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October 2014

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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."

 -------------------------------------------------------------------------------

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!  ;-)

 

Advice from Niccolo Machiavelli?

In the spirit of the coming holiday season I offer this Machiavellian little ditty.  I’m hearing this one spreading more and more, like a quiet wildfire, and in my role of providing news, opinion and insights you can’t find anywhere else… here goes.  And please remember I take no stand on either side… as Joe Friday would say, “just the facts ma’am” ;-)  And if you don’t know who Joe Friday is, you should.

But first let’s take a mental field trip with our old friend Niccolo Machiavelli.  Perhaps you have heard the phrase of being Machiavellian?  Machiavelli is famous as the author of a small book, The Prince, published in 1532.  In it he applies the analytic tools of science to politics to determine the best way to rule effectively… remember this is the 1500’s… kings and princes ruled the land.  To be ineffective might mean your head ending up on a spike.

One of the general themes of The Prince is that accepting the aims of princes—such as glory and survival - can justify the use of immoral means to achieve those ends.  Basically Niccolo gives his advice from both thought and observation on how to best achieve one’s princely goals.  People to this day still argue about his thoughts on “right and wrong” versus success. 

He is the source of great quotes.  Some are…

“Everyone sees what you appear to be, few experience what you really are.”

“If an injury has to be done to a man it should be so severe that his vengeance need not be feared.”

“There is no other way to guard yourself against flattery than by making men understand that telling you the truth will not offend you.”   This one every owner and manager needs to understand.

“it is much safer to be feared than loved because ...love is preserved by the link of obligation which, owing to the baseness of men, is broken at every opportunity for their advantage; but fear preserves you by a dread of punishment which never fails.”  This is probably pretty good advice for a prince in 1532 and it kind of captures the essence of what is meant by being Machiavellian.  Perhaps a Who’s Your Daddy culture IS better than a Who’s Your Buddy?  I think Niccolo might think so.

“The first method for estimating the intelligence of a ruler is to look at the men he has around him.”  Look at your management team… how do you stack up? 

“A man who is used to acting in one way never changes; he must come to ruin when the times, in changing, no longer are in harmony with his ways.”  Good advice for today’s beer industry.

“Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.”  Talk to your management team and attempt to permanently instill this thought in their minds.

“The promise given was a necessity of the past: the word broken is a necessity of the present.”  We have all probably experienced this from suppliers and retailers of yesterday and today… and perhaps in the backseat of a car in our rambunctious youth ;-)

Anyhow I think you get the gist of Machiavellian.   So what does this have to do with beer wholesalers? 

First a couple more side trips…

Many ABI distributors find themselves in the unenviable position of fearing their primary supplier.  Not only is ABI using the US beer market as a Cash Cow, they are also using “their” distribution system as a significant source of milk.  And one would expect that ain’t going to be changing… I’d bet it will get worse long before it gets better.  Although part of me asks what is the basis for all of this (I know, shocking eh?).  I see ABI distributors making record profits… in lousy economic times… so what’s their beef?  But what do I know?  ;-)

But many ABI distributors are looking for protection nonetheless… from their favorite source of protection, state legislatures.

As I have written about in Who’s Your Daddy, which you can find here and a follow-up piece Who’s Your Buddy, which you can find here… ABI and MillerCoors seem to be taking different paths in this game.  ABI is most definitely an “I’m your daddy”- type corporate culture.  MillerCoors seems to be taking a much more “I’m your buddy”-type culture.

Now this could be simply the result of who is running the companies… and as I have noted, Brito and crowd come from a much different culture than the typical American.  But I think it becomes reality based on a simple fact… power… eh, Niccolo? 

Starting with the Third, A-B has been slowing turning “independent” distributors into franchisees.  Most A-B distributors welcomed this trip and even hastened it along… it was easier (and still is?) to let corporate do all of the thinking.  Ultimately, most hurried down this path because they were making boatloads of money (and most (all?) remain doing so today).  In addition, when a supplier makes up close to 100% of a distributor’s volume, they do have more than a little say in how things are done.

