Conlin Beverage Consulting, Inc.

Random Thoughts on Craft Brewing

Craft beer… the prettiest girl at the dance.  Harry, Benj, Modern Brewery Age, Beverage World, Beverage Industry and everyone else and his dog have written extensively about where it is and where it is going.  As usual, let me help clarify why. ;-)

First we need to understand that words are abstractions, they don’t necessarily exist in the real world.  Thus the craft beer industry doesn’t really exist.  Craft brewers yes… an “industry” not so much.  So all this concern about where the industry is going is somewhat off the mark.

Each and every one of these craft brewers will do what they perceive is in their self-interest.  That’s exactly what they should do.  So for example when folks are wringing their hands over the explosion of craft brewing capacity they are talking about something over which no one has any control.

As a mental exercise, let’s take a stroll and see what the Tragedy of the Commons can teach us.  Haven’t heard of that phrase before?  It comes from an article titled "The Tragedy of the Commons" by ecologist Garrett Hardin. 

Hardin used an example involving medieval land use in Europe.  The Commons was a “public” area where herder’s could graze their livestock.  Since it was “owned” by all, no individual or group existed to look out for the best interests of the Commons.  Thus it was in each herder's individual interest to let as many of their livestock as possible graze there.

Of course this will ensure the Commons is sooner or later overgrazed and damaged for all.  But for the individual herders, for at least a while they receive all of the benefits from the additional livestock grazing, while the damage to the Commons is shared by the entire group.  If all herders make this individually rational economic decision, the Commons will be depleted or even destroyed, to the detriment of all.

Now the craft beer business is not a limited resource like the Commons but the realities they face are similar in many ways.  One can look at the landscape of craft brewers and see a very likely train-wreck regarding over-capacity.  But who is going to pull back their expansion plans for the good of the “industry”?  I can answer that… no one.

Much has been written about the issue of old craft beer and the damage it might do to the “industry”.  Guess what, folks have discovered the wonders of pipe-line fill.  It can make a business look incredibly successful (for at least a while), whether this is reality or not.  All those warehouses and all that retail space adds up to quite a bit of beer… this is something the big boys discovered long ago.  And if the beer gets old?... perhaps that’s not a worry of an individual craft brewer.  And the damage it does to the “industry”… what “industry” is that? ;-)

KNOW WHO YOU ARE

Long ago in my MBA finance class we had a case study on a quickly expanding grocery/mass merchandise chain, a hypermarket.   The case study was to analyze the financial-driven growth of this company… and the solution/discovery was that their growth was the only thing funding their operations… and once the growth slowed or ended, the company was not financially sustainable and would fail.   Obviously rapid growth sooner or later hits a wall and down the company fell.

So my prediction on the craft capacity front is that a number of things will most likely happen to individual craft brewers…

·         Some will hit the wall at high speed and meet an unfortunate end....fail to plan then plan to fail.

·         Some will hit the wall at slow speed and will survive the experience if they get some well needed strategic and tactical help.

·         Some will power through the whole episode and come out stronger and more profitable – these will be considered the smartest guys in the room – but remember as I’ve noted before, nothing wrong with a little luck to go along with their skill.  However, if you can only have one, give me luck any day!

·         Some might be able to cash out before the wall and possibly laugh all the way to the bank if they have value and brand equity.

And of course too many trade publication view things from a static perspective, but the tsunami is inevitable.  Keeping up with change and paradigms shifts are critical… so the entire issue of what is a craft brewer is an ever changing one.  Consumers don’t care if this or that company fits into this or that category.  That’s not the way they think – and why should they?

Most importantly, one has to contend with a wide range of strategic and tactical options. Perhaps Company A wants to some day become the biggest brewer in the land. Perhaps Company B wants to ramp up as quickly as is possible (can you say fill that pipe-line) and get out while the getting’s good.  Either choice is acceptable (as are hundreds in between) but your success is more likely when you know the exact path you hope to travel.  Not that there won’t be surprises and adjustments as you walk that path, you just have to have the knowledge and flexibility to deal these too.

All you craft brewers out there… need some business development support?  We can link where you want to go with how you will get there!  Steve and I are now working with craft brewers to explore their options based on their unique situations.  Give us a call and let’s talk about diving a little deeper.

ABOUT RETAILING

Perhaps one perceives themselves as a brewer, not a retailer.  The next sees the craft beer-thing simply as the draw to fill their on-premise establishment (kind of like the strippers at a “gentleman’s club”).  Note this doesn’t imply the retail-vision will produce lower quality craft beers, just that their strategic vision is different than those with a desire to be a brewer first and foremost. 

And it can be quite a retail draw.  A retail-focused craft brewer just opened up in my neck-of-the-woods and their business is incredible.  They are only open limited days and times… but every time they are open, they seem to be packed.  Anyone in this business knows that you can make a heck of a lot of money in a short period of time with a hot on-premise establishment. 

In fact in many places in the country a push-back is starting from regular on-premise accounts from what they consider the unfair advantage the craft brewers enjoy via their tap rooms.  The craft brewers (being the prettiest girl at the dance) often get special treatment for their tap rooms… most to their advantage.  And of course since they make everything they sell, their retail profitability is dang high!

How long will it last?  How high will it go?  Heck if I know.  But there is no indication it is slowing nor do I think things will ever go back to “normal”.  This is a permanent change in the landscape.  Lots of moving pieces and I’d guess there will be surprising winners and losers.

Some pricing changes are already occurring… in several places in the country major craft brewers are priced at parity with Bud/MC 6 pack bottles.  Perhaps those $12 four-packs are going to find some pricing pressure?  And of course volumes remain soft for the big boys (and quite a few others)… everyone is asking themselves if this will be the summer when serious price competition fires up. 

What’s going to happen to those high prices and sweet margins the craft brewers (and their distributors) presently enjoy?  From a distributor perspective, in MANY situations, those craft beer gross profit dollars are what is keeping you healthy.  You might want to take an objective look at your business exposure.  Our valuation services do just that and much more.

Just some things to think about as we go about our Commons and our everyday business.

Coca-Cola rethinking their US distribution plan

There was an interesting article in the 4/17/13 edition of the Wall Street Journal.  If you subscribe, you can find the article here.  The headline was “New Coke: Bottlers Are Back”

 Basically the article was about Coca-Cola’s recent change in direction where it is now gradually getting out of the distribution business, again.  Some quotes from the article explain this: (underlining and highlights are mine)

 “Coca-Cola Co. likes to have its cake and eat it too.

 That is why it sold its bottlers and then bought them back again. That is why it is now going back to the franchise model for distribution.

 In a deal that would allow it to keep vast amounts of control over its business, Coke said it reached an agreement in principle to expand territorial distribution rights to five independent bottling partners. That would reduce Coke's direct control over its U.S. distribution only to about 75% from 80% currently. The company said more such deals are on the way as it backs out of the delivery business.   

 "You need to walk before you run,'' said Muhtar Kent, Coke's chief executive, in an interview, of the step-by-step approach.

 In 2010, Coca-Cola Co. paid $12.3 billion to buy its biggest U.S. bottler in order to secure control of most production and distribution in its home market. Now, this latest approach will allow it to keep production of popular brands including Sprite, Powerade, Minute Maid and Coke in-house but gradually parcel out distribution once again.

 The move is a delicate balancing act by Coke, which is trying to keep a tight grip on how its drinks are made and sold while shedding the capital-intensive business of maintaining delivery trucks, routes and warehouses. Coke also is seeking to boost sagging profit margins in the U.S., where soda consumption has fallen eight straight years.

 Coke's share price surged 5.7% Tuesday to close at $42.37 on the New York Stock Exchange as Wall Street applauded the model even as the company reported a decline in first-quarter profit and revenue.

 The Atlanta-based company's move could prompt PepsiCo Inc., PEP +4.13% its main beverage rival, to speed up its own review of its operations. PepsiCo paid $7.8 billion in 2010 to acquire two large independent bottlers, also giving it direct control of most of its U.S. beverage manufacturing and distribution.

