctance?  Yeah they raised the offer price a little, but mainly they agreed to allow the senior management (the decision makers) of AB to reward themselves like Saudi princes.  Once they had lined their pockets with more than a little ching-a-ling-a-ling… it was amazing how they welcomed InBev into their boudoir… no more keep your hands to yourself.  What was once a terrible idea for shareholders suddenly became a great idea for shareholders… once enough promised silver had changed hands.

Cynical yes.  True?  Sadly yes again.

Our InBev friends (now ABI) have proven themselves very good at deal making so I certainly wouldn’t bet against them in their run for SABMiller.  The international brands/footprints work pretty well and if ABI can’t make deals happen, they’re stuck with just running the dang things… and that’s a lot harder to do… and doesn’t offer nearly the rewards to THEIR senior management for a little extra ching-a-ling-a-ling in their pockets.  The AB deal put more than a little ching-a-ling-a-ling in their pockets… what was it?  Only about $2,000,000,000 or so for a very small group of individuals.  I’ll do deals every day for that type of ching-a-ling-a-ling.

Just like those country music songs, it all comes down to ching-a-ling-a-ling and spurned (and not spurned) love… basically what’s in it for me?

Now after 900 words (and beating an old song to death), what does this mean for US beer distributors?  Harry reports that even if the ABI/SABMiller deal happened, it would mean little to wholesalers.  I profoundly disagree.

This deal will be driven by international positions and the US is a minor part of these calculations.  Beer distributors keep that in mind.  The US isn’t driving this potential merger; from a decision-making viewpoint it is small potatoes.  It is a headache, but one that can be managed.  And to repeat myself… yes the US market is a great cash cow but it is also a pain in the rear from a supplier perspective. 

We already know how the businesses are performing under current ownership. Dumping/spinning-off all or parts of the US market at the right price is not necessarily a bad idea, especially if the business is likely to sell for more than it’s worth to the present owner.  Even if ABI could add value, it’s not too far-fetched that the businesses could become structurally less attractive in the US. 

If they finally agree to take that love off the shelf, they will make the US market work one way or the other.  And anyone who is telling you how it will all shake out in the US is simply telling stories.  No one… and that includes the present players on all sides of this... can tell you how the US will shake out.  There are far too many moving parts and far too many players… both known and unknown.

With this move, and the continued 3-tier and franchise erosion driven by the craft folks, we could see a profound remaking of the entire US beer distribution system.  Remember things are always like they’ve always been right up to the moment they aren’t anymore.

And don’t let the present Justice Department and its anti-trust positions give you any false hopes… most likely it will be the next administration who would ultimately agree to these actions… and they may take a far different stand than the present one.

For you unconsolidated Miller Coors distributors…could you be holding a structurally unattractive business that would provide a lesser rate of return?  You’re playing roulette, and I’m afraid it might be the Russian kind, especially for the medium to smaller volume distributors.  Take your chances if you like but with these potential changes of ownership, where do you stand?  And if it happens, the odds of what would legally be described as “change of ownership” are very high indeed.  One of you saps, if not both, will be heading to the exit.  You might go “baby tantrum-style” - a style I personally know well ;-) but you will go.

Only a handful of states have franchise laws that protect distributors regardless of almost anything… where you will stand if this happens is determined by the state you’re in.  But you might be facing a situation of bye-bye brands (and effectively your business) with the only argument being what fair market value is.  Who knows, perhaps Coke goes farther than Monster and tries to pick up the entire beer distribution bus?  Does anyone really think they couldn’t run it?  It might just be how much it costs to get it.

We may find that pretty much every wholesaler is playing roulette… and all they can do is cheer for the ball to ultimately fall in the right slot.  MillerCoors, Molson Coors, ABI, Heineken, Coke and Pepsi, Pabst, Boston Beer, Constellation, some of the other larger craft brewers… all might willingly or unwillingly join the party.

Rather than being a non-event for beer wholesalers since we all know how it will go in the US… this could be the start of a re-making of the entire US beer/beverage distribution industry.  It sure feels like the pressure has been building for profound change for some time.  Each of you… look in the mirror and tell me you don’t believe the same thing. Is this the event that sets it in motion?

For the US, even if the structure is attractive, how much more value could the new owners provide? Learning and developing new skills at the corporate level as we know is a very difficult and slow process, especially considering the product portfolios and supplier biases within our industry.

If I’m a fence-sitter this might be a great time to take the offer premium… that extra ching-a-ling-a-ling – and to accept those overtures from that lover that keeps calling on the phone.  Hanging on to your business could mean it will sell for less in the future… perhaps one heck of a lot less. Financial and strategic analysis is a great evaluation tool.  It could give both a potential buyer and seller their affordability index when considering paying a premium or maximizing the purchase price.

Regardless, finding out the value of what you have might be a good place to start in an attempt to formulate a strategy… and yes, Cook and I (actually mostly Cook) do some of the best valuation and M&A work in the country.

Roulette might be a fine game in a casino (although I hear it is a sap’s bet) but it has no place in your business planning.  Russian roulette is a game for far braver souls than I.  I sure wouldn’t be playing it with my business… for most of you, by far the largest asset you own.

What will come of this?  Who knows.  But once these things get in motion, they seldom go back to where they were before.  And hoping and praying the ball falls in the right slot is no way to plan for your business’s future.  That starts with a phone call to me to discuss how we can meet your needs and discuss scheduling a strategic planning session.  Just saying… ;-)

Learning from Monster

In continuing my tradition of upsetting as many people as is humanly possible, let me weigh in on the recent Monster kerfuffle.  And in the process hopefully set out a path for peace with craft brewers.

As a brief background, here’s what Reuters reported on August 15th  -

Coca-Cola Co's $2.15 billion wager on a stake in Monster Beverage Corp highlights the growth-starved soft drink company's embrace of deals that fall short of a full-blown merger and acquisition but allow it to test-drive potentially risky targets.

The world's largest soda maker said Thursday that it was buying a 16.7 percent stake in Monster. Coke will get two directors on Monster's board as well as Monster's non-energy brands, such as Hansen's Natural Sodas and Peace Tea. Monster will get Coke's energy brands, which include NOS and Full Throttle, as well as access to Coke's extensive distribution system.

Taking a minority stake instead of acquiring Monster outright gives Coke the opportunity to get the perks of being in a $27 billion global energy drinks market without taking on the financial and public relations risks that come with the controversial category, analysts said. If the deal closes as expected, Coke will distribute energy drinks but will not actually own them anymore.

For most of the world this isn’t a big deal one way or the other.  But for beer distributors, specifically ABI distributors who carry the brand, it is a painful lesson in business realities.

You see for them, the key phrase is “as well as access to Coke's extensive distribution system”.  One can be assured that this feature was a prominent factor in setting the purchase price.  Coke wants the brands to make money for THEIR people, not some ABI folks who they have never met.  Thus the ABI distributors will be terminated per their contractual rights.

And thus the ABI folks will be paid one times trailing 12 months gross profit.  The ABI folks believe this is not an equitable purchase price… but here’s the kicker… THEY signed the contract.  Although Harry reports they say they were “compelled” to sign this contract, from a legal perspective they were not.

They freely and openly signed this contract.  They were in no way compelled to do so, they could have easily said “nope!  I’m not signing this contract.”  But of course a “nope” vote would have in all likelihood meant the brands would go somewhere else.  Thus they signed the contract, granted one which contained some terms they didn’t like… but they still signed the contract to keep the brands rather than losing the brands.

It was a clear-cut business decision they made.  Guess what?  Business relationships (in fact relationships of all kinds) are often based on power.  Pure and simple.  “You want the brands?  Then sign the contract.”  If the contract was so onerous that no one would sign it, Monster would have been forced to alter it.  But it wasn’t that onerous and the brands were hot and contributed a great deal of gross profit to those distributors lucky enough to have the brands.  Thus they signed.  And I believe they ALL signed.  How onerous could the terms be if every freaking distributor decided it was better to keep the brands and sign the contract than to risk losing the brands?

And let us never forget (and yes, beer distributors seem to need to be reminded of this on a regular basis) they are Monster’s brands and they can do what they want with them, limited only by contractual bonds.  That’s the way the world works.

Are these terminations going to hurt some of these distribs?  Oh yeah.  In most Monster/ABI distribs the Monster brands are one of at least the top 5 gross profit contributors.  Sometimes 2 or 3.  So the loss of these gross profit dollars will most assuredly impact their bottom-lines.    

To which Monster and Coke respond… so?  You’ve made a ton of money on the brands over the years.  It was a good relationship for both parties but now the situation has changed and Monster and Coke are going to do what they perceive to be in their best interests… bound only by their contractual obligations.  Although I understand the distributor’s unhappiness, I see no evil here.

Which brings us back to craft brewers and distributors.  I’ve made a ton of friends by my stance on beer franchise laws and the three tier system ;-)  Yeah, right.

As I have written about before, I believe tying franchise laws and the 3 tier system together is a tremendous strategic mistake for this industry.  Beer distributors are the last line of defense for the 3 tier system.  Much like Frodo in the Lord of the Rings, if you don’t accomplish the task, no one else will.  And if the 3 tier system goes, so do most of you.

Franchise laws on the other hand are another example of putting power to use, only this time beer distributor power (funny how we like power when it benefits us, but hate it when it goes the other way).  Those prettiest girls at the dance, the craft brewers, are chaffing from these franchise laws and are fighting (effectively) to exempt themselves from them.  And in the process they are setting up the destruction of the entire 3 tier system.

