Conlin Beverage Consulting, Inc.

Conspiracy or Just Good Strategy or Just Plain Crazy?

OK… I try to stay away from conspiracy theories as much as is possible, the black helicopter crowd and all.  But as has been noted, you’re not paranoid if they really are after you ;-)

What brings up my conspiracy paranoia?  When things just don’t make sense… and some things coming from ABI just don’t make sense.  I have no idea if the following is correct or not (and haven’t decided if I believe it or not), but it is my feeble attempt to put some meaning to actions I don’t understand…

First of course we have the audacious run at, and purchase of Anheuser-Busch… a fat, bloated cash cow if there ever was one… and one that was simply squandering an internationally known brand name of tremendous value.  The wizards of InBev showed they were better than most at spotting corporate waste and identifying national and international value… in addition to being pretty dang good financiers… and pretty good at strategy. 

Also, I hear the ABI folks are great planners, they have a plan for everything… quite detailed plans for almost every possible action.  They most definitely aren’t shoot-from-the-hip-type guys.

Then Brito lets slip that ABI thinks they could self-distribute at least 50% of their US volume… from ABI’s viewpoint, the independent three-tier system has had its uses but is a rather antiquated concept whose time has come and gone (at least that’s my read on their thinking).  And as they have proved in their past actions, they are pretty good at spotting value and squeezing profits out of a system.  Unfortunately for beer distributors, those profits (and cost savings) they are targeting are YOUR profits.

But how to get them?  Yes “wholesaler margin management” and “distributor profit pool optimization” and “system-wide cost mutualization” will get them a fair share of your profits but is there a bigger play going on here?  One which helps get rid of the entire concept of a mandatory three-tier system?  Allowing all manufacturers of the product to legally distribute if they so choose?

This is where the black helicopters start flying ;-)

First is the Dallas bitch-slap where distributors are told in no uncertain terms that they are to get rid of almost anything that isn’t an ABI product.  As I noted, when I first heard this I thought it was jaw-droppingly stupid.  This country is experiencing a brewing renaissance that is unprecedented anywhere in the world.  The Brewers Association reports

• Growth of the craft brewing industry in 2011 was 13% by volume and 15% by dollars compared to growth in 2010 of 12% by volume and 15% by dollars.
• Overall, U.S. beer sales were down an estimated 1.3% by volume in 2010.
• Imported beer sales were up 1% in 2011 and up 5% in 2010.
• The craft brewing sales share in 2011 was 5.7% by volume and 9.1% by dollars.
• Craft brewer retail dollar value in 2011 was an estimated $8.7 billion, up from $7.6 billion in 2010.
• 1,989 breweries operated for some or all of 2011, the highest total since the 1880s.

With these market dynamics ABI wants “their” distributors to walk away from these products and this exploding marketplace?!  As I noted in my Who’s Your Daddy here and Who’s Your Buddy here pieces, from an ABI distributor perspective this is incredibly stupid… for the MillerCoors folks it’s like finding money on the street.  It also makes it more difficult for the explosion of craft brewers to get to market… more on this later.

But one could argue ABI simply wants “their” distributors to focus solely on their products… and it isn’t new, the old AB under Three Sticks had the same plan under “100% share of mind”.  Although the market dynamics of the craft beer world have changed dramatically since then, one could still make the case… and it still might be a stretch but one could make the logical case for it.

But what I’ve heard over the recent past simply does not make sense.  ABI field personnel are pushing distributors to simply walk away from brands with the argument that these brands will simply exit the marketplace!  And we’re not talking about some minor, never heard of craft beer here; we are talking about some major suppliers who have been around for years.

Now I know of no one in their right mind who knows anything about the distribution business who would state that with a straight face… just walk away from these suppliers and they will exit the marketplace?!  The MillerCoors distributor won’t pick them up (for no cost!)… nope.  The supplier will just meekly accept their departure from the market?  Yep.  Yeah, and I’ve got a bridge to sell you.

None of this makes sense… and thus the conspiracy starts spinning in my head.  What if this is all part of a fiendish (might I say insidious) plan to dismantle the independent three tier system?  What if the market leader decided it was in their best interests to “become” the second tier but couldn’t do so outright (or they didn’t want to take the heat for trying)?  What if they needed cover for their plans and saw a way to use the prettiest-girl-at-the-dance (the craft brewers) as a means to implement their plans?

Put on your tin foil hats and follow me for a while…As Harry pointed out in April, “An estimated 10% of ABI’s total volume (98 million BBls) is sold through their brewery-owned branches or 130 million case equivs........ABI branches sell nearly four times what Boston Beer Co. sells in a year.”  A-B has never owned so much of its own volume. What does it mean?

This is a regulated product.  That is an important point.  In an independent three-tier system the brewer MUST go through an independent distributor to reach the retailer and consumer.  But what happens when a brewer can’t find a willing distributor?  Short answer, they go out of business.  Now they might have gone out of business for a whole number of reasons… but the forced restriction on distribution is like an intellectual “get out of jail free” card…

“the reason and the only reason my company went belly up is because I couldn’t find a distributor who would willingly carry and sell my product.  How is that fair?”  I could have distributed it and I had willing retailers but this stupid law put me out of business”

This is an easy argument to make and it is very difficult to prove there isn’t at least a little truth to it.  Every failed/failing brewer will make this argument to some degree.

Now the truth about distribution of any consumer products good (or any good for that matter) is that distribution is a bitch to get.  That’s just the way it is.  If many of these brewers instead baked cookies or potato chips they would find distribution extremely difficult to obtain (and many would simply go belly up)… ah, but in the cookie or potato chip aisle they could distribute themselves, assuming they could find any willing retailers  (and they would a few for at least a while).

But since this is a regulated product, that option isn’t open to them and thus they get the intellectual “get out of jail free” card… and work to change the law… because they are a sympathetic lot whose business travails are severely damaged by this mandatory three tier silliness… and the erosion starts. 

I believe every state in the nation presently has some exemption from three tier laws allowing brewers, based solely on amount of brewing output, to operate in the second and sometimes, third tiers… sometimes in all three tiers.

What if the market leader wanted to accelerate this pressure?  Much like water rising behind a dam, sooner or later it will find its way.  In a market duopoly like the US (the two big boys controlling over 80% of the market) the options for distribution are pretty small… what happens if the market leader would cease to be an avenue of distribution for an exploding brewer population?  Sure the MillerCoors distrib would pick up some but market dynamics simply don’t support a single-distributor model anywhere in the real world.  And of course in areas with fairly high population densities a third “craft beer’ distributor can be supported… or of course a wine and spirits distributor.

But it would still put additional pressure on accepting accommodations for brewers… then the latest move, telling distributors to drop some pretty major suppliers and noting they will simply exit the market.  Ahhh, no they won’t.  And if they can’t find distribution they too will join the chorus for second tier accommodations (like the end of the requirement for an independent three tier system… bye bye independent distribution tier).

Sooner or later, either through lawsuit or legislative action, the entire reason for the independent second tier will be questioned. 

“These folks have been self-distributing for years and the sky hasn’t fallen”…

 “equal treatment under the law”…

 “I run a family business, work hard, and my entire business is put at risk because I am forced to go through an independent business for distribution… one who won’t focus on my products… etc” 

 Which all plays into the hands of ABI and their desire to self-distribute… not today, but in the not too distant future.  And it’s a win-win for ABI… forcing distributors to focus solely on ABI products ensures them the maximum effort from distribution… and withholding 50% of the nation’s beer distribution capacity from an explosion of brewers is certain to add pressure on state-by-state accommodations for brewer self-distribution.  Both work to their favor, regardless of how completely successful they are.  And once one accepts the notion of self-distribution (and the sky hasn’t fallen), then the only, and the last battle is solely over the size limitation… sooner or later an easy win.

And unfortunately for the prettiest-girl-at-the-dance (those craft folks), they may find their handsome new supporter doesn’t really have their best interests at heart.  Anyone want a carbonated soft drink?  Most may find they rue the day they thought self-distribution was such a great idea… and thinking they can contain self-distribution based on some arbitrary volume output is most likely wishful thinking (if they’ve even thought that far ahead).  The craft folks won’t know what hit them when ABI (and of course MC) put their tremendous power to work directly at retail.  Instead of a 500 case deal, they will be talking about a 50,000 case deal.  They will own on-premise.  I know the street pretty well and blood will flow… unfortunately most of it will be spilled by the craft brewers.  But that’s a side point. 

Is this ABI’s insidious plan or is the high altitude in Colorado getting to me?  Heck if I know.  I know they are detailed planners.  I know they think strategically.  I know they want to self-distribute a fair amount of their beer.  I know the “alignment” issue (carrying only ABI products) is at best self-serving.  I know attempting to remove 50% of the nation’s beer distribution capacity from any other brewer is certain to add to the pressure from the bottom to allow self-distribution.  I know the erosion has already occurred in every state in the country… some arbitrary size limitation is the only thing stopping full self-distribution in every state in the country.

Are some of these latest moves on simply dropping products a strategy to get one of the mid-sized brewers to make a break for it and attempt to go direct again? (Pabst tried it in California years ago and failed… but the world has changed since then).

Conspiracy or crazy?  You know the best conspiracies are never discovered, that’s why they were the best.  Paranoid?  Not if they are really after you.  Heck if I know if this is the plan… but some of these actions will generate other distant actions which are all aligned with ABI interests.  Isn’t that what a conspiracy (or just good strategy) does?  It sets in motion actions which influence the flow of things… all towards a desired end-point… and all without anyone’s fingerprints on it.  Or I guess it could all be a coincidence… who knows?

Remember, “Just because you are paranoid DOES NOT mean they ARE NOT out to get you!  Now take off the tin foil hats and get back to work ;-)

High Stakes Poker and Consolidation

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I’ll start this post with an acknowledgment that values for beer distributors have not gone as I would have predicted… and I kick myself because what did happen should have been easily predicted… I erred in my analysis by putting too much weight on my own experiences, my own checking account… and I don’t play high stakes poker.

So let’s back up.  I would have guessed that values for beer distributors would have been experiencing downward pressure over the recent past.  Sure margins are great (thanks to ABI and crafts/imports) but sales are generally flat to down.  Lots of uncertainty and risk still remains, COSTCO-type moves, ABI wholesaler margin management, various cost/expense increases, etc.

Yet just the opposite is happening.  Values are heading up, big-time.  In fact my associate Steve Cook and I were recently discussing the present state of affairs and we both believe the days of buying as a financial asset have gone for good.  These deals are all strategic and the prices paid reflect that.  And when I say strategic, that doesn’t necessarily mean adjacent or one with a lot of operating synergies, it means fitting into a longer-term plan.  These values also reflect what it takes to get a reluctant seller out the door.

So what does this have to do with high stakes poker?  At some point in a high stakes poker game the remaining players are all sitting in front of large piles of chips and the bets start getting bigger and bigger.  They must if someone wants to win… plus in many cases the person is playing with other people’s money.  If the bets don’t increase, everyone simply sits around playing with their chips until something breaks the equilibrium. 

Although the analogy is not perfect, this captures the dynamics occurring in beer distributor deals… all those who were primarily concerned about asset protection have already left the game.  This is where my previous prediction veered off course… driven by my checking account.  Based on my financial position, I would be most concerned with locking in the value.  But if you’ve been in this business for years (or generations) you have already accumulated significant financial assets.   Thus you will play the poker game much different than me.  You will be much gutsier in your bets… for even if they all headed south it would in all likelihood have very little impact on your personal financial situation.  Add to that the fact that in many ways you too are playing with other people’s money… this also puts upward pressure on deals.

Thus deal prices are heading up.  Now most brokers hold onto the magic number (or range) like it is the only thing of value they bring to a deal.  Well I think Steve Cook and I bring a lot more value to the table than a simple number.  So here it is… these recent deals are going for north of 4 times gross profit (just for distribution rights)… some pretty far north.  And yes, I know how to value a business but we often need a common means of measurement and a multiple of gross profit seems to capture this at a 40,000 foot view… plus it makes unsolicited offers easier since it requires no intimate knowledge of the other distributor’s financial performance.

Unless these are complete vertical integrations (and these aren’t), at these numbers you will almost assuredly have to supplement the earnings of the acquired distributor with cash flow from another operation.  The days of having the acquired company pay itself off in 6 to 10 years are long gone.  At these multiples the payback will take far too long… possibly into the 15-20+ year range depending on buyer circumstances.

This is one of the advantages of being a consolidator… having multiple operations which can help fund future acquisitions.  Folks who made acquisitions years ago now sit on debt-free cash producers which can easily provide cash flow for more and more acquisitions.  There is an advantage to always thinking long-term and strategically… and it is not too late to join this club if you have the desire and the stomach for it.

But this isn’t everyone’s cup of tea… but just like that high stakes poker game, you get to play, not set the betting rules for everyone else.  The big dogs are out running… if you want to play, get off the porch… if not, sit there and play with your chips.  In the next few months we will see a lot of folks who thought they were buyers turning into sellers.

Why?  Because the financial incentives strongly point in that direction… mainly because of our ol’ friend taxes.  Let’s look at a simple, back of envelope example…

• A distributor with $50 million in annual sales.
• 25% margin, or $12.5 million in gross profit
• Driving 7% to the bottom-line, or $3.5 million in pre-tax profits

• At 4 times gross profit the selling price for distribution rights is $50 million (plus all other assets)

• Assuming a present capital gains tax rate of 15% on 100% of the net value of the distribution rights, this equals $42.5 million in after tax proceeds… plus of course 85% of the selling price of all other assets.

• If one keeps the business you will have annual income of $3.5 million in pre-tax profits; assuming a personal tax rate of 43% (federal + state + local).  Thus $2.0 million in after-tax proceeds (plus whatever personal compensation and benefits you take).

• At $2.0 million in annual after-tax proceeds, it will take over 21 years to payback or earn the equivalent of the after-tax sales proceeds… and this ignores the time value of money!  If one assumes a 3.25% cost of money (cheap by historical standards) it will take around 35 years to equal the after-tax proceeds of the sale of just distribution rights, we're ignoring the proceeds from the sale of all other assets… but of course, in the end you still own the asset.

• And don’t forget, for those 35 years you aren’t just hiding the sale proceeds under your mattress… they too are earning income.  At a 5% rate of return, that’s over $2.1 million annually (pre-tax).

THESE are the reasons it makes sense to consider these offers… whether one wants to or not. 

Of course not all things are equal… if one has as much money as one needs or many family members involved in the business it may be the case that no number will make sense for the entire family, thus you remain in business.

So, if you want to run with the big dogs you had better open the check book and move quickly (don’t forget, you can’t hurry brewery approvals and they do take time).  After the election the tax situation just might get A LOT bleaker… in fact we may find the entire industry enters a 4 year lull in deal flow.  Why would one pass on a sale today yet sell in a year or two when after-tax proceeds will be substantially less?  Don’t forget, after-tax proceeds are all that matter.  If it doesn’t get done this year (and Obama wins), it would seem to make more sense to wait until the political situation changes in Washington at the end of Obama’s second term.

Lots of moving parts but the big dogs are beginning to up the ante in this little poker game of ours… as I noted, I would have already taken the money and ran for the door… but the question you must face is do you have the stomach for this level of poker?  If so, get the deals done this year.  If not, you can of course stay put or hope for that unsolicited offer to visit your inbox.

 Interesting times in the beer distribution business indeed.

Conlin... the trouble-maker

First, please subscribe to this blog… to the left of this text enter your email address… and you will be emailed anytime I post a new blog.  Second, the post…

Well the NBWA Legislative Conference has come and gone… thanks to all who allowed me to participate in some cost mutualization… I drank and they paid ;-)  You’ll understand that concept in a few paragraphs.

Independent beer distributors of the United States unite!  For those who studied Latin… "tous pour un, un pour tous"  the famous motto of The Three Musketeers “all for one and one for all”.  I believe The Beer Musketeers should adopt this motto as our own.

It is about unity and sticking together, strengthening the bonds of the brotherhood and sisterhood of beer distributors.  The absolute necessity of hanging together and acting as a single, unified force at both the federal and state levels.

If you think about it, the reality we face is pretty straight-forward.  When we discuss the erosion (or destruction) of the independent three tier system, we are discussing your demise, no one else’s.   The first tier, the producers/suppliers are going to continue to exist… if there is any product to distribute they must.  The third tier, the retailers are going to continue to exist… someone has to sell it to the end consumer.

But the good ol’ second tier, independent distributors, what about them?  When we talk about the erosion of the 3-tier system we are basically talking about the erosion or death of your businesses… you’re the only ones who might be leaving the party.  Never forget that reality.

Think about your fellow independent beer distributors…  I don’t care if you love them or hate them.  I don’t care if you compete with the dirty, rotten SOB or have a great relationship.  Your fellow distributors are your brothers and sisters.  They are your true partners.  If you don’t stand together you will most certainly fail.  If you turn on each other, you will most certainly fail.  

Never ever forget… it is your businesses on the line.  Not the retailers… not the suppliers…It’s YOUR asses on the line.  100% of the “erosion of the 3-tier system” comes out of your hide.  100%! 

If the independent three tier system goes away, that means most of you go away… and those who remain will face a world profoundly different than the one you face today… a world where your power, your profitability and your value are all far less than they are today. 

All who know me know I am a strong supporter of NBWA - even when I profoundly disagree with some of their tactics… which is probably more than Craig and his crew would like ;-)  I am also a loud supporter of strong, unified state associations.

The federal level is important but in this battle the state level is where the real warfare will take place… and a unified voice is incredibly important.  A unified voice is a must for accomplishing legislative action, whether at the federal, state or local level.  Without a unified voice, the odds are very great you will not be able to generate the support and votes you need to accomplish your tasks.

Now some pundits out there say Conlin is just making this stuff up, trying to generate business by being a trouble-maker (and I freely admit to being a trouble-maker)… causing strife and friction between suppliers and distributors where none existed before.  I guess it was the Garden of Eden until I came along.  Now I don’t know what world these folks are living on… or whether they have already been cowed by the power (and possible retribution) of the major suppliers.  Something you all should think about. 

I freely admit my blog is a marketing mechanism which is aimed at…. here’s a surprise, marketing.  But me making this stuff up?  My Bitch Slapped in Dallas, here was a direct quote from one who was there.

Although my Slaughterhouse analogy, here might have crossed the line of good taste… I think it reflected (and continues to reflect) the reality on the ground.  My Who’s Your Daddy piece, here reflects a very real conflict of paradigms between ABI and every single one of you.

And although ABI is right now the primary spear catcher you all must realize that success forces competitive response.  Every distributor has lived this… a competitor makes some stupid move, like bringing in 30 packs or some crazy pricing move.  You and your management team correctly say, “that’s crazy and we’re not doing it”… but if it turns out to be short-term successful, you will respond.  You all have lived it.  Thus it ultimately doesn’t matter whether it’s ABI or MC or Pabst or whoever… if the actions are successful, they will force competitive response… whether that company or person really wants to do it or not.

If you recall, a couple months ago Morgan Stanley came out with an investment piece on ABI,  Another Billion? Time to Look at US Distribution Profits.  This heartwarming piece ;-) explained their thinking on ways ABI could “extract” at least $1,000,000,000 of incremental profit from “their” distribution channel.  If you haven’t read much about this in the trade press you might want to ask yourselves why… but that’s a story for another day.

Well Morgan Stanley came out with another ABI analysis on March 8^th.  These analysts are cold blooded mercenaries (I can relate to that)… and they are putting their reputations (and incomes) on the line with their projections.  I can assure you they have not been influenced by any Conlin trouble-making.

And what do they think?  To put it in my terms, they think distributors are going to get their asses kicked… they are betting against your ability to stop the pillaging of your income… at least $1 billion.  And yes, that word begins with a b.  And that’s only from the ABI network.  If you believe MC will just watch this happen without responded you are living in a fantasy world.

So what do these disinterested financial vultures think?  The following are all direct quotes from the piece (the underlining and bold are mine)

• Stock price is targeted to go up 20%

 

•  Potential distribution profit pool optimization: We believe ABI in the US could grow EBITDA by $2bn through 2015

 

• For more than six months now, ABI's sales organization has had new management in place –which has substantially affected the way the company executes in its No. 1 market.  Wholesaler feedback points to the introduction of very detailed operating instructions and targets. While some distributors have not welcomed this, many are starting to realize the value of this improved focus on execution.