 Coke currently has about 70 small bottling partners manufacturing and delivering about 20% of its drinks in the U.S. Tuesday's announced deal would increase the scale of five of them…

 But unlike past distribution deals, some of which stretch back generations, Coke isn't giving the bottlers perpetual rights to the new territories. Instead, bottlers would be given 10-year licenses for any new real estate, which then need to be renewed. The initial deals with the five bottlers aren't expected to close until 2014.

 Mr. Kent said a lot has changed since Coke began striking U.S. distribution deals for its famous cola roughly a century ago. At the time, territories were determined by how far horse-driven carriages could travel in a single day. The new distribution deals are "moving us into the 21st century,'' he added.

 Selling off distribution rights could earn Coke a lot of cash. Consumer Edge Research estimates that the 80% share of U.S. distribution rights currently owned outright by Coke to be worth around $9.5 billion.

 Coke isn't ready to surrender control over manufacturing, though, planning instead to further integrate bottling operations around the country. Manufacturing of Coke products currently is spread over hundreds of facilities.

 Mr. Swartzberg said he wouldn't be surprised if Coke eventually also sells majority stakes in the manufacturing part of the business a few years down the road.”

 My first reaction is to notice that same old big business trend… new management has to do “new” things.  Team X comes in and decides outsourcing is the key… after they leave Team Y comes in and decides insourcing is obviously the right call.  Can’t just stand there, you’ve got to do something!

But this change is pretty big news.  Coke has found (and it seems Pepsi might be following) that the distribution end of their business is better done by others.  I completely understand their desire to control the production (it is after all THEIR product) but they have found the “capital-intensive business of maintaining delivery trucks, routes, and distribution” is perhaps not their strongest suit.

Soft drinks are like beer, they require a lot of feet on the street and a smaller, more local private company driving this effort seems to be a superior choice.  I hope some of those craft brewers think about this… are they craft brewers or are they distribution companies who happen to brew beer?  Strategically these are WAY different beasts.  Et tu Brito?

In fact in other parts of the world, Coke has already divested itself of both distribution AND manufacturing… they let other specialists take care of that.  They want to retain control and make money.  Pretty simple.

Also interesting that these franchises aren’t perpetual but rather with a fixed time frame.  Coke wants to ensure IT ultimately controls them, regardless of who actually owns the thing.  Again, I understand their desires.  Might we see something like this taking hold in the beer business?  I’d be surprised if we didn’t.

Of course there are many differences between soft drinks and beer but as many organizations have found, specialization often leads to better performance.  Let the local guys deal with the warehousing, delivery, and merchandising needs (by definition these are local activities, they must be) while the big dogs focus on getting a great product produced and marketed.  Then pass the ball to the local guy and let them take it to the street.

Sure makes sense to me… and obviously to Coke and Pepsi too.

UPDATING YOUR VALUATION PROPOSITION

By Stephen Cook, CMC

Great Lakes Consulting Associates, LLC

www.BeverageGuru.com

The nature of consumer goods and the dynamics of the supply-chain continue to tax our abilities to effectively manage and concisely communicate. For the beverage industry consultant, using numerics to identify opportunities by developing illustrations is a must have for our “chief” kit. How better way to get your point across then by “painting with numbers.” Don’t believe it? Consider this.

A long time ago while at home in NYC, I was watching John Gnagy, America’s pioneering television art instructor.  I remember thinking how creative and impactful Gnagy’s visualization process and comments were. His audio-visual process was incredibly effective in translating his vision into a reality that was easily understood by viewers. Just how good was it? He was chosen as the first performer, on the first show on the day the TV broadcast antenna was completed atop the Empire State Building in NYC.  This self-taught “blacksmith” of art went on to become one of the country’s greatest audio-visual educators by teaching drawing art, yes drawing and art, to millions of viewers. Gnagy’s success focused on breaking down the drawing process into fundamental elements and developing a quick, easy and proven method to learn through visualization and communication.

Our valuation methods and process are very similar to Gnagy’s approach. The process addresses the fundamentals, namely, the business components that drive cash flow and the overall value of the enterprise. We keep it simple yet effective and compare our clients operating financials to a pro-forma template that is organized, easily understood and presents a clear of picture of the business. Just like Gnagy our “painting with numbers” methods are proven and provide high value by visually translating and clearly communicating the current and longer-term financial realities of your business based on size, region, product mix and financial performance.

As the pressures of consolidation continue to diminish (estimate over 80% domestic volume consolidated), we are finding more clients interested in a less formal valuation process and an updated financial review. Our high value-added strategic planning approach to company valuation aligns well with the ever-changing market needs for many of our wholesaler clients by identifying areas of financial strength and weakness; providing a clear picture of what the business looks like; and ensures our clients are focusing on the right priorities and business drivers which convert into increased value of the enterprise.

A valuation process of this nature is about more than just providing “a number”. It is about enhancing your planning process by providing expert insights into sales and operational areas of improvement throughout the company. Deliverables include financial-based analyses of your entire company AND an industry performance comparison AND projections of sales revenues and operating expenses based on current activities and trends.  This is a battle-tested executive management tool which could be a vital part of your strategic planning session.  

The Proposition, from both a strategic and tactical standpoint to wholesalers:

Can you afford NOT having an updated valuation profiling of the enterprise and NOT use the results in your planning process? KNOWING MORE, ABOUT YOUR COMPANY, THAN POTENTIAL BUYERS, SUPPLIERS, COMPETITORS OR CUSTOMERS IS JUST GOOD BUSINESS PRACTICE!

Give us a call if you would like to discuss further. Looking forward to everyone having a great and prosperous year.

 

 

Operational Realities of the Explosion of Brands and Packages

Had quite a few responses to the last post on brand and line-extensions.   So I thought I’d talk a little more about this explosion of brands and the operational realities this creates. The constant evolution of the beverage scene will continue to put stress on strategic planning and proper resource allocation.  There is no room for complacency.  The game is from here on out.

AN ENVIRONMENT OF CONSTANT CHANGE

I admit I’m getting old but I well remember driver-sell days.  Can you imagine trying to sell today’s product line via driver-sell?!  I would pity the poor driver who had to try to come up with that day’s load.  Yikes indeed.

We live in a world with an explosion of suppliers and brands and packages.   

• Suppliers come and go (expect this to pick up pace as a normal process of shake-out sooner or later occurs in the craft world).
• Brands come and go.  And not just from smaller folks. 
• Being the “Bud guy” no longer insulates you from these market-driven realities.
• Seasonals – everybody’s favorite ;-) make things even more interesting. 
• Packages come and go and come back again. 
• Lastly, the battle for space is never ending, and I have yet to find a box-stretcher that can magically accommodate everyone’s desires.
• Bottom-line… performance from every area of an organization is becoming increasingly important and increasingly more difficult.

As some of my responses noted, this is simply the new normal so you might as well get over it and get out there and sell.  Never forget the advice from that old guy (104 years old) “Was ain’t is”. 

THE NEED FOR ORGANIZATIONAL FLEXIBILITY & PLANNING

Many companies have responded to these changes by adding a few of these over here… and modifying some of those over there.  Over time, these individual responses to a rapidly changing market often become inefficient and less effective than desired.

Why?  Well, remember your company is an integrated complex system.  It is a living, breathing organism whose performance is directly affected by the relationship and ability of the parts to communicate and work to a common goal.  It is not the sum of a bunch of different parts.  The better all aspects of the system work together, the better the system will perform.  Having parts which are not in harmony is not only inefficient; it can be very frustrating too.  Think of an engine whose timing if off, the system will not perform well no matter how hard one tries.  And it will most likely take even more effort (and $$) to obtain this sub-par performance.  A Lose-Lose situation.

These market-based organizational modifications are well and good if part of a larger strategic and tactical planning process.  Otherwise it can cause a lot of organizational stress.  Occasionally, one needs to step back from this and with the management team look at the company completely anew… the roads are where the roads are.  The bridges are where the bridges are.  The retailers are where the retailers are.  Other than that, everything can be changed.

