Conlin Beverage Consulting, Inc.

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.

My wife Barb and leukemia

This one isn’t about beer, it’s about my wife Barb and life.  Rather than attempt to talk to all my friends and acquaintances in the beer business about this, I thought I’d post some thoughts.  Many of you have met Barb, most recently the West Virginia wholesalers had that pleasure as we enjoyed their hospitality on the Outer Banks.  Barb has accompanied me to many beer conventions… she even used to work my trade booth when I did such things – she’s be working the booth and I’d be out drinking beers ;-) 

 Life is a surprising thing… you’re rolling along and wham, things can change in an instant.  My wife and I had one of those moments when a week after her 49^th birthday she was diagnosed with Acute Myelogenous Leukemia.  Trust me, that ain’t a good thing.  Diagnosed on a Tuesday, talking to the bone marrow transplant folks on Wednesday, in the hospital Thursday, and a 7 day chemo regime started on Friday.  As of this writing she is just finishing her 7 day chemo… still feeling great. 

 Those who know me know that I try to be straight-forward about all things – as readers know, I often note that what we want doesn’t change what is.  This one definitely stuffs that reality in your face… it’s a guaranteed death sentence if the treatments don’t work.  Don’t want to do the treatments?  Dead in 60 to 90 days… kind of makes the choice an easy one.

 One of the first things we needed to do was to get our heads on straight regarding the treatments, chemo and others.  Barb and I found ourselves fearing the treatments… dreading them.  But this is ass backward.  The treatments are freaking scary for one reason, they make the reality you face VERY real.  But you’ve already got the bad news… it’s kind of like fearing something that has already happened.  Our bad news is AML, not the treatments… and there is nothing we can do about the AML, it is what it is.

 That chemo is my savior.  That chemo is my joy juice.  That chemo is the only hope we have… I do not fear it, I rejoice that it exists.  As I watch the shots and the drips I think about badass paratroopers jumping from their plane and racing to confront the enemy.  I cheer them on with every ounce of my being.

 From here on out neither Barb nor I will fear any treatments that come our way.  They are good… the bad has already happened.  I’m certain almost every reader of this site has had a cancer or disease hit close to home… keep the above in mind when talking and thinking about the problems you face.  Reframe your thinking to see the treatments for what they are… a Godsend.  Cheer them on.  In my sales training I always emphasize that the best “sell” is always the truth… the above is the truth.  Don’t run from it, embrace it and find strength in it.  And help those around you understand the truth… don’t ahhh about the treatment… that’s not the bad.

 And to get on my political soapbox again… screw ObamaCare and the planned government takeover of our medical system.  I want those freaking pharmaceutical companies to make a lot of money… I want them investing in new drugs so they can make a lot of money… I want the freaking government to NOT screw up the best medical system on the planet… because ultimately, those “evil” drug companies are the only thing that is going to save a hell of a lot of folks… my wife being one.  My mom being another a few years back and my dad being another just a few months ago.  I’m certain almost everyone reading this has had the same experiences. 

 Which leads to another get your head on straight moment.  Although an AML diagnosis at age 49 isn’t the best news one could get ;-) one needs to stare the facts in the face… and as usual there is a lot more good news out there if you just open your eyes to it.

 Let’s take a worst case analysis… we often respond to this type of bad news as if the death sentence was something abnormal, something only these poor saps have.  But of course that isn’t the case… everything that lives will some day die.  We all are going to get that ticket punched sooner or later.  For Barb, it might be sooner but that is the only difference.  Sure we wish it would be later but sadly our vote doesn’t count in this.  

 But by over-reacting to this information, we make the situation seem far worse than it really is.  Sure it would be nice if Barb had another 20 or 30 years (and we pray she will) but if that isn’t God’s will, then it won’t be.  But the choice is ours… we can cry and bray about what might not be or we can celebrate and remember what is and has been.

 And death isn’t some strange, unfamiliar thing… it is OK, and most likely just the end of this physical aspect of our lives.  It was only a generation or two ago when almost everyone was much more familiar with death… almost every family lost a young child or two… childbirth was a dangerous thing which caused the death of many women… “normal” everyday diseases used to kill with impunity.  It wasn’t that death was a welcome visitor, but it was a very normal part of life... with most of these deaths occurring at home.  People were just more familiar with it.   Although I don’t want to go back to those days, there were some advantages.