 

• Importantly, we believe compliance at the wholesaler level is high, because: a) the "carrot" of potentially being part of the "Anchor" wholesaler group (those wholesalers that will be allowed to act as consolidators); b) many wholesalers agree with this new strategy; c) wholesalers are unwilling to risk going into a termination procedure which at worst could go through and at best would involve a costly legal battle.

 

• In our note on ABI, Another billion? Time to look at US distribution profits (10 November), we envisaged ways in which ABI could extract more profits, at least $1bn incrementally, through greater system-wide cost mutualization and wholesaler margin management. Our conversations with distributors suggest that the "low hanging fruit" is being captured at the moment, involving important cost transfers to wholesalers (reduction in brewer funding of trade marketing, logistics-related costs) and what we would refer to as "Level 1" mutualization (e.g. making the Managed Freight Program compulsory for all wholesalers). "Level 2" mutualization, e.g. admin cost externalization to ABI's own share service centers, is seemingly more in the cards post-selection of anchor wholesalers.

 

• Meanwhile, wholesalers themselves are cutting costs and consolidation will drive efficiencies, in which we believe ABI will partake to the extent that it gets to decide – via its pre-emption rights on any distributorship sale – who can actively participate in consolidation and who cannot.

Cost mutualization… that sounds like some freaking word made up by some consultant.  In my world of cost mutualization, I drink and you pay.  In ABI’s world they mutualize costs by having you cover some of their costs… as freaking many as they can.

Wholesaler margin management.  Distributor profit pool optimization.  Do you think any of these actions are in your favor?  The power of the anchor wholesaler concept (they insidiously won’t disclose who this golden anchor is… thus everyone has the “chance” to win this golden ring).

These aren’t my words.  These aren’t my descriptions.  This is what is coming your way and your ONLY freaking hope of fighting this is to hang together.  The entire concept of the anchor wholesaler is to pit ABI distribs against other ABI distribs.  There is tremendous power in connectivity… in unity… in truly living one for all and all for one.  To phrase it another way, setting it up so it’s every man for himself is a certain way to weaken you all.  And as I mentioned above… if ABI’s wholesaler profit management and cost mutualization are successful, MC will be right behind them.

As a side note on the insidious anchor wholesaler concept, there is a way to fight this.  STICK TOGETHER!  If every ABI distributor in a state does the same thing (picking up a new supplier or whatever), then nothing changes in your position relative to each other… all basically remains the same as before the action.  If you all act as one, the anchor wholesaler plan cannot work in turning one against the other… and yes I know, almost all of you want to purchase the other guy, but allowing ABI to get you all in a knife fight while they sit back and laugh is not the way to accomplish this.

And for a piece of self-promotion – I know, when aren’t I?  ;-)  Next time you decide to spend some money on an outside service provider, whether buying or selling or making operational improvements perhaps you should think… who should I use?  Someone who is a strong, vocal AND PUBLIC supporter of this industry?  Someone who pays a very real cost for this defense… trust me, I do.  Or someone who remains quietly on the sidelines… willing to accept your money but not willing to come to your defense when you are being attacked.  Who would you rather have next to you in a fight?  I know wholesalers, and I’d gladly have you all covering MY back.

I say the following as an outsider… whether you ever use my services or not, never ever forget…

You all have something very special here… very special.  I implore you to not simply give it up without a fight…for once lost, this special thing will never come back again.

Print the above paragraph and put it on your refrigerator at home, right next to your kid’s pictures (and perhaps your grandparents)… if that won’t focus your mind then nothing will.

Are you a franchisee or do you have a franchise?

The answer to this question will shape the future of the beer distribution industry… so ask yourself, are you a franchise or do you have a franchise? 

Perhaps a little clarity is in order…

As we all know, words quite often have multiple meanings and serious confusion can occur when one applies one meaning to another situation.  I think the beer distribution industry is facing a similar situation with the meaning of this franchise-thing… and the course it takes will forever shape this industry.

From the online Free Dictionary, a commercial meaning of the word franchise is…

*          Authorization granted to someone to sell or distribute a company's goods or services in a certain area…

*          A business or group of businesses established or operated under such authorization…

*          Commerce authorization granted by a manufacturing enterprise to a distributor to market the manufacturer's products

I believe the first and third meanings fit into what is generally meant in the beer distribution business when we discuss franchise… as in franchise rights.  The second starts to head in another direction.  The first and third meanings imply you have a franchise, the authorization to distribute and sell a company’s goods in a certain area.

The second starts down the road that you are a franchise.  What’s the difference?  Well to quote Mark Twain…

“The difference between the almost right word & the right word is really a large matter--it's the difference between the lightning bug and the lightning.”

If you have a franchise to distribute ABI or MillerCoors or Sam Adams or Flying Dog… then you are an independent business which simply has a franchise right(s) to “sell or distribute a company’s goods or services in a certain area”.  It might be for one supplier, it might be for hundreds, but you remain an independent business.  And you can operate your business as you see fit (as long as certain standards are met) and can buy or sell these rights under certain conditions defined by both law and supplier contract… but you are an independent business.

If you are a franchise then a whole other reality takes shape.  Let’s use fast food franchises as the perfect example… if you own a McDonald’s franchise, you are called the franchisee and McDonald’s corporate is the franchisor.  But you are not remotely an independent business.  When you purchase the McDonald’s franchise on the corner of here and there you are in effect purchasing the use of a brand name and trademark.  In addition, the franchisor provides a detailed formula and proven method of operating the business along with a significant amount of assistance in starting and managing the business.  You agree to operate only within this formula.  ALL operational decisions are made for you, your job is to simply follow them.  All materials come from your franchisor… EVERYTHING.  You do nothing that is not part of this formula, down to the frequency of cleaning the restrooms.  In effect you are simply an extension of the franchisor.  Let’s repeat that point again since it becomes extremely important… in effect you are simply an extension of the franchisor.   This business structure is used by a manufacturer as an efficient means to come to market… while retaining 100% control over all aspects of bringing the product to the end consumer.

Those companies which have a franchise are sometimes called product distribution franchises.  Those which are a franchise are called business format franchises.

Now let’s look at the beer distribution industry through this prism… are you or have you?  Are you a franchisee or do you have a franchise?  Historically distributors have had franchises from many suppliers.  With the dominance of Anheuser Busch over the past few decades, Three Sticks started to steer “their” distributors way from a having a franchise and towards being a franchisee… from a product distribution franchise to a business format franchise.  With the new owners of ABI, we see this process accelerate.  These “foreign corporate raiders” clearly plan to implement a world where ABI distributors ARE franchisees… with all the associated control that a franchisor has over the franchisee… in effect they are transforming ABI distributors from independent businesses to franchisees.  Look at everything ABI corporate already “provides” for their distributors.  They have already lulled many ABI distributors into accepting this evolution from having a franchise towards being a franchisee… smiling all the way to the Slaughterhouse. 

And of course by definition the power a franchisor has over the sale of a franchisee is FAR MORE than that which a manufacturer has over the holder of a franchise distribution right.  I’d guess pretty much all franchisors have the first right of refusal on any sale of their franchisee.  In a franchisee world, does it really matter if the specific location/territory is owned by a third party or the franchisor?  From any type of operational perspective, there is no difference; the specific business entity will operate exactly the same regardless.

But if one has a franchise, by what right does the primary supplier get first right of refusal on the sale of the company?  Of course they retain some control over the sale of their specific distribution rights, but of the entire company?  Trucks?  Warehouse?  Land?  Other suppliers?  That is a franchisee world.   

This brings up two points… first all you ABI distributors, do you REALLY want to become a franchisee of ABI?  Do you really understand the implications of this?  If you did, you’d be gathering the pitch forks and torches.  You are handing over your independence to your now and forever daddy.  And once done, it’s done… this is a one-way street… and you are already pretty far down the road. 

On a larger front and more importantly for the entire industry… (if foolish ABI distributors want to willingly walk into the Slaughterhouse, so be it)…

But on a larger front I ask how can an industry with a mandated three tier system be compatible with a world where distributors ARE a franchisee?  If the distribution tier is simply a 100% extension of the supplier, doesn’t the second tier in effect simply disappear? 

If the distribution tier is simply an extension of the supplier, doesn’t the second tier in effect simply disappear?

Doesn’t this completely destroy the entire reason for the design and implementation of a three tier system?  Doesn’t it simply mean there is a two tier system (at least for the ABI network).  What are the legal implications of this?  How is it legal?  Where does it lead?  And all you MillerCoors folks, don’t be too happy… success drives competitive response… so if this is very successful for ABI, MillerCoors is certain to follow.  That’s just the way it is.

Perhaps one might want to change the law to ensure it is illegal.  Do we really want to use this back-door method to dismantle the present three tier system?  How does it work where ABI distributors ARE a franchisee and all others HAVE a franchise?  What are the implications of this?  How can the “McDonald’s model” of a franchisee be compatible with a three tier system?!  I certainly don’t see it.  It destroys the entire reasoning behind a mandated three tier system.

For my simple mind, if beer distributors cease being independent businesses which have certain franchise rights, then the three tier system has no meaning. 

And what about branches?  How are supplier-owned branches compatible with a three tier system?  There is a natural conflict of interest!  Why is it considered acceptable for ABI to own branches?  If they can “become” the second tier through branches or franchisees, why can’t they “become” the retail tier and open and operate their own retail establishments?   The only reason it is “acceptable” is because this erosion was allowed in the past and it is now considered “normal”.  The distribution tier has been treated like a red-headed step-child for too long… do we really want to voluntarily continue to play this role? 

It may already be too late to change this but that doesn’t mean distributors should just meekly accept their position as the least important of the three-tier system (in fact distributors are sometimes seen as an impediment which brings no value; just protection of their own entrenched, self-serving businesses)… come-on, why don’t we just accept a two tier system and be done with it?  And if so, what makes a two tier system so desirable?  Let’s just get rid of the entire separation of tiers.  Why not?  I know of many who would like this and who could take serious advantage of it.

Or perhaps these past mistakes need to be revisited.  I ask again, if branches are OK, then why aren’t ABI package stores?  Or ABI convenience stores?  Or ABI Pub and Grub?  Or better yet… a national chain of supplier-owned “gentleman’s clubs”.  Those places sell A LOT of beer… yes, I’ve been in more than a couple ;-)  What a great way to build a brand! 

Why don’t they simply create franchisees to own and operate these businesses, thereby becoming a seamless extension of the supplier?  I don’t claim to be an attorney - one of my few bright spots ;-) but I sure can’t see why franchising retail locations (both on- and off-premise) wouldn’t be acceptable with the present thinking… tied houses here we come!    

Can you imagine the uproar if they attempted this?  Yet both are just as serious an erosion of the three tier system as the other.  Why do we allow one when not the other?  Are there reasons for a mandated three tier system or does it belong in the dustbin of history?  That’s a rather simple question… yes or no?  My future doesn’t depend on the answer to this question… does yours?

As a side note, I recently spoke to a pretty smart fella and he pointed out we all need to use the proper language in this process… we need to emphasize not just a three tier system, but an independent three tier system.  Now he’s an attorney so he is used to playing word games but this one is important.  He noted that many may claim to support the three tier system but in reality they don’t support an independent three tier system.  Remember that Mark Twain quote at the beginning of this post… the right word being the difference between the lightning and the lightning bug.  Supporting an independent three tier system is what most of us mean when we discuss the issue… three tiers all with separate, independent ownership.  But some support a three tier system and they simply mean different companies in each tier, but no necessarily different ownership, i.e. branches.  Under this thinking, one could be a loud and vocal supporter of the three tier system while at the same time owning separate businesses in all three tiers. 

This somewhat bastardizes the entire reasoning for the three tier system but logically I guess one could make the case (especially if you want to use words to hide and confuse rather than to disclose and clarify).  Therefore we need to expand our language to always include an independent three tier system.  Without that word, branches are not a violation of the three tier system.  Without that word, brewery owned retail establishments don’t violate it either.  I appreciate this insight… that word is DANG important as we fight these fights.  You might want to ask your suppliers whether they support the three tier system or an independent three tier system… ahh, that difference between the lightning and the lightning bug.

There you are distributors… go your state associations (and of course NBWA) and get in gear on ending these abominations… it’s only your and your children’s future you will be fighting for.  Or walk quietly towards the Slaughterhouse… it’s your call.

 

 

Tough Love For Craft Brewers

Since I have a knack for stating the obvious, let me state that craft beers/brewers are the prettiest girl at the dance… and they know it.  My blog has recently been discovered by a number of craft beer and craft brewer web sites… places like the Craft Brewers Association (http://brewersassociation.org )... And BeerNews (http://beernews.org) ... And Guys Drinking Beer (www.guysdrinkingbeer.com), got to love that name, says it all… and then there is Aleheads (http://aleheads.com )...

After my Who’s Your Buddy post, which can be found here, I noted a lot of visits from this place called Aleheads.  If you recall my Who’s Your Buddy post suggested that MillerCoors fully embrace the craft beer world, using their strength and “their” distributors to help this market flourish. 

I must admit I hadn’t heard of Aleheads before but I don’t generally visit beer geek websites (and I truly say beer geek as a compliment).  But please do go to these sites and you’ll find many more great craft beer sites to visit ….  I went to Aleheads to see what was up and lo and behold there was an article with my lovely picture under the headline “All Hail the Conlin”  It was a pretty good article – with a title like that how could it be anything but?  ;-)  Here is the link to the Alehead post, http://aleheads.com/2012/01/06/all-hail-the-conlin/#more-13546   

And for beer distributors it is rather insightful on what even dedicated beer fans know (or don’t know) about beer distributors and this industry… I have to admit I sent the link to that article to a few friends and most thought I had written the thing!  It’s the title-thing… my friends know me and my ego.  I have henceforth requested all who communicate with me begin their speech with a hearty “All Hail the Conlin” but have found compliance is very poor, to say the least.

Well back to these craft beer drinkers and brewers.  I communicated with a few of these folks and thought I’d directed a post more to them… to give them at least my take on the history of the beer business and why they have the opportunity to exist.  That last part might have more than a few thinking what does that mean?  Opportunity to exist?  Some probably believe this market opportunity just popped up, like most do, and not the result of an industry structure set up long ago.

Well Sherman, let’s take the Way Back Machine and see what things were like about 100 years ago in this country regarding beer and alcohol.  In a word, things were bad ;-)  Not from a consumption viewpoint, consumption was rocking and rolling.  That was the problem… there were many excesses prior to Prohibition… many.  Ken Burns in his three part piece on Prohibition called this a Nation of Drunkards... you can watch his film on your computer at this link http://www.pbs.org/kenburns/prohibition/watch-video/#id=2082675582   Pretty good stuff if you can ignore his liberal worldview… I know, I can’t keep off my political soapbox ;-) 

Anyhow, prior to Prohibition most bars/taverns were what are called “tied houses”… a tied house was a tavern or bar that was partially or totally owned by the local brewer (pretty much all brewers were local then, and there were A LOT of them).  In a tied house you could only purchase that specific brewer’s products.  Tough luck if you and your buddy liked different beers, you wouldn’t be drinking together at the same tavern… it wasn’t possible.

Competition for customers was fierce and the brewers found owning the individual taverns helped them in their search for customers.  Showing the law of unintended consequences cannot be fought, some cities raised the cost of a liquor license in the hope of stamping out what they considered were too many bars.  This move just pushed the retailers even further in the tied house direction.  This took many forms…they sold to “their” taverns on extended credit terms, provided the equipment and supplies, sometimes charging low or no interest, often paying rebates for pushing their brand or carrying it exclusively.   Or they took the whole enchilada and owned the place outright.  The focus being on maximizing sales… period.  Things like gambling and whore houses on the second floor were initially introduced as draws to sell more product.

Now these tied houses weren’t the only reason for “A Nation of Drunkards”, but they certainly did contribute to the problems… and these problems contributed to that failed experiment call Prohibition.  As it became quite evident that Prohibition was a pretty bad idea, many ideas were considered… the people had clearly spoken and they prefer legal alcohol… but what to do to ensure the pre-prohibition excesses don’t again raise their ugly head?

As a political solution the 21st Amendment to the Constitution was passed.  This amendment repealed Prohibition and also gave states the authority to regulate the production, importation, distribution, sale and consumption of alcohol beverages within their own borders.  Yeah for state’s rights!!

Another facet of this solution was the introduction of a regulatory system known as the three-tier system.  It takes its name from the regulatory feature it implemented, three separate and independent “tiers” which would be responsible for the production, distribution, and retail sale of alcohol.  Thus one tier is the brewer who manufactures the product.  Another tier is the independent distributors who warehouse and sell the product to retailers.  And the last tier those licensed retailers who sell the product to the consumer… both on-premise (where the product is consumed on site) and off-premise (where the product is taken home for consumption).

Tied houses would no longer exist in this new world.  And right there is the reason EVERY craft brewer and craft beer drinker should on a daily basis salute the three-tier system.  For without the three tier system, those brewers would not exist and therefore neither would their succulent craft beers.  Read this paragraph three times… if not for the three tier system, you folks would never have had the opportunity to exist.

Think of an alternative world where the three tier system never took hold and tied houses ruled the marketplace… assuming retail establishments matched market share, AB (now ABI) would own and operate about 50% of all bars, taverns, and restaurants in the country.  Is that freaking scary or what?!

Other major brewers would own the rest (there probably never would have been a MillerCoors organization).  In this world of tied houses, where would the vibrant, exciting craft beer business be?  It wouldn’t.  Sure a small local brewery might open and operate a bar or tavern here or there but there is no way they could get beyond that… state-wide coverage?  Not going to happen.  Broader distribution than that?  Dream on.

It is very important that one understands and appreciates that the laws and regulations introduced to further separate the tiers were all to your advantage.  In many states credit sales are not allowed… nor are consignment sales (pay me once you sell it)… brewers or distributors owning retail accounts is not allowed… the brewer or distributor can’t give “anything of value” to the retailer.

Assuming a small brewer could overcome the weight of the tied houses (and they couldn’t have), what of the impact of these other laws.  Hey Mr. Retailer, you need a draft system?  I’ll give you one if you only sell my product.  Hey Mr. Retailer, you want generous credit terms, no problemo… but of course we’d want you to focus solely on our products.  Need a new coat of paint or a new bar or free advertising on the radio or TV or Internet (or glassware or signs or lighting or…), again no problemo… but there’s that thing about those competitive beers you sell.

How would you like to be an undercapitalized small brewer (and all small businesses are undercapitalized) trying to compete against this.  It wouldn’t be a problem because you couldn’t compete against it.  The existence of almost every one of these laws is the reason you have the opportunity to exist.   That is a cold, hard fact.

Now anyone who reads my posts knows that my political beliefs lean towards conservative/libertarian.  When I first started working in this industry I somewhat scoffed at this system… I’m a small government, individual freedom type guy.  But even in my libertarian heart I have found that it works pretty darn well… I might mess with it around the edges but in general I can’t think of a better system to accomplish the goals of society in preventing pre-prohibition excesses.  In addition it is a great method to ensure taxes are paid (in the real world this was one of the factors which pushed some reluctant politicians towards supporting the 21^st amendment) and to ensure product quality and consumer safety.

And from the craft brewers and craft drinkers perspective, it prepared the soil so you could flourish.  Not to beat a dead horse, but without all this the odds of you all existing today is next to nothing.  The major brewers would control everything and you would never have had the opportunity to be anything more than a brew pub… and even that would have been tough.

So what do craft brewers attempt to do the minute they enter this industry?  They attempt to seek exemptions from the laws which made their existence possible.  