The answers to these questions should drive the planning process: Who are you?   Who do you want to be?  What market realities do you confront?  What are your organizational strengths and weaknesses?  What threats and opportunities present themselves?  What are your options?  Where is the company going?  Is that where you want to go?  How will you get there? 

A HIGH RETURN ON YOUR INVESTMENT

Now I’m biased in this but I firmly believe my or Steve’s presence in this process greatly helps ensure a better, more effective and efficient solution.  You and your management team know each other very well.   Sometimes that’s good but sometimes it is a hindrance to creativity.  You all are well aware of the other’s thoughts, biases, and BS.  Often important issues aren’t even discussed since everyone already knows everyone else’s opinion.  Necessary and vital discussions don’t occur since they lead to the same dead-end… why go there for an unproductive exercise in frustration? 

Perhaps you need someone with new BS ;-)  That’s me.

Although you and your management team are the experts in your specific marketplace (and if you aren’t there is little I can do to help you), Steve or I perform a critical leadership role in the strategic planning process while providing the organizational design expertise (based on hundreds of wholesaler and supplier engagements) to meet your ever-changing needs.  Together we create a better, stronger team.  I’m the agitator who changes the dynamics of this mental process.  And when we’re done, I leave as does my cost.

I firmly believe there is tremendous value (and team building) in the planning process.  Most management teams learn to love me right away.  I’m about identifying problems and SOLVING them.  In addition, I generally can give the boss more grief than they can comfortably do ;-)  

My attitude is you are paying me for my advice and insights; therefore I am obligated to provide them.  This type of true unbounded communication rarely occurs without the presence of an outside agent of change.

As an additional benefit, I help owners better understand their team and I help managers become better at the art of management.  This last point is not a minor one.  Your managers and supervisors are the tactical players who guide the battle… the better they are at managing, the better your performance on the street and on the income statement.

Not to brag ;-) but your entire organization will be better because of this process.

The best time to do things is the present. Take good and make it better.  Take great and drive it to a higher level.  But don’t wait for pain to force this mindset.  Instead embrace it as a positive and rewarding constant. Let us work with you, your management and staff to design and implement a continuous improvement process.

Take a week or two and re-imagine your company with our assistance.  You won’t regret it… but then again, I’m biased. ;-)

Give me a call or email if you would like to discuss this opportunity. 

Line extensions and Krusty the Clown

When I speak to state associations I often stray off into the weeds and find the Simpson’s cartoon character, Krusty the Clown.  Krusty is a shameless shill who will put his name on any product… and I mean ANY product.  All of them being of rather dubious quality. 

A tale of two strategies

I use this amusing – hopefully ;-) illustration to make the point on the difference in strategy between MillerCoors and ABI as they roll out new products.  MillerCoors has historically been hesitant to do line extensions, especially on major brands.  ABI has no such qualms.  First a disclaimer… I use Krusty as a humorous example, not a reflection of quality.  ABI and MillerCoors produce GREAT products of the highest quality.  They all may not be your cup of tea, but the quality is always world-class.

But whose strategy is “better”?  That is easy… the one that works the best.  Although Brito never did seek my advice prior to the acquisition – his loss ;-) I’ve always thought they saw more value in the brand names than did others (both for the US and world-wide markets).  Yes of course they saw a shockingly corpulent cash cow but I think they also felt the value of the brand names was not completely reflected in the stock price.  My gosh, it wasn’t that long ago that one in four beers consumed in this country was a single brand, Budweiser.  THAT is a mega-brand.  And this fact was reflected throughout the marketplace.  How many distributors are named “Budweiser Distributing" or "Bud of …” rather than “Anheuser Busch Distributing”? 

Therefore that they have proceeded with a line-extension strategy (ala Krusty) is not really too surprising.  In the past many producers have been wary of line-extensions (especially for major, important brands) and feared the potential risk of losing total market share based on several factors including:

1. The line extension would dilute and weaken the overall brand.
2. Failure of the line extension would damage the overall image of the brand in the customer’s eye.
3. The cannibalization of other brands in the portfolio.

In the past these may have been true (and of course anything taken to excess will have negative repercussions) but I think they are less true today. 

Today’s beverage consumer is used to (expects?) a lot of brands.  And these brands often come and go.  The negative impact of a “failed” brand extension is more often than not, simply not noticed by the vast majority of consumers.  And let us not forget the long and twisted path that got us to Bud Light (and others).

So I think the downside of well-executed brand-extensions is much less than many think.  It seems to me as if ABI is building the Bud Light brand into a mega-brand name under which various other products are grouped.  Obviously you have the various beer line-extensions but you also have Bud Light Lime-a-Rita, Bud Light Lime Straw-Ber-Rita.  Some might ask what does a ready to drink margarita-in-a-can have to do with Bud Light… but this is an extension of Bud Light Lime.

They are doing the same with the brand Budweiser but for now are keeping the extensions down the beer lane.  I’d have to guess this might also change.  These names give instant recognition to these brands.  At some point do these extensions begin to take a toll on the strength of the brand name?  Perhaps.  But if enough are hits, I think they will over-shadow the losers… and as noted above, today’s consumer doesn’t seem to really care about (or keep track of) of disappearing brands.

In addition, I believe another factor in the ABI brand strategy is control of “their” distribution network.  There is only so much time in the sales day (and only so much room in the warehouse) so these brands have the added benefit of forcing these wholesalers to spend limited time focusing on ABI brands rather than chasing the next hot craft beer.  Brito and the guys are pretty good at strategy and this must be one aspect of it.  I sure haven’t seen any ABI distributors dumping brands to grab that golden ring of Anchor Wholesaler.  So this achieves the same distributor network goal…control; whether the distributors want to play along or not.

Now MillerCoors has been much more careful with their brand names.  Sure they do things with Genuine Draft… but let’s get real.  That’s not much of a risk for them.  For them the big dogs would be Coors Light and Miller Lite.  They (or Miller) have put the Miller name on various products (and might be planning to do it again soon) but the Miller brand name is not remotely the Budweiser brand name.  Or at least that’s my read of the marketplace.

MillerCoors is rather attempting to build completely new brand identities based on differentiation within the portfolio.  In some ways this makes sense especially when we are seeing an explosion of new craft - and crafty ;-) brands.  People are trying new things… looking for new tastes, new emotional bonds… so customer trials should be pretty high.  And perhaps those hapless consumers will be fans of the product before they discover it is really brewed by MillerCoors.  And of course once a few of these brands are successful, they provide new avenues for THEIR own line extensions.  Over the course of a decade or so, this “multiplier affect” could prove to be substantial.  So one could go with a new brand building strategy and then roll into a line/brand extension strategy to capitalize on these successes – assuming there are any successes ;-)

And of course there is that old saying, “don’t put all your eggs in one basket”, so there is perhaps some strategic protection from these multiple new brand platforms. 

But ultimately I think the different strategies reflect the different realties ABI and MillerCoors face.  The strength, breadth and reach of their brand names are as diverse as their brand strategies.  Their power (and space) at retail is simply not the same.  Just think of the strategic impact of space at retail.  In many high market share markets, one could argue ABI has too much space for various brands.  These line extensions allow them to keep this space/handles (and from their perspective, hopefully grab more) rather than allowing the competition to make the argument to cut their space.  MillerCoors on the other hand generally losses the space battle (this is the definition of a zero-sum game).  So if they do a line extension, is the retailer more likely to demand that they squeeze it into their present space?  Or if they come with a new brand, are they more likely to take some of that “extra” space from ABI?  There are a lot of moving parts in these analyses.

MillerCoors long ago accepted the wisdom (or is it the reality, whether they liked it or not?) that they are best served in a multi-brand distributor.  AB and then ABI have never accepted this (nor do I expect them to do so in the near future).

The importance of supplier/distributor alignment

The best strategy always is based on the realities one faces.  These two face different facts on the ground (and different goals via distribution) and thus their individual strategies for brands (and many other things) will by necessity be different.  Only time will tell which is the “best” strategy.  My guess is that both will be successful.  This isn’t an “either/or” situation.