 Barb is a devout Catholic whose faith is unshakeable… in some ways you could consider the sooner part a blessing… she will nestled in God’s loving arms that much earlier.  She has a great life, starting with being born in the greatest, freest country the world has ever seen… at a time when women’s rights were flourishing.  Great parents, loving family with an older brother and sister and a younger brother and sister (and we’re hoping that one of them is a good bone marrow transplant match).  Grew up with a simple life, with a “jump the fence” friend (Gaye) right across the backyard.  She has more friends that I can count… including her “jump the fence” friend of well over 49 years ago… well basically since they were born!  One friend describes Barb as “buoyancy personified, life force itself”.  That is very accurate.

 She’s traveled the globe, lived in Belgium for a few years, has the most incredible son one could ever hope to meet.  She loves geography, has an undergraduate degree in it and a Masters in Library Science.  She’s the librarian at a middle school and she really loves the kids… and they her.  As for me, I consider most children disease carrying rodents but not Barb.  All in all Barb has lived an incredible, happy, simple life.  I was blessed to find her – I think she got the shorter end of the stick in that deal ;-)  So regardless of how this ends, we don’t have any complaints.  A damned good life and an incredible gift from God.

 But I can say all that, and it is all true, but that doesn’t stop my heart from aching beyond belief.  Those who coined the phrase heart ache got it exactly right… my heart doesn’t hurt, it aches.  And of course I cry more than a freaking over-emotional school girl – with apologies to school girls everywhere ;-)  This really messes with my macho image ;-)  If the pain I feel is any reflection of how much I love Barb, I have to admit I love her more than I imagined.

 Hug your kids tonight.  Hold your spouse like they might die tomorrow.  Thank God for every minute, every second, every moment of our lives… they are gifts beyond description but they do expire.  Don’t waste a moment… and when the time does come – regardless of the age, don’t fill it with dread, fear and despair.  Fill it with love and joy – a celebration of what was, not wailing about what won’t.  I’ll get off my soapbox now…

 And for those who are wondering… yes I’m still working.  Steve Cook and I are still rolling along.  Work is about the only thing which helps me take my mind off things I can’t change… our open for business sign remains brightly lit.

 Enough of this… next post back to the beer business.

A new year begins...

Well the year is over and a new one begins.  2010 was an interesting year.  Steve Cook and I got quite a few deals done… the latest from this assortment is our announcement here:

John Conlin of Conlin Beverage Consulting and Steve Cook of Great Lakes Consulting, who represented  Mark Twain Distributing, would like to congratulate both Mark Adams of Mark Twain Distributing and Greg Lloyd of Lloyd Distributing for successfully completing  the recent consolidation of their MillerCoors, craft and import beer portfolios within their new Missouri territories. Best wishes to all and thanks for allowing Steve and I to lend a hand.

As for the deal flow for 2011?  I’m at a loss to predict it.  The threat of huge tax increases on January 1, 2011 certainly got some folks moving to the door.  Now that it looks like the capital gains and income tax situation is settled for the next 2 years (if anything can ever really be settled in today’s political world), will we see a drought of deals?  Have all the sellers gone with only the long-term players remaining?  I don’t think so but one never knows. 