Using the state’s power to enforce these laws is at the root of this problem.  Rather these relationships should be set just like most other business relationships, through negotiations and a contract(s) which legally binds the parties to the agreed upon terms.  No need for the state to become involved.  And yes, power does influence the terms.  If the brand is on fire and is thus the most desirable girl at the dance, the terms will favor them.  If the brands are a dog and the brewer will take almost anything for access to distribution, the terms will likely go the other way.

So rather than crying about the unfairness of life, beer distributors should embrace these realities.  Beer distributors have an incredible warehousing/sales/distribution/merchandising system.  No one comes close to your relationship at retail and your frequency of contact to the licensed retailer.

So rather than fighting for the state to grant you perpetual franchise rights (something I believe you are going to lose… power comes and goes), why not offer tiered services for the suppliers you represent?

For Class A suppliers, you offer full brand support.  Everything up to and including brand authorizations.  For these folks you bring everything you’ve got to the table to help them build the brands.  In exchange, they agree to contractual terms which in effect give you strong franchise rights.  Perhaps more favorable GP terms too.

For Class B suppliers, you offer a little less and they agree to contractual terms which don’t give you as strong as a position in ownership/control of the brands.

For Class C suppliers… etc. 

Do you see where I’m going with this?  You change the paradigm and rather than giving every supplier everything you’ve got (which in reality few do any how)… you allocate your tremendous power based on the degree the supplier is willing to be contractually bound to you. 

You can then allocate your resources accordingly.  Hot brands will still happen and a smart distributor will ride that wave as long as is possible, even if those brands happen to be from a Class D supplier. 

Political power comes and goes… as you and the craft brewers are learning… although both are going in opposite directions… but your lasting power doesn’t reside in the state legislature but in the incredible sales and distribution machines each of you controls.  Use that to your advantage.  Just because you agree to distribute a product does not necessarily mean you have to “give it all away” to each and every one.  That’s not what the prettiest girl at the dance would do.  ;-)

And smart craft brewers will draft their contracts to also take advantage of this shift to meet their individual desires and market realities.

If you want more on this, give me a call or email.  No more freebies from Conlin ;-)

The Insanity of the 21 drinking age

One of my many complaints about the world is the federally-mandated 21 year-old drinking age.  That we have brave men and women risking their lives for our collective freedom and safety… people who are entrusted with incredible power, who make life and death decisions on a regular basis… yet that they can’t legally drink a cold beer is BS in my book.

Almost all states allow young women to have an abortion at 18 without any parental consent… yet she doesn’t have the maturity to drink a cold beer for another 3 years?!  Regardless of one’s beliefs on abortion, this reality makes no sense.

CNN just ran a piece which you can find here on what science is telling us about this crazy policy.  Of you can read it in its entirety below…

 

21: Science's limit when it comes to the drinking age

By Jen Christensen, CNN

updated 7:11 PM EDT, Tue July 15, 2014

Source: CNN

(CNN) -- On July 17, 1984, President Ronald Reagan signed into law the National Minimum Drinking Age Act, which withheld a percentage of highway funds from any state that didn't raise the minimum drinking age to 21.

The week before, Reagan had declared ice cream a "nutritious" food.

Perhaps that's a hint that politicians don't always know what's best for your health.

Thirty years later, there is a group of people with Ph.Ds and MDs who take issue with the drinking age. They say, from a scientific standpoint, that the law may target the wrong teen behavior.

The law came into being to solve a serious public health problem.

Before the minimum drinking age law, 16- to 20-year-olds were the most common drunken drivers.

When the drinking age was raised, the number of fatal crashes involving a young driver dropped significantly, from 61% in 1982 to 31% in 1995. It went down more for that age group than any older age group.

But while the law did have a significant impact on drinking and driving, it did not stop kids from drinking. In fact, it may have made drinking even more appealing to teens, whose brains naturally seek out risk more than adult brains do -- without considering what the consequences might be.

A survey of students at 56 colleges across the country just a couple years after the legislation passed found that "significantly more under-age students drank compared to those of legal age." This study concluded that "the increase in purchase age appears to have been not only ineffective but actually counter-productive, at least in the short run."

The definition of adulthood is not clear-cut when it comes to science.

"There's no magic that happens physically to someone when they are 21 as compared to age 18," said Dr. William Graf, a professor of pediatric neurology at Yale.

The American Psychological Association (PDF) says that drawing a single line between adolescence and adulthood under the law is at odds with developmental science. They say adolescence usually begins at about age 10 and ends around 19, but really it depends; maturity is based on an individual's experiences.

Developing brains

Current data from the National Survey on Drug Use and Health and Monitoring the Future, the two official surveys that monitor such topics, suggest that roughly 65% of college students (generally aged 18 to 22) drink alcohol in any given month.

Most of the college students who choose to drink are binge drinking, according to a study out of Harvard. Seven out of 10 are consuming five or more drinks in a row.

Binge drinking can have a damaging impact on a developing brain. Evidence suggests that heavy exposure to alcohol can cause irreversible brain damage and cognitive deficits, including memory problems.

Scientists say the teenage years are one of the most important times for brain development, next to infancy. Neurons in the brain are growing and strengthening, connections are developing to allow the brain to transmit information faster and allow the brain to process more complex thoughts, and the brain goes through a kind of pruning process to eliminates synapses that are infrequently used.

All this brain development has a huge impact on a person's development and mental well-being. It also means that young people have lapses in judgment during this time period as they try to figure out how to be adults.

The limbic system, the part of your brain that is involved in processing social and emotional information, develops early in adolescents. But the prefrontal cortex, the part of the brain that involves judgment, impulse control and abstract thought and the ability to anticipate the consequences of your actions, isn't fully shaped until your late 20s.

Mimicking behavior

Abigail A. Baird, associate professor of psychology at Vassar College, has spent her career trying to understand what happens with the typical adolescent brain.

Baird argues that if anything, in terms of biology, the age limits on driving and drinking should be flipped.

"If I were queen for the day, I would move the drinking age to 18 and maybe not let them drive until they were 21, at least not with other people besides your parents in the car," Baird said.

She likes the idea of graduated driver's license laws that slowly let young drivers have more responsibility as they get more practice in the car. This is based on the theory that they will learn how to avoid accidents as they gain experience.

The statistics back her up. Before states introduced graduated licensing systems during the first six months of solo driving, newly licensed drivers were about eight times more likely to be involved in fatal crashes than more experienced drivers.

"We all know adolescents are obsessed with learning from their peers. ... Adolescents learn based on experience. They are not good at learning abstractly; that's what changes a lot between 18 and 21. When you get older, you can learn from reading stories about people and by really feeling for other people."

Baird believes that society could use the way young people learn, to help them learn how to drink responsibly at an earlier age. If drinking were less of a clandestine affair, perhaps a teen's peers could model more appropriate behavior for younger participants. She says it's important to learn how to behave around alcohol.

"Find me a business dinner that you will go to where you are not offered alcohol," Baird challenged. "In our society, you do need to know what do around it and how much you can handle."

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Wisdom from CNN?!  Go figure ;-)  If you want to watch an interesting video of drinking ages around the globe go here

Is the concept of “we mutually pledge to each other our lives, our fortunes and our sacred honor" only for saps?

First a clarification… in a recent post, which you can find here, I referenced a Steve and some have mistakenly believed I was speaking about my buddy and associate Steve Cook.  I was not.  I was referencing the Brewers Association inspired NYT op-ed by Steve Hindy.  And I didn’t even get a dang t-shirt!  ;-)  I’ll let you all figure that out. 

All I can say is that for 25+ years I have worked with beer wholesalers and I can tell you that you can take their word to the bank.  I’ll do a handshake deal with almost any beer distributor in the country, regardless of how many zeroes are in the deal.  The same cannot be said of others. 

To all the beer wholesalers out there… the craft brewers are not your opponent and it is destructive to think of them in that manner (and the same to you craft beer folks regarding distributors) but the BA is most definitely an opponent if not an outright enemy.  Accept reality as it is and deal with it.

But onward and upward… one thing a good manager (or consultant) must do is to always try to manage the “what if’s”.  What if this happens?  What if that happens?  How does that affect the company?  In this process one has to mentally project the business (or system) 5 or 10 years out.  What incentives does it drive?  How does it work once the dust has settled?

That’s why the present battles over franchise protection and carve-outs are so lacking.  Many of the arguments are focused solely on the here-and-now.  I don’t hear too many folks projecting out what these things might mean 5 or 10 years down the road.  And if history is any guide, tomorrow will actually show up.  ;-) 

That was one of the many insights of the founders of this country… they attempted to set up a system which would work today, next year, and 200 years down the road.  Does anyone see any such thinking in these carve-out/franchise arguments today?  Nope.  Government is simply a means to achieve one’s short-term financial goals.  Beyond that?  Who cares!  ;-) 

Let’s all see who can control the power (and the feedin’ trough… ‘cause that’s what it all comes down to) and they are today’s winners.  These battles are a microcosm of our larger society.  The founders of this country stated “we mutually pledge to each other our lives, our fortunes and our sacred honor.”  They meant those words and they captured the reality they faced.  From that to “how can I set up the trough for me”.  Sad.

I personally still see things lining up where the 3-tier system disappears in the relatively near future.  As I noted before, beer and beverage distributors are the last line of defense.  And I believe some of the larger distribs think they can survive quite nicely without it (I think they are wrong).