Work hard my friends, stay the course....THE BEST STRATEGY WILL ULTIMATELY BE THE ONE THAT GAINS THE BEST ALIGNMENT OF THE THREE TIERS TO MEET CONSUMER NEEDS. Don’t forget who is driving the bus!

As a side note, I’ve heard from many ABI distributors that they do like some aspects of ABI’s brand creation.  In the past AB would study the hell out of some new product idea before they even considered taking it to market.  This created a lumbering process where new brand introductions were very slow (and costly).  Under Brito and company they do a quick study and if the results look good, they roll.  Saves money, gets the product out there for the consumers to decide, and keeps “their” distributors hopping on THEIR products.  Pretty good strategy indeed.

Would Krusty approve?  I think he would give it a hearty, “HEY HEY!”.

Drinking age sanity

I had planned to use this post to discuss the strategies and risks behind line-extensions... but the following was just published at National Review Online and it is a must read.  I couldn't agree more!

You can find the original link here,

http://www.nationalreview.com/articles/343680/cheers-drinking-reform-charles-c-w-cooke?pg=1

And here is the wisdom of Mr. Charles Cooke...

Cheers for Drinking Reform
It should be a libertarian’s dream issue.

By Charles C. W. Cooke

Alcohol occupies a peculiar position in the culture of the United States. Like so much else besides, it is subject to the ongoing brawl between puritanism and libertarianism, two philosophies that have long jockeyed for dominance here. Americans have made many contributions to the bar — including the perfection and popularization of the cocktail. But puritanism has survived, enjoying a rich history of its own. Benjamin Rush’s inquiries into alcoholism spawned a variety of anti-alcohol movements at the outset of the new republic; in the 1850s, “temperance” overlapped uncomfortably with the Know Nothing movement’s distaste for secular principles; and in the 1920s the 18th Amendment was passed, in part on the back of widespread mistrust of immigrants and the drinks they brought with them. The role of alcohol in society, remember, is the only such question ever to have been placed within the U.S. Constitution. Nowadays, the folly of Prohibition is widely known. But in practice it still obtains for some, as a deviant exception to the rule of adulthood.

In the United States, we treat 18-year-olds as full citizens. At this age, a man may vote and he may serve as a juror — or he may search for excuses as to why he should do neither. He may smoke cigarettes and fly an airplane. He may get married, or he may eschew that road in favor of pornography and promiscuity. He may enter into contracts, max out his credit cards, and run a business into the ground. He may join the military, putting his life in danger. In some jurisdictions, he may run for public office. Less welcome but no less real are the opportunities to be executed by the state for capital crimes and to sign up for the Selective Service. But what he may not do — in any of the fifty states — is walk to a bar and buy an alcoholic drink. This is nonsense — an aberration from the usual rules. What sense does it make to deprive an adult of just one feature of adulthood, and why are the arguments in favor of doing so taken seriously?

Lobbying the federal government in the 1980s, Mothers Against Drunk Driving claimed that there was a connection between young-adult drinkers and the worrying number of deaths caused by drunk driving. Their evidence is by no means indisputable. Traffic fatalities in the 1980s decreased considerably less after the drinking was raised than they did during the same period in Europe, where drinking is common at 18 and below; and, as the research of Harvard’s Jeffrey Miron shows, the “drinking age does not produce its main claimed benefit.” But, arguendo, let’s presume that MADD was correct. A bigger question would still remain: If practicality wins out in that arena, why is it alone? Why is William Pitt’s “Necessity” justifiable as the “plea for every infringement” in this domain but not in others?

Should we perhaps raise the marriage age or age of consent to 21? And if not, why not? After all, young people often think they are in love when they are not, and young lust can lead to inordinately bad decisions. (Just ask Romeo and Juliet.) Should we make home ownership illegal until one has 20 years and 12 months under one’s belt? Again: If not, why not? Perhaps our young people need a little time to rehearse in the marketplace before they make the biggest financial decisions of their lives? In fact, given that purchasing a house is top of almost all common stressors, one might classify being forced to navigate the mortgage market while sober as cruel and unusual punishment.

The answer to these questions is that there already exists a cutoff point beyond which your personal choices are deemed to be nobody else’s business. The rapper and producer Dr. Dre had, he said, “a house, a Mercedes, a Corvette and a million dollars in the bank before [he] could buy alcohol legally.” This inconsistency is grotesque. Are we to indulge an arrangement by which a father might say, “I’m really proud of you for joining the military, son. But don’t you dare have a drink”? In Personal Reminiscences, Robert E. Lee quotes Stonewall Jackson as having claimed to be “more afraid of alcohol than of all the bullets of the enemy.” That was certainly Jackson’s prerogative; alcohol, like so many things, can be terribly destructive. But recognition of this is neither basis for wise law nor sufficient reason to deprive young adults of their choices. Guns are destructive, too. Smoking is destructive. Paint thinner is destructive — I would buy a round for the first politician who defended the notion that the state should insist on age limits for the patrons of Home Depot.

 The 26th Amendment lowered the minimum voting age from 21 to 18 and, in doing so, corrected the untenable incongruity of 18-year olds’ being drafted into the military and sent to fight in the jungles of Vietnam but asked to wait three years before they might cast a ballot. In the wake of the change, with 18 set as the new yardstick, a majority of states saw fit to lower their drinking ages. Between 1970 and 1976, 30 did so. This logical trend was cut short by federal overreach. And what an overreach! Under the provisions of the Federal Underage Drinking Act, any state that holds out and allows its resident adults to enjoy a drink before they reach the age of 21 will be punished with a 10 percent decrease in its annual federal highway funds. This is no less than legalized bribery, one of many means by which the federal government circumvents the restrictions imposed on it by the Constitution and buys off the states. That since 1988 not a single state has told the feds to bugger off and mind their own business is a testament to the craven, upside-down nature of modern American federalism. (Also to the tyranny of self-interested majorities: Whatever demographic changes are visited on the United States in the years to come, we will likely not see an electorate that cares that much that people 18 to 20 years of age are deprived of the opportunity to go drinking

The law is an ass, and it is faithfully treated as such. Winston Churchill, who, having “taken more out of alcohol than alcohol [took] out of [him],” would no doubt have opposed the status quo on libationary grounds. But Churchill also wisely counseled against contriving a legal framework that undermines respect for the law. “If you have ten thousand regulations,” he enjoined, “you destroy all respect for the law.” Quite so. With the exception of the equally asinine laws against marijuana, it is difficult to think of another law that has become such an open joke among those at whom it is aimed. It’s not just the drinking bit: We introduce our citizens to the responsibilities of adulthood by encouraging them to get their hands on — and casually and routinely use — false identification documents. This in turn causes the purveyors of fake documents to proliferate and pushes them into the mainstream.

Drinking Reform has few public champions, which is a shame, because the issue presents those who habitually exalt limited government, individual liberty, and the rule of law with a golden opportunity to prove them congruous. Truth be told, it should be a libertarian’s dream issue. Why haven’t prominent figures picked it up? Benjamin Franklin said that beer was “proof that God loves us and wants us to be happy”; he also warned that the United States would remain a republic “if you can keep it.” Federalism’s advocates are missing an opportunity to demonstrate what happens to republican principles when the federal government gets too powerful. What better way than a call for the repeal of the Federal Underage Drinking Act to introduce to the young people of America both of Franklin’s principles at the same time?

— Charles C. W. Cooke is an editorial associate at National Review.

 

Another watered down rant?!

News flash… it have been scientifically proven that Conlin is NOT watering down his rants!  Whoever starts rumors such as this should be horse whipped, and I know just the horse to do it. 

 So let’s start with that class action lawsuit against ABI. 

 A classic: the cart before the horse

First, who was the judge who approved the class action status?  An attorney doesn’t make that decision… they can ask for it but a judge has to grant it… why on earth would a judge grant class action status to such a flimsy action?  Why not let the plaintiffs first provide the hard evidence that this nefarious “watering down” was actually occurring?  Why let the damage to ABI happen (and which they all know will happen) before, SHOCKINGLY finding that the claim doesn’t hold up to testing?