• Waaahh… I don’t want to pay the same tax rate as everyone else!  Let me ask you, who does?  I want special tax treatment since I’m small… and of course if I grow and exceed the  volume threshold, I’ll want to change it again in my favor… that’s just human nature.  I’ve been involved in start-ups and small businesses for well over 30 years… guess what, they all would like to pay a lower tax rate than their larger competitors.  I think this industry is making a profound mistake in granting special tax privileges to ANY group, especially just because today they happen to be the prettiest girl at the dance.
• Waaahh… I don’t want to operate under these “silly” and “arcane” three-tier laws.  Like far too many, once they are where they want to be, they want to change the rules to now favor themselves.
  • If you don’t want to operate in a regulated environment, then brew root beer.  You knew this was a regulated product (as it should be… even in my libertarian heart) when you entered the industry, don’t cry about that fact after you enter it.
  • I want to self-distribute because I can’t find someone willing to distribute my product.  Bullshit!  That might have been true years back but not today… distributors have teams out looking for craft brewers to represent.  In the annuals of consumer products I doubt if any small manufacturer has EVER had such a favorable distribution and sales environment.   Here’s some tough love… go out and start a cookie company or a chip company or any consumer product and you will find getting distribution is a bitch… that’s just the way it is.  You are facing nothing special; in fact you’re not facing this at all.  No, if you really listen to what many craft brewers are truly saying, they simply don’t want to pay the margins to their distributor partners.  Money is tight, etc.  As I noted above, in ALL small business start-ups money is tight… get over it.
  • I even want to go further… I want to brew it, distribute it, and sell it to consumers too!  Forget the three tier system!!  I want to be all three tiers at once!  Why?  Because I want too.  It would be soooo much easier and I could make more money.  And if I get lucky and really take off?  Then damn the three tier system and let me race across the country.  Of course the competitive response this might drive might just take us back to the tied house days but what do I care?  I’ll have cashed out and be on the beach.  My focus is solely on MY business… not the regulatory environment which got me here… not on what my exceptions might bring about… not on anything but what I see in the mirror… and that’s me.
  • How about this all you craft brewers… why does size matter?  Why don’t we offer ABI, MillerCoors and all the big boys the same rules and regulations which you hope to operate under.  That would only seem to be fair.  What would the world look like?  What would your prospects be?  Very poor indeed is what your prospects would be.
  • Waaahh, I give my distributors great margins but they simply don’t focus enough on my brands.  First this is a complaint from every supplier in any distributorship with more than one supplier.  Every single one.  Again, this is nothing special to do with you.  Is it the supplier’s job to get more than their fair share of mind from the distributor’s sales and distribution staff.  That’s your job… quit whining about it and go do your damn job.
    • And speaking of that, what exactly do you bring to the table?  You’ve gone out and got approval for a label (I bet that whole process surprised you) but what else?  In chain driven markets do you go out and get chain approvals?  Nothing is sold through a chain unless it has been approved… what do you bring to the table here or is this something you expect your “overpaid” distributor to accomplish for you?
    • Or do you expect your distributor to basically build your brand for you?  Really?!  Tell me where else on the planet in any industry this occurs?  Oh, but you’re the prettiest girl at the dance so nothing applies to you.
    • What of your production processes?  How do you perform here?  If your distributor goes out and gets a few handles for your brew, can you get it to them when they need it?  The distributor is the retailer’s beer consultant… YOUR failures become the distributor’s failures… and each one erodes their standing as a high-quality, believable beer consultant.  Retailers might put a cup on a tap handle for a day or two waiting for the product, but not much more than that.  Can you do your job and get the product there or did the distributor’s sales rep waste all that time and energy (and credibility) getting the handle in the first place when you can’t get them the product for a repeat?  Guess what, those sales reps are only going to put up with that a few times before they quit bothering with your product.  Again, that’s just the way it is.  Is that their problem or yours?
    • What of advertising?  Is your distributor’s sign shop your primary advertising medium?  What do you bring to the table?  As a freebie (something I am loath to do) let me give you some advertising advice… table tents sell beer.  Especially new beer but they are good for all.  You can take that to the bank.  If you take nothing else from this rant, take that.

In a roundabout way let me help you understand the industry you have entered.  Long ago, in the mid-80’s a milestone was reached in the grocery business.  As an industry they made more money renting real estate than they did on the actual sale of groceries.  Here’s how the retail world thinks about things… those eyes and ears that walk into my stores each and every day are mine.  Got that?  Those folks who walk in are “mine” and if you want an opportunity to reach them, you must pay me for that opportunity.  I don’t care if your product sells or not, but you will pay me in an attempt to reach them.  The more eyes and ears I provide, the greater exposure I provide to your product, the more $$ you provide… that’s before a single product has been sold.

Now because we are a regulated industry with the three tier separation, nothing of value can be given to retailers thus we do not operate with these same rules… something which bothers the chain stores and which they’d like to change.  What would the world be like for you craft brewers if you had to pay slotting fees for every product you were lucky enough to place?  Think you are cash strapped now?!  Again, you couldn’t compete in this world if it were to be allowed to occur… your distribution would be seriously damaged as a result.  As a side note, you should all thank the National Beer Wholesalers Association (www.nbwa.org) for fighting this fight for you… in the mid-90’s there was a concerted effort by retail to allow slotting fees for this industry… and you don’t see no stinken’ slotting fees today, do you?  How many retail outlets would you not be in if there were?  How about an end-cap… those cost money my friend, for everyone but beverage alcohol folks.

Now let’s take this thinking about eyes and ears to a distributor.  What does a distributor provide to you?  First, a beer distributor will service every single licensed retail account in their territory… every single one.  In a small market this might be “only” a few hundred… in a major market this might be in the thousands.  Thousands of retailers become available to you in one single move.  How many eyes and ears go into these retailers each and every day?  But there is much more.  Not only does the distributor provide weekly (if not more) service to these accounts, they know the accounts intimately.  You don’t need (or want) to be in every one of these retailers… you want to be in the right retailers.  The distributor provides this knowledge and the sales execution for every one of these retailers.  That alone is not a little thing… in fact in is an incredible thing.

One could make a strong argument that you should pay distributors directly for the opportunity to reach these eyes and ears… that’s not going to happen so let’s look at how you do pay them… by providing good margins to them.  But here’s the rub… they only get these margins if your product sells.

Let’s assume you bring a margin of $10 per case to the distributor… what is your sales potential?  If they sell 1,000 cases in a year, they earn a whopping $10,000.  But that’s gross dollars… what about all the overhead?  What about the sales rep’s salary?  What about the driver’s salary?  What about the merchandiser’s salary?  And speaking of merchandisers, again in chain-driven markets, the off-premise retailers don’t refill the shelves, that’s the job of the distributor.  If you self-distribute do you think you can be in these accounts 4 – 14 times per week filling the shelves?   What about the distributor’s  profit after all these costs?  The distributor brings a hell of a lot to the table to build your brand for the chance to make a whopping $10,000 before any expenses.  And how many of your brands will sell 1,000 cases in a year in an average market?  They get the chance to make a few thousand dollars and you get the chance for them to build your brand into a powerhouse (or even a little pony) which you can then sell to ABI or MillerCoors for retirement money.  You expect a lot from a distributor.

In on-premise accounts who cleans the draft lines?  They don’t magically clean themselves… and when the bartender pulls your tap handle and a chunk of stuff which closely resembles horse snot (yes I know horse snot) comes shooting out, do you think this might affect the person who just ordered your succulent brew?  You only get one chance to lose a customer. 

Do you have the staff for on-premise nights high-lighting your products?  Do you have the staff to hang your merchandise (if you bring any to the table in the first place)?

And what of old beer?  Who takes care of that?  And when a distributor eats the cost of old beer, they are eating the full cost of it, not just their margin.  One case of old beer eats up the profits from at least 4 cases of beer… leveraging but in the wrong direction.

On a side note, speaking of old beer… all you craft brewers had better start paying a little bit more attention to the quality of your product.  I was recently in a major liquor store here in Colorado (not a chain market) and was listening to a sales rep talk to the store manager about various craft beers he was trying to sell.  The sales rep noted a craft brew on the cold shelf which was a 2009 product!  How many old six packs are out there?  How many bombers are WAY past their prime?   I’ll repeat what I said above; you only get one chance to lose a customer.  I realize there is a fine line between pushing distribution and generating a lot of old beer but I see a storm a-coming on this front.

Now some of this is simply the result of the category being so hot… and with soooo many new entrants each fighting for a very limited share of mouth.  Many craft beer- focused retailers have far too much space devoted to craft beers… it is simply not possible to keep it all fresh.  They don’t really care since they just want the foot traffic… those eyes and ears… and competitive forces drive them to have every craft brew out there.   The same liquor store I just discussed has doors and doors and doors of craft beers (that’s great)… more than triple what they have for larger domestic brews… but even just filling the cold shelves probably is more beer than their traffic can keep fresh.  Just the pack-out of these cold shelves is around 5 cases.  Don’t even get me started about bombers.  Do the math… how many brands do you have?  In how many packages?  What type of turns do you need to keep the product fresh?  In many situations it simply doesn’t work.  And ultimately the retailer doesn’t care because the distributor will be forced to eat this old product, whether this is legal or not it will happen.  That’s the real world. 

I strongly recommend craft brewers work more with their distributors to ensure product freshness (one of the many values of beer distributors).  The good name of your products depends on it.

How’s that for a long winded rant?  Craft brewers and craft beer drinkers… this is an exciting time and one with tremendous opportunities.  Don’t try to change the rules which have allowed you to come into existence.  Don’t underestimate the value your distributors bring to the table.  Definitely don’t underestimate the value of the three-tier system. 

Is it sometimes difficult to change distributors?  Sure.  Remember they are the ones probably building your brands… they aren’t putting in that effort to make a couple extra thousand dollars in a year.  They want to reap the short- and long-term rewards of their efforts too.  Can you blame them?

The beer industry, all tiers, is a great industry.  Rather than working to change the rules for your short-term advantage, instead work to make and help sell the best beer you possibly can. 

And lastly a business plug - I don’t do this stuff for free ;-)  

My strategic partner, Steve Cook, has extensive business development experience in helping suppliers bring their product to market and addressing all of the issues I discussed above (and many more).  If you are a craft brewer and would like or need a business partner to help you take your business to the next level, give me a call or email and let’s talk about how we can use our expertise to help your beers be the ones that survive and prosper.  Trust me, it is worth the time and effort… and yes the $$ too.

How’s that… first I piss you off then try to sell you something… such is life until “All Hail the Conlin”  ;-)

A Few More Observations From Littleton

First on the VERY scary front… if one were a betting person, one would bet that major war is coming to the Middle East.  The present estimates are Iran is 6 to 12 months away from a nuclear bomb… and if you take the Iranians at their word, nothing is going to stop them from this attempt.  Obama has stated that he will not allow the Iranians to get a nuclear bomb (one can debate how much his bluster matters but he has stated it many times and it is official US policy).  For the past few years the Israelis have been warning anyone who will listen that they cannot live with a nuclear-armed Iran… basically imploring the world to halt this before they have to take matters into their own hands.  I’m afraid that time is coming sooner rather than later… and no matter what actions the US takes, we will be drawn into this.

Very possibly this will be a war like the West hasn’t experienced in decades… it could turn into a religious war the likes of which the world hasn’t experienced for hundreds of years.  The Iranians are promising to bring it to our shores.  They have threatened to unleash their terrorist proxies across the globe.  With the turmoil of the Arab Spring, Israel may (almost certainly will) find itself attacked on many fronts.  Countries in the region will likely be drawn in regardless of their ruler’s desires.  The jihadists streamed into Iraq to fight the Great Satan (that’s what they call us)… the rush to exterminate the Little Satan will likely draw an even larger flood, especially if they sense this might be the opportunity to finally push the Israelis into the sea.  Israel’s next door neighbor, Egypt, just elected Islamists to over 75% of their parliament.  Does anyone really think they’re just going to sit on the sideline?  If this thing starts, the odds of it spinning out of control are very high indeed.  Do the Israelis go nuclear to protect their very existence?  Would you?  Will it matter if they do?  Or do they quietly accept extinction?  That may be the choice they face.

Regardless of steps taken, or bluster exhaled, if it happens THE PRICE OF FUEL WILL MOST ASSUREDLY ROCKET UP.  The Saudis have stated they will make up for any Iranian oil… but there will be an incredible spike in prices regardless.  And the Saudis, home to more than a couple jihadists, may find it difficult to control their own situation.  Protect yourself however you can from this coming fuel Armageddon.  Estimates are that if the Israelis attack, it happens before the fall (perhaps sooner rather than later)… and then Katy bar the door.  

And to quote Rahm Emanuel, “never let a crisis go to waste”… if this happens use the opportunity to re-set delivery systems for effective and efficient service levels across the board.  Have a plan in place NOW.  Spend some time with your management team thinking about how you can turn these events to your advantage.  Neither you nor I can stop what is coming… at least prepare your business for a very likely and very scary future… and it is only months away (if that). 

 

BETTER TRENDS AND MORE PRESSURE ON DEALS

On a more positive front, it seems like deal flow is kicking into high gear… and the multiples are heading up!  Big time.  It seems the dogs have left the porch (big and small) and if one wants to run with the pack, action is required.

Both of these trends somewhat surprise me… I wouldn’t have predicted it. (that is called honesty.  I could say I saw it all along but that simply isn’t the case).  I guess there are a number of reasons deals are jumping…

• Taxes are of course a big deal.  If Obama wins reelection, capital gains taxes are going up at least 100%, at least another 15% lost to Big Government… a total of 30% off the top!  Regardless of the size of the deal, this takes A LOT off the top of any sale.  Heck, if Obama wins reelection, dang near every tax is going up… but that’s a story for another day ;-)

• It seems a lot of smaller and mid-sized folks have looked at the chess board and have determined the odds are great they don’t have a long-term place on the board.  Therefore they are more amenable to an exit… especially considering the first point and the high demand side of the equation… they certainly are in demand.

• Another MAJOR factor in driving this is the multiples being offered.  Buyers have also looked at the chess board and decided if they want the opportunity to remain, they have to get these deals done… and to give reluctant sellers a little push, the multiples are WAY up.  The days of ANY solely economic purchase are long gone… these deals are all strategic and the prices being offered reflects this.  Get use to longer payback periods, that’s just the way it is.  That or go back to the porch while the other dogs run.

• In the ABI network specifically, there are a lot of smaller wholesalers… and whether the three points raised above or ABI’s muscle flexing, many are getting out while the getting’s good.

• It seems many larger wholesalers (MC and ABI) are also trying to strengthen and expand their footprints versus their fellow large distribs.  Once someone gets a deal done, it’s done and a wanna-be purchaser will most likely be forever out of that specific territory.  Makes one move whether one wants to or not.

If you fit into any of these categories let Steve Cook and I help.  As a selling client once noted, you only get one chance to get the sale of your business right.  And if you’re a prospective buyer, you might (and this is a big maybe!) get more chances but the impact of some less than optimal choices will haunt you and your business for years to come.

In some cases, potential buying opportunities have been squandered due to basic human nature.

• You never considered your options or thought they were limited.
• You were not proactive and got “left in the dust.” – “I would have, but....”  You were still sleeping on the porch while the other dogs were long gone.
• You didn’t get a “professional opinion.”  I can do this myself.
• Change is scary so inertia settled in.
• Don’t have a plan or the plan fails to consider outside forces.

“You don’t know, what you don’t know”  That is a truism which affects us all.

We don’t claim to bring any magic to the table … just honesty, integrity, objectivity and an intimate understanding of every aspect of this industry.  And the investment in our services is not as much as you might think… Bringing high value has always been the goal and our mantra.… whether it’s M&A work or operational improvement.  Bringing high value ensures our long-term success, and we don’t just talk the talk, we walk the walk.  Cook and I can help you navigate these waters.

Many deals could also involve the possibility of brands not transferring.  Whether a buyer or a seller there are strategies and methods to address this… but it is one point in time when suppliers have the maximum leverage and they most assuredly will attempt to steer the process to their liking.  Who can blame them?  Again, timing is critical!

Right now it looks like there might be a flood of deals for the rest of the year.  If this is your course, don’t delay.  One can always attempt to hurry the process along but there is one area over which we have no control… brewery approvals.  Brewery approvals are seldom timely… ABI is taking an incredibly long time to approve deals… and that’s for some “anchors” which have the green light from the highest authorities.  Don’t push this off until late in the year when there may be a backlog of approvals waiting.  If you want to do this, you’ll want to close this year.  You don’t want to be sweating bullets waiting for approvals as the clock ticks towards midnight on December 31^st.  The tax implications would be profound.  And it gives suppliers the opportunity to extract an extra pound of flesh as you become more pliable as this deadline approaches.  Don’t delay if this is your path… there is nothing to be gained by waiting.

 

And lastly, you’ve got to love beer wholesalers… after my last few posts where I attempt to warn wholesalers about the existential threat posed by some ABI corporate moves I received quite a few emails (mainly from ABI distributors) which in general read something like…

“John, I agree with everything you say but I’m still looking to buy… keep me in mind”

 Gotta love it.

 

Random Thoughts From Littleton

For those who haven’t read ABI’s “Wholesaler Family 2011 Consolidation Guide”, I recommend you do so, even non-ABI distribs if you can get your hands on it.  It is certainly an interesting read and clearly shows they plan to be actively involved in driving and controlling consolidation.  Although consolidation remains “voluntary” (how could it be otherwise?) their desires are pretty obvious… fewer ABI wholesalers and more corporate control over those who remain.

ABI sure looks like they plan to be VERY active in controlling the consolidation process.  In fact they put themselves first in line for EVERY transaction which occurs… they get the first right of refusal on every deal in the country.  Right now I’d be a little surprised if they allowed any transaction to occur in a major market without taking the thing for themselves… you know how important those branches are for territories which are unprofitable ;-)  The only thing which may prevent this is ABI’s top-dog bonus program… they may not want to accumulate any additional debt until their big payday.   Just a guess on my part… for some reason Brito and Dave don’t call me with regular updates… but I will accept the call when it comes.

What does this first right of refusal mean to values?  Nothing good if you’re a seller.  A first right of refusal on any property generally makes the property less saleable.  A potential purchaser has to rightly ask themselves whether it is worth the cost in dollars and time to go through the entire purchase process with the knowledge that some other party only has to match the offer to get the prize… their cost is zero… the wannabe purchaser’s cost could easily be in the hundreds of thousands dollars, weeks (if not months) of time.  Just lining up financing is more than a small task and it isn’t free.  You only move forward if you are fairly certain the holder of the first right of refusal doesn’t plan to execute their right.   Does ABI plan to execute their rights? If they did on just a few deals, what impact would it have on ALL future ones?   I’d hazard a guess the impact could be substantial.   If I were a wholesaler in ANY state, I’d be racing to take this “right” away from them… in whatever manner I could. But then again, I’m a trouble-maker.

This “right” gives ABI tremendous power over wholesalers.   You want to make an acquisition? First question, are you an “anchor” wholesaler for ABI?  For those who haven’t read the consolidation guide, a major factor in being ‘allowed” to grow your territory is your alignment with ABI. i.e. do you carry other brands or are you on the 100% share of mind ranch?  This is an incredible club to have over the distributor’s head… play the game as we tell you (who’s your daddy again?) or you ain’t going to be making any stinken’ ABI acquisitions.  This isn’t a game of tiddlywinks… this is power, pure and simple.  Distributors need to do something to change this equation, otherwise the brewery (your daddy) has the power… you don’t… and that’s that.

A recent ABI transaction illustrates this power and its effect on transactions… Mr. Seller decided to exit.  He struck a deal with Mr. Buyer.  Mr. Buyer was an adjacent ABI distributor, in good standing, etc. But for whatever reason, ABI decided Mr. Buyer isn’t who they desire so they “redirect” the transaction to another purchaser.  So, Mr. Original Buyer forfeited all the time, effort, and $$ it took to get the deal done and is shown in none-to-subtle terms that he has no long-term future in the ABI network.  Mr. Redirected Buyer got the transaction (for almost no effort) but probably owes his soul to the company store (there’s that song again).   “Who’s his daddy?” is now not in doubt. 

Short-term it was good for Mr. Redirected Buyer but long-term?  It gets even worse… for whatever reason (whether ABI or Mr. Redirected Buyer) someone didn’t want to pay the price Mr. Original Buyer was willing to pay, so Mr. Seller took a haircut and sold to Mr. Redirected Buyer at a LOWER price than originally negotiated.  Both Mr. Original Buyer and Mr. Seller took it in the shorts.   This was a true shocker since Mr. Seller accepted this lower price.

Why would Mr. Seller accept this?  Suppliers generally retain the right for a redirection as long as it is under the same price and terms as the original deal… the seller isn’t damaged and Mr. Original Buyer has no standing to sue since he never owned the thing.   Did Mr. Seller simply roll over and accept the haircut just to get the deal done?  Or was there more?  Did ABI flex their legal & financial muscle and force the thing? 

ABI has attorneys on staff… lawsuits don’t really have an out-of-pocket expense for them (at least in the beginning).  Not so for a distributor…  business lawsuits are REALLY expensive (you’ll spend a couple hundred thousand so fast it will make your head spin).   Litigation also could take a great deal of time, longer if appealed (and they very often are).

Mr. Seller faced a couple less-than-preferred options.