Which brings us to a second point, the concept of robustness.  A measure of how robust a system is is “its ability to effectively perform while its variables or assumptions are altered”.  A robust system can operate without failure under a variety of conditions.  The more robust a system, the better it is equipped to deal with change, both foreseen and unforeseen.

Looking at the ABI versus MillerCoor distribution systems, the typical MillerCoors distributor is far more robust than their ABI competitor.  This is not due to someone’s careful planning, it’s the result of market shares and what distributors have had to do in order to survive and prosper.

A distribution system with only one supplier is pretty much by definition not as robust as a distribution system with 10 different suppliers, none being a big majority of share.

Thus the typical ABI distributor is at far more risk from change than is their MillerCoors competitor… because their distribution system is less robust and thus is less able to “to effectively perform while its variables or assumptions are altered.”

Combine this system reality with an aggressive supplier who looks at you as a Cash Cow and the typical ABI distributor is under tremendous strain… or so they perceive themselves.

Which brings us back to Machiavelli.   What advice would Niccolo give to ABI and MillerCoors distributors?  For the ABI folks… work aggressively to make your distribution system more robust.  As long as they have close to total power over you, they have close to total control over you.  Great goal but that too ain’t going to happen overnight.

Perhaps try to enlist your distribution competitors to help provide some protection for you from the potential ravages of your supplier.

But this is where the Machiavellian part raises its head… from what I hear in the shadows around the country, old Niccolo is finding some willing converts to his way of thinking in the MillerCoors network. 

I think Niccolo would warn the MillerCoors folks from going too fast in the direction of fighting to help your competition.  If your primary competitor… a competitor who has kicked sand in your face for years… a competitor who due to market share has ruled you and the retail scene for years… if this competitor is now being bled and thus weakened by their new master, why would you want to stop it?

If this competitor is being weakened by the actions of their supplier, why wouldn’t you sit back and let them be?  Wouldn’t it make more competitive sense to allow any and all things which weaken your competitor to take place?

Niccolo might ask why should a MillerCoors distributor join the fight for uniform FOBs… this is a weapon which cuts their competitor much more than it does them. 

Niccolo might ask why should a MillerCoors distributor join the legislative fight on any of these fronts which at their core are primarily directed to stop moves by ABI.

Niccolo might ask why should a MillerCoors distributor fight any of these fights FOR their competitor, especially when their competitor has failed to answer their requests for help in the past… sorry, I’ve heard that complaint for many years from many states.  “Just the facts, ma’am”

Of course the answer to these questions is “it might happen to you someday too”.  But the MillerCoors distributor is more robust so the odds of it damaging them are much smaller.

And Niccolo might scoff at the idea of “someday”.  What matters is the here and now, not some hypothetical future which may or may not ever occur.

Niccolo might ask what does the MillerCoors distributor get (because EVERYHING has a price) for supporting legislation that primarily benefits their main competitor.  He might advise to support, but to ensure you are paid handsomely for this support.  Extracting a pound of flesh when the opportunity presents itself… or letting the bleeding continue.

I have preached the importance of unity for beer distributors for some time.  You can read any of my past posts to see this is true.  And I don’t take a position on any of what I’ve discussed… just asking the questions.  But these are interesting questions and I believe a strong case can be made for both sides…

The “we’re in this together” side AND the “let them be bled dry” side.  I know a surprising number of MillerCoor distributors who are beginning to lean to the “let them be bled dry” side.  After almost 500 years,  good ol’ Niccolo’s advice is still perhaps right on the money.

Which side are you on?  It is interesting times in the beer business, eh Niccolo?  And to all you state association execs that herd cats on a daily basis… sorry.  Have a great holiday season ;-)

 

Technology is changing industries AND consumers

The major trade publications continue story after story regarding the softness in the big beer brands.  In fact they note that big brands of all types of beverage alcohol are struggling.  Unfortunately they all also continue to look to the past to explain the present and predict the future.  Wrong!