That is of course a rhetorical question… that a judge makes a stupid decision is like a “dog bites man” story.  Sadly very common.

But in the Sunday March 3^rd Denver Post, ABI felt they had to respond to this dubious charge with a full page ad touting all the water they have canned/bottled for disaster relief… with the tag line “they must have tested the wrong product”… above a picture of their canned water.  The ads ran in the Houston Chronicle and the New York Times among others too.  You can see the graphics and a short story here, http://blog.chron.com/beertx/2013/03/anheuser-busch-punches-back-with-ad-campaign

A couple things on this story… The Popular Science website ran a story titled, BeerSci: Is That Water In Your Pint Glass? Anheuser-Busch is being sued for watering down their beer, but there's a way to test for that.

Which you can find here, http://www.popsci.com/science/article/2013-03/beersci-water-your-pint-glass.   As they note, for $100 this claim could have been tested before a class-action lawsuit was started.

Searching for truth and objectivity

For those with an inquisitive mind I have a project… use any search engine and search for articles on this ABI watering down its beer story… use whatever words you think will work.  You can skip the articles (and there are MANY) but make certain you read the comments.  Read at least a few article’s comments… in a short period of time you can get a pretty good idea where the beer industry is today… and it ain’t pretty for any of the mega-brands.

If anyone thinks the craft beer craze is slowing or is only a short-term aberration, these pages and pages of comments will dissuade you of this foolishness.  If ABI and Molson Coors and SABMiller only got their revenues from the US market, one would be wise to short their stock.  You will be hard pressed to find ANY commenter supporting these companies or their brands.

Luckily, you all are distributors so continue what you are doing… offering incredible value to every craft brewer out there… and in realty, offering incredible value to every supplier you carry.  The future for the light mega-brands is going to be one of tough sledding.  And my gut says the odds of some young craft beer drinker switching to Bud Light or Miller Lite or Coors Light AT ANY TIME in their lives is incredibly small.  Just ain’t going to happen.  Not that these drinkers won’t necessarily drink products from the big suppliers (but many never will)… but that most will likely NEVER drink those products.  At least that’s my crystal ball.

Want to save some dollars and get better results in keeping track of this industry?

Did you know that by using the power of the modern search engine you can get free, broader, more objective perspectives than many (all?) subscription industry publications.  You can typically get better, more timely, unfiltered information delivered to your inbox as often as you desire.  In today’s world why let someone else determine what is news and what isn’t.

For reference, Google has what they call Google Alerts (and many of the search engines have a similar feature).  You enter in a key word or two and anytime that word/phrase is in a story you receive an alert with links to the stories.  I use a lot of alerts… ABI beer, MillerCoors beer, beer distributor, beer wholesaler, Anheuser Busch, Conlin Beverage Consulting, John Conlin, etc.

They all do a great job too… you only get the best results… you’re not inundated by a ton of stuff, just fairly targeted, very timely news on what interests you.  With some well-defined alerts, in 15 minutes of reading you can be on top of everything happening in this or any other industry.  And if you find you get a bunch of stuff that is not what you are looking for, simply fine-tune your searches.

In effect these search engines allow you to create your own personal, industry-specific newsletter.  You can go as deep or as wide as you desire.  All with very little effort.

In fact I found that link to the newspaper graphics via an alert… it was the first link in an alert for “Anheuser Busch beer”!  

If I were a distributor, in addition to the broader industry-related alerts, I’d probably have alerts for every brand and supplier I carry… in addition to my company name.  That way I will always know what is being written about them (and yourself).  You can perhaps spot trends before they become well-known.    In today’s connected world, why let anyone be a gatekeeper on information?  As you are well aware, the Internet is changing business models across the globe… it’s doing the same here.  If you desire, you can easily control the flow of information and manage it to your desires.  No one else needed. And you don’t have to be an Internet wizard to accomplish it.

And of course if you want opinion and rabid rants, you’ve got little ol’ me ;-)  Yesterday is yesterday… or to quote an old geezer from a story I did long ago, which you can find here, was ain’t is.  Don’t ever forget that.  Whether it’s subscribing to industry  publications or projecting brand trends or designing your company for the future… things change… change with them.

More on craft beer and the value of distributors

A few months ago I did a radio interview with a guy who does an Internet radio show and blog called Bite and Booze, http://www.biteandbooze.com (it’s about food and alcohol down in Louisiana).  His name is Jay Ducote.  So after 15 minutes of my incredible wisdom, this is what he created and put on YouTube… http://youtu.be/txcDK3XGb6c

 I think most of you will agree with this.  In fact it might be a useful link to send to legislatures who are thinking about writing craft beer carve outs to franchise laws.  15 minutes of genius cut down to one sound bite… such is life ;-)  But it IS a good sound bite.  Way to go Jay!

 Next post I’ll give my 2 cents worth on line extensions versus new brands… or as I note in speeches to state associations, a Krusty the Clown strategy versus a non-Krusty the Clown strategy… and it won’t be watered down either ;-)

 

 

 

 

Is Conlin Watering Down His Rants?

Where to begin?  I guess let’s start with the news of the day… some disgruntled ex-ABI employees have helped start a class-action lawsuit alleging that ABI waters down some of its beer.  You know about class-action lawsuits?  The Legal Dictionary subsection of the Free Dictionary notes (underlining and bold mine):

 Class action lawsuit - A lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group.

 Class action lawsuits have become a controversial topic in the 1990s. Once seen as a way of empowering individuals with small claims to have their day in court, class actions are viewed by many lawyers, legislators, and government officials as a vehicle for plaintiffs' lawyers to make millions of dollars on issues of dubious merit.

Critics of class actions remain unconvinced about the social and legal value of group lawsuits. In small claims class actions, critics question the value of supporting litigation in which individual class members have very small stakes. For example, does it make sense to permit a lawyer to initiate a class action where a utility company overcharged two million customers two cents per month? Such filings demonstrate to the critics the lawyer-driven nature of most small claims class actions. The individual claimants, because they have so little at stake, do not exercise any control over the litigation or elect to opt out of the class and pursue individual claims. With the plaintiffs' lawyer in total control, the dynamics of the lawsuit change. The lawyer has the largest economic stake in the outcome, leading to settlements that guarantee high attorney fees and minimal payouts to the class members.

Critics also dispute the value of the private attorney general role. Most class action attorneys, they contend, are seeking lucrative financial awards rather than social justice. Moreover, class actions may interfere with the regulatory and oversight functions of the appropriate government agency. The agency may conclude that the injuries attributed to the defendant are insignificant and do not warrant prosecution. A class action substitutes the judgment of the private attorney for that of the public's elected officials.

Bottom-line, in many class-action lawsuits the end result is the lead attorneys pocket tens of millions and the “injured” parties get a coupon for $1.50 off the next time they purchase the product.  As with far too much of our legal system, corporations weigh the costs of fighting the lawsuit (and that includes damage to image, negative PR, etc.) versus the cost of just writing a check to the instigating attorneys to make them go away. 

I have no idea of the merits of this lawsuit… although I think it highly unlikely ABI would bother with such a stupid move.  And this is from a major ABI-basher.  There are still folks around who remember a market-leader call Schlitz… and what happens when accountants start making product decisions.

But let us use other people’s pain for our own learning.  What is the source of this lawsuit?  Disgruntled employees.  Do you have any idea how many companies have been hung out to dry by disgruntled employees? 

This industry has changed a lot in the past few decades… what might have been ignored years back might be a major problem today.  If you are playing fast and loose with things… I’ll leave it to you to fill out the list… you are giving tremendous power to your employees. 

And like a lot of things in life, in the good times everybody gets along… but a laid off or terminated employee might get the crazy idea of revenge in their minds… and they might very well act on this goal of revenge.  And in today’s world of lawsuits and a media looking for “gotcha” stories, it is not all that difficult for a disgruntled employee to cause you some serious pain.  Especially if they truly know where the dirt is.