Craft brewers are going to regret the world they bring about.  A handful will prosper via alliances with MC or ABI but the rest are going to be local brewpubs.  And the Heinekens of the world will also have to choose a partner and hope it all works out for them.

Intellectually one can make a strong case that carve-outs are actually ass-backwards.  Beer distributors actually do (can) build small craft brands much more than they do established nationally advertised and supported brands.  One can argue that franchise protection should be applied to the small brewer with the carve-out being reserved for large, national brands.  I won’t hold my breath but if one analyzes the reality on the street that is much more consistent with the way things actually operate.

My argument remains that these things don’t need to be enforced by government.  Let the marketplace sort it out like happens in other industries.

It’s kind of funny but I’m working on an unrelated business start-up right now and I plan to offer strong franchise protection to my business partners.  Not government enforced… I WANT to do it.  I not only want them to make a good margin on the product, I want them to own and build equity in the manufacturing and distribution rights.  This is a proven method to ensure commitment from a business partner and to allow them to share in the financial rewards of success.

 Long ago I wrote a blog entitled, Plenty to Go Around, which you can find here.  Perhaps everyone in this industry should give it a read.  Do you have a mindset of scarcity or abundance?  I won’t hold my breath for the BA and others to get on board but as I noted above, the individual craft brewers remain supply-chain partners, not the opponent.

But since I remain a cynic, I’m still betting the 3-tier system is going to be taken apart… piece by piece with little thought given to the future… and few will be happy with where this takes us.  But what the heck do I know? ;-) 

 

 

 

 

 

 

Long-Timer or Free Rider?

Had planned to write no more about this but I received a surprising number of very personal responses to the last couple posts.  I know I’ll get beat up for relaying their feelings but they pleaded for their beliefs to get aired.  I think the recent posts got them fired up to vent their feelings… so get out the sticks for good ol’ Conlin and here we go…

This one captures the general feeling…

Your last two post are the truth and the truth hurts.  Beer people like me could care less about distribution values because I love the business with no plans to ever sell.  This business provides a great living each year for doing a great job executing.   On the other hand this type of information scares the hell out of people who dream of cashing out with a big check without ever putting in any effort to better the company.  They are The Free Ride Guys.  The Truth Hurts.

And another…

John, please add one more post just to screw with lazy, dumb ass owners who think they understand what this business is all about from warehouse employees to sales and everything in between.  Too many of the 2nd and 3rd generation owners do little more than cash their checks.  They do nothing and reap great rewards while their employees work really hard for their pay.   Most of these owners claim to be right wing Republicans but they are really Liberal Democrats who keep getting funding from the distributorships… “government/distributor” handouts for doing no real work.  They hide when there’s real work to be done but are always first in line come payday. 

 And lastly, a longer venting…

Conlin, it is sad that many owners never get to the warehouse when the day starts so they never get a pulse for what is really going on on a daily basis.  All they do is run around with their calculator crunching distributor “For Sale Value” every time they read an article from Harry or Benji when someone sells for an inflated price to see how much their deal is worth.  They run a few reports and think they busted ass for the day.  They leave in the early afternoon so as not to miss their favorite hobby. The only reason politicians like them is they give them campaign checks but they love telling friends how much influence they have with the politicians.  These owners have no clue how to relate to the working people of the distributorship, only the very few office people they see. Most managers know how to play them because they always tell these owners good stories, not the reality of what is really going on. (sadly, even if they knew the real stories they would leave for home and hope the problem will disappear). These owners receive not one ounce of RESPECT from any employee. From my personal experience and observation, in partnerships there is usually one person who actually loves the Beer business.

The others hang around Yacht Clubs, Tennis Clubs, Hunting Lodges and Country Clubs where they envy the members who have cashed out of their business. It kills them that they may never get to join that club. None of these guys I am describing love this business. Many were forced in by a parent, but they DO love the $$$$. I bet only a few of them could make over $100K on their own. The only thing that keeps some of them in is a son or daughter. The other cousins or siblings in the beer business that love this business keep these people from the big cash out. I would really love to know if these owners think they bust their ass every day for the yearly salary they receive????  They better be very thankful that other blood keeps the ship sailing in the right direction.  They had better hope that the real worker does not get the attitude that they are tired of making them rich while they keep working long hours and weekends while the lazy owners are at home or the Country Club.  It does make me angry to have to split profits with these types of partners. Most of them try other business deals but fail miserably because they have no work ethic or no real life experience.  If these type of owners were left to run things the operations would crash and burn within two years while they were getting stolen blind.  These owners have no clue how to run a beer operation.

Weee doggie!  Venting the ol’ spleen indeed!  There… to my friends who sent these (and others in the same vein) I’ve made your feelings public… now get out the pitch forks and torches and get after the messenger.

Strong feelings from folks who bring it every day versus those who they see as having as their sole interest protecting their lucky sperm club handout and free ride.  Although these feelings might seem only tangential to the arguments about franchise law, carve outs and the rest… might it not be the actual essence of the thing?  Just a thought. 

In addition, for some of these “unequal” relationships I recommend a frank and honest discussion about possible methods to meet everyone’s goals… it is possible with flexibility on all sides.  And a great consultant like me to help the process along ;-)

Other than that, I’ll leave it to the reader to decide the merits of the arguments… I’ll just add that I find folks who bring it every day are less concerned about exit prices than those “free riders” who operate with one eye on the exit door.

Thanks to the distribs and employees who shared.  This industry is filled with great folks… owners and employees.  We do a disservice to all when we focus solely on what we perceive as our short-term self-interest.

 

One more thing…

Well actually a couple more… had a lot of responses to the last post.  In no specific order:

 1.     Exit values – without franchise laws exit values will plummet.  No question about it.  It will probably end the exodus of beer wholesalers from the industry.  Wholesalers will make their money from operations, not a big payday as they head out the door.

2.      IMHO, equating franchise laws and the 3-tier system is a strategic mistake.  As a factual matter they are not the same and one does not imply or require the other.  It makes our defense of the 3-tier system look entirely (largely?) self-serving.

3.      Beer wholesalers (and the wine and spirits folks too) are the last line of defense for the 3-tier system.  If not you all, who?  The gold rush mentality of the craft brewers isn’t going to change.  And neither is their self-serving belief that no “antiquated” rules should apply to them.  They will gladly tear the guts out of the 3-tier system.  I have no doubt they will cry when the results of their rampage comes back to haunt them.  And it will decimate them.  But by then it will be done.  No one will be putting this genie back in the bottle again.

Chain retail, especially off-premise, has been fighting to get rid of the 3-tier system for years.  They will gladly go along.  All of us who work the street know what will happen to the craft folks when this happens.  And they think getting distribution is difficult now!  Wait… fools.  On-premise accounts can be had for the price of a draught system.  They aren’t even bringing a knife (or even a spork) to a gun fight.  They are self-important toddlers walking into an MMA cage.  Fools.

The larger brewers can live quite nicely without the 3-tier system.  I don’t see them getting involved in the fight, they’ll just let it happen and execute their strategies on whatever future happens along.

Let me repeat… wholesalers are the last line of defense for the 3-tier system.  NO ONE else is going to fight for it.  No one.  And the compromises being offered to the prettiest girl at the dance only moves the ball in the direction of its destruction.  I know you’d all rather not mess with franchise protection.  It will crush exit values and perhaps put your businesses at risk from the big 2.  Not a great situation, but you have to analyze it versus the other possibilities.

Perhaps franchise laws made sense in a world of 80 brewers… but they sure don’t seem to be compatible in a world with thousands of brewers.

But not to worry… I have absolute confidence of the following…

The craft folks will continue to be completely self-serving.  In the end they will see the foolishness of their moves, but by then it will be too late… and of course some will make big $$ before that happens.  THAT hope is solely what is driving their actions.

The big 2 will pay lip service to the 3-tier system but basically sit out the fight (and that’s what I’d do too)

Chains will look out for what they perceive is in their best interests… and this is basically anti-3-tier… ah, the dream of direct shipping.  Oh, and brewers are going to happily pay wholesalers money for not doing anything once this happens… yea, right.

NBWA will look out for the folks that run NBWA… remember it is just a good paying job for them.  One that they’d like to keep. 

 Beer wholesalers will fight to the death to keep franchise protection.  Put those all in the hopper and what comes out is effectively the end of the 3-tier system.  Perhaps sooner than most expect.  So don’t worry.  All will be well ;-)

 

Franchise law, carve-outs, and the 3-tier system

Well it seems the pot is really starting to boil.  The Brewers Association and NBWA are getting out the short knives.  Craft brewers and distributors are manning the ramparts.  Bars and restaurants are beginning to rise against the special treatment afforded to craft brewers, just because they brew the stuff.  Some distributors are telling NBWA to stay out of their state’s business.  It seems as if everybody is upset with someone… ah, ain’t spring swell?  ;-)

As some of you know, I was going to get into this fight, earning me my new nickname of Bad News Conlin ;-)  And it seems some may have plagiarized my work (and even my title), eh Steve?  I won’t even begin to discuss the self-serving (and unprofessional) actions of various organizations and individuals… but enough of that ;-) 

I’m heading in other directions and plan to leave this fight for others.  But I thought I’d throw out my 2 cents worth in an attempt to save the most dynamic and entrepreneurial beverage alcohol industry the world has ever seen.