Here’s my quick analysis of how I would think about the sale or stay decision…

• First I’d recommend a financial analysis of you current operations and your family’s financial situation.  Let’s take an extreme Armageddon-type situation, i.e. the bulk of the value of your business disappears… are you and the family still OK?  (and can you live with that?)  If so, then no amount of fear or uncertainty regarding the future should push you unwillingly towards the door.  I think a lot be beer wholesalers fall into this category… they might still choose to leave, but it will be a free choice.
• Is the distributorship your “job” or an investment?  Or being a family business is it even more?
• Do you have a buy-sell agreement that ensures the perpetuation of the enterprise no matter who the owner(s) are or what their personal motivation and interests are?
• Small market or large market… perhaps counter-intuitively, the smaller market, more rural folks might be better protected if the 3-tier system would begin to crack.  Regardless of the size of your market, there are compelling reasons to get bigger… including hedging the financial impact of ongoing operating challenges through economies of scale while attracting suppliers who want to effectively expand their current footprint.
• Overall the 3-tier system has had a number of wins this year… does this continue or will some earth-shattering development occur?  Your crystal ball is as good as mine. DSD still provides the most effective distribution method and most efficient way to manage overwhelming numbers of daily retail transactions.  Those who want to loosen the 3-tier system are not going to go away – in this fashion they are like the neo-prohibitionists… for the other side there will never be a “compromise” which will be enough to settle the matter… other than our demise.
• Taxes… it’s not what you sell for but what you keep that matters… are tax rates settled for the next couple years?  And what about the 2012 political landscape?  Are the tea-party folks going to kick butt and push for lower tax rates across the board?  Historically, reductions in capital gains taxes have always led to increased revenue.  Or does Obama win in 2012?  If so, I’d have to hazard a guess that he will keep his class-warfare themes in high gear and try to accomplish through regulation what he can’t accomplish through the legislature.
• What is the short- to medium-term outlook for the US economy?  How long can the federal government borrow $0.41 for every dollar it spends?  Obama plans for trillion dollar deficits as far as the eye can see.  Many  states are up against the wall… their diminished revenues, underfunded pensions and other liabilities could cause a crisis of epic proportions… will they fail?  Or will the Feds (that’s us by the way) step in and save them?  If so, where do the dollars come from?  There will be tremendous pressure to raise taxes to find this money from somewhere… and as the famous bank robber Willie Sutton supposedly replied when asked why he robbed banks… “because that’s where the money is”… the tax man is going to be hunting for this money from those who have it.
• Do tough economic times help or hurt the industry?  The answer to this isn’t as clear cut as it might seem.
• Fuel prices… they most assuredly will continue to go up as the world economy continues to pick up steam.  Recently the ex-president of Shell Oil said $5 per gallon gasoline might be here by 2012.  As a nation we continue to unilaterally disarm our own ability to produce energy.  At least for the next 2 years this is unlikely to change… in fact it will most likely get worse as the Obama administration uses regulations to hinder oil and gas development… and I have yet to see a green energy “solution” to the diesel engine… an engine which at some point in time moves pretty much every single product bought or sold in this entire country.  And oil and gas development is a long-term game… even if the elections of 2012 provide a tremendous shift, getting oil and gas fields up and running takes years, not months.  Short-term price increases hurt distribution industries… but is this true for the long-term or can we adapt and turn it to our favor?  I’d start planning for higher fuel prices right now. 
• The Middle East – this one isn’t going away and the rare good news is sadly always balanced by the much more frequent bad.  It sure looks like the Obama administration is going to accept a nuclear Iran (Europe has already done so)… it is difficult to see how that works out well for anyone, anywhere on the planet.
• Values… are they going up or down?  Some have stated they think deals will start moving when sellers lower their sights on price… I think this is absolutely backwards.  Deals happen when strategic buyers step to the plate and pay a price which makes sense to the seller to exit.  These purchasers rely on economies of scale to cover the deal over a longer estimated payback period.  Meanwhile, economic buyers over the past couple years have pulled in their horns for one primary reason… uncertainty.  As this uncertainty fades, purchasers have a little more confidence about what the future holds and can pay accordingly.  But if you look at this industry and the way it has weathered a pretty poor economy, you’d be a fool to sell your business for any low-ball amount. 
• So still a lot of possible bad news out there but bad news has always been around.  The sun will still rise tomorrow.
• In summary, these are the reasons I tend towards being a seller rather than a buyer - but I’m looking at the world through my checking account ;-).  I’d be looking to lock in and preserve the wealth which has been built by perhaps generations, but if you’ve already got the wealth then the analysis is much different.  But if you’re one of those folks who has determined they are probably a seller, but in a “few” years, I recommend you go NOW.  What upside is there in waiting?  What good news is going to head down the pike?  Which has a higher probability… good news or bad news in the next few years?  Sure seems like bad news is a distinct favorite.

On a broader front, are you looking to improve the value of your business by finding some extra profit?  Here are a couple of easy ones which are better than finding change in your couch…

 *    If you offer 4 day per week service, go back to the more efficient and effective 5 day per week.  You won’t cut 20% of your delivery costs but 10%-15% are waiting to be had.  Add up the cost of a class A driver – salary, payroll taxes, worker’s compensation, health insurance… depending on your market a single driver will cost you from $50,000 (at the very low end) to over $100,000.  How about the cost of a tractor/trailer or truck?  Lease cost per year, fuel, tires, oil, maintenance, licensing, insurance, technology… another $40,000 to $50,000 per year?  Taking a truck/driver off the road saves at minimum $100,000 per year… most likely closer to $150,000.  It’s just waiting for you. 