If you have ever been so foolish to fool around on a spouse, you know the power you give to your “cheat-mate.”  With YOUR actions, you hand tremendous power over to them.  Which in the good times might not matter… but when you decide to end the affair the other side might not be so magnanimous. One phone call and your life will change forever.  Trust me, many a person (generally guys) have cried in their beers over this one.  If someone thinks they have been screwed – so to speak ;-)  they will very likely seek revenge.

I know of an ex-beer distributor who terminated an employee.  This employee was none too happy about this course of events.  This same employee knew where many bodies were buried… in this case knowingly selling out-of-code product.  This employee took this information to a major supplier of this distributor.  This major supplier was just looking for a reason to get rid of this distributor and lo-and-behold, their wish called them up on the phone.  This person is no longer a beer distributor.

How many of your employees have knowledge that would cause you great pain if it became public.  Here’s a solution… stop the crap.  Those days are long gone.  If you aren’t absolutely pure as the driven snow, change.  EVERY employee who knows of this stuff is a time-bomb waiting to explode.  Perhaps they might get the idea that they could use a little extra assistance in their retirement fund.  Stranger things have happened.

Changing subjects… much has been recently written on the explosion of SKUs and what retailers, distributors, etc. should do about it.  First I think they are phrasing the question wrong.

At its core, this goes back to that age-old question on whether businesses follow demand or create demand.  If one believes business can create demand, then they have the power to control SKU expansion.  If one believes business follows demand, then retailers and distributors can do little to impact this… it exists and they are simply trying deal with this reality in the most efficient and profitable manner possible.  Until you answer this question, any discussion on SKU growth is somewhat meaningless.

In addition, are we talking about an explosion of SKUs (4 packs, 6 packs, 12 packs, 15 packs, 18 packs, 20 packs, 24 packs, 30 packs, 36 packs, and don’t forget the single serves – often in different bottle/can sizes and of the same brand)… or are we talking about an explosion of BRANDS and the associated increase in SKUs driven by this brand growth?

I’d guess reality is a little from A… and a little from B.  Sure suppliers try to push for SKU growth IF they can use this to gain incremental space at retail.  Walk down the toothpaste or laundry detergent aisles to discover this isn’t a new concept. 

As a side note, here is a great idea every distributor in the country should take.  Far too often beer-folks walk into retail and blindly go to the beer aisle.  There are millions of dollars of marketing being done in every chain grocery out there.  Literally take a field trip to your local chains and together with management and employees, walk down every aisle.  Observe and LEARN.  Make this a regular part of your market calls.  You’ll see opportunities for secondary displays but more importantly watch what others are doing.  Can you steal their good ideas and make them your own?  Remember, this isn’t 3^rd grade math class, copying good ideas is very much allowed.

But right now, the market for craft/new beers and products is incredible.  Trying to control and throttle this at the distribution level is probably not a great idea.  I don’t think it is in your power to control… so why try?

Instead look to manage (not change) the reality you confront.  Yes this might mean changes to your sales and merchandising forces, delivery fleet, most definitely your warehouse, and every other aspect of your business.  That’s where Steve Cook and I come into play.  We can provide a new set of eyes with years of experience to help you and your organization adapt to this new world.

 

TEACHING DOGS NEW TRICKS

In a lot of our recent organizational design AND operations work, we have found our client’s desires are spread across the entire spectrum of their operations.  So Steve and I have created an updated yet flexible consulting project approach for these demands… it’s pretty simple, we’ve added a “Chinese ala-carte menu” option.  We come in for anywhere from a couple days to a week or two and focus on whatever is causing you the most problems or the opportunities that have significant upside.  It’s all your call and it can evolve as we go.

As part of the process, we will provide objective, fact-based recommendations and high value-added solutions by applying two uniquely different approaches. We can either directly provide the needed leadership and expertise or function in a complimentary project support role and leverage our expertise to assist you in exploring your unique business situation, identifying problems, quantifying the risks and developing practical solutions and plans that work.

You get an industry expert to work on whatever you desire.  Not just pointing out the problems, but working with your management team to SOLVE the problems and GAIN competitive advantages.  Give Steve or me a call if you want to investigate this high-value service.

 

GLOBAL BRANDING

Lastly, NPR’s Planet Money had a recent story on SABMiller and ABI and how many brands around the world they own (210)… along with a map showing their respective brand-strongholds.

You can find the story and map here.. http://www.npr.org/blogs/money/2013/02/19/172323211/beer-map-two-giant-brewers-210-brands

It’s kind of interesting.  See… no watered down rants here ;-)

 

The ABI – Grupo Modelo Antitrust Charade

I’ve been asked repeatedly my take on the Department of Justice’s decision to fight the ABI – Grupo Modelo deal.  None of the reporters who asked wanted to quote my response… it doesn’t fit into the narrative… although they all agreed.  They’ve seen enough so that they are cynics too ;-)

Thus let me weigh in and tell you my cynical take on the DOJ’s decision to sue to stop this merger.  I believe the decision comes down to a simply thing… ABI must not have greased the right palms and/or didn’t grease them enough.

 Brito and crew were there at every Presidential debate......... but they must have been a little slow in reaching for the ol’ checkbook.  Welcome to the new world of crony capitalism… well actually when it comes to antitrust enforcement, it seems that has always been a world heavily influenced by politics.  Facts?  Not so much.  Political beliefs and who’s scratching whose back?  Oh yeah.

Think I’m a cynic?  Well duh.  But think this analysis is wrong?  Consider this:

• A two year DOJ investigation into Google’s practices recently ended with basically no action.  Many articles have been written, and I mean many, on how during this time Google spent $25,000,000 on lobbying efforts.  Most of the writers noted that this was a pretty good investment.  And if you consider market power, etc. Google is far more “dangerous” to the public than ABI will ever be. 
• Facebook now employees close to 15 lobbyists.  Do you think they do this just because they like to piss money away?!  This is the essence of crony capitalism.  Equal treatment under the law?  That’s for saps who don’t know how to play the game.  And of course it gives tremendous power to our political overlords, who bestow their favors on the chosen few.

As for ABI, I’d guess they thought they would be dealing with a different administration and this deal would have sailed through… which it very likely would have.  Same facts but different results.

So as you read the various handwringing’s over what ABI might have to do to get this blessing, don’t necessarily believe for a moment it is about hard facts and cold statistics.  Those are only used as window dressing to support decisions that have already been made… and to bolster the power of these political overlords.

Think this rant is just Conlin going off the deep end again?  This quote from an article in The National Review Online states how the game is played… “As law professor D. Daniel Sokol told the Wall Street Journal, in antitrust cases “Defining the market is 90% of the game. . . . If you win that battle, the rest is easy.”  Every professor in my MBA program felt the same way.

You can read the entire article here, http://www.nationalreview.com/articles/339916/brew-busters-daniel-foster

And this process isn’t restricted to ABI.  How many folks out there are either for this or against it based solely on what they think it means to them?  Let’s at least drop the charade that this is about “market power” or protecting that helpless little consumer… it’s about winners and losers being decided by some political power.  We cheer it when it lines our pockets… we curse it when it empties them.

Nothing less, nothing more.  I have no ability to change this but I refuse to act as though this is really about the DOJ “protecting” the poor citizens of this country.  It’s about protecting things, just not what they say it is.

Think about the supposed “solutions” that are being offered… selling a brewery is going to change the US beer market?  Divesting a brand?  That’s just the economic pain the government wants to inflict as payment to get this thing approved.

Since I don’t have the necessary facts to offer ABI a hard suggestion, I’ll instead answer with my gut… I wouldn’t give an inch on anything of importance.  This isn’t ultimately about facts so why act as though it is?  If I don’t want to piss away a ton of money over the next few years (and waste a lot of management time) I might tell them to screw off.  About that penalty?  You were foolish to give in and include it in the deal.

Wait 3 more years and restart the deal.  You already own 50% of the dang thing… you’re not going nowhere.  There will be a new administration and next time either they will be more politically aligned with letting these deals happen or ABI can get better at writing the right checks to the right folks.

Isn’t this crony capitalism fun?  ;-)

Can the 21st Amendment be the model?