It’s kind of funny how dang near everybody in this industry is making more money than ever before, yet the fighting only escalates as the dollar signs go higher and higher.  I think there is a word for this… but why go down that street?  ;-)

Let’s start at the beginning… December 5th, 1933.  Without that, none of you exist in your present form.  And the wisdom of the 21st Amendment.  I’d have to guess it never would have passed if it had attempted to determine the nation’s alcohol laws.  This side wouldn’t have like that.  That side wouldn’t have like this… and it would have died.

Instead the framers of the amendment made the right (and easiest) choice.  Let the stinken’ states decide.  It was clear the country wanted legal alcohol.  The well intentioned (well, at least somewhat well intentioned) 18th Amendment was a classic example of federal government over-reach.  Rather than following the basic structure of that failed experiment, the 21st Amendment went the other direction.  States-rights.  Alcohol consumption is by definition a local issue… my getting drunk every Saturday in Littleton doesn’t affect anyone in California.  So the 21st Amendment was written to both legalize alcohol AND to let the states decide alcohol regulation.

And part of this wisdom was the creation of the 3-tier system; a mandatory system whereby distinct “tiers” would only be allowed to operate in the production, transportation and sale of beverage alcohol.  THIS system is the reason we have the most dynamic beer, wine, and spirits industries in the entire world.  On this point there really can’t be any debate.  In these fights this point must never be forgotten.  It is the design that holds the entire system in place.

Yes, it in effect does use government to create a protected monopoly, the beverage alcohol distributor.  But the pluses to society FAR outweigh the negatives.

So everybody that’s fussing and feuding right now should pause and consider if their actions and desires help or hurt the 3-tier system.  For without the 3-tier, most of the players in this industry, brewers, distributors and even retail, would find their existence quite tenuous.  Alas, that has as much chance as the proverbial snowball in hell.

The beer industry (and general beverage alcohol) is undergoing a cultural revolution.  Not that long ago, all the players (brewers, distributors, retail) were basically family businesses.  And family businesses see the world and operated quite differently than public companies with their “professional” management.

Family businesses generally think much longer term… they have no need to focus on quarterly results and daily stock price.  Family businesses generally have a much stronger bond to their employees, to their customers and to their local communities.  This isn’t a moral statement, just a factual observation.

With the dominance of retail chain grocery, the family retail business isn’t quite as dead as the dodo but it is close.  Thus the way retail thinks has undergone a transformation.  And during this same time frame the power of these chains has increased exponentially.

It wasn’t that long ago that the major brewers were all family businesses.  Well A-B really wasn’t but Gussie and then the Third ran it as such.  Now all the major brewers are huge, international businesses… and they think as such.  Again this isn’t a moral issue; it’s simply the way it is.

Of course the upstart prettiest girl at the dance craft brewers are family businesses but I’m not certain they have the time frame thinking of the typical family business, perhaps in 20 or so years they might.  They are more creations of a “gold rush” mentality (and reality)… gettin’ some while the gettin’s good.  Is every craft brewer this way?  Of course not, but I’m speaking of in general.  And do they in general have an appreciation of the system design that has allowed them to flourish?  Nope.  And do they care?  Nope.  That’s just the way it is during a gold rush.

Thus the beer distributor is the only remaining player who still truly thinks and acts as a family business.  Again, no moral aspect to this… just the way it is.

But even our lovable beer distributor has undergone a transformation over the past 30 years.  Back in the day when every community had 4 – 6 distributors, each one was a nice family business that provided a nice living for the owners.  Now the typical distributor (of which there are now 2 in every community) is a VERY profitable enterprise – and about as recession-proof as any industry in the country (and as close as is possible to printing money)… most distributors rank in at least the top 0.5% (you’re there if your income is $1M per year).  That means 99.5% of all Americans make less than you do.  And many rank in the top 0.1%.  Thus 99.9% of all Americans make less than you do.

Not what most think of when they think of the “typical” family business, eh?  And for the most part, not a group that is going to get sympathetic treatment by the media.  And you are created by the government and state law.  If a brewer wants to go to market, they MUST use you.  There is no way around it.  It’s that or throw out the 3-tier system. 

Pull back and look at it from a non-distributor view-point… you’re a creation of the government AND you’re in the top 0.5% of all incomes.  I can hear the tiny violins playing right now ;-)

There was another transformation which also occurred during the past 30 years.  Beer distributors used their political power to pass franchise laws.  So now not only does a brewer have to use a distributor to reach retail and the end consumer, they in effect are forced to give up ownership of their brands, forever.  That one is kind of hard to swallow.

Beer distributor talk about how they build brands and thus deserve an equity piece of every brand they distribute.  That may or may not be the situation, but does the state really have to be involved?  Why can’t each party simply come to terms with the other and have this agreement captured in a contract.  That’s how every other business works.  Just because this is a regulated product does not mean that government must have their thumbs on the scales.

I firmly believe the entire beer industry is doing themselves and more importantly, society a disservice in the direction this fight is going.  And that direction is carve-outs for the small brewer.  If anyone thinks the definition of “small” will remain the same, I have a bridge to sell you.  Carve-outs are an affront to the 3-tier system.  Ultimately you can have one or the other but not both.

Carve-outs are the small brewer’s response to a clearly unfair situation… namely franchise laws.  And please don’t talk about the ability to terminate “without cause”.  We all know that is a self-serving illusion.

It seems to me that either franchise laws go or the 3-tier system does.  I know and love beer distributors but I vote to get rid of franchise laws.  The attempts to evade these self-serving laws are setting up the destruction of the entire 3-tier system.  The issue of pre-prohibition tied houses will pale in comparison when international brewers team up with incredibly powerful chain retail.

Sure without franchise laws one will see a lot more “churn” with the smaller brewers.  So?  One will also see an explosion of new distributors.  Beer distributors will have to fight to keep every brand they have, every day… again, so?  That’s the way it works in the competitive world the rest of us live in.

Without franchise laws the “need” for small brewer self-distribution goes away.  Here’s my recommendation for the craft brewer who wants to enter distribution.  Go to your local retailers and sell in your product.  That’s something YOU should be doing anyhow.  While at the retailer, ask them who they think is the best performing beer/alcohol distributor that services them.  Go to that distributor and tell them you have already sold in these products/quantities at these retailers and they are awaiting delivery.  Close the sale with the distributor.  The craft brewer can spend their time building the brand and not attempting to become a warehousing and delivery entity.  Sure they have to share the margin with the distributor (So what?  Distributors add real, tangible value) but the craft brewer is not force by law to forever giving up equity in their brands just to get distribution.  If they chose to, fine – that’s part of your negotiations.

Let me repeat, take away franchise laws and the intellectual arguments for self-distribution disappears.  And self-distribution is quite clearly the end of any type of 3-tier system.

Some distributors will say, without franchise laws (or getting equity in the brands) they won’t distribute their products.  No problemo.  The issue isn’t whether you will or won’t, the issue is will anyone.  Again, welcome to a competitive world beer distributors.  You won’t determine any of this, the marketplace will.  And you will do what the marketplace demands or you will pay the consequences.

The real problem beer distributors have with ridding themselves of franchise protection is with the big 2.  They are afraid what ABI and MC would do to them without franchise protection.  First, don’t forget the brands are theirs.  Perhaps the world doesn’t require as many beer distributors as are presently out there.  So?  Do you all have some god-given right to a monopoly which puts you as some of the richest individuals in the country?

I know distributors and their employees quite well.  I believe most (but not all) would fare quite well in a world without franchise protection.  Will some have to go through gut-wrenching changes?  Of course.  Will some cease to exist?  Again, of course.  Welcome to the world the rest of us operate in each and every day.

But most will survive and prosper in this new world.  I have yet to see a huge, multi-location distributor outperform the smaller, local distrib.  Never.  Add value and prosper.   Or if you truly are this century’s buggy whip manufacturer, then you are toast no matter what.  Please don’t destroy the dynamism of this industry as you fight to keep your government-protected rice bowl.

Have the courage to see that franchise laws are sowing the seeds of your ultimate destruction.  Get rid of them and draw a line in the sand… there is now no reason for carve outs from a system that has served society well for over 80 years.  Carve outs are the ultimate enemy and they will destroy the very structure that made the small brewer possible.  They will also destroy the most dynamic beverage alcohol industry the world has ever seen.  Getting rid of franchise laws will cause you some pain.  Allowing carve-outs to take root will cause your demise.  It seems the choice is pretty straightforward.

I know many out there will disagree with me but that intellectual position is based on one assumption… that the volume limits for carve-out exemptions will remain low (and controllable).  I simple do not believe that will happen… and once you give in on the intellectual arguments against carve-outs, the only barrier left in place is the volume cap. 

It is beyond naive to think that the BA, state craft brewers associations, and individual craft brewers are not going to continually push to increase these limits… forever.  Distributors, you are the only players left in the market who think long term.  If you give in, the 3-tier system disappears.  Based on my contrarian analysis, it’s as simple as that.

 

 

What does Ludwig say?

Yesterday The Wall Street Journal ran a great quote from the brilliant economist and philosopher, Ludwig von Mises.

As he noted, "Everyone carries a part of society on his shoulders, no one is relieved of his share of responsibility by others. And no one can find a safe way for himself if society is sweeping towards destruction. Therefore everyone, in his own interest, must thrust himself vigorously into the intellectual battle." 

 

And here is the piece from the WSJ…

Notable & Quotable

Economist Ludwig von Mises on the supremacy of consumer interests over producer interests in a market economy.