The following post was first printed in October 17th edition of Modern Brewery Age.  You can find the original at http://www.breweryage.com/tabloid/archive/2013/JohnConlin.pdf

Or you can simply continue reading.  As a side note, if you don’t subscribe to Modern Brewery Age, you should.  It is well worth the price and provides unique news and data you won’t find anywhere else.

 

Technology Has Changed America’s Taste in Beers

By John Conlin

President, Conlin Beverage Consulting, Inc.

First a disclaimer by the author.  I offer analysis, not my desires and wishes.  Only by looking at the facts can we hope to devise a successful strategy for dealing with the realities we face.

That said, is technology killing America’s beer industry?

No. But it’s changed America’s taste in beers, probably forever. The big losers? The mega-brands that have dominated the industry for more than a generation.  It’s not that the consumer no longer desires the likes of Bud Light, Coors Light, Budweiser, and Miller Lite, the top four brands in the country, but rather that the consumer for which these products were developed is rapidly transforming.

It wasn’t that long ago that one of every four beers consumed in this country was a Budweiser.  Even today, one of every five beers is a Bud Light. These mega-brands and their mass produced and mass marketed appeal ruled the beer world.  Similar mega-brands ruled most consumer products, killing off their smaller regional and local competitors over the past few decades.  But many of these mega-brands are seeing falling sales as consumers race to other brands and products. 

Are we seeing the end of the mega-brand?  Yes and the culprit is technology.  Technology is remaking of the very essence of the American consumer.  The impact of this technology skews toward youth but it is impacting all of us, regardless of age.

Technology has brought choice and personal customization to almost every area of our lives.

It is remaking of the very essence of the American consumer.  That in turn has changed what we buy and how we buy it.

Look at TV entertainment. First came the change from three networks to hundreds of channels. And now the Internet has transformed the entire concept of visual entertainment. Today, we can pick the time and source of what we’ll watch -- and the device we’ll use to watch it.

There are very few “mega-brand” TV entertainment shows any longer. As a result, viewers are watching very different things.

And how about the ubiquitous smart phone?  Here is a product which has already become the most important item in many people’s lives.  It is the primary means that they use to interact with the world around them.  And it allows almost complete personalization.  Almost every aspect of it can be changed to fit the user’s desires.  And it can easily be changed tomorrow and the next day and the next.  You can listen to the music you want when you want.  You can watch video entertainment of your choice and time.  Smart phones offer immediacy. The explosion of apps offers people ways to use these powerful computers in their personal and professional lives that was unimaginable only a few years ago.  The iPhone was introduced only 6 years ago! 

Which brings me to my observation; to believe that this consumer, and all who follow, will be drawn to some mass-produced, mass-marketed mega-brand is beyond wishful thinking.  The foundation of a mega-brand is built on a consumer who is becoming rarer each and every day.  From a manufacturer’s perspective, the problem isn’t with the product.  The problem is that the consumer for who the product is designed is becoming more and more scarce.

Not only is this technology changing the expectations and desires of the average consumer, it is also allowing these desires to be met.  Advances in technology and manufacturing now allow small players to produce world-class product, for relatively small investments.  This is true for manufacturing, packaging, labeling… the whole nine yards.  And although there still might be some economy of scale advantages for the mega-manufacturer, and these have historically been quite large, these advantages are shrinking all the time.  And all evidence is that this will only continue.  In addition, in a world where customer choice and personalization is king, being smaller, nimbler, and local is an advantage, not a weakness.  The huge plant built on the concept of very large production runs might be turning into an albatross, not a competitive advantage.

The Internet ties directly into both changes allowing a free flow of information and opinion from both consumers and manufactures.  Put all these together and you have a contradiction.  The present consumer mega-brands and their manufacturing infrastructure simply aren’t built for the world in which they find themselves.  And nothing they can do will change this reality.

In the beer industry, we see it with the explosion of craft brewers and the share declines of the mega-brands.  Of the top 4 brands; Bud Light, Coors Light, Budweiser, and Miller Lite, only Coors Light is eking out a volume increase.