The 21^st amendment to the Constitution repealed the 18^th Amendment, the failed experiment called Prohibition.  But it did something else of equal importance.  Rather than attempting to decide and dictate all of the issues related to alcohol laws and regulations, the amendment simply stated that alcohol regulation was to be decided at the state level.

There was genius in this decision.  It greatly increased the odds of the amendment actually being ratified. Attempting to dictate every aspect of alcohol regulation for the entire country would simply have insured the amendment would never become law.

The 21st Amendment allowed states and their citizens to craft laws and regulations that fit their unique desires and situations.  It built on the reality that an individual’s consumption of alcohol is a local issue.  It allowed effective control of beverage alcohol while creating a framework where competition and the marketplace would still flourish.  It has been a tremendous success.

I believe a similar model should be used to transform the K-12 public education system.  End The Education Plantation, www.EndtheEducationPlantation.org is a single issue, non-partisan organization which has only one goal:  Passage of federal legislation requiring any state or school district that accepts any federal education dollars to offer Education Freedom Accounts to every child attending school in that state or district. These Freedom Accounts would have to equal at least 95 percent of the total per pupil spending of that district or state.  Other than that, we defer all other decisions to the states on how/where these funds can be used. This only demands that parents control the money spent on the education of their children.

In effect, this legislation would force states to create a state-regulated market for K-12 education (and pre-K and higher education if they desire). Just like the 21^st Amendment, we use federal power to force Federalism in the education of this country’s youth.

This will unleash the wisdom of millions and is guaranteed to improve the educational outcomes of rich, poor and middle-class children alike.

Obviously different states will decide different things. Regardless of your political beliefs, some states will make decisions you agree with and others you disagree with. Guess what. That’s happening right now.

The public education system of this country is failing far too many children.  Seventy percent of all eighth graders are not proficient in reading.  It’s worse for minorities.  And, sadly, the future of most kids is somewhat set by the eighth grade.

The vast majority of these non-proficient children will NEVER become good at reading.  Think of what this means for their job prospects, their cultural activities, and how they will raise the next generation.  Most fourth and eighth graders are also not proficient in math. This does not bode well for any of us.

ACT reports 75 percent of all incoming freshman are not prepared for college. Only four percent of African-American high school graduates are ready for college.

And few students wake up the day before high school graduation and decide to attend college. Most of these students have been preparing for college for years. Yet only 25% are ready?

And what of those who didn’t take the more difficult classes and don’t plan to go to college? Do you think their educations are any better? A recent article talked about a small manufacturer who was looking to fill some entry level positions. Out of 100 applicants with high school diplomas, only three could pass a simple math test!  And of those three, none knew how to read a ruler.  This is simply wrong.

Yet the country spends more money per pupil than every other country on the planet, save one -- over $12,000 per student per year.  In most parts of the country you can attend a pretty good private school for that amount.

Our country is filled with dedicated and loving teachers, administrators, para-pros and volunteers.  It is not the people who are failing.  It is not that we spend too little money.  It is that the top-down, expert-driven system is simply failing.  And the only way to fix a failing system is to CHANGE it.

We don’t claim to know the answer to every question.  We don’t have to.  Rather we know the system that will find the best answers for the lowest cost -- freedom and competition.  Our proposed legislation would, in effect, force states to create a marketplace for K-12 public education.  Let us unleash the wisdom of millions and let them discover and create better schools for all of our kids.

The future of today’s children and in a very real sense the future of the country depends on it.  The genius of the 21^st Amendment, which has served the country quite well for 80 years, can be the model for transforming this country’s K-12 public education system.  Raise your voice. 

Regardless of your wealth or education, no one is immune from these failings.  We will either collectively solve this problem or we will collectively watch this problem destroy our country.  If not us, who?  If not now, when?  Please step to the plate.  50 million children and the very soul of this country are pleading for us to do something.  Join us.

Here’s what Milton Friedman wrote in 2004…

Government is committed to assuring that all children receive a minimum education. It currently does so by setting up and running schools, assigning students within a designated catchment area to each school. Students are thereby deprived of choice. They go to the designated school or else they do not benefit from the government commitment and their parents must pay twice for their education—once in the form of taxes, again in tuition.

Equally important, government is deprived of the benefits of competition. It is as if the government decided that the automobiles it uses must be built in government factories. What do you think the quality and cost of government cars would be? Or, to take another example, it is as if recipients of food stamps were required to spend them in a specified government-run grocery store.

It is only the tyranny of the status quo that leads us to take it for granted that in schooling, government monopoly is the best way for the government to achieve its objective.

A far more effective and equitable way for government to finance education is to finance students, not schools. Assign a specified sum of money to each child and let him or her and his or her parents choose the school that they believe best, perhaps a government school, perhaps a private school, perhaps homeschooling. Let the schools in turn, whether government or private, set their own tuition rates, and control their own operating procedures. That would provide real competition for all schools, competition powered by the ultimate beneficiaries of the program, the nation’s children.

That’s all we are trying to do.  I hope we can count on you.  If you agree, please spread the word.

 

 

Black Swans and the Future

Well a new year has begun and who knows what the future holds… other than higher taxes, but that’s a rant for another day.  I worked with a distributor some years back where we analyzed what the future held for them.  A generational hand-off was planned and they wanted some outside opinions on various courses of action.

This was a relatively small distributor in a rather remote part of the country.  The population had been declining for years and we all agreed, there was nothing on the horizon which was likely to change this.  And population has a huge impact on this and many other businesses.  With a growing population you’ll look like a hero if you can just maintain market share… growing share AND having a population increase will make you look like the best distributor on the planet.  But a shrinking population makes it incredibly difficult… you have to grow share just to remain in the same place.  And as we all know, growing share is easier said than done, especially if you’ve already got a pretty high share to begin with.

For these folks although they were profitable, financial projections (under almost any likely scenario) showed that in about a decade or so, things would be looking bleak.

The big question was how would this impact this upcoming generation?  Would we simply be setting them up to fail at some point in the not-so-distant future?  From a strictly financial perspective the answer was rather obvious… if there was a suitor who would pay a good multiple (and there was)… it made the most sense to sell and to set the next generation up doing something else.

But as I have noted many times, a privately held business (or even a public one, eh Brito?) is much more than simply a financial asset.  The owners took the analysis to heart but decided they were going to remain in the business.

The Black Swan Scenario

IF our predictions regarding the future had been even remotely accurate, this distributor would today be facing a tough profit/loss situation.  But then something magical happened… and it goes by the name of the Bakken Shale formation.  This state is now the second largest oil producer in the country, behind only Texas.  And it is only beginning.  Talk about boom times and all the growth and good times they bring!

I suppose you could call this a Black Swan event.  What’s that you say?  A Black Swan is “an event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader.  Black swan events are typically random and unexpected”, i.e. they can’t be predicted.

So what does this little feel-good story have to do with all you other beer wholesalers?  Don’t ever forget that you do not know (nor does anyone else) what the future holds.  I’m assuming if you are a beer distributor on January 1, 2013… then you plan to stay a beer distributor.

Yeah, yeah, I know… consolidation MUST happen.  It’s a forgone conclusion and nothing you can do will stop the march of these forces.  Don’t ever forget that in the 1960’s – the age of the business conglomerate - business classes taught (and forecast) that sooner or later (generally sooner) there would only be a handful of businesses in the entire country!  The efficiencies of conglomerates where simply so great that there was no way to stop their march of consuming all businesses in their path.  Think of all those synergies!

Yet where are conglomerates today?  Few still exist.  What looks like a sure thing on a spreadsheet quite often looks quite another in the real world.  Will some of you make the wrong choices in the coming years?  Of course.  But that is easy to determine when looking in the rearview mirror.  I have found that predicting the past is not too difficult.  Now the future…. that’s another thing all together.

Fail to Plan; Plan to Fail!

So as the new year begins, sit down with your management team AND consider engaging me or Cook to provide some high value-added objective decision support ;-)  Think of what the future holds and what makes sense.  Spend some time on the current state of the enterprise (a company profile comparison), possible future(s) scenarios (strategic planning)… and even on some impossible futures (sensitivity analysis).  Prepare your company. 