1. Accept the haircut, curse and walk away (I do not know the amount of the haircut but was told it was a pretty big haircut relative to the deal).

2. Fight ABI… suing and being tied up in the courts for YEARS? Probably spend at least a million dollars (very likely more).  And what does he fight for?  He has already agreed to sell his business (see the consolidation guide) so for all those years he has no distributorship to fund the fight… they just might stop shipping to him.  He would then have no distributorship AND no money because he never consummated a sale.  Sure he might “win” in the end but at what cost?  Don’t think it can happen to you?   Think again.

I have noted in the past that I had the unpleasant experience of dealing with venture capitalists… I received more than my fair share of kicks in the groin but I did learn a few lessons… one being contracts quite often can be close to worthless.  You also must have the desire AND the financial means to enforce the contract… I have noted in the past that for 99% of beer wholesalers, you can take their handshake to the bank.  Unfortunately that’s not the way it is in a lot of the world out there.  In the world of pure power business, those inches and inches of contract might in effect be worthless firewood.  How long will it take to win?  How much will it cost to win?  What are the odds of not winning?  Do I have the financial and emotional resources to fight for years and years?  And what does “winning” look like? (sorry Charlie Sheen)  Are you going to spend years (decades?), a million or two in real out-of-pocket $$, probably lose the income from your business during this time all in the hope of enforcing a contract which might gain you a million or two?  Even if you might win double or triple that?  Is it worth it?  Yeah we all know about Maris (but how many years did that go on?).

One of my learning groin kicks was that people sign contracts all the time which they have no intention of honoring. It may shock naïve school girls like myself, but that is the way many play the game.  Welcome to that world.

In summary, I must take this opportunity to pass along my own spanking to far too many wholesalers out there. I’ve been telling distributors FOR YEARS if they wanted to get out of the business, sooner was better than later. I believe my direct quote was… either take your chips off the table and run to the door or prepare your business (and your industry) for long-term survival. Either one is acceptable… nothing else is. I noted there was little if any upside in staying (unless you planned to realistically stay for the long-haul… and market dynamics would allow it) and TREMENDOUS downside… were the odds more that good things would happen or bad things?  Well that future is now staring you in the face.  It’s not too late to exit at a great multiple but I have no idea how long this will be true.  And no, that’s not just a ploy to get you to engage our brokerage services - although if you are selling you should ;-)… it’s the truth and worthy of your consideration!!

It might be that the door has already closed… it is obvious it is beginning to close.  Wake up!  I have no idea how ABI plans to proceed on their control of transactions but the evidence isn’t good.  And MillerCoors distributors are potentially far from immune for this reduction in value.  And that’s just the risk from your suppliers… what about the Costco’s of the world?   Do you think chain grocery and c-stores have had an epiphany and forever abandoned their desires for central warehousing and shipping direct?   Is the world poised for a change where the protection of the three tier system is now everyone’s goal?   Is the world going to race back to 1980 and allow beer distributors to go about their business as they always have?  So where’s the upside anywhere one looks?

Right now, either find a willing buyer or prepare your business and perhaps even more importantly your industry for long-term survival.   For you larger distributorships, don’t be lulled into the false comfort that you can position yourself to be the last one in the line walking into the Slaughterhouse, and they’ll close the door before you get there… that is a pretty big bet and the implications of losing it are not very comforting.   Fight for your industry… it is under assault! When you’re in an existential fight (that’s a fight for your very existence), take the directive from a past world leader…

"Not One Step Back"

Who’s Your Buddy?

I’ve spent the last couple posts discussing the evolving relationship between ABI corporate and ABI distributors.  A clash of paradigms indeed.  But what of MillerCoors corporate?  Some observers think MillerCoors wants to follow the ABI corporate path… an attempt to be “their” distributor’s daddy.  Whether this is true or not, I’ll give my free advice nonetheless…

First let’s take a stroll down memory lane.  Years back, before the Miller Coors merger there was unhappiness among some of the independently consolidated Miller Coors distributors (most distributors had already become Miller Coors by this time).  Distributors felt they were getting unfairly financially squeezed by both. … some were more upset with Miller… some more with Coors.

There was little joy in Whoville for these Miller Coors distributors, except for some joy generated from a very surprising supplier… good ol’ Pabst.  Now Pabst at this time was resource poor.  Its brands were what they were and the trends were what they were.  Its power over distributors was what it was… they weren’t going to be anyone’s daddy.  But you know what?  During this period Pabst was incredibly distributor-friendly.  Rather than squeezing pennies from their distributors, they brought pretty good margins.  Rather than attempting to use power over their distributors, they instead were the distributor’s friend.  They actually lived the “what can we do to help?” attitude every time they walked into the warehouse.  And they even meant it!  Note that again, they actually listened and saw their role as helping the distributor “sell more beer” in whatever manner they could.  They knew they couldn’t beat up their distributors… and even if they could have, to what end?

Now I’m not so naïve to believe they did this out of the kindness of their hearts… who knows, if they had the power perhaps they would have made “a bunch of foreign corporate raiders” seem like girl scouts in comparison.  But they didn’t have the power and instead they played the hand they were dealt… and they played it pretty darn well.  When Miller or Coors personnel walked into the warehouse the grinding of the teeth started… when Pabst folks showed up they were actually welcomed.  Usually by the entire organization!  Look at Pabst trends from this period.  This “Who’s Your Buddy” strategy had a distinct positive impact on Pabst and their distributors… and the good feelings (and all the positives associated with them) lasted quite some time. 

So what does this warm and fuzzy tale have to do with MillerCoors corporate?  I offer the following guidance and perspective as they decide which path to walk… hopefully they will not attempt to emulate the “who’s your daddy” power play of ABI and instead continue to create their own paradigm, the “who’s your buddy” strategy.

1. Rather than attempting to limit and control “other” craft beer product, instead embrace them all.  Help your distributors become the craft brewer’s best friend.  Help your distributors become THE desired distributor for every craft beer on the planet.  ABI corporate, in their insidious genius, is actively working to limit their distributor’s ability to attract other suppliers.  Go in exactly the opposite direction and work to strengthen your distributors.  Of course you want to build your brands but I would argue you AND your distributors are stronger and better positioned to do this if you embrace the hottest category in the entire industry.  Use your technology and power to assist your distributors in this arena, not work to limit them.  Help your distributors gain state-wide coverage… heck perhaps nation-wide!  Put out the welcome sign for Yuengling and everybody else… “hello friend, you are welcome and desired here”. 

Let ABI corporate plant their seeds of fear, you should continue planting seeds of partnership and goodwill.  You’ve started down this path with the MillerCoors Distributor Doctrine and other moves.  Don’t change directions and go for the Ring of Power just because you hear its siren song.

As with most things in life, it is possible to create a virtuous circle where one good thing generates another good thing which generates another good thing, etc., etc.  Let’s assume MillerCoor corporate follows the buddy strategy… where will the bulk of the craft beer end up?  With MillerCoors distributors.  What strategic advantages can MillerCoors corporate gain from this?

• Their distributors become the marketplace leaders, probably in units but definitely in gross profit dollars.  This allows tremendous leverage at retail… look at AB over the past 30 years and how they used their market strength to their advantage.
• After the shake-out and consolidation in crafts (it happens in all new, dynamic markets), where will the “winners” most likely be?  In the MillerCoors distributor network.  This sure makes an acquisition or two more likely for MillerCoors corporate.  On the other side, if ABI wants to make an acquisition of one of these winners, THEY can gain from the acquisition but at the distributor-level their distributors are screwed.  The brands will in all likelihood already reside in the MillerCoors network.  And in a whole lot of the country, forcing a distributor to divest a brand is far from an easy task (impossible in many states)… to say nothing of the multiples it will take to get this done… 5X to 10X gross profit.  Either way, the MillerCoors distributor network AND corporate are sitting in the best possible position.  The lay of the land will make an ABI acquisition in this space more difficult and will limit the synergies the acquisition generates.  Just the opposite for MillerCoors.  This is a tremendous barrier for ABI to overcome.

The gross profit these highly desired brands bring to the distributor could generate more bottom-line profits for MillerCoors corporate without impacting the distributor’s power at retail – I might be warm and fuzzy but I do live in the real world ;-)  You can be quite honest about this… you help the distributor in attracting and managing these brands and in return you get a little more $$.  Win/Win.  And not “managing” these brands by keeping them down… managing the brands to give them all the greatest possibility of success.  Let the consumer decide.

Helping expand the entire craft beer segment will only help your efforts in this category.  This doesn’t hurt Blue Moon or the 10^th and Blake stuff, it helps them all.   Again, win/win.  Look at any new, growing category… helping grow the category ALWAYS helps the present participants, always.

 “Focus” on maximizing the selling opportunity… ah that “F” word.  I can hear some of the corporate people repeating it like a mantra… “but the distributors will lose focus on our brands”.  To this I ask why?  Is it not the field people’s job to get more than their fair share of mind from a distributor and grow share.  That’s job #1 of every supplier.  Aren’t your people up to the task?  If so, why?  I’ve met more than a few MillerCoors field people and from what I see, I think your people are more than up for the task. 

The MillerCoors distribution network has years of perfecting the art of distributing multiple brands from multiple suppliers.  They are well prepared to execute on anything which comes their way.  You will win more being their buddies than attempting to show them who their daddy’s are.

For distributor and supplier alike, leverage this power at retail.  Become the retailer’s #1 beer consultant.  Do what is best for the retailer, knowing that sooner or later this will work out to the advantage of all.  Rid yourself of self-serving tactics, do retailers really need 15 linear feet of Bud Light? 

Consider expanding and leveraging the “who’s your buddy strategy” for FMBs, energy drinks, whatever.  The power play of “who’s your daddy” will in all likelihood create tremendous opportunity for MillerCoors corporate and distributor alike.

MillerCoors competes in a duopoly and due to your competitors “insidious genius” you currently have a huge tactical advantage staring you in the face… hopefully, you will stay the course and not choose to follow the power play of your competitor and avoid reaping the very real negative fall-out.  Don’t create more opportunities for the huge wine and spirits houses to become permanent, big-time players in this distribution market.  Follow the “who’s your buddy strategy” for both your distributor network and every craft brewer out there.  Do you fight your natural instinct to grab for power?…  Or instead leverage your size and embrace (in every sense of the word) a win/win partnership with the entire craft beer world. 

As I’ve noted before, I know what choice I would make.  Now of course everything I’ve just said works for ABI corporate too… but I won’t hold my breath waiting for them to change their stripes.  Sooner or later I predict they will change course… but only after multiple kicks to the groin (I expect them to be slow learners, especially for something they don’t want to learn).  But until they do learn this lesson, MillerCoors corporate and distributors should put on their pointy boots and, as they say in the country, make hay while the sun shines.

I guess the only question is whether MillerCoors can take advantage of this gift from ABI and deliver a true win/win strategy.  Or will they take the other path and play a self-serving and ultimately futile game of “who’s your daddy”?  Time will tell.

Who's Your Daddy?

A conflict of paradigms, or to put it in my usual professional manner… who’s your daddy?  For all you ABI distributors, that question has been answered… or at least ABI corporate is trying to answer it for you… THEY ARE.  Do you see the Slaughterhouse doors right there in front of you?  ‘Cause if you don’t, you aren’t looking. 

It is truly amazing the paradigm that has been established here.  For those in need of a refresher, the Free Dictionary describes paradigm as:

A set of assumptions, concepts, values, and practices that constitutes a way of viewing reality for the community that shares them

It’s basically a framework through which you view the world.  As an example, one paradigm was once the world is flat.  It of course was replaced by the reality-based paradigm, the earth is round.  This is an important point… paradigms can and do change.  New facts change paradigms… Newtonian physics to relativity.  Personal growth and observation can change paradigms… one’s political beliefs might have at one time been big government socialism but based on real-world feedback they evolve to small government libertarianism.

So what is the specific paradigm I am discussing?  The paradigm that independent businesses which distribute ABI (and in the past AB) products are by definition THEIR distributors.  Miller and Coors never really had this paradigm. 

Let us take a mental field trip and think about the evolution of the beer wholesaling industry.  Anheuser Busch wasn’t always dominant.  There are more than a few distributors who long ago decided to go with Stroh or MisterBrau (or someone) and dumped AB.  But over time AB did gain dominance and in this process it created the paradigm… AB distributors were part and parcel THEIRS.  Ownership was separate but that was about it.  Remember that paradigms are mental frameworks… for all non-science based paradigms; they exist because we allow them to exist… and over time this paradigm took hold, pushed aggressively by AB corporate.  Miller and Coors would have probably also liked to create this paradigm but their market situation was much different than AB’s.

In all honesty more than a few AB wholesalers actually enjoyed this paradigm.  They didn’t have to think about their businesses… they didn’t have to plan too much… they just sat back and let good ol’ AB tell them what to do and it worked out pretty well for them.  Well if you haven’t noticed, good ol’ AB has been put out to pasture and the new sheriff in town has very different plans for you… to say nothing of a rapidly changing consumer market which doesn’t necessarily favor the offerings of ABI.

But don’t feel too bad, AB corporate and more importantly Three Sticks, were very good at creating and propagating their desired paradigm.  They did it “upstream” too.  Although the extended Busch family owned only a fraction of the shares of Anheuser Busch, the stock market allowed them to run the thing as their own private family business.  It was incredible to behold.

Note the concept of creating and propagating their paradigm.  Well as time went by and the marketplace changed…

• Miller and Coors distributors became one in most markets, thereby increasing their financial strength and impact at retail.  For years AB distributors laughed all the way to the bank as the Miller and Coors guys fought over “their” remaining share.  Being a 60 share distributor competing against 25 share and 15 share wholesalers is MUCH different than competing against a single 40 share distributor.

• A lot of very high profit product within a more diverse portfolio was also included in this 40 share… over time this made the MillerCoors distributor the gross profit dollar leader in many markets.   To top it off in many markets the AB distributor sold A LOT of less profitable sub-premium product.

• The MillerCoors distributor continued to get A LOT better and became much more competitive.   The net result was in many markets the MillerCoors distributor organization was much better at being a true multi-brand distributor than their AB competitor.  As I remind both, it’s not that the MillerCoors people were inherently superior… they simply faced a reality of becoming better or dying… and this has a tendency to focus one’s mind ;-)

• The growth of imports and even more importantly, the craft beer segment continued year after year… by now I hope it has ended any confused thinking that this is some sort of short-term fad.  And with AB’s paradigm, the vast majority of this product went to the MillerCoors distributor.  Thereby increasing their power at retail in the only really “hot” segment of the beer category… and greatly increasing their bottom-line.

• And expanding beyond beer, the energy drink category (and others) was also putting down pretty good roots during this time… again feeding the MillerCoors distributors.

These and other factors slowly challenged the validity of the AB desired paradigm… that “they are your daddy” and know best.  Over time many AB wholesalers broke from this paradigm and guess what?  The sky didn’t fall.  The world didn’t collapse.  They got a little grief from AB (in some cases more than a little) but they went about their business and many became more competitive, great multi-brand distributors.  And this momentum gained.  It made tremendous strategic sense from the AB distributor’s perspective… leverage your already impressive power at retail to gain the best brands available.  Some leveraged this even further, using the power of an entire state’s AB distributor network to pick up brands.  The paradigm that AB distributors were THEIRS for the simple fact of distributing their product was quickly being put to rest.

Ahhh, but not so fast.  Along comes InBev and now we have ABI.  Whether they are a bunch of “foreign corporate raiders” or not, they are much different from the past.  From various ABI corporate statements, it becomes clear they would like to take over a fair amount of their distribution.

They also don’t really like this new evolving distributor paradigm and much prefer the old, who’s your daddy paradigm.  Thus the recent meeting in Dallas where they yanked pretty hard on the ol’ leash.  As thousands have learned over thousands years, once you allow someone to be your daddy, they don’t easily relinquish this power.  Especially those who come from a very power-centric culture.

So now the question to the ABI distributor is what paradigm do you choose to live by?  Is the world flat or round?  Are you an independent business or is ABI your daddy?  Remember, YOU choose to allow this paradigm to exist.  You allowed it to exist in the past and you allow it to exist today.  It might have made sense in the past but the past is just that, the past.  It might have made sense when 1 out of 4 beers consumed in the country was a Budweiser… there will never be a brand like that again.  The consumer has profoundly changed since then.  The rear view mirror isn’t where you need to be looking; you need to be looking at what is coming at you from the future.  InBev’s (and now ABI’s) history of growing brands is rather poor to say the least.  Sure they can lower the price of Stella but can they build a brand?

ABI corporate’s goals are clear… the paradigm remains the same - you wholesalers are THEIRS.  They are your daddy… they control you… and the new ABI corporate sure looks like it intends to make that point very clear… for some reason an old country song just popped into my head as I write this… “I owe my soul to the company store.”  

But does this make sense from a distributor, or more importantly from a market place perspective?  As markets continue to change, the businesses which serve them evolve (whether one likes it or not)… the net result being something better for our consumer goods industry.  Better systems, more consumer choices all designed to capture market share by “giving the consumer what they want when they want it.”  Unfortunately, the progress made during the ABI transition and what appeared to be a very positive paradigm shift for the once stagnant AB wholesaler network (which didn’t know how to sell high-end products and was finally gaining steam and becoming true multi-brand distributors) might be for naught. Unless, unless you stay the course.

For the ABI distributor network we believe it is the time to continue your paradigm change.

Today’s beverage wholesalers are smarter, stronger and know their business.  Why?  They needed to do so to stay competitive.  What was a WIN/WIN paradigm for the previous generations has become a WIN/LOSE narcissistic supplier driven paradigm for the current ABI network.

Perhaps the more rational paradigm is that you are independent businesses which distribute beer and beverage products… and yes, ABI is a significant part of that business (in some cases the only part) but that still doesn’t mean you are THEIRS.  You are YOURS and you should act accordingly.  Of course you should do a great job for ABI products… you should do that for all your suppliers…  I wrote in the last post that Carlos and company come from a “big man” culture… one big boss and almost everyone else waits for the next command; no independent consult with those who are affected the most… I think in many ways that’s the definition of a “who’s your daddy” culture.   You are not an equal partner, but rather an entity subservient to your daddy’s wishes. 

• Do you really want to voluntarily put that leash back on?

• Will you stay the course or will you chase the Golden Ring of being the Anchor Wholesaler?  An “Anchor” wholesaler who ABI won’t identify… thus giving everyone the “chance” to chase the Golden Ring.  Insidious genius ;-)

• Will you sell off brands and ignore new ones as your MillcrCoor competitor dances to the bank?  

• Will you in effect force the wine and spirits houses to become a permanent big-time player in the beer distribution world?  

Most of you are in this for the long haul… the folks who want to be your daddy now probably won’t be around in 10 years… you’d better think long and hard about the long-term strategic implications of what you are doing.  And you are discovering… once you allow that someone to be your daddy, they don’t easily relinquish this control over you.  To continue my use of offensive metaphors, it’s getting to nut cutting time and you had better decide which side of that fence you want to be on.

This quote is perhaps overused but it does capture the reality one sometimes faces…

First they came for the Socialists, and I did not speak out --
Because I was not a Socialist.

Then they came for the Trade Unionists, and I did not speak out --
Because I was not a Trade Unionist.

Then they came for the Jews, and I did not speak out --
Because I was not a Jew.

Then they came for me -- and there was no one left to speak for me.

-Pastor Martin Niemöller-

Currying favor in the hope that you can position yourself to be the last one to walk up the chute in the Slaughterhouse is simply a flawed strategy… as many have discovered.

And what of consolidation?  For those looking to sell, there is good news on that front… at least a little.  Since the Dallas meeting I know of a couple of unsolicited offers… these unsolicited offers weren’t “let’s start talking” offers but “I want to purchase you now” offers.  These offers were based on strategy… and from a strictly financial viewpoint these offers were absolute no brainers, it would take a couple decades to earn from operations the after-tax proceeds that the seller could pocket upon sale.  I tip my hat to those making the offers… they stepped to the plate and did what is necessary to ensure their vision of the future is the one that occurs.

For the rest who plan to stay I have a couple suggestions…

1. Work to strengthen state franchise laws on many fronts.  The more corporate can limit who can purchase, the more they depress the market price.  And they more they control your lives.  Work to cut these strings which they use to make you THEIR distributor.  Outlaw branch operations… they are the camel’s nose under the tent… they are long-term assaults on the entire industry.  And to any ABI corporate folks reading this… don’t worry about those “unprofitable” territories which “require” a branch operation… I can have willing and qualified buyers lined up today to purchase any you care to sell… so stop with the bull.
2. Don’t forget your true long-term partners are your fellow distributors, even the competitor down the street.  I’ve quoted it before and I’ll repeat it again, Benjamin Franklin’s famous admonition during the signing of the Declaration of Independence…

          We must all hang together, or assuredly we shall all hang separately.