On the other hand, the Brewers Association reports that as of June 2013 there were 2,538 breweries in the United States, more than at any time in our history. Over 400 came on-line in 2012 alone. More are coming.

This craft industry was up 15 percent by volume and 17 percent by retail sales dollars in 2012; this in an industry which was up around 1% in volume in 2012.  And the move to these smaller, more personalized brands is accelerating.

Some mistakenly believe this softness in the mega-brands and the incredible craft beer renaissance is due to changing consumer tastes and that light lagers are dying.  Or that they are finally paying the price for years of sexist advertising.  Or their creative material is lacking.  Or pricing is too aggressive.  Or the foreign ownership of the big two brewers, Anheuser Busch InBev and MillerCoors.  These and many other reasons are being tossed about in an attempt to explain the present situation in the world of beer.

Although there might be some truth to each, the underlying reason is far deeper.  The power of technology has profoundly changed our expectations of the brands we consume.  The one-size-fits-all mega-brand is simply not in sync with this transformed consumer.  This is true in almost every consumer products arena.

Craft distilling is exploding. Artisanal products are taking off. Natural and organic products, almost always from smaller manufacturers are taking share from their larger, national competitors; and these new kids on the block are doing this all with almost no advertising or marketing.

The country is headed back to a time when small local and regional manufacturers command the consumer’s affections. These consumers desire choice and are drawn to authentic, unique, and local products and brands, not mass produced products with ubiquitous national advertising.

This will hit large national/international manufacturers hard with share losses coming primarily from the big national brands that have dominated the market for the past few decades. Ironically, it’s their size and dominance that make them vulnerable.

In the beer world, expect to see continued declines in the mega-brands as they fight what is most likely a long-term losing war. Gimmicks with packaging and less (or more) sexist ads won’t change this reality. The consumers these mega-brands were developed for are quickly changing to become adverse to their value proposition.

Technology that has enabled small manufacturers to succeed in the marketplace has transformed many industries in a very short period of time. And that includes the beer industry.

Will the Big 4 beer mega-brands die overnight? Not likely. But their future is one of tough times. Consumers have changed and are never going back. More and more they expect and demand the ability to personalize all the important brands and products in their lives -- including beer.

------

John Conlin, President of Conlin Beverage Consulting, Inc. has been providing operational, financial, and merger and acquisition consulting services to the beer and beverage distribution industries since 1986.  Conlin is an expert in the operational and financial aspects of mergers and acquisitions, organizational improvement, and driving corporate change.       

Are you a panda or a cockroach?

Robustness.  A measure of a system’s ability to deal with changing inputs while still functioning at a high level.  A robust system continues to function even though inputs change.  A less robust system’s performance is negatively impacted by input changes.

These systems could be anything… software code… a mission to Mars… a company or organization… your family car… even a living organism.

The old Windows operating system was a great example of a piece of software with a low robustness factor.  If a person hit the “wrong” key, you’d confuse the software, get a blue screen and have to re-start the computer.  A robust piece of software would continue to function even though the user made many wrong entries.

If one were designing a flight to Mars, one would want it to be very robust.  Stuff happens and you’d need the systems to continue to function within a wide range of inputs.  No pulling off to the side of the road if you have any problems on this trip.

You family car has become more and more robust through the use of technology.  Ideally it continues to function even in extreme situations (changing the inputs) like full braking or ice-covered roads or evasive, accident-avoidance.

And this type of analysis also works for living systems, i.e. animals.  For this example I take two extremes… our friends the panda and the cockroach.

We’ve all probably heard stories about that tough SOB, the cockroach.  Survive a nuclear war.  Survive dang near anything, anywhere.  THAT is one robust system.  Inputs might change.  Individuals might be wiped out.  But there will be enough survivors to keep the cockroach roaming the planet.  A single female American cockroach will produce around 150 young in her 1,000 day life time… Do the math.  That can add up to A LOT of cockroaches in a very short period of time.  They are omnivorous scavengers who will eat almost anything.  They can go for as long as 6 weeks without food… they are fast, sprinting as fast as 80 centimeters per second (that’s over 31 inches per second) and can turn on a dime at full speed… and yes, the can live without their heads for weeks.  Talk about robust!