 *    Another way is to better balance your delivery and sales work-loads.  Having unbalanced routes is inefficient and adds to the number of vehicles/drivers/sales reps.  If you look at a tractor/trailer as a machine, the mathematically certain way to need the fewest number of machines is to maximize their capacity.  Having routes that are 1,500 cases one day and 400 another is a waste of that delivery capacity.  Want the fewest number?  BALANCE.  Although we often blame retail for our balancing problems, I find most of the time it is simply the way the routes are built.  Will we have to fight retail occasionally?  Yes, that’s the essence of change.  Is it worth it?  Is in my book… and IF our sales staff performs, the vast majority of these “problems” will simply fade away.

Once you’re running the most efficient operation you can, the only way to grow is to take market share away from someone else or hope for population growth in your territory.  Thus if you want to direct your growth and leverage your channels of distribution, expanding your beverage portfolio into other beverages categories is definitely worth looking into; more gross profit per stop.  You have a sales and distribution machine; leverage what you already have to drive continued business growth.  Because of the need for supplier efficiencies, a broader more state-wide distribution is a must for many of these products.  I’ve written about forming state-wide (and even multi-state) distribution co-ops to leverage your collective sales and distribution machine.  It’s a great idea which only needs willing participants… so far that has been the problem as many folks don’t want to help “strengthen” a distributor they hope to one day purchase.  Short-sighted in my book but not everybody plays by my book.

Mergers are always a way to make more money and strengthen all parties.  But they aren’t for everybody and it takes willing partners to make these work.

For unconsolidated MillerCoor operations, merge if that works, if not do a gross profit dollar neutral territory swap with your fellow MillerCoors distributor… everyone ends with a smaller footprint and makes more money… and NO ONE loses anything!  Repeat that last note… no one loses anything and all parties make more money… what is wrong with that?! 

2011 will be a great year for some; a not so great year for others… as I’ve said before, grab the future by the throat and make certain the future you desire is the future that comes by increasing the value of your business enterprise… in every possible way.

 

 

Random Thoughts From Chicago

WOW… and they call me Johnny Sunshine ;-)  This year’s NBWA convention was an interesting time.  First as I have repeatedly noted, all things considered this industry is kicking butt and taking names.  In terrible economic times with darn high unemployment the vast majority of distributors are seeing profitability hold, and in many cases it’s even up… many are seeing tougher volume numbers but still quite a few are up in these tough times.  Compare yourself to almost any other industry out there (other than those on the government teat) and things look pretty dang good.  This is a stable, profitable, and fun industry which is difficult to match.  That’s the good news… which wasn’t discussed nearly enough in my opinion.

As for the bad news… a lot of the general session was focused on the existential threats the beer wholesaling industry faces.  That’s a big word, existential and its definition in this usage is of, relating to, or dealing with existence, i.e. these threats are threats to the very existence of beer wholesaling.  Note that these threats are not to the beer industry in general but specifically to the beer distribution industry.  Don’t forget that. 

As Jim Koch was quoted by Harry regarding the three-tier system,   "Large suppliers don't need it, and large retailers don't want it."  Don't look to consumers or legislators for relief:  they "don't understand" how the system works.  Yikes!  The theme of the convention could have been a call to arms… for the battles have already begun.  I think I’ve been noting this for the past few years and all I’ve got for it was grief  ;-)

Let me once again repeat my words of wisdom… 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.  A lot of the Chicago talk was about preparing the industry for long-term survival.

And if you want to take your chips off the table, there is still time to get out this year but you’ve got to get moving now.  Give me a call.  If the exit isn’t your goal, that’s OK too.  But if that’s your choice you need to strongly support your state associations and NBWA to help fight the existential threats which are not going away any time soon.  You also need to examine your organization to ensure it is maximizing profitability… in uncertain times pocket the money now.  In addition, be prepared to step to the plate if any acquisition opportunities present themselves.  In a nutshell those are your options. 