Follow the example of Three Sticks and create the paradigm you desire… or let a bunch of bankers who have no interest in you or the US beer distribution industry become your daddy and see how that works out.  I know which choice I would make.

 

 

Bitch slapped in Dallas

“Nothing like getting bitch slapped on a Monday morning.”  That’s how one ABI distributor described the start of their recent national distributor sales meeting… another, “My great granddad started this business and I’ll be damned it I’m going to let a bunch of foreign corporate raiders tell me how to run it.”  Whee-doggie, sounds like a grand time in Dallas!  “Never saw so many pissed off people in one place before.”   And another, “I’ve never walked out of a meeting before feeling true fear of my supplier”. 

Trust me… Benj and Harry kind of sugar-coated the degree of anger at that Monday meeting… they have to sometimes walk softly as to keep their sources… but I have no such limits so full speed ahead.

5 years ago who would have thought AB distributors would be where they are today?!  MillerCoors distributors have had a pretty good run over the past few years, in many markets becoming the gross profit dollar leaders.  With the new ABI directive back towards exclusivity (which certainly helped the MC climb), the MillerCoors folks will be dancing around their desks… tomorrow and for years to come.  The value of these folks just went up.

When I first heard this was coming down the pike I thought… “this is jaw droppingly stupid”… but of course I view the world through a distributor’s eyes… and for the ABI distributor it is “jaw droppingly stupid”… but for ABI corporate maybe not.

For those who are unaware, ABI doesn’t believe it is getting adequate focus on their brands from their wholesaler network… I guess in their view the reason Bud and Bud Light are down is because their wholesalers aren’t performing… they’re losing focus as they chase other brands and suppliers.  Sorry corporate guys, you’re barking up the wrong tree if you believe that.  Look at Coors Light… it is sold and distributed by wholesalers with MANY other brands but somehow it is growing.

Therefore ABI wants to head back to the “100% share of mind” ranch for their distribs.  They use other words but that’s the gist of their desires.  And anyone audacious enough to compete against an ABI branch operation with non-ABI brands is an insidious swine or some such thing ;-)  Ditto for selling products outside your territory against other ABI distribs.  For those who have forgotten or missed it the first time, please read my little ditty called “The Slaughterhouse… a Modern Fable” which you can find by clicking here to get a better understanding of how this game is played… and if you are not careful, your role in the game.  Right now I think they are trying to line you all up in the loading chute ;-)  I certainly wouldn’t voluntarily walk onto the killing floor… metaphorically speaking of course.

So where to start?  Let’s just jump in and see what floats to the surface.  First, I don’t know of any ABI distributors who are planning on selling off brands… but there will probably be a few – give me a call and Steve Cook and I can help you maximize the price.

But for most that ship has already sailed.  For those who are willing to sell brands, they will most likely find a willing buyer in their MC competitor… who will laugh all the way to the bank.

How about Yuengling?  Whether corporate likes it or not, Yuengling gets AT LEAST 50% of their volume out of ABI’s hide.  Now if that’s going to happen regardless, the ABI distrib is MUCH better off with it in their house rather than MC – sorry all my MC clients, just talking strategy.  If it’s in the ABI house they will trade 50% of the Yuengling volume from their other brands and gain 50% from their competition.  If Yuengling “only” gains 5 share, the ABI house gains 2.5 share… not too shabby.  But if it goes to the MC guy, the ABI distributor losses 2.5 share… a 5 share difference in the two outcomes.  What if Yuengling gains 8 share?  And guess what… the Bud handle is generally the most vulnerable handle out there (if you work the streets you know this to be true)… I know the wholesaler’s sales reps would much rather be able to keep that handle in their house rather than losing it to the competition.  But from ABI’s perspective maybe this will make the distributor work that much harder in an attempt to regain this lost share.

And what of providing state-wide coverage for a supplier?  This has been shown time and time again a better strategy for obtaining quality brands than a market-by-market approach.  In the ABI network the Tennessee folks were the first to pull this off with none other than Yuengling.  The strength of state-wide coverage is indisputable… it is much more in line with what many smaller suppliers desire.  But here’s where the ABI corporate strategy becomes genius… insidious perhaps, but genius none the less.   

With this one move ABI corporate has made the possibility of a state-wide ABI distributor network push for a supplier very, very unlikely.  Why?  In all likelihood there will be AT LEAST one wholesaler who won’t want to buck ABI… for whatever reason.  They may be chasing that carrot that they will be the chosen anchor wholesaler who will be approved as the chosen consolidator.  I think a metaphor for this dream is captured by the cartoon strip Peanuts where Lucy continually pulls the football away from Charlie Brown’s attempted kick… only to have Charlie Brown attempt it again and again.  But of course someone will be this consolidator… perhaps this one time you will be the one to get the carrot.  Talk about betting on the come.  This course of action will require a lot of trust from the wholesaler… and sadly, trust of ABI corporate at this point in time is very low.  That’s true for wholesalers AND the bulk of ABI employees.

Others won’t join a state-wide push simply out of fear of retaliation.  Whatever their reasons for not participating, it will be very difficult to put together a state-wide ABI distributor coalition in any of the continental states.  The MC network will be dancing to the bank.  That’s just the way it will be.  If the remainder of the ABI distributors in a state want to forge ahead, they will have to be creative in filling the hole left by the non-participating distrib.  And of course ABI has already stated their feelings on distributors who go into other’s territory… it will take some gutsy adjacent ABI wholesalers to do this.  Or the ABI folks will have to consider having the MC distributor (or someone) fill this hole.  Add these all up and in one single move, ABI has just fundamentally changed the landscape for attracting new brands… in my opinion to the severe detriment of ABI wholesalers and to the extreme benefit of MC wholesalers.  But as I noted above, this may be jaw droppingly stupid from a distributor’s viewpoint, it is insidious genius from corporate.  You ABI folks WILL focus on ABI brands since corporate’s actions have severely limited your ability to attract other suppliers.  You’ll have few other choices.  Freaking genius. 

And of course any state where ABI has a branch operation is similarly screwed.  How do you fill this hole from a potential supplier’s viewpoint?  Anyone audacious enough to compete against a branch operation is an insidious swine, or some such thing ;-)  Looks like my MC clients will be pocketing a lot more gross profit dollars as suppliers will again find they have few other places to go.  I think the wine and spirits guys will also win as they find more and more desirable beer brands coming their way.  Is this good for the beer business?  Does ABI corporate give a damn?   Why should they?  Their motto has changed from “we’re in the business of making friends” and creating a Win/Win with our business partners to “we’re in the business of making money” and we Win even if you Lose.

Although it won’t change a thing, I’d like to recount my early experiences in consulting to the beer distribution business.  ABI corporate is concerned about FOCUS, let me tell you about focus.  When I first started in this business in the mid-80’s a lot of my first jobs were working with Stroh, Pabst, Heileman, etc. distributors who were fighting for their lives.  I remember one owner who noted he was afraid to bring me in since he didn’t want to scare his employees with how bad things might be.  As I told him, your employees knew you were in trouble probably before you did.  Your folks aren’t stupid… a driver used to put off 500 cases and now he’s putting off 250… he, and everyone in the company knew.  They had EXTREME focus… every employee knew everyone’s jobs were on the line.  Although it was very difficult to keep morale up, every employee had extreme focus.  Yet where are these distributors today?  They were sold.  There is a hell of a lot more to it than focus.  And anyone who doesn’t believe that an AB distributor bleeds Bud doesn’t know distributors.  Or at least they used to bleed Bud.  But ultimately the consumer must want to purchase what you distribute… as a wise beerman once told me, the last 12 inches are the consumers.  THEY have to be the ones who reach into the cold box (or across the bar) and grab the product.

As I freely note, I am a mercenary who works for whoever is paying me for that week or to complete a transaction.  So in the beer world I’ve worked with Miller folks, Coors folks, MillerCoors folks, and of course ABI folks.  And from an unbiased, don’t have a dog in this fight, perspective… AB had the most loyal, dedicated network of wholesalers in the entire country.  This loyalty was an amazing thing to behold.  THIS LOYALTY WAS BASED ON TRUST; a trust that both parties would do what’s right to succeed. AB distribs would do things that were clearly not in their short-term interests simply because they trusted AB (and AB make most of them rich).  I think the entire beer industry used to stand back in awe at this loyalty… and strength.  AB wants 100% distribution?  The wholesalers would click their heels, salute, and go get it done.  Simple as that.  In a short period of time ABI corporate has thrown this trust in the trash can… or are in the process of making the throw ;-)  I believe it is a profound mistake... but again, I view things from a distributor’s perspective.  And once loyalty is lost, it will not be easy to re-earn wholesaler’s trust.  But what if loyalty is over-rated?

Loyalty (trust) or fear (lack of trust)?  Both can be used to motivate someone over the short-term but only loyalty will work for the long-haul.  ABI corporate clearly thinks fear is a better choice.  I think this is a reflection of culture.  In a past business I traveled extensively in Mexico focusing on high-tech businesses.  It was an amazing, eye-opening experience.  I’d walk into a company with 100, 200 professional employees and only the boss would have Internet connectivity!  This was the norm.  NO ONE else would have it.  In the rare occurrence where employees had some access, there would be a communal table (much like a library but with less privacy) where a few computers set offering Internet access.  It is a reflection of their culture… note to us, everyone doesn’t think like we do.  It is not a collaborative, warm and fuzzy management style… it is a “big man” culture where there is one big boss and almost everyone else is a peon.  You can see it clearly in Latin American companies, in their politics, in most areas of life.  Carlos and company come from the “big man” culture.  And they treat their employees (and their distributors) from this cultural perspective.  This isn’t a moral thing, it’s just the way it is.

As I understand it, few ABI employees below Peacock knew of this new push toward exclusivity and the planned tone of this meeting until the actual distributor meeting!  Obviously these folk’s opinions were neither asked nor desired.  I find that shocking but this is clearly not an American-type culture.  ABI corporate is an international company run by a few Brazilians.  Guess what?  That ain’t going to change, whether you or I like it or not.  And to top it off… the very, very top of this company is awaiting a tremendous payoff (is it $1 billion or $2 billion?)… I’d guess walk away money for all of them.  Their idea of long-term (if it even exists) is MUCH different than a distributor’s idea of long-term.  Their great granddaddy didn’t start their company and they frankly don’t give a damn about your granddaddy.

And the insidious genius of their plan follows this culture… they don’t have to convince the majority of you… they only have to co-op a few with dreams of being the chosen distributor… or a few with fear… or a branch here and there… and it accomplishes their goals regardless of what the majority of the ABI distributors want.  Jaw droppingly stupid or genius… depends on which end of the stick you are holding.  And what are you distributors going to do about it?  You have very little power in this game… “here’s where the line forms for those who want to sell… otherwise shut the hell up and do what we tell you.”  ABI is dismantling the strongest, most loyal distributor network the country has probably ever seen (sorry MC folks but you know it has been the truth… note the past tense).  And once that toothpaste is out of the tube, it is impossible to put it back.  The ABI distribution network is going to be left tattered and torn while a handful of corporate big dogs pocket an amazing amount of money.  I can guarantee you your granddaddy is rolling in his grave.  Amazing times. 

My gosh, think of markets where craft beers have a 30 share.  Under the new ABI push, the ABI distributor will get what, maybe 5 share?!  Maybe.  That leaves 25 share for their MillerCoors competitor!  25 share of VERY high margin product.  That is a HUGE profit pool.  But I guess it will force the ABI distributor to focus on ABI products… what other choice will they have?

What about Yuengling as they continue their expansion?  Are they going to be comfortable going with ABI distribs when they know the strong feelings of their major supplier… and if push comes to shove, is the wholesaler going to go with a supplier who is perhaps 5% of their business… or the supplier who is 95% of their business?  Not a tough call.

The same is true with all new brands as they examine their distribution choices… it just got A LOT harder for ABI distributors to make their case for new brands and suppliers.  And the genius of the ABI corporate move is that it ultimately doesn’t matter what an individual ABI distributor says… the damage is done… their actions will limit distributor choices regardless.  Jaw droppingly stupid or insidious genius?

I’ll write more of this in a future post (or hire Steve Cook or me to help you design and build it) but my advice to the MillerCoors folks is to prepare your companies for this new future… you’ll have to develop an organizational structure which allows you to fully sell and support ALL of these new brands and suppliers.  It sure looks like many will be coming your way.  Don’t give them any excuses and force them into a wine and spirit house.  Grab the opportunity that insidious genius provides you.  State-wide associations?  Get them up and running NOW.  The next year or two is going to shape the beer distribution world like never before… as I’ve said before, grab the future by the throat and ensure the future that comes is the one you desire. 

And for ABI distributors… yikes!  Yikes indeed.

This thing is getting a little long so we’ll end it now and continue in the next post… a Morgan Stanley analyst thinks ABI corporate can “source” $1 billion from wholesalers in what he calls a “win-win” for both corporate and distributors.  He is missing one thing… culture.  Why in the world would he just assume ABI corporate desires a win-win?  He’s putting his cultural bias on top of a culture which doesn’t think like he does.  A fatal mistake…

 

Even More Random Thoughts From Vegas

A few more random thoughts from Las Vegas…

• As usual I hear many insights as I speak to folks from around the country.  I spoke to a senior manager of a recently merged organization and asked how the partners were getting along… and he nailed it… “they are learning how to disagree”.  What a great observation.  For those who are considering a merger (or even those who have already made the jump) this is a very important point (newlyweds should also pay attention).  Learning to disagree is a valuable experience, and something many owners have never really had to experience.  Sure you can have all the debate you want but in the end, the owner slams their fist on the table and that’s the way it is.  But in any type of partnership, that’s not the way it is… thus the value in learning how to disagree.  This first requires honesty… everyone sits in the meeting all happy-face (nothing wrong here!) and the minute they walk out the door the bitching starts.  All of you (and your employees) have experienced these types of waste-of-time meetings where nothing that is real is discussed.  This is not the course to a long-term relationship.  Instead honesty is required… you think this and I think that, and I think you’re wrong and here’s why.  Remember, we too often assign a moral aspect to our disagreements… generally no one is “good” and no one is “bad” in these disagreements, we simply disagree.  You think pricing strategy X is what we should follow… I think strategy Y is a far better choice.  No one is “bad” in either.  Second, keep the fist off the table… you have partners (or a spouse) and they get a say in this too, whether you like it or not.  Yes it is good being King, but in a working partnership no one is King.  If you can’t accept this, don’t form partnerships (or get married).  And work on the art of disagreeing… it doesn’t mean the other person is bad or stupid or whatever… it simply means you disagree.  Learn to live with this reality… learn to actually like it.  Vigorous, honest, friendly debate almost always leads to better solutions.   

• Spoke to another large southeastern wholesaler who was attempting to put together a multi-distributor acquisition of various brands – these are becoming more common every day.  It was a magnificent strategic move which would strengthen all purchasers… only one problem, the purchase multiple for the brands was relatively high and a couple of the distributors were balking at the price.  I agreed with the concern but the move was a huge strategic advance and the volumes were pretty low… thus the total acquisition price per distributor remained quite low… and if they wanted to get the deal done, that is what it was going to take.  You find very few fire-sale prices in this industry… most sellers can take a “take it or leave it” approach, they can live with either option.  But a few of these folks just couldn’t get over the multiple being “too high” (whatever that means)… and thus they walked away… for what in the end was a fairly small sum of money.  Which leads to another great quote from the distributor who was trying to drive the acquisition… “strategy, not price paid will determine the long-term winners in this industry”.  I know it is easy to spend other people’s money (just ask the federal government) but I wholeheartedly agree with this insight.  As I remind people… remember a company called InBev which WAY overpaid for Anheuser-Busch… it was a HUGE mistake… yeah right.  They seem to be laughing all the way to the bank.  Strategy is everything… price paid is just the method you use to achieve it.  Don’t forget.

• To expand on the above point a little, you also have to be a “player”.  I have a client and good friend who I have known for many, many years.  He’s been in the market for an acquisition since I’ve known him.  He’s debt-free, got a ton of money and could finance a HUGE transaction.  Want to know how many deals he’s got done?  Zero.  He is a bottom-feeder who keeps looking for that great deal but he refuses to step to the plate and offer market prices.  Who doesn’t want to buy things at a below market prices?  Unless the seller is in distress, this NEVER happens… and even then it seldom occurs, the marketplace is generally incredibly efficient.  Deals have happened around him that he wasn’t aware of until after the fact… this upsets him… “why didn’t they call me?!”  They don’t call because they know he is a bottom-feeder and why waste their time and effort on a person who in the end won’t even offer market price?  What’s your reputation out there?  You can dream all you want but deals are an auction… and if you want the item on the auction block you can be the top bidder or you can go home… those are you only two options and dreaming and scheming won’t change a thing. 

• Software co-op – This wild and crazy idea (I’m a font of those) is bred out of client and personal frustration. Perhaps it is time for distributors to band together and create their own integrated route accounting system (of course with all the bells and whistles).  For close to 30 years I’ve continued to hear complaints (mostly valid) about the offerings of the software providers to this industry.  In fact, after a few years in this industry (mid to late 80’s) I seriously considered starting a company to provide distributor-centric software for the beer (beverage) distribution industry.  If I was going to do this I would need to raise capital, therefore I’d need to make a pitch to investors… but unfortunately, there are structural problems with this industry (and they continue to this day)…

*    It is a consolidating wholesaler marketplace (therefore a shrinking base of potential customers) with an evolving set of needs.

*    The software is pretty specific with few if any areas other than distribution to expand into… a lack of additional opportunities.

 ü  It is a “replacement” sell.  One of the most difficult sells there is.  You don’t go in and simply sell your product; you have to kick someone else out to make your sale.  Seamless integration?  Smooth transition?  Bull.  It is a pain for all involved and thus to make the sale you have to offer and the client needs to identify a substantially better product to induce the client to switch… or as in many cases, you get so sick of your present provider’s shortcomings that you’re willing to jump ship regardless. “Just make it go away!”

Unfortunately, when one adds these all up it doesn’t make for the best pitch to potential investors who hope to see a substantial return on their investment.  You see the impact of these market realities in the present providers… all very small businesses… folks who are running on legacy software but who don’t want to take the time and $$ to completely re-write their code.  Products whose performance gives one pause… I run a report this way and I get this answer, I run it another way and get a different answer.  “Seamless” upgrades which throws your inventory off for months.  Many wholesalers live “the nightmare,” so you know what I’m talking about. 

Is there a better way for today and tomorrow?  Perhaps a customer-owned, non-profit co-op which develops and maintains software specific for the beverage distribution industry?  Your businesses are far too large and complex to put up with sub-par software, but based on the market realities I’ve just outlined above, I don’t see world-class software coming into this industry… the business fundamentals simply aren’t there ($$ opportunities) for independent outside investors.  A co-op might be the answer and could have many advantages…

*    Assuming one could attract enough initial members, the cost per member would be substantially less than what you are presently paying.  Members who join after the start-up phase would be charged more than initial members.  To minimize the risk to members, the investments could be staged or offered in traunchs… $X for design specs, if the member chooses to continue $X for beta product, etc.  The key point is the first point in this paragraph, attracting enough initial members.  If that can be accomplished the rest should be relatively easy… KEG 1 and the Reyes’s could get it going on the MillerCoors side, get a similar group with ABI products and off you go… the smaller folks will line right up.  Find an experienced project person to run the thing, form a user’s group to direct product specs and development and run with it.  And PLEASE, this shouldn’t be a MC versus ABI product… just the best product for the entire beer distribution network.  For once let’s leaving the fighting for the street, where it should occur.  And since the lines between beverage distribution are fading, it should include wine, liquor, beer, NA’s, etc.

*    Since we would just be beginning, we would have no old legacy code to work around.  New code written specifically for today’s and tomorrow’s hardware… and using the best software language(s) to accomplish our tasks.   The user group could work directly with all major suppliers and retailers to ensure all desires are met.  With a large team of quality software engineers, you would be surprised at how quickly this product could take shape.