March 24, 2014

Ludwig von Mises, "Nation, State, and Economy" (1919):

One of the great ideas of [classical] liberalism is that it lets the consumer interest alone count and disregards the producer interest. No production is worth maintaining if it is not suited to bring about the cheapest and best supply. No producer is recognized as having a right to oppose any change in the conditions of production because it runs counter to his interest as a producer. The highest goal of all economic activity is the achievement of the best and most abundant satisfaction of wants at the smallest cost. . . .

Preferring the producer interest over the consumer interest, which is characteristic of antiliberalism, means nothing other than striving artificially to maintain conditions of production that have been rendered inefficient by continuing progress. Such a system may seem discussible when the special interests of small groups are protected against the great mass of others, since the privileged party then gains more from his privilege as a producer than he loses on the other hand as a consumer; it becomes absurd when it is raised to a general principle, since then every individual loses infinitely more as a consumer than he may be able to gain as a producer. The victory of the producer interest over the consumer interest means turning away from rational economic organization and impeding all economic progress.

 

Wisdom then, wisdom now.

Disruptive change - How will you respond?

I have a friend who owns a small taxi company (he also knows the beer distribution business pretty well).  He’s witnessed firsthand how disruptive technology can quickly transform an entire industry… can you say Uber?  Now the beer distribution industry isn’t facing a disruptive technology but rather a beer renaissance like the world has never seen before.  This is a very good thing but it is also going to be disruptive.  Change by its very nature is disruptive.

This friend sent a great email warning to beer distributors along this line…

… All the legislatures in the country are giving Uber and other ride sharing apps the green light breaking up protectionist laws in place for taxi companies that date back as much as 100 years.  The beer industry should be on notice!

The world is a changin.

He’s got that spot on.  The only question is how each of you responds.  He’s watched with amazement as the large taxi companies spend all their time and effort on using their regulations and protectionist laws (and “purchased” politicians) to try to stop the likes of Uber.  As he notes, perhaps they would be wiser to spend more of that time and energy in actually improving the services they offer… to actually compete rather than fight to keep the other guy out of the game.

Each of you faces the same issue.  Will you fight solely to protect your rice bowl or will you adapt to long overdue change and compete?  If you chose to fight like the taxi companies, you need to ask yourself what type of permanent political damage you are doing to yours and the industry’s reputation.   

Reputations are a lot like virginity, once you lose them they are dang tough to get back.  ;-)

You can (and sadly most likely will) wrap yourself in “good for the children and society BS” but if your sole concern is protecting a very self-serving, protectionist agenda you will be laying the groundwork for your eventual demise.

Fight or adapt and compete.  I know many of you and your organizations.  I hope you take the adapt and compete road … you’ll be doing a dis-service to your legacy and every employee if you attempt to man the protectionist barriers and demand the tide stop rolling in. 

And it’s generally never good news when an industry is in the news… following is an article from the 3/12 edition of National Review Online.  You can find the original here or just continue reading.  I counsel you all to choose your battles carefully.  Win or lose, fighting for the indefensible will do serious damage that will come back to haunt you.

jc

March 12, 2014

Alcohol Battles Brewing in the States

A slew of proposed laws would loosen restrictions on the sale of booze.

 By Katherine Connell

At least six states are taking aim at the country’s byzantine patchwork of state laws governing the sale of alcohol.

As any out-of-towner knows who has attempted to buy wine in a New York City convenience store only to unwittingly purchase the awful “wine product” Chateau Diana, laws governing the sale of alcohol can seem bafflingly arbitrary. In New York, where wine and beer cannot be sold on the same premises, it doesn’t look like Trader Joe’s will be tearing down the wall between its wine shop and grocery store any time soon.

Elsewhere in the nation though, from Maine to Florida, restrictions on alcohol are being challenged in state legislatures this year, driven in part by the burgeoning popularity of the craft-beer movement.

In Florida, Republican state senators have proposed measures this legislative session that aim to ease up on some of the rules currently hampering the state’s small-batch brewers. One bill would legalize the sale of 64-ounce growlers — containers filled straight from the tap, sealed and sold to customers — as is allowed in 47 other states. Florida at the moment permits the sale of 32-ounce bottles, but that’s not the industry standard. Another bill would allow licensed beer retailers to offer free tastings, as is legal for stores selling liquor and wine. The large beer distributors in the state are unhappy to see their market dominance challenged and will put up a fight.

A proposed law that was voted down last week in New Hampshire would have done away with the current requirement that all stores that sell beer also stock at least $3,000 worth of food. “If the bill were to pass, it could open the door for boutique-type beer stores that could cater to our smaller, yet growing, beer industry across the state,” Republican state representative Pamela Tucker said, before the bill was killed on a 163 to 142 vote.

Democratic representative Ed Butler insisted that the law was worth keeping because “the sale of food at stores with beer and wine hopefully encourages consumers to enjoy one with the other.” As the New Hampshire Union Leader editorialized, the assumption seems to be “that people who buy beer in bottles and cans have no food at home with which to enjoy their alcoholic beverages.”

Pennsylvania, which maintains a state monopoly on the sale of all types of alcohol, is infamous for the hoops it makes retailers and consumers jump through. It’s not possible to purchase wine and beer in the same location, and the only way to pick up a six-pack as opposed to an entire case of beer (the only thing typically on offer at the state-run beer distributors), is to swing by a restaurant or deli, which take advantage of “eating place malt licenses” to sell beer to go. Grocery stores in Pennsylvania have taken to attaching sit-down restaurants to their buildings so that they can do the same.

Legislative attempts to move toward privatization, as recently as last summer, have been unsuccessful in large part because the state-run stores are staffed by unionized employees who benefit from the status quo. Nevertheless, Republican governor Tom Corbett called last month in his state-of-the-state address for another go, and some legislators are prepared to take up the challenge.

“Let’s make 2014 ‘last call’ for state-controlled liquor in Pennsylvania,” Corbett said. “We have to reform our antiquated system of state-owned liquor stores. Visitors often wonder about it — unless they’re from Utah.”

In Utah, liquor restrictions are a live issue for different reasons. A majority of residents belong to the Church of Jesus Christ of Latter-Day Saints, which teaches its members not to consume alcohol. Beehive State lawmakers are in the midst of a heated debate about whether to tear down the “Zion curtain.” That’s the barrier, often a frosted-glass panel, behind which bartenders in restaurants are required to go to mix drinks or uncork beer for customers, so as not to expose children to the act of alcohol being dispensed. The 2009 law requiring the barriers exempted restaurants that opened prior to January 2010, so proponents of the bill to undo the law argue that the current rules unfairly disadvantage new businesses, in addition to alienating tourists.

Maine liquor regulators this year started cracking down on bars for displaying the alcoholic content of different beers, a practice that is prohibited in a post-Prohibition 1937 law that’s still on the books. The idea behind the law was to keep advertisers from making high alcohol content a selling point, but with the rising popularity of craft beers, which include a variety of more potent brews, it’s a common and seemingly commonsense practice to post alcohol content. Democratic state representative Louis Luchini is working on legislation to address the issue, but in the meantime, bar owners and brewers are unsure what the law requires of them.

Alcohol-content levels are at the center of a battle over beer in Tennessee, where there’s a movement being led by the Craft Brewers Guild to “Fix the Beer Cap.” Any beer exceeding 5 percent alcohol content in the state is classified as “high-gravity” beer and is subject to the same sales restrictions as liquor, which can only be sold in state-licensed stores. Even if a measure on the ballot in Tennessee this fall to allow wine to be sold in grocery stores is approved (an idea favored by 66 percent of respondents in a recent Vanderbilt University poll), the cap means that some beers with half the potency of wine would still be verboten in supermarkets.

“I know there are a lot of consumers who want to purchase Chimay, Delirium Tremens, and they want to be able to able to get it with the convenience of a grocery store,” said Republican state senator Brian Kelsey, who favors raising the cap. He and other state legislators have hit on one issue, at least, that can unite Republicans and hipsters.

It's settled... legal pot is headed your way!

It’s settled… legal marijuana will soon be coming to your state.  As you respond with a well-deserved, whaaaaa?... let me explain.  The first reports on legal weed sales in Colorado have arrived and they are amazing… 50% higher than previous predictions.  It looks like the legal weed industry (both “medical” and recreational) will be a $1,000,000,000 (yeah, that’s one billion) industry.  That’s in Colorado.  Can you imagine what it would (will?) be in a state with a large population?

This will bring in a couple hundred million in annual tax revenue for the state.  How many states in the union would like to tap into this free deluge of taxes?  Where else can they find this much easy money? 

Sure, they will wrap it in “good for the children” BS but what they really are eyeing is a mountain of greenbacks… all racing to the state coffers.  Money that the politicians get to spend!  Why do you think so many big-government politicians are vocal supporters of global warming (er, climate change)?  The way they “address” this issue is to tax carbon, thereby giving them a never-ending river of money to spend… and power to grab. 

To help get this initiative passed in Colorado, the first $40 million in taxes must go to school construction… oh, those precious little tykes!  See how that makes everything all right ;-)

Of course here in Colorado our fool governor is already planning new spending on this river of free money.  That’s the reason more taxes never solves any present problem, instead the leviathan simple gets bigger and bigger… but that’s a rant for another day.