On a more positive front, as I was hanging around the Joose booth… those who were there will understand… I was tapped on the shoulder by someone I hadn’t seen for a few years and what he said warmed my cold little black heart.  He is an owner’s son and he wanted to thank me for pushing him to leave his distributorship to go work where he’d be just another employee… just another regular schmoe.  He spent a couple years working for another distributor and said it was the most important and rewarding experience of his business career.  He finally knew what it was like to be just “one of the guys” and he loved it.  He said one of the most important things he learned was what work-load you can truly expect from an employee.  I always tell owner’s kids that in many ways they are screwed at their company… half the employees are going to suck up to you since you’re the owner’s kid.  Thus you never really learn what reality is.  The other half will try to stab you in the back anytime they get the chance… and again, you never really learn what reality is.  The only way to truly learn and experience the “real” world is to leave your distributorship and go work elsewhere.   

We spoke for quite some time and my attempt here doesn’t remotely capture his eloquence in describing this profound experience.  To top it off he specifically searched me out to thank me.  Wow.  Experiences like this help make all my travel worth it.  For those who follow the wisdom of Dr. Seuss, I almost felt like the Grinch of Christmas fame whose heart grew to twice normal size… almost ;-)    

I also engaged in a few craft beer discussions… I was noting that historically beer drinkers drink brands while wine drinkers drink styles… I posed the question, is this a danger to the craft beer segment since they don’t seem as brand loyal as other beer drinkers… as is often the case my associate Steve Cook put his finger on it and noted that craft beer people drink the category… and that concept is driving the exciting growth of this dynamic category.  So over many a craft brew we settled on… historically beer drinkers drink brands, wine drinkers drink styles, and craft drinkers drink the category. 

Lastly I have to call bull.  For those who don’t know what this means, you call bull when what someone is saying simply goes too far.  Calling bull means I don’t believe you and I publicly challenge you to defend what you were saying.  And who do I reserve this call for?  For the hypocrite Terry McAuliffe.  I would have publicly called bull at the convention but they stopped taking questions before I could get to the mike.

Why is Terry a hypocrite?  During his speaking session Terry was bragging about how much money he makes and how he doesn’t need all the tax cuts of the Bush years.  In fact he called for higher taxes rates for all “high income” individuals.  I challenge you Terry… no one is stopping you from paying higher taxes.  It is quite easy to do and the government has no problem cashing your check.  Do you do so Terry?  Do you simply file 1040EZ and let the tax burden fall where it may?  Or do you spend a lot of money to employ accountants and tax attorneys to minimize your taxes?  If you believe what you say why don’t you take the lead?  Send the Feds an extra 10% or 20%... or even more if you desire.  Instead you lecture others while you do just the opposite.  Typical hypocrite politician.

On a side note Terry, why did you decide to locate your new car company in the south?  Michigan is hurting and has a lot of excess capacity on the entire automotive front… the United Autoworkers would love the additional work.  Yet you move to the south.  How does this action square with your supposed political beliefs?  Again I hear that “h” word stalking you.

If anyone knows Terry please feel free to forward this to him… I’ll post his response, unedited… but I do reserve the right to comment.  What say you Terry?  I say bull. 

Another Win-Win Transaction & Beer Wholesaling and Bessie the Cow

Before I start this post Steve Cook and I would like to congratulate ABI distributors Chris Canale and Charles, Ray, and J.R. Hand in their recent transaction, the acquisition of D. Canale Beverage Company in Memphis by the Hand Family Beverage Company.  Steve and I were privileged to represent D. Canale Beverage Company during the process.  A tip of the hat to all parties involved.  Chris decided now was his time to exit the industry and the Hands stepped to the plate and made a significant strategic move which sets the chess board for years to come… a clear win-win for all involved.  Thanks for providing us with the opportunity to participate in your success. Best wishes to all.   

 

 

Now the post Beer Wholesaling and Bessie the Cow… What do beer wholesaling and a good ol’ milk cow have in common?  Let me enlighten.  A distributor I know explains his decision to NOT run towards the exit in a simply analogy.  He’s a high share ABI guy (with willing suitors) but his thinking might fit many out there. 

A good ol’ milk cow has one primary goal… producing milk.  A young cow with a lot of promise has a certain value.  As the cow ages the value probably decreases… but the decision point is whether the value of the milk the cow produces over these years is greater than the decline in the value of the cow.

This ABI distributor accepts the fact that the value of his business might (will?) decline over the next 10 years but will the cash flow produced over this time frame exceed this decline in value? … the milk produced versus the cow’s value.

This distrib is making the bet that the milk will exceed the decline for his business.  It seems a lot of folks are making a similar bet.  Will this be the case?  Only the future will tell.