*    This co-op could support a much larger software team allowing for better products, quicker updates, more support for all the new hand-held devices, etc.  Every member would gain.  When you consider the size of the software teams backing all of the major route accounting systems (and the various peripheral software) versus the $$ size of this industry, you see that these are very small companies trying to support a massive, dynamic industry… but the market reality I have already outlined above, lack of $$ potential, stops serious software expansion… therefore let’s do it ourselves.  I’ve nothing against the present providers; it’s just that there is perhaps a better way.  As the mob, ABI (and yes, even MillerCoors) and I would rightly say… “nothing personal, it’s just business”.   That quote covers a lot of things in this industry anymore.

 

Random Thoughts From Las Vegas

First the important stuff… I simply don’t have the eloquence to state my feelings toward beer wholesalers, their execs and staff.  Your collective outpouring of love - I know that’s not my usual macho self ;-) but that’s the only word which comes close to describing it – this outpouring of love for my wife Barb and her fight against leukemia is overwhelming.

I only wish my attempts to sell my services would generate such a response ;-).  The number of people who stopped me to inquire about Barb astonished me… the vast majority being people who have never met me or Barb… and they all assured me their prayers and well wishes continue every minute.  When I got home I told Barb she was a minor celebrity with beer distributors and their employees… that generated quite a flood of happy tears.

Perhaps the most wonderful (and most difficult) were the many, many folks who told me their stories… stories of wives and husbands, brothers and sisters, parents, children, friends and their battles with cancers and other serious diseases.  Many of these stories had happy endings… far too many did not.  It is a funny position to be talking to someone you’ve never met about the most intimate aspects of your life and those around you… as both parties try not to breakout bawling… sometimes out of joy… sometimes out of sadness.  Trust me, it throws that macho-image right in the trash can.  But it really drives home what is ultimately important.

I state the following as the highest compliment… a compliment that has nothing to do with gender but a great deal to do with character… wholesalers and their employees are some of the greatest people you will ever have the pleasure to meet… you are magnificent bastards and I am honored to know you.  My buddy and associate Steve Cook edited out the word, I put it back… as I note in the first sentence, I state this as the highest compliment… and I profoundly mean it.

And on the Barb front, today is day 219, 219 days since the bone marrow transplant.  As long as the leukemia doesn’t come back, we are almost out of that dark tunnel and we look forward to putting this behind us as a minor bump in the road… at this point in time it is a 15% chance it comes back… this might sound bad if you hadn’t walked the path Barb has walked… when we started it was 100% mortality if nothing was done, 80% mortality with treatment… trust me, from that perspective that 15% looks pretty dang good!  If not for the immunosuppressants depressing her immune system, Barb is healthy as can be.  A few more months of that and then hopefully the end of this episode.  And since I can’t help but get on my soap box… please don’t let government destroy the finest medical system the world has ever seen.  Very real people and very real lives are at stake.  I know this intimately.

Now on to some random thoughts from Las Vegas…

• Management lessons from the Distributor Only Meeting – I asked many distributors about this meeting - to save Craig some headaches I don’t sneak in anymore… you owe me Craig ;-) and the general feeling was… “more of the same”… “nothing new”… and the real kicker repeated to me many times, “a waste of my time”.  One distributor who was in the “waste of my time” category talked about how he and many other distributors had to travel much earlier to attend this meeting, which in the end turned out to be a waste of time.  As he talked I had a flashback of MANY conversations I have had over the years with drivers and sales reps who complain about most meetings being a waste of their time.  As I told this distributor, let this experience be a lesson… for it is one thing to waste other people’s time and a far different thing when it is your time being wasted.  Honestly look in the mirror… do you force your drivers or sales reps to come in an hour or two early for a weekly meeting only to waste their time?  Guess what… your employees don’t like it any more than you do.  Perhaps the advice you’d give NBWA… don’t waste our time unless you have valuable, content rich information should also be applied to your own company.  Trust me, every employee you have will thank you for having this epiphany – if you have nothing new to say, don’t have the dang meeting… treat other people’s times as you would wish your own to be treated.

• Operations - The Next Big Area Of Improvement? 

Do you have a vision for the potential of your company’s operations area? Some estimate the number at over $2 billion for the entire industry.  Many wholesalers will need reorientation and reprioritization if they want to have a top flight operations department and capitalize on the potential cost opportunities.

A forward thinking wholesaler talked to Steve Cook and me about how he thought the next big area of improvement for beverage distributors is in operations – delivery and warehousing and support.  He made an incredibly insightful statement that the sales area is generally measured on a grade scale… you know, display execution is a B+, distribution a C-, margin control an A-, etc.  But operations are generally graded on more of a pass/fail grading.  I think he’s got that generally right. 

We have developed many metrics to measure sales performance (and in all honesty it is sometimes easier to make these measurements) but have not necessarily spent as much effort in the operations area.  Now I FIRMLY believe distributorships MUST be sales organizations but that is the key word, organizations.  Integrated, cohesive, with aligned systems… and all parts must work at a high level if the entire system is to work at a high level. 

A common theme I encounter in a re-organization is “which position is more important”… in answer to this I emphasize that in an integrated system the question has no meaning.  In an integrated system all parts are equally important in the functioning of the whole organization… what is more “important” in your car?  The spark plugs?  Transmission?  Tires?  Steering wheel?  The question makes no sense… the car doesn’t function without any of them.  As an analogy I use the Challenger space shuttle… that’s the one which exploded soon after takeoff, killing all on board.  The shuttle was an integrated system which cost over $1.5 BILLION dollars… guess what, the failure of a $5 DOLLAR part (an O-ring) caused the system failure and subsequent explosion.  If you could talk to those dead astronauts, which part of the integrated system do you think they would identify as the most important part?  Keep this in mind as you pull back and examine your operations area… nothing is unimportant in a system.  Perhaps implement a new grading scale for operations with is a little more refined than the simple pass/fail.  And perhaps quit using the operations area as a “dumping” ground for those employees who cease to provide value in their present positions. Better yet, do some investment spending and improve your company’s operations area now.

• 75^th Anniversary of NBWA…

While at the convention I discovered that next year is the 75^th anniversary of the NBWA.  I am a STRONG supporter of the NBWA and every state association.  This industry needs a strong voice at both the federal and state levels.  I certainly don’t agree with every move NBWA makes – although I haven’t thrown any bombs recently at Craig – but that’s the nature of business organizations… few are ever going to support 100% of your desires.  But they are incredibly important and only a short-sighted beer distributor would not support them.   Perhaps even those states which split their associations along supplier lines could rethink their choice… these splits were not implemented for the benefit of beer distributors… you all know this to be true. 

Tom Long gave a pretty good speech emphasizing the importance of the partnership between brewers and distributors.  He is absolutely correct; your suppliers are your partners… but remember, partnerships only work as long as things work for both parties.  Once this is not the case for any partner, the thing generally falls apart or changes considerably.   I’m all for partners with our suppliers but I’m more for brothers among wholesalers!… And guess what?  Your fellow distributors (yes, even your direct competitor) are your brothers (or sisters if you prefer)… they are your brothers whether you like them or not.  They are your brothers regardless of what happens… since it is certain to impact you both.  Brothers are bonded in blood.  Brothers are different from partners… you forget that at your own peril.

 And lastly for these random thoughts…

*     It was nice to meet with several trusted clients who engaged Steve Cook and me to provide value-added consulting support for their mergers and acquisition activities based on our reputation and expertise.

*    Owners saying “NO, I won’t sell,” shouldn’t be considered the final statement.   Instead let Steve and me create an opportunity.  Let us leverage our professional expertise by creating and establishing a potential transaction process.  Still might not get them to yes but I’m certain it will get them closer.

*    Just a thought since I’m frequently asked the question.  If you’re buying or selling or simply looking for a valuation, give us a call.  It doesn’t have to cost an arm and a leg to sell your business to some adjacent wholesaler.  We provide the best value in this business.

 Next post – more random thoughts from Vegas.  And lastly, Barb sends her heartfelt (and tearful) thanks.

Cash Cows and Beer Distributors

In a recent post, which can be found here, I discuss the possibility that ABI might spin off their US/North American operations.  In it I write how InBev saw A-B as a fat cash cow just waiting to be had.  But what of distributors?  How do you all fit in the world of Cash Cows and Question Marks?

First a little background on the genesis of the Cash Cow matrix… years ago the Boston Consulting Group came up with a simple matrix for portfolio planning for a company’s business units.  It has fallen out of favor, but it remains a useful tool when analyzing trade-offs between business units in a single company or a stand-alone business versus its competitors.

The matrix measures two factors…

1. Relative market share – a proxy for how much cash that unit can produce
2. Market growth rate – a proxy for cash usage

There are 4 combinations within this matrix…

1. Cash Cows – high market share with low market growth rates… can you say A-B in the US market? Can you say high mix of domestic beer products? 
2. Stars – these already have a high market share (power) in a quickly growing market (opportunity)
3. Dogs – low market share with low market growth rates… the worst of both worlds
4. Question Marks – low market share with high market growth rates… the market is growing but will this low share business unit be a winner or a wannabe?  Many (most?) craft beers might fit in this category.

 

 Dogs are generally candidates for divestiture depending on their unique geographics and product portfolio… sell or harvest the dang thing since the money tied up in the business has little potential.

Question Marks are just what the name implies, a question.  To grow them will require significant cash and if they turn into Stars it will be money well spent… or after years of consuming cash do they turn into dogs when the market growth slows?  Thus the question… again using craft beers as an example, this is perhaps the reason few seem willing to invest significant resources in a craft beer until the picture becomes a little more clear.  Sure the craft beer market might be a winner, but will this or that specific brewer be a winner… that’s a tougher question.

Stars generate a lot of cash because of their market share but also consume a lot of cash due to the fast market growth rate.  Ideally a Star maintains its large market share and becomes a Cash Cow.

Cash Cows are leaders in a mature market… they generate more cash than they consume… this pretty much defined A-B which generated A LOT more cash than its’ operations consumed..  Under classic strategy these business units should be “milked”… taking profits and investing as little cash as is possible.  Cash cows provide the cash to drive a lot of the other actions of the company

• Providing cash to turn Question Marks into market leaders
• Cover company-wide admin, R & D costs, debt service, dividends, etc.

And since Cash Cows generate a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of the cash stream using a discounted cash flow analysis.  That is EXACTLY what InBev did with great accuracy.  In addition, InBev not only saw a Cash Cow just waiting to be had in A-B, they saw a Cash Cow that was EXTEMELY fat… thereby increasing the potential cash flow to anyone willing and audacious enough to go after it.  And that they were.

So let’s circle back to viewing distributors through this prism… first what about market share?  Most markets in the US have evolved to a two distributor world.  Historically the AB folks had the higher market share but in the past decade or so the MillerCoors folks have pulled even or even exceeded AB in the perhaps more important market share of gross profit dollars.  In short, in many markets the ABI distrib sells more boxes of beer but the MillerCoors distrib generates more gross profit dollars… obviously helping their bottom-lines and increasing their clout with retailers.  Thus for this analysis one might put both distributors in the high market share category.

And what about market growth rates?  Again, both distributors play in the same market and thus confront about the same market growth rates… which sure look to be flat to low growth as far as the eye can see.  So we’ll put both distributors in the low growth category… which ends up with beer distributors in general being a Cash Cow-type entity.  That’s a real surprise, eh?  ;-)  Add the fact that they operate with exclusive territories and Ol’Bessie becomes even more of a reliable cash cow.

Distributors can be money machines… generating A LOT more cash than they consume.  Throw in the fact that many are decades old with little or no debt (generally the only significant debt most wholesalers have is from acquisitions or new warehouses), and you have distributors being significant Cash Cows.  Thus distributors sell for fairly significant multiples…

• Steady cash flow streams which can be relatively easily and with pretty good accuracy projected far into the future – fuel prices are probably the largest outside unknown
• Exclusive territories with strong state and federal legal protections
• Distributes a recession-resistant product

How many beer distributors do you know of who have gone belly up?  I can only think of a few and in all cases they were idiots… sorry for the tough love but that’s the way I see it.  It is amazing how long a small, low market share, well run distributorship can continue to provide a very nice income stream. 

So the next question is what do you do with this nice cash cow you own? 

• Do you use it to grow?
  •   Within the industry through acquisitions?
    • Contiguous?
    • Non-contiguous?
    • Is this seriously an option?  I have one client who has a very nice, very profitable 2M+ case operation… unfortunately their territory is contiguous to two other distribs… one being multi-state mega-distributor and the other a very large distributor.  The odds of my client being able to grow through contiguous acquisitions is basically zero.  Thus the strategy they are following is to run a lean operation (maximize the milk) and to use the proceeds to invest in other businesses/industries.  Of course they are looking for new products to help provide even more gross profit (who isn’t?) but even there, their ability to solely significantly impact a desirable supplier is pretty low.
    • They are following the growth outside the industry model… keep the cash cow and use it to fund “other stuff”.
• Do you “have” to grow?  We all know the mantra… you must get bigger to spread your fixed costs over more and more boxes.  You have to be 5M cases to be long-term viable… or some such number.  If this even true?  I don’t believe so.  I don’t believe there is some magic number of cases you must achieve to be long-term viable.  I have another high share 2M case client who has a very tight territory with a small account base.  As we have joked together, it would literally take the end of beer distributing for this distrib to not be long-term viable.  There are folks who do 400K annual cases who will be around as long as they choose to be… not everyone fits in this category but there are plenty who do.
• Do you “have” to sell?  Most of those who “had” to sell have already done so… so in general, you don’t “have” to sell, but is it a wise financial choice?  As usual, that depends. ;-)  Ignoring all the non-financial reasons for not selling, ultimately the sell decision comes down to one thing… the price being offered… ask A-B about that.  I had a fairly large, very profitable client - thanks to me ;-) who gave me a call a while back.  He had an unsolicited premium top dollar offer and wondered what to do… … the story ends with me losing a client and him pocketing a boat-load of cash.  This was a true win-win… the acquiring wholesaler made a great strategic acquisition with a quite livable payback period.    
• On the other hand I have a client who is looking at an acquisition opportunity… problem is he’s an economic buyer and is being advised that 5-6 times EBITDA should be the max to pay.  I don’t know of ANY “cash cow” distributor who would sell their business for these values… it simply doesn’t make financial sense.  There is no reason not to sell a cash cow… but it IS a cash cow and the transaction prices must reflect this reality.  InBev understood this… and they remain laughing all the way to the bank for significantly “over-paying” for Anheuser Busch.  Accept this reality or go home.
• Do you fund the Question Marks?  Question Marks are always a puzzle… if they work out you’re a genius… if they don’t, well let’s just say you’re not.  Is putting a lot of dollars into a craft beer operation a good idea?  Or is it better to just let those products be serviced by your normal operations?  Ben E. Keith has started an operation distributing craft beers around the entire state of Texas… and those are some serious miles out there… is that a good use of the milk?  Or is it part of a larger strategic move to drive more acquisitions?  Eagle Snacks was a serious Question Mark and we all know how that turned out… sucked up A LOT of milk.  But if it had worked…  Or do you fund Question Marks in other industries?  Or do you start a non-alcoholic division?  In the past many have found these to be Dogs, but not all.  Or expand into wine and spirits?  These are all Question Marks that may or may not be a good use of your milk.  Think, plan and execute regardless of the path you take.

In summary, you’re sitting on a valuable asset, namely a Cash Cow… what you do with it and the milk it produces?  That depends.  The only certainty is that you should strive to run a lean, high performance/high demand organization.  Regardless of where the Question Marks and Dogs and Stars may lead, you can never go wrong with constantly striving for a lean, mean, efficient and effective fighting machine. 

Most wholesalers know how to be efficient; however, being effective requires focus and innovation. Take the “old school” approach with the “new school” spin and laugh all the way to the bank!

 

My Wife Barb and Leukemia - Part 2

Since I brought it up I suppose I should continue the saga… my wife Barb and leukemia.  As I noted in a recent post which you can find here, my wife was diagnosed with acute myeloid leukemia (AML) in mid-January… about one week after her 49^th birthday.  Trust me, that ain’t a good thing.  Whether we knew it or not, we had entered the land of scary statistics.

I wrote that first post when my feelings were still very raw… I wanted to capture that… I wanted to not forget what it was like.  This post is a little more in control ;-)  Don’t know if that is good or bad, it simply is.

First a picture… luckily for Barb, she looks pretty good bald ;-)  Since we figured Barb would never be bald again we had some professional photos taken.  She likes this one…

 

This was taken by the daughter of a friend from high school who is a great professional photographer.  Her name is Sarah Guibord.  Sarah has a great artistic eye and is young, bubbly and outgoing – kind of like Barb!  She has the ability to really connect with folks and I think it shows in her work.  So if you need a wedding photographer, or any type of great photographic work, please consider Sarah.  To see some of her work, her web site is www.sarahguibord.com

Now back to the story… this process started when Barb was feeling a little ill (which is very rare) and I bitched until she went to the doctor.  She had postponed a routine blood test for a few months so she decided to have this done on the same visit.  Then came the call that she perhaps had leukemia and we should visit an oncologist.  More blood drawn and then the wait… I was stuck in a tough place since I was in the process of putting a new re-organization in place… a critical time that I couldn’t simply walk away from.  I make a profound commitment to my clients… they put their businesses and the lives of their employees in my hands… I do not take this commitment lightly and up until this moment in time have always put their best interests ahead of mine. 

Thus I was on the road when she first visited the oncologist with a good friend.  We tried to hang in there but when I got a crying phone call at 10:00 AM that she needed me home I simply bailed.  I generally try not to bawl in front of my clients ;-) but this time didn’t have any success.  This was 2 days before we were putting the new organization on the street.  But as I often note in my consulting… if you build something right (as an example a gasoline engine) it MUST work if every part works as designed.  It is a physical reality.  When you turn the key it will fire up.  This client has a great management team and we had spent months building and training the new org… I did bail but the re-org hit the street with no more than the usual bumps in the road.  A big thanks to some great owners and a great management team… you know who you are.

So I flew home and we cried and waited.  On Tuesday we met the oncologist.  Yes it was leukemia, AML to be specific… at that point we didn’t know anything about leukemia… other than it was one of those diseases you don’t want to get.  Although the oncologist didn’t have enough data, he guessed a bone marrow transplant might be the best hope.  This oncologist attends church with one of Barb’s good friends… when he said goodbye to us he was crying… when an oncologist tears up on telling you your next steps, you can be pretty sure things aren’t real rosy in Barb-Land. 

But luckily for us, one the country’s regional centers for bone marrow transplants is in Denver… Presbyterian St. Luke’s.  Seattle is the big dog in this world but all of these doctors have trained in Seattle.  So on Wednesday we go to see the experts in this… the Colorado Blood Cancer Institute.  We spoke to the head of the place, a pretty nice doctor originally from New Zealand.  We discussed the various options… bad and worst.  The first step would be induction therapy… the goal of this being to get the leukemia in remission.  After that, and assuming it works, we would either move on to a bone marrow transplant or more chemo treatments.  This is when the land of bad statistics becomes much more focused… things like 80% mortality rates… yeah that means 8 out of 10 will die.  But with effective treatments this might be turned to “only” 60% mortality.  Yee haw. 

I’ve often joked that life is easy when there are no choices and we were certainly at that point.  We had asked the first oncologist what would happen if Barb chose to do nothing… real simple he said, you’ll probably be dead in 60 to 90 days.  Makes the first decision relatively easy ;-)  The leukemia would continually lower Barb’s ability to fight infections and sooner or later (probably sooner) one of them would simply run wild through her and that would be the end of that.  A measure of one’s body to fight infections is called the absolute neutrophil count (ANC)… anything below 1,000 means you are very susceptible to infections… Barb was at 576.  We were darn lucky Barb hadn’t already caught something… she is a librarian in a middle school and you all know my feelings about kids… they are disease carrying rodents ;-)  As we go through this process we will find this belief is closer to reality than one might think.  Not the rodent part, the disease part.  We keep away from young children like the plague… easy for me, not so easy for Barb.

We decide to move forward with the blood cancer experts and Barb is scheduled to enter the hospital on Friday… so we go from a Tuesday diagnosis… Wednesday meeting with blood cancer specialists… Thursday they insert a port… and Friday hospital.  A week to remember (or forget).  On Friday Barb starts a 7 day chemo treatment and plans to remain in the hospital for around 30 days.  She handles the chemo pretty well and nothing terrible happens during this long stay.  The chemo drives her blood counts very low and she is VERY susceptible to infections during this time so there’s a lot of glove wearing and other protections.  But she makes it through… finally a bone marrow biopsy and the good news that there is no sign of leukemia, it is in remission.  That’s the good news… but with AML and the subset of it that Barb has, the good news is tempered by the reality that it almost always comes back… and when it comes back it might be more aggressive, it might not go into remission again, and you’ll probably be a lot sicker the next time around. 