On the other end of the spectrum there is our warm and cuddly friend, the panda.  The panda is a very specialized animal.  It basically eats only one thing… 99% of its diet is bamboo.  Which is unfortunate from a robustness-viewpoint.  An omnivorous scavenger who will eat almost anything is WAY more robust than an animal which eats only one thing.

Even worse, bamboo has almost no nutritional value.  Therefore the panda must spend 10 – 16 hours PER DAY foraging for food and eating 20 – 40 pounds PER DAY to keep alive.  And even then the panda has a very low energy level.  It becomes exhausted after only minor exertion.  The female ovulates once per year and can become pregnant for only a period of 2 – 3 days.  Many don’t even have the energy or desire to breed.  From an evolutionary viewpoint this is a useful adaptation since you couldn’t have a lot of pandas wandering around… they’d eat all the bamboo and they all would die.  But from a long-term survivability viewpoint, this all adds up to a very low robustness and thus, an endangered species.  Human activity hasn’t helped them but they are in reality a very specialized animal which is most likely, long-term a temporary visitor on this planet.

Which brings us back to you and your organizations and the title question… are you a panda or a cockroach?  How robust is your organization?  I don’t know about you, but I’d sure rather build a cockroach organization than a panda organization.

From a supplier/risk viewpoint, the MillerCoors distributor is more robust than their ABI counterpart.  Since the typical MillerCoors distributor has their volume spread over more suppliers, they are less vulnerable to “changes in inputs”, i.e. specific brand declines, than their ABI brothers and sisters.

Many ABI distributors are attempting to become more robust through the addition of new suppliers.  Most likely a wise path to walk but in the short- to medium-term, ABI distributors will be VERY reliant on one very significant input.  That’s just the way it is.

But what about other changes in inputs.  How does your company stack up on the robustness scale?  Look at your personnel.  If ol’ Joe gets clipped on the highway some morning does your company continue operating at 100%?  If your ordering person wins the PowerBall and walks out with no notice, do you not skip a beat?

If anything happens to ANY of your folks does the system keep operating at a high level or does it have problems?  Are you a panda or a cockroach?

In your next management meeting spend a little time looking at every aspect of your business… people, technology, energy, equipment, brand/supplier strategy, disaster planning, vision and mission, etc. and ask how we can become more cockroach and less panda.

If tough times come the cockroach will still be around ready to take advantage of all the opportunities change presents.  The panda can barely get by in good times, in tough times it is probably toast.

So ask yourself, are you a panda or a cockroach?

 

 

 

 

The Coming Artisanal/Craft Era

Paradigm shift - a radical change in underlying beliefs or theory.  Some times in history it is evident that one is living in an on-going paradigm shift.  The French and American revolutions might be examples.

But I believe most of the time we are unaware of the incremental small changes that are occurring around us.  If you could step out of the here-and-now and look down on what is happening it might be quite evident… but since we live in the here-and-now we often don’t see the paradigm shifts until they have already happened.  It is always easier to view the past than the present.  Then one can look back and see how “obvious” these changes were.

With that intro, I believe we are in the midst of a profound paradigm shift that will rock most consumer product companies to their core.  Over the recent few decades this country has seen the growth of large consumer product companies with their associated strong national/mega-brands.  The smaller local and regional players were hit pretty hard during this time… in fact most have been squashed as this national/mega-brand reality simply rolled over them.

But that tide has already turned.  I believe we are in the midst of an explosion of artisan or craft consumer products that will only accelerate over the coming decades.  One sees it in this industry with the explosion of craft brewers.  The Brewers Association reports that as of June 2013 there were 2,538 breweries in the US… more than at any time in the country’s history.  And hundreds more are coming on-line.

Although it hasn’t receive as much attention, the craft/artisanal distilling industry is following the same path as craft brewers… although at an even faster pace. 