It’s not an insignificant bet… I had another ABI distributor who responded to my last post, “Tough Love From the Other Side” which can be found here with these comments

John—You should have sent us razor blades with that column...unfortunately we are only one bad Wall Street prediction or one Board of Directors meeting away at any one time from your prediction.  Our financials are in their hands. 

Even with those concerns, guess what bet this guy is making.  He’s an aggressive buyer/consolidator who calls me once a month to remind me he’s in the market to purchase.  He’s betting on the milk to keep flowing even with his very valid concerns.  Like most things in life… you play the game, you take your chances.  Predicting the past is pretty easy… the future?  Not so much. 

As a side note, if there are any ABI folks looking to get out anywhere in the country; please give me a call so I can get this guy off my back.  Sorry John ;-)   And my buddy Steve Cook continues to remind me there is no shortage of qualified buyers; the trick is getting the right match-up.

 

 

Tough love from the otherside

Let me tell you about the most amazing experience I recently had.  Now as regular readers of this site know, I am a rather hard-headed, cynical son-of-a gun – or at least some type of son ;-)  I don’t go in for mystical mumbo jumbo… I leave that to those blouse-wearing poodle walkers (a useful quote from good ol’ Willy on the Simpsons, aaacch!). 

But to my amazement I had a profound spiritual experience… a channeling experience.  Have you ever heard of channeling?  It’s where a spirit passes information to a channeler (that was me).  And this spirit (I believe it was the ghost of senior brewery personnel… he went by Mr. Spirit, or Mr. S to his friends) strongly desired that I pass along these words of wisdom to beer wholesalers near and far.  I guess he was cruising the nether-world and noticed my piece on the slaughterhouse fable, found here, and decided to make contact.  Who am I to argue with a spirit?!

First, Mr. S wanted me to let you know that over the years the brewers have done an excellent job of getting wholesalers to think like brewers.  That’s great for them, not so much for us.  He recommended you rid yourself of this thinking.  The economics of distribution and the economics of brewing are very different and you need to ensure you are fighting for the right side. 

He thought it was great that we view our suppliers as our partners (as we should) but we also need to be grown up enough about this to understand that when it comes to nut-cutting time (yes a crude analogy but one which might come very close to capturing the reality we face), we are likely on our own… with our only true partners being our fellow distributors.  Their body parts are on the line just like ours.  Don’t blame me that Mr. S is an earthy sort of fellow!

I like to present myself as the black hearted mercenary management consultant, but in all truthfulness I’m probably not as bad as I pretend… but some may disagree.  But I do have the ability to pull back from my current position and to directly and accurately view things from the other person’s perspective.  To be honest – and my usual humble self ;-)  that is one of the reasons I am so effective at helping to drive change throughout organizations and in negotiating either side of a deal.  My empathy quotient is quite high.  I don’t just intellectually understand the other positions, I emotionally understand them too.  Perhaps that is why Mr. S decided to use me as a vessel to speak directly to beer distributors. 

 And that’s also why I am so loud and adamant in my counsel to beer distributors.  You might end up walking up the slaughterhouse chute much sooner than you think.  I can put myself in ABI’s or MillerCoor’s position… or in this case the channeled Mr. S will do so for us all…  But please don’t shoot the messenger... or in this case the channeler ;-)  The truth might hurt but it is better to at least know of the possibility than to be happily blind.  Quit reading this now if you don’t want some tough love from your spiritual guide… this is what Mr. S told me on the night of yore…

First, most brewery personnel think distributors make far more money than the value they bring.  Few would shed many tears if they could take a fair amount of money out of your pockets.  They might not tell you this but I will. 

Most of you have no idea how difficult it is to climb the corporate ladder.  LOTS of competition from a lot of qualified and driven people.  It is not easy to move up in the organization – a lot more people wanting to be promoted than there are positions… and now the competition for the senior positions is international in scope!  It sure isn’t getting any easier.  Long hours, too much travel, too much politics and almost certainly at least a couple relocations (the spouse and kids just LOVE that)… often for a good paycheck, but not a great paycheck.  And with the consolidation of the past 30 years, little to no job security regardless of the job you do.  That’s the life of the people who sit across from you.  You don’t necessarily need to feel any compassion or pity but you should understand where they are coming from.