So the choices are… do nothing and hope it never returns… start down a path of future chemo treatments (consolidation therapy) where you attempt to keep it in remission… or go for a bone marrow transplant.  The bone marrow transplant is not a risk-free choice.  Just complications from the treatment alone will kill up to 20%.  Yeah, double yikes.  One of the doctors (and he wasn’t that old) noted that when he first started in this area of medicine, 50% of the transplant patients died within the first MONTH… of course he told us this after the transplant ;-)  This is incredibly complicated medicine.  In affect they are transplanting a new immune system… and our little ol’ immune systems are rather important to a wide variety of our body’s functions.

But the transplant does have one major factor… if it works (and doesn’t kill you) it is the path to a potential CURE.  Not guaranteed by a long shot but a chance nonetheless.  Since we knew the transplant was an option, Barb’s siblings were tested for a match during her hospital stay.  She has 2 brothers and 2 sisters and we hoped and prayed that one would be a match.  Luck again was on our side and her oldest sister came up a perfect match, 10 for 10.  So we reviewed our options… a perfect match for a transplant (the better the match the better the odds)… Barb was a little unique since she was young, strong, and in good health (many people are quite ill by the time they even enter the hospital)… we weighed all of these and the various bad statistics associated with each choice and Barb decided she wanted to go for a cure, thus a bone marrow transplant.

So Barb had about 3 weeks out of the hospital… “go out and live your life”, yeah sure.  She entered the hospital again for another 30 day stint.  Started with getting a CVC put in… 3 lines that go from her heart and exit on the chest… for drawing blood, giving IVs, etc… makes her feel like a Borg (for all those Star Trek fans out there).  It stays in for over 4 months.

6 days of chemo treatments to kill her bone marrow… this is when you’ve burned that bridge, there is no going back.  As they note in the consent agreements you sign, if you pull out of the procedures after this point you will most certainly die… no bone marrow, no blood, no you.  Kind of cut and dried.

A day off the chemo and then the transplant.  The transplant sounds like a big deal but it’s basically hanging an IV bag filled with the donor’s bone marrow stem cells.  Her sister had entered the hospital the night before and early that morning they harvested the bone marrow from her hips… just 2 holes but about 200 samples… kind of like directional drilling for oil and gas ;-)  Her sister was sore for a couple days but that was it… so if you can save someone’s life by being a donor PLEASE do so, it is not that big a deal… especially considering you will have the profound honor of attempting to save another person’s life.

If you want to be a donor candidate the first step is to register… you can sign up by going to “Be the Match” which you can find here http://www.marrow.org .  You simply swab the inside of your mouth and send it to them.  That’s it.  They keep you on file and if there is ever a match they contact you.  We were lucky in that Barb had a sibling match… only 30% of folks have that… the rest have to hope and pray that there is someone registered out there who matches up.  If you’d walked the hospital halls as many times as I have and watched all those poor folks who have run out of options sweating bullets, you’d join in a flash.  I did.

You want to know what your donated bone marrow does? 

About 12 days after the transplant Barb’s blood counts started going up… the transplant was working!  They call this engraftment… the donor stem cells migrate to the bone marrow and then simply start doing their things… it’s kind of like planting a garden and waiting for the plants to sprout.  That’s what your donated bone marrow does… it gives the chance for life.  Please register.  Young men are the primo candidate for being a donor… they’ve got the best stem cells.  Go figure.

Bone marrow transplants are amazing medicine.  There are two main types:

1. Autologous bone marrow transplant: "Auto" means "self." Stem cells are removed from a person before they receive high-dose chemotherapy or radiation treatment. After these treatments are done, the stems cells are put back in your body. 
2. Allogeneic bone marrow transplant: "Allo" means "other." Stem cells are removed from another person, called a donor. Most times, the donor must have the same genetic makeup as the patient, so that their blood is a "match" to yours.

Barb is an allo.  With allo bone marrow transplants you have to change your thinking about the transplant 180 degrees.  When you think of some organ transplant, one of the main issues is your body rejecting the donated organ.  With an allo bone marrow transplant you are transplanting a new immune system… so the problems aren’t that your body rejects the new bone marrow… you no longer have an immune system to reject anything.  Instead the potential problems are your new immune system rejecting your entire body.  Obviously that can lead to some, as they say in medicine, “poor” outcomes.  And you don’t want no stinkin’ poor outcomes.

That’s called Graft Versus Host Diseases (GVHD).  If GVHD really gets going, it is a VERY bad thing.  So after the transplant they give immunosuppressants… in my simply way of thinking they attempt to keep the new immune system “asleep”.  If it wakes up, it screams what is all this “other” doing here?  It’s not me and it sends T-cells (the primary immune system cells) out to take care of the problem… attacking everything else, which is basically one’s entire body.

Overtime they lesson the immunosuppressants step by step (like 6 months to 1 year) and hopefully gently “wake” up the T-cells… they’ve made peace with the new body and everyone lives happily ever after.  But some folks have to stay on the immunosuppressants forever.

After Barb’s transplant her blood counts continue to improve and after about 30 days in the hospital she heads home.  But this is a marathon not a sprint… one of the docs uses a marathon analogy to describe the process of a bone marrow transplant… when you leave the hospital you’re at about mile 3 out of 26!  This is a yearlong struggle, perhaps longer. 

So as you walk out of the hospital you have an immune system which isn’t yours and due to the immunosuppressants, you in effect don’t have an immune system anyhow.  Barb does have one… it is in various bottles which sit on our kitchen counter.

Thus you have to be VERY careful about pretty much everything…

• cuts and any damage to your skin - your body sends T-cells to fix the problem but this gets those little ol’ T-cells rolling which can lead to GVHD… and of course any infection can be the end of you 
• eating - things that might give a healthy person an upset stomach might kill you
• inhaling – viruses, mold spores… they are nasty critters which can end your life quickly.  Keep away from kids!
• And of course just the normal critters and nasty’s which reside on and in all of our bodies… they might decide to make a run which can lead to poor outcomes.

Any of these can be a problem… for the first 100 days after transplant you have to live within 30 minutes of the hospital… not A hospital but THE hospital.  This is specialized medicine.  If you don’t happen to live within that, you stay in a hotel.  Why 30 minutes?  Cause this stuff can happen VERY fast and once it gets going… well you get the idea. 

Any of these can cause what’s called a cascade affect… something is running wild in your body so they lesson the immunosuppressants to help… but this wakes up the T-cells and they go on a rampage… and it cascades downhill very quickly.  One of Barb’s priests noted that he is called to the 3^rd and 4^th floors (the transplant floors) of Presbyterian St. Luke’s way more than any other place in the entire city.  This is incredible medicine but those statistics don’t lie… this really stuffs it in your face that at its core, these statistics are each one some poor sap trying to live another day.

Barb had a bone marrow biopsy at 30 days after transplant and no sign of leukemia… in addition her T-cells were 100% donor and her bone marrow was 64% donor.  Had another at 100 days after transplant and still no sign of leukemia… her T-cells still 100% donor and the marrow up to 75% donor… the goal being 100% donor.  This will GREATLY reduce the odds of the leukemia ever darkening our doorstep again.  The more time we can put behind us without leukemia, the better the odds it never returns.  I saw some graphs of mortality rates versus time since diagnosis and it makes one’s heart skip a beat.  For the first year it is like a rock falling off a cliff… 50%+ die in the first year.  So the farther we can get from January 2011, the better.

So we plug along one day at a time… today is day 151, 151 days since transplant and all is well.  Barb’s hair is coming back… she’s got a good jarhead look going right now.  As I noted, this is incredible medicine and without it Barb most certainly would already be gone.  And as with all major diseases and the fight against them, literally thousands and thousands have died while furthering our knowledge of the battle.  I tip my hat to each and every one of them.  May they truly rest in peace.

ABI to sell off US operations?

A smart banker?  Is that an oxymoron or what?  A couple years back I was talking to a pretty smart banker; this was right after the InBev purchase of Anheuser Busch.  We were talking about where this might lead and he said the feeling on the street was ABI would sooner or later spin off the US (perhaps North American) operations of ABI… load it up with a lot of debt and either take the thing public or more likely sell it to someone… perhaps Pepsi.

I recently told this story to a group of ABI wholesalers and they expressed more than a little concern.  Thus I called my smart banker friend and asked him what he thought of this earlier guess.  Well Mr. Smart Banker said he’s more confident than ever that this will sooner or later be the end game… and until then ABI treats the US market as the cash cow it is.

Cash Cows are leaders in a market with high share, low growth rates and a mature product portfolio… they generate significantly more cash than they consume… this pretty much defined the old A-B.  Under classic strategy these business units should be “milked,” maintained, then eventually harvested as the company continues taking profits and investing as little cash as is possible. 

Cash cows provide the fuel to drive a lot of the other base-broadening actions of the company including:

• Providing the needed deep-pockets to turn low market share ventures with high market growth into possible winners and market leaders.
• Covering company-wide admin, R & D costs, debt service, dividends, etc.

And here’s a final kicker… since Cash Cows generate a relatively stable cash flow, its future value can be projected within a reasonable range. And as the final, final kicker… InBev not only saw a Cash Cow just waiting to be had in A-B, they saw a Cash Cow that was EXTEMELY fat… thereby increasing the potential cash flow to anyone willing and audacious enough to go after it.  And that they were.

It all makes perfect sense from ABI’s perspective; you use the Cash Cow of the US Anheuser-Busch market to fund your growth around the globe.  In addition you now own one of the most important and valuable brand names in the entire world… something you can leverage everywhere you go.

Look at ABI’s actions since the acquisition… they definitely cut the fat.  Thereby increasing the “milk” from ol’ Bessie… A-B.  And they have shown through their actions they will gladly trade a little market share for more profit… a classic Cash Cow maneuver.  There is a rumor they would be willing to lose enough share so they could close a brewery... obviously targeting their least efficient brewery.  Have no idea if this is true or not but it is discussed over beers in the distributor world.  Look at ABI’s recent pricing moves… moves many on the street question at this point in time with this economy.  But from a Cash Cow perspective it makes perfect sense. 

As a side note, but what does it mean to an entire industry when its leader is being run from a Cash Cow perspective.  How will this impact the other players?  – other than everyone making more money, at least for now -  Do the wine and spirits folks gain share as the leader’s focus is primarily on milking the cow and spending the milk on markets with a lot more upside potential in other countries?  Thoughts to be discussed on another day.

And remember, when I say a Cash Cow should be milked, taking profits and investing as little cash as is possible, I’m not saying they will (or should) be stupid about it.  They will of course invest in this business but just not as much as if there were more upside potential.  They don’t want to hurt the Cow… just milk it.

Which returns us to the first point in this blog… that ABI will sooner than later divest themselves of the US market.  So you might ask why would they be willing to sell their Cash Cow?  To which I’d respond, why wouldn’t they if the price was right?  A Cash Cow is a wonderful thing but it has little upside potential… remember it already has high market share in a low growth market… where is there left to go?  Many high share ABI distributors ask themselves the same question.   

For ABI, an international company, where to go is where the action is… like China, India, other places around the world.  And again, if the price is right why not get the heck out of Dodge?  And remember, because the Cash Cow’s cash flows are relatively steady, it is fairly easy to discount these stable future cash flows back to a present value… if the offer is greater than this, Katie bar the door.

Now I’m not certain if this sell option was Brito and Company’s plan from the beginning but I’d be willing to bet a large sum that it has always been a possibility in their planning… remember that whether you like their plans or not, ABI is filled with A LOT of very smart folks who have shown themselves to be pretty good at this chess game. 

Take a fat Cash Cow and turn it into a lean Cash Cow… thus driving the value up by increasing cash flow… in this case significantly.  Use your pricing power to increase margins even more, again increasing cash flow and increasing value.  Then find a strategic buyer who has synergies with the Cow and the value goes up even more… perhaps far beyond the value of the discounted cash flows.  Perhaps someone like Pepsi?

I believe the last couple years have shown something to Brito and Company… the US beer market is a pain in the rear from a supplier perspective. 

• Brito talks briefly (as I recall it was one sentence) about the potential for ABI to self-distribute up to 50% of their volume (adding some significant milk to the ol’ cow) and what happens?  Laws pop up in state after state ending this possibility. 
• They attempt to purchase the remaining shares of a distributorship they have owned FOR YEARS and what happens?  A new state law prevents this from happening. 
• Although the US beer market might seem as one… we all know it is really 50 different legal worlds… and I’d have to guess the folks at ABI find it a tad annoying to have to deal with this battle day after day. 
• And if it comes down to pure power politics at the state level, the beer distributors will win every single time.  That’s just the way it is and I don’t think it is going to change.

So if you’re ABI what do you do?  You of course continue to milk the cow and attempt to maximize its milk production.  At the same time you look for those strategic buyers who could share some of their potential operating synergies with you via the purchase price… Steve and I do this in our brokerage business all the time.  ABI continues to own the brands and takes them around the world… with a “don’t let the door hit you on the way out” attitude to the US market.

And since it appears that NO strategic buyer would be able to/want to purchase the ABI distribution network in total (even if you all wanted to sell)… … the new strategic buyer/venture partner is probably going to abandon the current ABI distribution network (where possible) and gain tremendous synergies by using one they already have in place… can you say Pepsi.    

I think this was originally part of InBev’s plan… to unlock an incredible cash flow by in effect taking over their own distribution… Brito’s “we can self-distribute 50% of our volume statement”.  This would REALLY get that ol’ Cash Cow a’milking.  Unfortunately (from ABI’s perspective) they have found they do not have the keys to unlock this treasure.  Yes I know, from the distributor’s perspective this isn’t unlocking a treasure but is rather stealing it from its present owners… all a matter of perspective.  So the distributor’s legal actions have taken the keys to this treasure from ABI and in all likelihood, they won’t ever get them.  But the treasure still awaits.  But how to get at it?

It would seem to me that the only way to get this treasure is to find someone who in effect already has the keys… in this case those keys being an already established distribution system.  Thus presenting the opportunity to take this treasure by the simple act of leaving the present distribution system.  Of course there are only a handful of companies who already have these keys… but all it takes for them to gain the treasure is to be willing to share some of it with ABI via the purchase price.  And if history is any guide, treasure always continues to attract those who want to gain the wealth…  and this treasure is just waiting to be had.  Now of course the legal actions taken in various states would impact the new owner just like ABI but perhaps there is a way around it?  The potential savings would be astronomical.  Heck, even if there were NO distribution synergies there are probably enough synergies elsewhere to make it work.  And if no one steps to the plate for this treasure, ABI simply continues to milk Bessie… a win-win for them regardless of other’s desires to unlock a mountain of treasure.

Harry and Benji can investigate this further from a legal perspective - I’ve got a real job where I make money by actually doing things, not just writing about them ;-) but I don’t see how a new owner could be required to continue to use a network of independent distributors.  And I don’t see how they could be required to offer any type of compensation to any party for this change.  Their argument would be that distributors HAVE ALREADY been compensated for their work… just look at your cumulative income statement over the past 50 years ;-)   Don’t shoot the messenger, I’m just telling you how they will present it.

If this were to happen I’d have to guess the ABI wholesalers might just be SOL.  A scary thought indeed.  And please let’s be sophisticated in all this… nothing ABI can say about this can have much merit.  They are a large publicly traded international company and their words carry much weight… and with the SEC they have to be careful what they say. That’s just the way it is.  So distributors are fundamentally on their own on this one.

Although losing a major supplier (with no compensation) might seem strange and unusual, it is actually fairly common throughout industries which use a separate, independent distribution channel… thus I’d have to guess there is A LOT of case law on the subject… most of it probably being bad news for beer distributors.  One might wish for this not to be true but I don’t see any fundamental business reason why it isn’t.

But then again, maybe my banker friend isn’t so smart and all of this is just a waste of words on a blog… who knows?  I’m just trying to do my job… providing wholesalers with various very real possibilities… whether they want to hear them or not.  And helping them analyze and address the world as it quickly changes around them.  Plus, it makes great water cooler gossip ;-)

Next post… is your distributorship a Cash Cow, a Star, a Dog or for sale?  And what can you do with what you’ve got.

 

 

What's Up With Values?

Before we start a brief discussion of values I want to give the Kentucky ABI distributors a tip of the hat for their great hospitality recently in Nashville.  As you might know, Nashville is Music City USA and that point was driven home late one night by a couple stirring karaoke renditions by industry pundit Harry.  First was a gut wrenching version of “Chasing Cars” by Snow Patrol… not a dry eye in the place.  For an encore Harry went with the King’s classic “In the Ghetto”… and just like the King, that stage was littered with women’s undergarments by the time he strutted off the stage ;-)  Gotta love this industry.

Now to values.  Some out there like to say values have declined and sellers simply have to lower their expectations.  We believe this is incorrect.  Beer distributors are rare and precious assets and this has not changed.  In pretty tough economic times this industry has fared quite well.  However, today’s environment has become more strategic and regional.  Wholesalers relying on local economics have become financially more vulnerable while regional consolidators and larger multi-brand operators appear to be well-positioned to move forward.

It is a classic case of “Where you stand depends on where you sit.” We have worked with several wholesalers who continue to move forward by redefining themselves to meet ever changing industry and customer needs. Progressive wholesalers are continuing to leverage their resources by incrementally expanding operations into other categories of beverage products and combining with more one-dimensional wholesalers within the region.

Although deal flow has slowed considerably it was somewhat to be expected.  First, most  who wanted to race to the door have already done so.  Second, there is so much uncertainty from the government that some potential acquirers and sellers have become somewhat frozen in place.  This will probably remain the case until the political situation becomes a little clearer… who knows, in 2012 – 2013 we could see even lower capital gains tax rates – depending on who wins.

But the most fundamental reason for values remaining strong is simple economics. As with any financial asset, why would the present owner accept a selling price which leaves them in a worse financial position?  Unless they predict coming significant negative events, why would they?  The answer is they won’t.

As a simple example, if the financial asset provides $1,000 in annual economic value why would one sell it if after-tax proceeds only provide $600 in annual economic value?  Not going to happen. 

However, there are situations which can have an effect on value.  For some distributors there are more than a few family and extended family members in the business.  What happens to them after a sale?  Unless it is a very large distributor there may not be enough value to allow everyone to walk away with retirement money; grid-lock sets in among the ownership group.  For some smaller operators there could be significant financial risk based potential sales erosion within your current brand portfolio.… These are real issues which have to be addressed.  In some of these situations there is almost no price which works for all interested parties.  Thus the asset isn’t sold… and most assuredly isn’t sold for some declining amount - a lose-lose situation.

We recommend that for potential purchasers and sellers of brands and companies, you think strategic value.  How many of you have made a brand purchase at a price which at the time might have seemed a far too high from an economic perspective?  And how many of you later found out that it was a great deal… the price seemed high but the VALUE to you far exceeded this price, whether you saw it at the time or not.  Think about InBev’s purchase of Anheuser-Busch.  Many thought InBev was paying far too high of a price… but look at the results of this acquisition… InBev knew the value to them far exceeded the price.  And they were right.  The future goes to those who are audacious enough to shape it to their liking… driven by a clear strategic vision.  Don’t simply look at price… look at value to you.  Not the value to the guy down the street, not the value to some abstract “beer distributor”, but look at the strategic value to you.  Whether you like it or not, this is the reality you face if you want to be in this business 30 years from now.

I’m not saying the consolidation wave is over, it isn’t.  I’m not saying now isn’t the time to sell, it might be.  I’m not saying there is a magical number of annual cases you need to distribute to remain long-term viable, there isn’t (if you have little to no debt you can last A LONG TIME in this industry… that might not be the wisest financial move but it can be done).  What I am saying is that unless we see significant reductions in the profitability of beer distributors, regardless of what some others might tell you, you’re not going to see the STRATEGIC VALUES of distributors fall. 

Depending on which side of the fence you are on this may make you happy or sad… but since when did ones desires affect reality?  Start the evaluation process by thinking strategically!

Give us a call if you would like to discuss in confidence your unique situation and needs.  These considerations and many other issues are what Steve Cook and I deal with when representing our potential sellers or buyers… we search for a win-win scenario on value, develop the best deal structure, assist with financing, and work with you on family and key employees issues... to name a few.