The local paper in Denver had a recent story on an artisanal cheese manufacturer.  This paradigm shift is not localized to any one industry or region.  It is the tip-of-the-spear and it is moving like lightning.  And I believe it will sooner or later impact nearly every consumer products company and every mega-brand in the entire country.

At its core, this is what is driving the present downward trends for all the beer mega-brands… that compounded by being used as a Cash Cow… which is being milked like a milkmaid mainlining Red Bull ;-)

The high-water marks for the beer mega-brands might have already been reached and they might face a long-term prospect of continued decline.  It might not be so much that the consumer doesn’t desire a light lager… just that they don’t want THOSE light lagers.  For any craft folks reading this, I believe this just might be an opportunity for you… there are only so many IPAs the world needs ;-)

There are many things driving this profound paradigm shift…

Technology and manufacturing – Since we live in the here-and-now we often don’t really understand how far and how fast things have changed on this front.  Small players can product world-class product… for relatively small investments.  This is true for manufacturing, packaging, labeling… the whole nine yards.  And although there still might be some economy of scale advantages for the mega-manufacturer (and these have historically been quite large), these advantages are shrinking all the time.  And all evidence is that this will only continue.  In addition, in a world where customer choice is king, being smaller and nimbler is an advantage, not a weakness.  The huge plant employing hundreds and hundreds might be turning into an albatross, not a competitive advantage.

People power – In addition, as the large consumer products companies have flattened their organizational charts and technology has replace thousands of positions, there is much less upward mobility for their employees.  Life-time employment is a thing of the past.  So there are people with tremendous knowledge and skill sets who are available.

Hard economic times – Perhaps counter-intuitively, tough times cause an explosion in entrepreneurial activities.  The risk/reward decisions become easier when you don’t have many other options… trust me, I’ve got some been there, done that on this topic ;-)

Intangibles – People are social animals… we long to belong to a team.  Few of us strive to be some anonymous schlep at some large, face-less, soul-less corporation.  These smaller companies offer a great deal of personal fulfillment… sure everyone would like to hit the long ball and get rich but getting up every day and loving what you do is worth a lot more than $$.  Talk to almost any employee at a craft brewer.  In addition, in a smaller organization you can actually see the results of your efforts.  If you work for a huge multinational company your efforts simply disappear into the ether whether you bust your butt or surf the web all day.  This is not true in a smaller company.

The changing consumer – let’s use the ubiquitous smart phone as an example.  Here is a product which has already become the most important item in many people’s lives.  It is the primary means that they use to interact with the world around them.  And it allows almost complete personalization… almost every aspect of it can be changed to fit the user’s desires.  And it can easily be changed tomorrow and the next day and the next.  Ring tones can be personalized to whatever you want… ring tones can tell you exactly who is calling.  You can listen to the music you want when you want.  You can watch video entertainment of your choice and time… the concept of TV is being transformed as we speak.  It offers immediacy… these folks don’t email (that’s soooo 2000).  They don’t leave voice messages… why take the time?  They text which is about as immediate as one can get… hit send and it’s at the other’s phone in a matter of seconds.  To believe that this consumer, and all who follow, will be drawn to some mass-produced, mass-marketed mega-brand is beyond wishful thinking.    

Combine all these factors and one can get a fleeting glimpse of the profound consumer products paradigm shift that is occurring under our feet.

Will the beer mega-brands go the way of the dodo?  Not anytime soon. There still are A LOT of bottles and pints of these brands being consumed.  Brand Budweiser has been declining for years and it is still the number three beer brand in the country.

Will they see continued volume and share growth?  I’d bet against it.  I think the future is in the other direction.  And it might come faster than any of us can imagine. 

Historically one often speaks of eras… no question the last few decades have been the era of the mega-brand.  Perhaps that era is coming to a close?

Beer, spirits, cheese, you name it… the small artisanal explosion is already happening.  Where it goes is anyone’s guess, but it will leave its scars on more than a few large consumer products companies and their associated mega-brands.  And perhaps on their distributors too.