And all public companies dance to the tune of stock price.  Although in the past the stock market allowed the 3^rd (and even the 4^th) to run AB like their own little fiefdom, a fact which still amazes Mr. S, those days are long gone.  The major suppliers now think like bankers or financiers… and unfortunately they also act like them.  A useful insight is to think of ABI as investment bankers who happen to own breweries… MillerCoors is right behind them.  This is neither good nor bad, it simply is.  And as public companies they have an obligation to do what is in the best interests of their stockholders.  If this includes taking money out of your pocket or dismantling the present distribution system then so be it.  Read that again… if they think that is in their organization’s best short- and long-term interest, then they have an obligation to make that move.  Beer wholesalers have an obligation to ensure this is never the situation. 

And don’t think the smaller craft folks are any different… although they like to think they’re the prettiest girl at the dance.  Many of them have problems with the 3-tier system to begin with.  They have their goals which may or may not coincide with yours.  The vast majority of them are “newbies” as far as beer distribution is concerned and they have no emotional or intellectual commitment to a vibrant 3-tier system... I don’t care what they say in public in front of a room full of beer distributors.  What the heck do you expect them to say?!  Right now they need you… tomorrow?  Who knows.

Both big and small brewers look at the average wholesaler (who they consider themselves to be much smarter than and work harder than) and say… “lucky SOB”… “members of the lucky sperm or egg club”.  Mr S. emphasizes that he doesn’t really care if you agree with this; this is many of their mindsets.  Remember this is tough love folks.

Next Mr. S really went on a rip… So you’re at a 25% to 30% margin… want to know how many other types of distribution industries make these types of margins?  Very freaking few.   Or to look at it another way… so you’re making $1.20 EBITDA per case … why should I as a supplier “allow” you to make this?  What if I took half of this and you made $0.60?  What would you do?  What could you do?  Sure you’d squeal and be unhappy but so what?  Your unhappiness might impact the marketplace short-term, something I don’t desire but it might simply be the way it is.  You could threaten to sell but there are plenty of buyers out there… “there’s the door.”

You could threaten to expand your list of suppliers… you’re doing that now.  In fact I have to listen to you talk about how I “only” keep your doors open, your profit comes from the small guys.  I ONLY keep your doors open?!  Look at that from another perspective… you ONLY exist because of my products.  Try to be a full-service distributor without me… yet I have to listen to how someone whose gross profit dollar contribution is a tiny fraction of mine is where your profit comes from.  Please!  Try servicing your retailers at any acceptable frequency on what they sell.  Try keeping fresh draught product out there with their volume alone.  Don’t talk too loudly about me ONLY keeping your doors open.

You could test the market for other beverages… you’re doing that now.  You could threaten to significantly reduce service… this leads to bad outcomes – read your equity agreement one more time; you’ve made commitments which I can enforce (and those little guys free-ride on)… and remember you’re still making $0.60 per case so pleading poverty won’t cut it.  I’ll take that in front of a jury anytime you want.  If you’re a 4 million case operation you’re still pocketing almost $2.5 million each and every year.  Every person on the jury would GLADLY trade places with you, as would all of your employees.  I’d shift as many costs as I could to your side… can you say sign machines?   It’s either cost shifting or margin reduction… perhaps both!

Sure we’re partners but we think the financial return on activities and actual skills brought to the table are skewed too far in your direction and we’re going to do something about.  And consolidation synergies?  Those will be split… and not to a degree you’re going to like.  All those wishing to sell please form a line… that’s OK with us.  Don’t like this tough love?  Tough.  Tell me where I’m wrong.  I didn’t cross over from the other side to make you happy, I crossed over to help those great and wonderful beer distributors survive and prosper in a world of increasing change.  As the analyst Carlos Laboy stated, “wake up and smell the coffee”… or you may be walking into the slaughterhouse much sooner than you ever thought possible.

 

And in a flash Mr. S left me for the spiritual otherworld.  Although I don’t agree with everything Mr. S stated, he does make some interesting points… and they are difficult to argue with.  Of course since he’s just hanging around in the nether-world he’s got a lot of free time on his hands.

 

Again I repeat… 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.

 

 

 

Plan B - Mergers and Territory Swaps

I have written that you should grab the future by the throat and make certain the future which comes is the future you desire.  I profoundly believe this but just because we can each work to shape our destinies doesn’t mean we get to select our own realities.  Facts are pesky little things which no amount of wishing will alter.  Or to put it another way… you’ve got to play the cards you were dealt. The bigger question is what strategic plan fits you?