The End of Old Beer? The End of Beer Distributors?

The Question:

Would greatly extending the shelf life of beer be a boon for beer distributors or could it profoundly change the beer distribution industry?

Longer shelf life and the end of old beer… or longer shelf life and the end of beer distributors?  Something to celebrate or an unintended dagger pointed at the heart of wholesalers?  We often note that beer is not a can of peas and should not be treated the same.  From a regulatory viewpoint this remains regardless of shelf life… but what if a can of beer becomes just like a can of peas from a shelf life perspective?  What might be the implications?  Let’s take a mental field trip and see what happens… 

• First the positives… and why the quest for extended shelf life will continue unabated.  I won’t attempt to guesstimate the dollar value of all out-of-code beer in the US but we all know it is a rather large number.  Throw in the gross profit dollar hit taken by discounting aging beer and the number gets even larger.  Think of the system-wide savings if these costs would simply disappear.

• And the savings wouldn’t end there.  On the production side it would simplify runs by allowing larger, more efficient runs… perhaps specialization?  Perhaps consolidation of breweries since physical location will become less important.  You’d have to balance this against increased distribution costs (just like closing a warehouse) but my gut says it would probably make a lot of $$ sense (just like closing a warehouse).  Operationally the savings would continue at both the supplier and distributor tiers.  Think of all the time and expense distributors incur in your drive to keep fresh product in the marketplace… sales, merchandising, delivery, warehousing, tracking and moving aging product… you all know the facts since you live them every day.

Now let’s magically extend the shelf life… what happens then?  First, I’d have to guess the DSD value to retailers and suppliers would shrink considerably.  I’d also have to guess that chain stores could now make a much stronger case that their centralized warehousing can adequately ensure product quality.  Does the value of basic merchandising shrink since proper product rotation, although still desirable, becomes much less important? 

Does it allow large wine and spirits distributors to aggressively enter this market?  Their once per week service (if that) might be quite adequate for servicing the majority of retailers.  If the shelf life could be extended on draught beer, this “ace in the hole” might quickly evaporate too… thereby greatly impacting the supply-chain value of the full-service beer wholesaler.  If you’re the last beer distributor standing in your state you might like this reality but what about the rest?  It could drive a massive exodus from this industry.

Of course you still have the velocity aspect of beer which would pull in the opposite direction but significantly extending the shelf of life of beer could be a profound game changer for beer distributors.  Remember that the conventional wisdom is always correct right up until the moment it isn’t anymore.  If it happened it would most likely get a lot of pieces in movement in a short period of time. 

And what of the consumer response?  Would there be one?  Would they care if the product attributes remained stable over a longer period of time?  My gut says a few beer snobs might care but if it can be accomplished without those awful “artificial preservatives” most consumers would quickly lose interest… and there are positive’s from a consumer perspective too… next time there’s a major sale why not pick up a 6 month supply?  How would this affect pricing and discounting?

Of course the technological breakthroughs which would extend shelf life to this degree might never happen… but then again they might.  The potential savings ensure the quest will not end.

The answer?

Who knows.

This could conceptually drive us towards a more 4-tier system that you see in a few states… a massive beer distributor servicing an entire state, with centralized distribution through chain stores, perhaps also selling directly from the warehouse to licensed retailers and then a much smaller beer “jobber” who would service the smaller accounts in their specific market.  The future might be pretty good for the massive distributor but no present beer wholesaler would be happy with the profit outlook being the beer “jobber” in your present marketplace.

What can wholesalers do about this?  Probably nothing other than to keep providing superior, value-adding services… and to keep their eyes wide open to a very dynamic landscape where things which might seem peripheral are actually much more than that. 

I’ll continue these thoughts in my next post where we think about values of distributors.

Inflation? What it might mean to you.

Stagflation.  A word from 35 years ago.  Are we headed there again or are there other possibilities?  And most importantly for this blog, what does this mean for beer wholesalers?  Specifically those in a buy or sell mode.

First for those youngsters out there, what the heck is stagflation?  It is an economic situation where the overall economic growth is slow (i.e. stagnant) yet there is high inflation.  Generally not a good thing for those who participate in this economy and as is always the case, especially those of lower incomes.  The inflation destroys the value of your earnings/savings while the slow economic growth denies economic opportunities.  We last experienced this situation in the mid- to late-70’s under the stalwart leadership of President Jimmy Carter.  Is it coming again?

Right now inflation is low if you believe the “official” measurements… if you live out in the real world you might have serious disagreements with this.  But one thing is very certain, money is very cheap… especially for banks (can you say crony capitalism?  But that’s a rant for another day).  So if you use interest rates as a surrogate for inflation, inflation remains low. 

Of course the Federal Reserve is printing money like there is no tomorrow - and if it keeps it up there might not be… at least not one most of us would welcome.  What happens when (if?) they stop printing greenbacks? 

As a side note, isn’t it amazing that wealth can supposedly be created simply by printing these things we call dollars… if you use the right paper, ink, and printing presses wealth is magically created.  Looking back at historical precedents, I can’t find a single instance where this worked out well for the general population but what the heck, as long as the dollar remains the world’s reserve currency we can simply export our inflation around the globe.  As Mad magazine’s great American philosopher Alfred E. Neuman notes… “What, Me Worry?”  Actually I think a more appropriate quote from Alfred (the only time it changed) was uttered after the Three Mile Island accident, “Yes, Me Worry!”  And worry we should.

I read in various sources that the federal government borrows somewhere between $3,000,000,000 and $5,000,000,000 EVERY DAY to finance its spending – different sources report different amounts.  Just over $0.40 of every $1.00 the government spends is borrowed money.  Sooner or later those chickens will come home to roost.

One can expect the government to do everything in its power to ensure interest rates remain low.  Why?  For a very simple reason, if interest rates go up the cost of servicing the national debt will increase substantially… thereby increasing the debt even further.  And the present situation is bad enough… under Obama’s rather optimistic budget, in 2018 (that’s only 7 years from now) interest payments on the federal debt will exceed ALL defense spending, including wartime spending.  That’s a chunk of change just for interest payments!

Unfortunately for the federal government (and all us poor saps), they operate in a world financial market so their desires might not rule the day.  And since those purchasers of government debt aren’t stupid, even if the plan is to inflate the debt away, these purchasers will demand higher interest rates to make up for this planned decrease in value.  So for the betting man, it would seem some degree of higher inflation/interest rates is coming.

So what should a beer distributor do regarding the “stay” or “go” decision?  Again, let’s look back at periods of high inflation to give us a guide.  Generally hard assets retain their value during inflationary times.  So first do you consider your distribution rights “hard” assets?... since that’s where the bulk of your value resides.  In a classical sense they are not hard, they are intangible.  But as we all know, although they are classified as intangible, they are much more tangible or hard than “normal” intangible assets.  That’s the primary reason some banks have such a difficult time lending to distributors for acquisitions.  They just don’t get this reality.

So that is your first question to answer… just how “hard” are these distribution rights?  If a Costco-type challenge would win big some day they might become a lot less hard and much more intangible… but if that doesn’t occur... how clear is your crystal ball?

And secondly what erosion (if any) do you foresee in your overall profitability?  What is your power in the supply chain to ensure your margins continue at present levels?... especially during times of relatively high inflation.  Back in the 70’s and early 80’s distributors did pretty well on this front… will the 2010’s be the same?  And on the cost front, can you control costs enough so that your profitability remains at present levels?  And if margins and/or costs negatively impact your profitability, can you find other products to make up for this lost bottom-line income?

Or is taking the money and running today the best financial course?  Values remain strong, the cost of money is low for the borrower thereby making financing easier… so the environment for selling is generally good.  But 20 years from now will this be the best decision?

That of course depends on what you do with the proceeds of the sale.  Obviously to grow your wealth you will have to generate a higher return than the true inflation rate.  In addition, to truly retain your wealth you need to account for a perhaps substantial decline in the value of the dollar.  You might want to think about keeping your funds in a basket of currencies (our friend Mr. Diversification) rather than being solely tied to the dollar.  It is difficult to see a future where this government doesn’t take a course of action that decreases the value of the dollar… like all debtors they want to pay back the debt with less valuable money.  But the choice for what to do with the sale proceeds is certainly not an easy one.

And for those planning to remain in the business, remember that a declining dollar pushes up the value/cost of hard assets… therefore a weakening dollar will cause an increase in oil prices and your fuel costs – but I still believe that over the longer haul, distributors can use higher fuel costs to their advantage... short-term though, they generally will come out of your hide. 

But acquisitions now might make more sense since as noted above, inflation is good for debtors… you pay back your debts with dollars which are worth less than the ones you got up front.  Now might be an ideal time to load up on low-cost, as long-term as you can get, FIXED INTERST debt. 

Regardless of your choice, now is most definitely the time to maximize the profitability of your company… and to not allow your lifestyle to consume all your profits.  Lots of uncertainty out there… a few years from now we will all be able to say what we should have done today… unfortunately that’s not the way it works in the real world.

And on a completely unrelated front, and to dig my hole a little deeper in the political arena, I end this piece with a political quote from the esteemed Alfred E. Neuman,

"How come we choose from just two people for President, and fifty for Miss America?"

The last presidential election certainly validates Mr. Neuman’s observation… as we and the world are sadly learning.

 

 

2 Big Deals... What Are You Doing?

So Orlando was finally sold and so was Raleigh… one a very large MC distributor whose sale was expected for some time (once the price was met)… and the other a large ABI distributor whose sale surprised quite a few.  In both cases far-sighted wholesalers stepped to the plate and expanded their empires.  In Orlando the Reyes added a large, strategic footprint in Florida, about 13 million cases.  In North Carolina, R.A. Jeffreys continued their acquisition run… adding the important Raleigh market and about 7 million cases.  In a relatively short period of time Jeffreys has become the ABI wholesaler in almost the entire eastern half of North Carolina.  It is a huge geographic footprint with tremendous growth potential for the next 100 years (at least).

 There are many paths to success. However, one can argue the most important first step is to understand your strategic position.  Just the process of this analysis is extremely valuable… done properly it forces you to consider all alternatives and it should force you and your management team outside of your comfort levels.  Just as important, YOU MUST HAVE A VISION AND STRATEGY THAT EXPLAINS TO PEOPLE WHY THEY ARE WORKING. With a vision that employees can trust you can make big changes in a short time.  It’s not about meeting budget, IT’S ABOUT CREATING A BETTER COMPANY.

 So, look in the mirror and ask yourself what are you doing and why? 

• Do you have a strategic vision which is driving your dynamic business model? The world is rapidly changing and staying in one place simply isn’t an option. 
• Do the employees feel like they are part of something bigger?
• Are you leveraging your assets to improve the financial health of your business?
• Does success mean a better quality of customer service AND higher efficiencies?

We’ve encountered far too many wholesalers who were hesitant to change simply because they didn’t have a coherent vision and management where not on the same page.

Steve and I can assist and support your efforts to build a better company and ensure everyone has a grounded, common vision by providing immediate expertise.  As your transaction representatives and general management consultants, we become a member of your  management team to assist in these needs – sale, acquisition or operational… broad skill sets, lots of “been there, done that”, focused effort, and when the need is over so is the cost.

Far too many players are left out of an acquisition simply because they don’t have the  expertise to truly understand how they can make an acquisition work for both the buyer and the seller… far too many distribs walk away from strategic acquisitions simply because of misperceptions and personal biases that they mistakenly allow themselves to get priced out of the game… quite often the issue isn’t actually price but rather the misrepresenting of operational cash flows and the underestimating of synergies within the new business model.

And of course there are those who are simply “bottom-feeders” who are looking for a great economic deal.  Unfortunately, these economic buyers never get a deal done and in effect they are letting others determine their future.  Although this isn’t my choice, it is a fine strategy IF it is a strategy… if it isn’t then it is a very poor choice.  Guess what, there are a lot of great deals out there but they are not necessarily only price driven! 

When considering any transaction the need for good analyses to drive good decisions is strong, especially in these times of rapid changes.  The quality of the analyses becomes even more important due to the longer-term nature of the potential acquisition opportunities. 

Determining who you are and how much a company is worth to a prospective buyer or seller is a good way to keep your “head in the game.” We recommend as a minimum, a quality “base-line” valuation for any proposed transaction you may consider.  Additionally, many of our clients use our updated versions of these “base-line” valuations to provide insight for ongoing strategic planning and operations analyses since it provides both refreshed industry comparisons and current valuation references.

Please contact Steve Cook or myself if you have any interest in learning how we can help you create a better company and how to apply “base-line” valuations as a strategic tool for transactions and operating modelling.  You’ll be glad you did. 

 

 

 

 

 

 

Interest rates and their impact on deals

Before we think about the beer distribution business, first a quick paragraph about scale.  When people talk about millions of this or billions of that or the now more used trillions, it is difficult to really comprehend such large numbers… so here is a little example to make the point (stolen from a letter to the editor in the Wall Street Journal).

If one were to spend a dollar a second, in one year you would spend $31,560,000 – we’ll forget about leap years.  At this rate: 

• If you wanted to spend $1,000,000 (one million dollars) it would take a little over 11.5 days

• If you wanted to spend $1,000,000,000 (one billion dollars) it would take just under 32 years.

• If you wanted to spend 1,000,000,000,000 (one trillion dollars) it would take just under 32,000 years!

• If that doesn’t scare the crap out of you – regardless of your political leanings – then you aren’t paying attention… per CBS news, debt under Obama is forecast to increase just under $6 trillion dollars from the day he took office to 2012!

And to end this part, a spot-on quote from that great American patriot P.J. O’Rourke…

It's not an endlessly expanding list of rights -- the "right" to education, the "right" to health care, the "right" to food and housing. That's not freedom, that's dependency. Those aren't rights, those are the rations of slavery -- hay and a barn for human cattle.

 

Now back to the beer business – interest rates are sneaking up and their impact on deal price could become a more significant factor for 2011 and beyond.  In fact it is difficult to foresee a future without much higher interest rates.  First, interest rates have been at historical lows for quite some time and we may have seen the bottom of the trough… money has been basically free for banks.  Second, although the official inflation rate remains low and the wizards at the Federal Reserve tell us there is nothing to worry about… based on the Fed’s past performance, that statement alone is probably cause for worry… the signs of inflation are everywhere. 

• Fuel prices up
• Energy prices up
• Steel prices up
• Health insurance costs up
• Gold and other precious metals up big time
• Commodity prices up – in fact a significant factor in the recent turmoil in Egypt and other places is serious inflation in food prices… up 15% and more in many places.  If you live in a place where 50%+ of one’s disposable income is spent on food, this is a huge impact on your ability to feed yourself and your family.
• Beer prices up – other than residential and in some places commercial real estate, I don’t see any sector which isn’t confronting the consumer with higher prices.

Of course high unemployment and excess capacity in many industries is holding down some inflation, but how long can that last?  Wage inflation is held down by the economic situation but employees have long memories… you all know the refrain, “I haven’t had a raise in 3 years”… the pressure is already building on this front. 

And as the world’s reserve currency (at least for now) the US has the advantage that we can export inflation to the rest of the world… something they rightly aren’t overjoyed about.  You can take Federal Reserve Chairman Ben Bernanke’s word that he has "100%" confidence he could prevent runaway inflation” or believe your own lying eyes and wallets.  Many believe inflation is how the government is going to address our present debt situation… they’ll just inflate it away as part of an official strategy.  So it sure seems like a safe bet that interest rates are going to be heading up, the only question being how much. 

What does this have to do with deals and their pricing?  As a seller you want to push the envelope on selling price… but the buyer only has so much flexibility to make a deal work.  From the purchaser’s perspective, the net present value of every dollar in financing cost is a dollar less they can offer for the business.  Thus higher inflation and higher interest rates start putting a cap on deal price… with higher interest rates the “same” price can end up putting a lot less money in the seller’s pocket… the increased financing costs in effect coming directly out of their pocket… Sure one would like to push this off on the purchaser but if they are already at the upper limit of price, their flexibility is going to be fairly limited.

Depending on the size and the nature of the transaction, Steve and I are seeing some increased interest rate sensitivity on some deals we are trying to complete.  Depending on what your total interest rate is (usually Libor plus bank rate), we estimate using a annual 5.875% interest that an increase of five (5) basis points in monthly interest rates, on a $50 million commercial loan, amortized over 7 years (84 periods) would increase total costs for the period by over $300,000.  Doesn’t sound too bad, but that’s for only 5 basis points or a .05% increase (a basis point being one hundredth of a percentage point, 0.01%).  A .075% total increase or 7.5 basis points in monthly rates could increase total costs exponentially to an estimated $915,000 for the same loan…  And lastly, a highly unlikely in the short term, but never say never total monthly increase of .10% increase or 10 basis points (or 1.2% annually) could increase total loan costs by a whopping $1,500,000

Now I’m not predicting that a 100 basis point increase is right around the corner but as you can see, the impact of waiting or dragging out a deal could be significant… delay and there might go your beach house!  And as I mentioned above, if as a seller you are pushing the upper envelop of price, these increases in financing cost are most likely to come out of your take.  So as I have commented before… if you’re on the fence as a seller, you might want to seriously consider getting out the door now… and if you’re a purchaser, you might want to step to the plate and get that deal done.  If not, an increase in financing costs could effectively put the kibosh on either side being able to get a deal done at an acceptable price for both parties.

Time is money! – Benjamin Franklin

Inflation is most likely coming and it will be ugly.

• You pay more for equipment and services.
• Taking on debt is more difficult due to the higher applied interest rates.
• From an equity standpoint, the value of your company could diminish as well if you don’t change who you are or how you do business.

 For your reference and comparison, the previous two week LIBOR postings shows an upward movement of 10 basis points on the 1 Year and 3 Month LIBOR Rate! I wonder where the numbers will be in the next 26 weeks?

  From the 1/19/2011 Update

the  LIBOR, other interest rate indexes

	This week	Month ago	Year ago
Bond Buyer's 20 bond index	5.39	5.15	4.31
FNMA 30 yr Mtg Com del 60 days	4.47	4.59	4.80
1 Month LIBOR Rate	0.26	0.26	0.23
3 Month LIBOR Rate	0.30	0.30	0.25
6 Month LIBOR Rate	0.46	0.46	0.39
Call Money	2.00	2.00	2.00
1 Year LIBOR Rate	0.78	0.78	0.88

 

From the 2/2/2011 Update

the LIBOR, other interest rate indexes

	This week	Month ago	Year ago
Bond Buyer's 20 bond index	5.25	5.08	4.36
FNMA 30 yr Mtg Com del 60 days	4.61	4.46	4.76
1 Month LIBOR Rate	0.26	0.26	0.23
3 Month LIBOR Rate	0.31	0.30	0.25
6 Month LIBOR Rate	0.46	0.46	0.37
Call Money	2.00	2.00	2.00
1 Year LIBOR Rate	0.79	0.78	0.85

Reference: LIBOR | 1 Month Libor 3 Rate 6 Month Rates Bond Index Current One 90 day 30 Day http://www.bankrate.com/rates/interest-rates/libor.aspx#ixzz1BapPHDPx

Want more stuff making a case for moving quickly on that acquisition or sale?

1.      Inelasticity of domestic beer prices is changing the game.

• Is case volume a thing of the past?
• Lower volume - higher margin contribution craft beers are growing strong.
• More of our clients are asking us to value their business for strategic planning purposes.

Not only is this no-frills product an affordable option, it has significant value by providing quantitative industry comparisons while illustrating the financial sensitivity of the current business situation.  Easily updated it can show the impact of current changes in dollar volume, gross profit and operating methods.

2.      The first guy in his area to sell usually can get a better premium.

• Consolidators can handle limited incremental amounts of debt.
• By being first, you can sell when you want and push the price.
• Secondary wholesalers wanting to sell might be dormied due to limited interest in more rural areas and might have to reduce the selling price by millions to affect a transaction.

3.      Uncertainty and a loss of control within the industry by wholesalers is creating a “risk-aversion” operating philosophy for an aging ownership group.

Might be better to take the money and give it to junior versus gambling financial security on the longer term paybacks of most beverage consolidation strategies as directed by the breweries.

 Are interest rates headed up?  Without a doubt.  Is there a fair amount of uncertainty in the beer distribution business?  Heck yes… ABI and SABMiller merging?!... Costco-type moves?... tax pressures… the future of mega-brands.  Impact on values?  We’ll have to see… but remember, once we know it will be too late.