These numbers also really bring to light just how large the illicit drug trade is.  Assuming some of these sales are from pot-tourists and perhaps this legalization has slightly increased consumption, these are still amazing numbers.   Each and every day this marketplace is operating in every state in the land.  It seems it can operate above ground or below, but it is going to happen.  With this type of money flowing, it is not surprising that criminal gangs fight so hard to control it.  And now our legal criminal gangs - politicians ;-) are going to be fighting for their take too.

No question I am a cynic but I don’t see many states walking away from this fire-hose of free money.  And as I noted in a previous post, unfortunately the serious potential problems with legal pot most likely won’t be evident for years and years… but that river of tax money can start right away.  And after a couple months of legal sales, the sky hasn’t fallen in Colorado.  So far there really haven’t been any reported downsides… some concerns about stoned driving but no facts that support those claims yet.

If I were a betting man, I’d have to wager legal weed is coming to your state, probably sooner rather than later.  If this is an industry you’re thinking of joining, I recommend you move quickly.  Many states are doing the ol’ marijuana two-step… starting with medical marijuana and then heading towards full legalization… mimicking either alcohol “control” states (where the state runs the stores) or “license” states (where the stores are independently operated under a license from the state).

If you are going to jump in, get moving on the medical side first.  At least here in Colorado, they have a considerable advantage once full legalization hits.

As I’ve always told my clients (mainly because I need them to be 100% honest with me)…

1.      1.    I don’t make moral judgments… things like running the mistress’s expenses through the company ;-)

2.      2.    I’m not the IRS… things like running the mistress’s expenses through the company ;-)

So if you want to talk more about this industry, give me a call.  Unless there is a huge, unforeseen issue, one would have to guess it is here to stay.  And of course once the politicians start spending this additional money, it will be difficult to voluntarily turn off the spigot… for then they would have to find a new source of funds (dang tough to find a politically viable source which will provide this level of coinage) or they would have to cut programs and people (ain’t going to happen).  Therefore once this thing gets going, it takes on a life of its own and most likely won’t ever end.  A ton of money is going to be made by a lot of folks.  That’s just the way it is.

A grand experiment indeed.

 

What is the future for brands?

There was a great article on the decline of brand strength in the most recent The New Yorker magazine.  You can find the original here or just continue reading for the full article.

Beer and beverage brands are different than a car or TV… their strengths are less physical but rather more mental and psychological.  The emotional ties are what drive their successes.  Thus beer and beverage brands face more risk when these psychological bonds begin to fray.  Bud Light, Coors Light, Miller Lite, etc. are what they are.  Unlike the auto or TV, new “gee whiz” technology won’t be able to impact the consumer’s desires.  Thus the challenge.   Or opportunity, depending on how one looks at it.

That said, here is the article…

Twilight of the Brands

 by James Surowiecki February 17, 2014

 Twelve months ago, Lululemon Athletica was one of the hottest brands in the world. Sales of its high-priced yoga gear were exploding; the company was expanding into new markets; experts were in awe of its “cultlike following.” As one observer put it, “They’re more than apparel. They’re a life style.” But then customers started complaining about pilling fabrics, bleeding dyes, and, most memorably, yoga pants so thin that they effectively became transparent when you bent over. Lululemon’s founder made things worse by suggesting that some women were too fat to wear the company’s clothes. And that was the end of Lululemon’s charmed existence: the founder stepped down from his management role, and, a few weeks ago, the company said that it had seen sales “decelerate meaningfully.”

It’s a truism of business-book thinking that a company’s brand is its “most important asset,” more valuable than technology or patents or manufacturing prowess. But brands have never been more fragile. The reason is simple: consumers are supremely well informed and far more likely to investigate the real value of products than to rely on logos. “Absolute Value,” a new book by Itamar Simonson, a marketing professor at Stanford, and Emanuel Rosen, a former software executive, shows that, historically, the rise of brands was a response to an information-poor environment. When consumers had to rely on advertisements and their past experience with a company, brands served as proxies for quality; if a car was made by G.M., or a ketchup by Heinz, you assumed that it was pretty good. It was hard to figure out if a new product from an unfamiliar company was reliable or not, so brand loyalty was a way of reducing risk. As recently as the nineteen-eighties, nearly four-fifths of American car buyers stayed loyal to a brand.

Today, consumers can read reams of research about whatever they want to buy. This started back with Consumer Reports, which did objective studies of products, and with J. D. Power’s quality rankings, which revealed what ordinary customers thought of the cars they’d bought. But what’s really weakened the power of brands is the Internet, which has given ordinary consumers easy access to expert reviews, user reviews, and detailed product data, in an array of categories. A recent PricewaterhouseCoopers study found that eighty per cent of consumers look at online reviews before making major purchases, and a host of studies have logged the strong influence those reviews have on the decisions people make. The rise of social media has accelerated the trend to an astonishing degree: a dud product can become a laughingstock in a matter of hours. In the old days, you might buy a Sony television set because you’d owned one before, or because you trusted the brand. Today, such considerations matter much less than reviews on Amazon and Engadget and CNET. As Simonson told me, “each product now has to prove itself on its own.”

It’s been argued that the welter of information will actually make brands more valuable. As the influential consultancy Interbrand puts it, “In a world where consumers are oftentimes overwhelmed with information, the role a brand plays in people’s lives has become all the more important.” But information overload is largely a myth. “Most consumers learn very quickly how to get a great deal of information efficiently and effectively,” Simonson says. “Most of us figure out how to find what we’re looking for without spending huge amounts of time online.” And this has made customer loyalty pretty much a thing of the past. Only twenty-five per cent of American respondents in a recent Ernst & Young study said that brand loyalty affected how they shopped.

For established brands, this is a nightmare. You can never coast on past performance—the percentage of brand-loyal car buyers has plummeted in the past twenty years—and the price premium that a recognized brand can charge has shrunk. If you’re making a better product, you can still charge more, but, if your product is much like that of your competitors, your price needs to be similar, too. That’s the clearest indication that the economic value of brands—traditionally assessed by the premium a company could charge—is waning. This isn’t true across the board: brands retain value where the brand association is integral to the experience of a product (Coca-Cola, say), or where they confer status, as with luxury goods. But even here the information deluge is transformative; luxury travel, for instance, has been profoundly affected by sites like TripAdvisor.

For consumers this is ideal: they’re making better choices, and heightened competition has raised quality and held down prices. And they’re not the only beneficiaries; upstarts now find it easier to compete with the big boys. If you build a better mousetrap, people will soon know about it. A decade ago, personal-computer companies like Asus and Acer had almost no brand identity outside Taiwan. Now they are major players. Roku, a maker of streaming entertainment devices, has thrived even though its products have to compete with similar ones made by Apple (which is usually cited as the world’s most valuable brand). And Hyundai has gone from being a joke to selling four million cars a year. For much of the twentieth century, consumer markets were stable. Today, they are tumultuous, and you’re only as good as your last product. For brands like Lululemon, there’s only one consolation: make something really great and your past sins will be forgotten. ♦

 

Holy Guacamole… continued

We are 14 days into the biggest social experiment in our lifetimes… the legalization of marijuana in Colorado (and soon Washington).  This is the first place in the modern world where weed is legal for retail sale.

It is a social experiment of immense (and unknown) proportions.  Many liken this episode to the 21st amendment which repealed alcohol prohibition and legalized (once again) its production, sale, and consumption.  I believe this analysis is actually backwards… I think a better comparison is with the 18th amendment, the one that outlawed alcohol.

You see, the 18th amendment was a grand, well intentioned (for now we’ll ignore the anti-Catholic/anti-immigrant aspects) experiment.  That’s what it was, an experiment.  Fed up with the excesses of rampant alcohol abuse, a motivated group convinced the country that the solution was to outlaw the product.  We all know how that experiment worked out.

Legalization of weed is also a grand, well intentioned experiment.  I personally believe it will work out a lot better than prohibition but that’s all that is, a belief.  No matter how one looks at the issue, it is an experiment whose long-term consequences are unknown.  And it sure looks like it is going to be copied throughout the country, years and years before these consequences are truly known.

Why is it going to be copied around the country?  Good ol’ cold, hard cash is going to drive it like a racing freight train across the country.  Not illicit cold, hard cash but cold hard cash as in a tax windfall for states that jump in the pool.

Here are some quotes from a Denver Post article, you can find the full article here… (emphasis added is mine)

Only one week into Colorado’s history-making recreational marijuana industry, one shop has already sold out of pot, others fear they may soon join it and perhaps as many as 100,000 people have legally purchased marijuana at Colorado stores.

Industry advocates estimate Colorado stores have already done more than $5 million in sales — including $1 million on New Year’s Day — though National Cannabis Industry Association executive director Aaron Smith acknowledges those are “back-of-the-envelope” figures. The owner of one store said she expects to make as much in sales in the first 10 days of January as she did all of last year selling medical marijuana.

Many shops have imposed caps on maximum purchase amounts well below the caps required under state law. Numerous store owners say they have sold out of marijuana-infused edible products. Toni Fox, the owner of 3D Cannabis Center in Denver, said she closed her store down on Monday and Tuesday this week, just to restock and give her staff a rest.

Even for stores that reported robust inventory, like High Country Healing in Silverthorne, owners said marijuana could become scarce across the industry if more stores don’t get their licenses approved and open to absorb the flood of interest.

“None of us could really prepare for what was going to hit us,” High Country Healing’s owner, Nick Brown, said on Tuesday. “I think we all thought we would see huge demand and lines. But I don’t think any of us expected what was happened over the last six days.”