 Strategic Plan A: Mergers & JVs.

With this in mind let’s talk a little about mergers and joint ventures.  Are they for everyone?  Of course not.  Are they easy to accomplish?  Not remotely.  Will anyone get 100% of what they desire?  Guaranteed not.  Let’s start with that last point.  In the VAST majority of situations, those considering a merger or joint venture are doing so because their first choice is not available.  Generally the first choice is to purchase the other guy and be done with it.  But if that isn’t an option, mergers and joint ventures can be a solid second choice and does keep everyone’s skin in the game they love. The trick is to learn how to play your new position successfully.

On the financial side they are tax-free (that’s always a plus) and don’t create piles and piles of long-term debt.  On the strategic side they make all parties stronger and more viable over the long haul… or worth more on a future exit.  On the operational side there are always synergies… sometimes huge, as in vertical integrations… sometimes smaller, as in horizontal integrations.  They are complete win-win scenarios except for one area… your family business no longer is a family business.  It is now a corporate entity.  This may or may not be a big deal… but remember, we started this by accepting the fact that this is the second choice since the first choice is not an option.  Those pesky little facts again ;-) 

But this is a profound change.  Mergers are an intimate act, and I mean that in all of its depths.  And you should think of them as a one-way street.  Once done, they are almost impossible to un-do.  It’s much easier getting a divorce than getting out of a merger.  Can we address this rapid evolution from a family business to a corporate entity?  Sure, I do that all the time… but it is still a profound change which requires flexibility from all involved.

And since it seems that a lot of beer wholesalers out there have decided they aren’t going to run for the exits, mergers and joint ventures are something which demand at least a modest examination.  One select group who should consider them in much more detail are those unconsolidated Miller and Coors distributors.  You can fight MillerCoors all you want but sooner or later something will be done with these markets… and mergers allow a win-win scenario which I don’t believe is likely in any of the other scenarios.

Strategic Plan B: Brand Consolidation - Territory Swaps

But of course not all folks are meant for an act as intimate as a merger.  What to do if you look at the other side and simply decide there is no way I want to be in business with them?  There is another Plan B – a territory swap which provides a win-win solution for suppliers, and wholesalers alike by consolidating all brands within a beverage category… not what everyone wants, remember those pesky facts, but still a win-win considering the cards on the table.  In a Miller and Coors territory swap one side trades their Miller (or Coors) territory for the other sides Coors (or Miller) territory… thus each side ends up as a consolidated MillerCoors distributor.

Let’s look at the positives of a territory swap:

1. Like the merger they can be structured to be tax-free.
2. There is minimal financial stress associated with consolidating brands. They can generally be designed to be gross profit dollar neutral – thus neither side gains or losses any gross profit.
3. Operating efficiencies for both wholesalers improve since drop sizes (gross profit and cases per stop) go up.
4. Territory footprints becomes smaller, thus increasing delivery efficiency and lowering fuel and variable service costs
5. Your main supplier gets off your back and you can return to arguing about important stuff ;-)
6. Lastly, each wholesaler gets a opportunity to improve their competitive advantage by gaining market share at retail and leveraging their resources against a smaller customer base

Add these all up and what do you get?  A financially stronger and more competitive distributor positioned for the future.

Yes there might be issues with territories not aligning perfectly and perhaps your warehouse ends up not in the ideal location… but comparing those possible problems to the upsides… sure seems like a solid Plan B to me.

For a modest investment Steve Cook and I can work with you to identify the right opportunities and discuss your workable options.  We are well versed in the business issues, the financial affects on owner’s equity, the company’s operating needs and how proposed changes could impact your current organizational design and staffing.  Or one side can hire us and the other side hire another advisor… but I believe “dueling advisors” in most situations only increase the cost and problems and decrease the odds of actually getting to a win-win for both parties.  But that’s my bias ;-)

Anyhow, whether unconsolidated MillerCoors distributors or just a couple (or more) distributors who want to take steps now to ensure their survival and viability tomorrow, mergers or territory swaps are worth at least a little consideration.  Perhaps not a Plan A… but in some situations Plan A simply isn’t an option… but a solid Plan B for many out there… a way to play the cards you’ve got for a winning hand for all.