More than 10,000 people bought marijuana at Colorado’s recreational pot shops on Jan. 1, according to industry estimates and tallies provided by the stores. And, while that initial surge was expected, the sustained interest was not. Brown and several other store owners said they saw only a slight drop-off in sales in the days after Jan. 1.

Colorado is looking at a flood of weed-related tax revenue flowing into the state.  It sure looks like it will be a windfall bigger than anyone expected… and other states aren’t going to just sit back and watch it happen.  Thus the experiment is taking wings right before our eyes.  Hopefully it turns out a lot better than the 18th Amendment.

It is mind-numbing to watch it happening… and this from a guy whose views lean libertarian.  The Denver Post… the major newspaper in the front range of Colorado has even started a website “exploring the culture of pot” which you can find here or just go to www.thecannabist.co.  This isn’t High Times magazine… in effect this is each of your local newspapers!

Want to know how to make the best weed-infused butter possible?  Want to check out the reviews for the “strain of the day”?  Cooking with cannabis, here’s how!  “Find a store near you”… just enter your zip code.

Want to know what the pricing and product situation is?  You can’t order marijuana on-line but you can be an educated price shopper.  Click here to see prices at one store… on a WHOLE range of products.  Of course there is smoking weed.  But edibles are huge.  Candy, flavored sprays, concentrated oils for use in vaporizers.  It’s all here.

Want the best vaporizer out there?  Check out our reviews!  Elliot, here’s a new market for FIN ;-)  Sorry, I couldn’t pass that one up.

Lots of opportunity here for everyone.  Perhaps a new income stream for Harry and Benj ;-)  Perhaps with a publication name like Wacky Weed Weekly ™?  Or Stoner’s Daily ™ or The Daily Stone™ or ??   Please send me some of your suggestions for a title.

Amazing to watch this process.  That disconnect between illegal and legal still rattles around my head.  How this all ends?  Will this prove to be a mirror image of the wisdom of the 21st Amendment or the well-intentioned but foolish 18th Amendment?

Is everyone in Colorado going to end up like this?  Seriously, you might enjoy that link and video ;-)  Or is it going to work out alright?

And what about alcohol sales?  It seems the general consensus is that legal weed will have a minimum impact.  I tend to agree but we must remember this is simply a WAG, nothing more.  (don’t know what a WAG is?  You should).

But I can’t help but believe there will be some sort of “lottery effect”.  Was all this money (and there is A LOT) being spent anyway, just in the illicit trade?  If so, this legalization is a good thing.  It also puts into perspective how MASSIVE the illicit drug trade is.

 Or more likely, a portion of this money was being spent in the black market anyway and is now circulating in the legal trade.  But one would think that at least a portion of this money is ADDITIONAL spending, and thus the lottery effect on alcohol sales.  It’s probably the later with the only question being how many additional, new incremental dollars are being spent on the weed-market and where these incremental dollars are coming from.  We’ll know the answer to that sometime down the road.

Strange world where smoking weed is more accepted than smoking cigarettes.  Will kids even bother with cigarettes?  I think weed is probably cheaper.  Or will being loaded become “uncool”?  Again, heck if I know.

And lastly a correction… I wrongly stated that out-of-staters could purchase up to 1 ounce at a time.  That privilege is reserved for in-stater’s.  If you are not from Colorado, you can only purchase ¼ ounce per retail visit.  I guess it will take more stops to fill up that glove box than I first thought ;-)  Oh, and the cops in surrounding states suggest you keep it in the trunk, not upfront with the passengers - really.  Well actually they also recommend you don’t bring it into/through their states… yeah, right.

Let me know what you all think of it.  It is amazing to watch.

Holy guacamole! Legal weed arrives in Colorado

Well in 2 days it will be weed-thirty in Colorado!  Yes that’s right, as of January 1, 2014 legal retail marijuana shops will be opening throughout Colorado.  Screw that medicinal bull; this is weed for those who simply desire it.  This became law via citizen initiative and won with strong support… 55% to 44% with almost 69% voter turnout.

Since this is a topic near and dear to many a beer wholesaler’s heart ;-), I thought I’d give all you non-Coloradoans an update on the Mile High scene.

First, it is interesting to watch and listen to people as they discuss the topic of legal marijuana.  You can hear a disconnect from many as they still think of the product as an illicit drug rather than the legal, state-regulated product that it will be in 2 days.  One would have probably heard the same types of things during the end of Prohibition.  But of course Prohibition lasted only a little over 13 years so for most adults they could remember a time when alcohol was legal.

That’s not the situation for marijuana.  There is no one alive who remembers a time when it wasn’t illegal… and for the Feds it remains a Schedule 1 drug… and for what that means I’ll let the Federal Drug Enforcement Agency’s website tell the tale (which you can find in its entirety here if you choose)

Drug Schedules

Drugs, substances, and certain chemicals used to make drugs are classified into five (5) distinct categories or schedules depending upon the drug’s acceptable medical use and the drug’s abuse or dependency potential. The abuse rate is a determinate factor in the scheduling of the drug; for example, Schedule I drugs are considered the most dangerous class of drugs with a high potential for abuse and potentially severe psychological and/or physical dependence. As the drug schedule changes-- Schedule II, Schedule III, etc., so does the abuse potential-- Schedule V drugs represents the least potential for abuse…

Schedule I

Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. Schedule I drugs are the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence. Some examples of Schedule I drugs are:

heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), 3,4-methylenedioxymethamphetamine (ecstasy), methaqualone, and peyote

So heroin, acid, ecstasy, Quaaludes, peyote and weed are classified the same by the federal government!  Yikes!  Schedule 2 drugs (by their reasoning not as dangerous as Schedule 1 drugs) include cocaine, meth, oxycodone (OxyContin) to name a few.  Earth to the Feds… coke, meth, and hillbilly heroin are one HECK of a lot more addictive and dangerous than weed. 

As a side note to all you parents out there… the Feds also include Ritalin as a Schedule 2 drug, i.e. in the same category as coke and meth.  Yet Ritalin is handed out like candy to children (generally boys) around the country… sorry, that’s just me temporarily getting on my soap-box again ;-)

Back to legal marijuana… since this product has never been legal in the memory of any living American, it is somewhat understandable that people still think of it as illegal and build their arguments from this perspective.  Denver City Council went round and round arguing that it should be illegal to smoke weed (on private property!) if anyone else could either smell it or see you doing it.  This foolishness was finally voted down but it shows how the illegal/legal mental divide will remain with us… probably for many years.

Of course under-age use is always a concern.  This one is harder to predict but my gut says most younger folks who want weed have no problem finding it right now… from middle school on up.  Some have predicted a rise in older use since they long ago lost their connection ;-) and I’d have to guess this might be the biggest user impact of legal weed. 

And of course there is that old belief that marijuana is a “gate-way” drug that leads to harder drug use.  In a counter-intuitive fashion, I think it might just go the other way.  When marijuana is illegal you must purchase it from someone who in all likelihood has quick and easy connections to those selling (and using) other drugs.  With legal weed this connection is broken.  Someone buying legal weed will no longer be dealing with people who will readily sell them other drugs.  At least that’s my guess right now.

In addition, one comedian was talking about legal weed and teenage use and his take was that legal marijuana will end up LOWERING teenage/youth use… when the kids sit around and watch grandma and granddad passing the bong, it will change the whole ‘illicit’ attraction.  He said it much funnier than that though ;-)

This transitionary period (forward if the experiment works or backwards if it becomes a huge failure) will be one of working out a lot of kinks and contradictions.  Since marijuana is illegal from a federal perspective, the weed industry can’t find any bankers who will accept their business… this is a problem for the “medical” marijuana retailers in every state too.  Financial institutions can’t knowingly do business with any individual/organization who is committing a crime.  Thus out of self-preservation, the banks refuse to do business with the weed industry.  To solve this problem Washington State is proposing the creation of a state-owned bank solely for the weed industry.  Many think this too is destined to fail since from the Feds perspective, it doesn’t matter who owns the bank… knowingly doing business with criminals is still against federal banking and financial law… and every one of these retail establishments, their grow operations, and every consumer is labeled a criminal under federal law.

Employers in Colorado and across the country can still fire you from your job for smoking during off-hours, even though you are using a now legal product... and using it on your time.  I personally don’t think this one will stand but that’s the law right now.  Expect the marijuana lobby to respond to this injustice with alcohol as their foil… “Perhaps we should pass a law where an employer can fire you for consuming a beer or two after work or over the weekend.”  The beverage alcohol industry should be prepared to address this since it most certainly is coming.  It will be interesting to see which side NBWA and state associations take on this one.

Weed might be legal in the state BUT on federal land (think national forests, BLM land, and national monuments)… if you smoke you are breaking the law and can be arrested.

Smoking in public is also against the law as is in public establishments, i.e. bars and restaurants, concert venues, etc.  But I think any analysis of reality will tell you this will rarely be enforced.  I find it difficult to believe cops are going to be on the prowl outside (or inside) of bars looking for folks who are lighting up a quick one.

And a quick one it will probably be… A letter writer to the local paper noted that the image of people standing around smoking joint after joint is based on the past.  This legal weed packs a punch. 

As a side note, a number of years ago I heard an agricultural geneticist talk about the incredible advances in the potency of marijuana that was achieved by a bunch of backyard geneticists.  To put it in perspective he noted that if similar advances were made with vegetables, one would be growing tomatoes that were four feet in diameter and watermelons twenty feet long!  I’d have to guess this trend will only continue.

Back to the letter writer… this writer explained it is far too expensive and far too powerful for this type of use… this is the infamous one or two-toke material.  Folks will grab a quick hit or two and then go about their business… or so this letter writer’s prediction.

In fact there are products called vaporizers (and others) that allow smokers to capitalize on this feature.  The magazine High Times did a review of some, which you can find here.  Here’s their lead paragraph…

Since our first vaporizer buyer's guide in 2011, a plethora of new pen-sized vapes have hit the market – offering cannabis consumers a stealthy, convenient way to get high in almost any location or situation. But with so many options, how can John Q. Stoner know which ones are worthy of their cash and stash, and which ones are worthy of the trash? Well, fear not, loyal readers – that’s where we come in. Our diligent staff has reviewed and rated (on a scale of 1 to 5) 15 top vapor pens so that you can get ripped without getting ripped off. We’ve provided vital specs on each of the following devices and judged them based on seven criteria: affordability, durability, versatility, high, stealth, health, and ease of refill. But first, some general info ...

This whole legal world should be an interesting experiment, eh?  Weed-based tours are already set up for January 1… think craft beer tours… and this could be a pretty big out-of-state attraction.  I’m certain in the very near-term we will see combined tours… weed and craft brewers.  I’d also have to guess car-based trips to our fair state will be going up substantially in the near term… with many going home with a glove-box full of high quality weed.  It is only legal to purchase (and possess) up to one ounce… but there are a lot of stores and it is not illegal to go back to the same store multiple times… so going home with a 6-month supply probably won’t be too tough… or if you want to sell back home, you can probably pay for your entire vacation with the proceeds.

Law enforcement around the country is already complaining that Colorado (and Washington State) are flooding their states with marijuana.  Assuming this experiment doesn’t go badly, I’d have to guess legal marijuana will quickly be adopted by many more states.  As the beer, wine, and spirits industries know so well… even folks who don’t like the product LOVE the tax revenue.  I can easily see state legislatures complaining that they are getting all of the impact of semi-legal marijuana without any of the tax dollars that come along with it.  Call me a cynic but I’d bet the dollars will win every time ;-)

From the beverage alcohol industry’s perspective… what does legal weed mean for beer, wine, and spirits sales?  Heck if I know!  If anything I’d guess perhaps a slight downward push but it is hard to say.  Are stoners more likely to stay home and drink or simply stay home or head to the local on-premise establishment?  We’ll know in a year or two.

Is there opportunity for distributors here?  From your present business model I’d have to guess not.  I simply don’t see a need for warehousing and distribution of this product.  There is though A LOT of money to be made… whether it’s grow operations or retail (or perhaps retail chain?) I’d guess folks are going to make a ton of money.  Probably be a little Wild West aspect to it for a while.  Do you jump in or not?  I think this will first be decided by your feelings on the Prohibition-aspect… is this an illicit drug or a legal, state-regulated product?  Your call.  In a week or two, the view from retail.

The 3-tier system needs more beer distributors

Although I don’t necessarily try to be a contrarian, I do try to follow where the facts lead… regardless of whether I like the path or not.  And for the 3-tier system I believe the pendulum has swung too far regarding the number of beer distributors in the country.  Yeah that’s right; I think the conventional wisdom on the “need” for continued wholesaler consolidation is wrong headed and actually counter-productive for Brand Beer… and all the players along the way.

Anyone in this industry has heard it time and time again.  It is a mantra repeated over and over again until no one even thinks to question the foundation of the belief.  Exactly WHY is continued wholesaler consolidation “required”?

 The tried and true response is for cost savings… to remain competitive.  Really?  Margins, both % and $$, are generally at all-time highs.  What has happened to all those folks preaching about how wholesalers MUST learn to operate on razor-thin margins?

Although folks only whisper it, many (most?) wholesalers are making record profits… all while unit sales are down!... all this in some of the toughest economic times the country has faced in decades.  My gosh, how would things look if the industry volumes were up?!  I look all around and I don’t see any economic pain in the beer distribution business. 

I hear how ABI and then MC are going to rape beer distributors… heck I’ve even written things in this vein… but I sure don’t see it happening. 

If ABI and MC (and others) are trying to do this they must be incredibly incompetent.  I mean record wholesale percent margins… record wholesale dollar margins… and record wholesale profits.  If that is being raped by your primary suppliers then I know of a lot of industries that would gladly take some of that.

But still the mantra… consolidation WILL happen.  Consolidation MUST happen.  It is pre-ordained that consolidation is the way of the future.  Why?  Based on what facts?

From my observations, as beer distributors become larger and larger they become more wholesale logistics entities and less wholesale sales entities.  They can be very efficient on the distribution logistics… the nuts-and-bolts of receiving, warehousing, and delivery but they seem to be less and less sales entities.

 In fact some of the best known management and M&A consultants in the industry have preached for years that this is the preferred path for beer distributors.  Forget that “sales stuff”, let the suppliers take care of that and you can simply be a warehousing and distribution business.  Sadly, the industry followed their advice and now the vast majority of the beer a wholesaler distributes is already sold for them; they are simply replenishing the stock at retail.  I question whether putting up shelf strips, static stickers and building pre-sold displays are really the marks of a “brand building” industry.

Is some of the softness in Brand Beer (especially the national stuff) simply the logical consequence of losing the local market feel that a smaller distributor had?  Is Brand Beer getting its butt kicked by the spirits folks in part because beer distributors are becoming more and more like the large wine and spirits distributors?  Especially in their relationship with retail?  The special sauce that helped make beer such a powerhouse at both retail and consumer was (is?) perhaps based on their close relationship to retail.  A relationship which is weakened each time a distributor gets larger and larger.

I’ve heard this many times from beer folks.  I was just talking to one of the best beer guys I know and he noted he was far more intimately aware of his market when he was one million cases versus the six million he now is… and he’s still the beer guy he always was… he didn’t put in the clutch, it’s just that it is next to impossible to match local market knowledge and execution with a smaller distributor versus a mega-distributor.  That’s just the way it is. 

I don’t think it is good for Brand Beer in general or brewers and beer distributors in specific to continue to chase this supposed necessity to consolidate.  Craft brewers, craft distillers, consumer product manufacturers of all stripes are seeing a mad rush to local.  Brand Beer and big brewers and distributors ignore and/or fight this trend at their own peril.

If brewers want/need a larger footprint, then form larger associations of local beer distributors.  Long ago I gave away this wisdom and I’ve yet to see a state really run with it.  Lots of opportunity if distributors can just check their egos and the need to be the boss at the door… and of course get over the need to try to eat all the other distributors in the state ;-)

I understand operational synergies as well as anyone but one would think that at some point, the cost at retail to an ABI or MC of reducing their distributor base will far exceed the benefits of having one less warehouse out there to ship to… of course there’s always the issue of having one less beer wholesaler’s family (and senior management team) to support ;-).  Is consolidation being driven primarily by this fact alone?

Remember that beer isn’t wine or spirits.  The requirements at retail for beer are MUCH different than spirits.  A case of 1.75’s is one heck of a lot more drinks than a case of beer… and it doesn’t have a product-life of only around 3 months.  I won’t even bother bringing up the retail realities of draught product.

Soft drinks are much different too.  Beer distributors aren’t doing the manufacturing on-site.  This leads to different economics when considering warehouses (or plants) required.  This drives one to far fewer plants in any specific area vis-à-vis a beer distributor.  Beer warehouses are operationally cheap by comparison.

And one can only take the operational savings of closing warehouses so far.  You still have a very high retail service frequency and thus miles and additional drivers and trucks very quickly equal lots more dollars.  At some point in time it is cheaper to keep a warehouse open than it is to run the delivery operations from a distant location.  I know, I’ve done that analysis many times.  And with higher fuel prices, this distance shrinks for every fuel $ increase. 

And what about everyone’s favorite darling, social media?  Social media for beer folks is the essence of local.

Throw these all in the mix and it becomes evident that beer operations simply won’t consolidate down to the level of the pop or wine and spirits folks.  Not going to happen.  Include the overall general trend of the strength of local and it becomes evident that this inexorable march to consolidation is based on false pretenses.  Just because it is repeated often does not make it so. 

Obviously in major urban markets more consolidation is possible because of limited distances and high population density… but those same features are what allow for less consolidation in these exact areas! 

Is some of the softness in Brand Beer due to wholesaler consolidation and the corresponding loss of the local relationship?  I’d have to guess yes.  I don’t think one or two mega-distributors per state are good for Brand Beer or the brewers… big, small, or in-between.  And it most certainly isn't good for the foundation of the 3-tier system.  And I don’t think it’s going to happen regardless of what someone keeps repeating.

On a completely different subject… do you know of anyone who sold out in the last 25 years who did so out of financial necessity?  Or who really wanted to leave?  I know of none.  They only left because someone drove a dump truck full of cash to their front porch.  They left because someone was willing to pay them 20 years of after-tax income in one lump sum.  This is the ONLY thing driving consolidation in this industry.  It’s not need… it is someone else’s money.  I think this is rotting this industry from its core.

In addition, think of that… in at least 25 years not a single entity (or very freaking few) faced financial pain that demanded they close up shop.  No one has gone out of business in this industry in decades.  Other than government, I can’t think of a single industry in the entire country that can say the same.  Amazing.  Is this a forever thing or simply a sweet-spot that is going to end sooner or later?  More on this point in future posts and articles.  2014 is going to be an interesting year for the beer distribution business… I guarantee it!  ;-)