For the unexpected aspect, you shouldn’t attempt to predict black swan events… by definition they aren’t predictable.  Who knew what horizontal drilling and hydraulic fracking would do to large parts of the country?  Rather you need to build your organization with the robustness to deal with the negative ones that occur and the strength and ability to be able to exploit positive ones.

Which reminds me of an old story of a king, a condemned man, and a horse…

A man is sentenced to die by the king. As the verdict is announced, the man says, "Wait! If you spare my life, I promise that in one year, I will teach your horse to talk. If I fail, you can kill me then." The king is intrigued, and figures he has nothing to lose, so he agrees. Afterwards, the man's friend says, "Are you crazy? You'll never teach the king's horse to talk." The man laughs and says, "Think of it this way. I have an extra year to live, and a lot can happen in a year. I might die. The king might die. And who knows, maybe the horse will learn to talk."

So don’t spend too much time listening to others who tell you what you do or don’t have to do; knowing how your options support your vision is key… as I have noted before, grab the future by the throat and make certain the future you want is the one that actually occurs.  Who knows… maybe the horse will talk ;-)

 

 

 

Strategic planning is the key to “Big Ticket” acquisitions and divestitures

The days of the financial buyer seem so long ago. Just asking for the going multiple or just overpaying appears to be from a “by-gone” era in the beverage industry. There is too much at risk.

What is a realistic acquisition cost or a fair selling price? It depends....on who you are; how you organize your operation; and your portfolio mix.

How can that be? Because things are more complicated...period. The levels of financial analyses and strategic business planning needed to succeed in either transferring a brand(s) or acquiring a company AND running a profitable operation continues to escalate as the industry evolves.

For the great deals, both parties are mentally in sync and on top of their financial and operating game planning.

For the prospective buyer, it starts with a vision!

Properly evaluating a company’s current financial performance and understanding how to achieve operating synergy are fundamental to identifying the opportunity and accurately projecting future performance. Many times company’s potential to leverage economies of scale and/or capitalize on the vertical integration opportunities factors heavily for the strategic buyer when acquiring either brands or operations. Paying an “affordable” premium is individual to the unique situation of seller.

It has been our experience that these premiums are easily justified based on thorough financial and company analyses. These preliminary analyses normally include evaluating current organization structure, staffing requirements, gross profit contribution by brand, business systems and operations work flows.

For the potential seller, identifying the strategic benefits and the financial capabilities of the prospective buyers along with developing some financial sensitivity of the prospects “go-to” operations goes a long way. The affordability index for each buying prospect is as diverse as the acquisition candidates.

Give John and I a call if you would like to discuss in strictest confidence your needs and answer any questions regarding your company’s plans for the New Year.

We wish you the best during this Holiday Season.

End of Year Thoughts

Well the year is winding down and all-in-all it has been a pretty good year.  Hope life is treating you and yours well.  Thought I’d mention a few things to close out 2012 while bringing in the New Year… some personal, some beer industry related and a high value-added activity for wholesalers to consider for the New Year.

On a personal level, my wife Barb continues to fight a little Graft Versus Host Disease (that’s when her new immune system attacks the rest of her body) but other than that she’s strong as an ox – she loves it when I say things like that ;-)  This is somewhat to be expected but has gone on a little longer than planned… but all-in-all, things are going great.  Much better than being dead.

I thank God each and every day for her survival… and the wonders of modern medicine.  Without it, she would be in the ground for over 2 years.  It still gives me the shudders to think about it and the odds of survival she faced back then.  I was looking up some info on another project I’m working on and found data that chilled me to my bones as I mentally revisited that time a couple years back… and caused a little eye moistening… The American Cancer Society forecast that in 2012 there would be 13,780 diagnoses of Acute Myeloid Leukemia and 10,200 deaths.  I’ll let you do the math but I don’t think many want to play those odds. 

 

BENEFITS OF THE THREE-TIER SYSTEM

As I pull back and take a look at the industry, there is one amazing fact which leaps out… just how well the independent three-tier system actually works.  Think about it.  The top 2 brewers have 80% of the overall beer market yet in the history of the country there has never been a more dynamic time for beers, brewers, and consumers.  In many other types of markets where the top 2 players control that much share, competition is stifled (or at least they try).  Not so in beer.  It is incredibly competitive and these 2 combined eighty share companies are losing share!  So much for being able to use this market strength to crush the smaller competitors.  And competition is a funny thing… it is SO dang successful.  I don’t care what the industry, it out paces even the most determined attempts to control it.

It is a testament to the genius of those who structured this regulated system 75 years ago.  Without the independent 3 tier system, I can envision no situation where this dynamic marketplace would exist.  Much like the greatest document ever written by man, the US Constitution, many don’t understand the vision and brilliance (and compromise) which created the documents.  Tinkering with either is fraught with the peril of unintended consequences.  Changing either for some supposed short-term gain is foolishness on stilts.  You can take that to the bank.

 

THE CRAFT CONUNDRUM

And not surprisingly, the friction between the craft folks and “big beer” continue.  Just like the prettiest girl at the dance, more is never enough.  All rules must be bent to their desires and once they are… they need to bend even more.

Now some of the craft folks want to fight “faux-craft” beers…“craft versus crafty”… crafty, craft-like beers and “true” craft beers.  Their gentle sensitivities are all a-flutter that “big beer” is actually making products which “hide” their true ownership.  They call for “transparency in brand ownership and information to be presented in a way that allows beer drinkers to make an informed choice about who brewed the beer they are drinking." 

I guess their point is if ABI or MillerCoors (or god forbid Pabst!) makes a world-class IPA it’s not REALLY a “craft” IPA… just more bilge from some huge factory pumping out liquid swill… and the consumers are just too stupid to follow their taste buds.  I guess I had better toss one of my favorite beers, Pilsner Urquell in the trash… dang thoughtless taste buds… what do they know?!

What happens when one of these “craft brewers” cross their arbitrary volume line between craft and non-craft?  Do they then become crafty too?  Do the brands magically become faux-craft and swill like their fellow mega-brands?  The prettiest girl doesn’t think that far out since she doesn’t have too. 

Next they’re going to be telling me Little Debbie isn’t really making those cakes!  Or that Aunt Jemima isn’t a true master of maple syrup!  Say it ain’t so.  Cover the children’s ears!  Get the FDA involved!  Where is truth in advertising when we need it?

Sadly it seems whether big or small, almost everybody out there wants to use government and its’ enormous power to either help themselves or to hurt the other guy.  That’s one of the reasons I’m an advocate for small, limited government.  Human nature being what it is, folks will always attempt to use this power to their advantage.  It is far better to let free people freely interacting with other free people to determine most of these issues… under of course a general structure of laws and regulations.  But that’s my political soapbox.

But speaking of crafty, now I can’t get that great Beastie Boys song out of my head, She’s Crafty.  I can envision a great TV ad… hot babe drinking a craft beer (faux or “real”) with this song as the theme.   Some of the lyrics…

She’s crafty, like ice is cold  - This could become the tag-line for the first craft line extension from Coors Light!  You guys owe me!  Mid-six figures at least.

She's crafty, she's gets around

She's crafty, she's always down

She's crafty, you know she's got a gripe

She's crafty and she's just my type

She's crafty

I seen this girl I could never forget

Now, I like nothing better than a pretty-girl smile

And I haven't seen a smile that pretty in a while

The girl is crafty, she knows all the moves

Dang it gets better the more I think about it.  I’ve GOT to stop giving this genius away for nothing.  If anyone takes this and runs, please send the checks to my corporate offices.  She’s craaaafty!  And don’t forget to Fight for Your Right to Party!  ;-)

For one of the many YouTube videos of She’s Crafty, go here http://www.youtube.com/watch?v=4k9DE1zycg0

 

PRICING, PRICING.......PRICING

And speaking of strategy (how’s that for a segue?)… ABI is all about making money and their pricing strategy reflects this.  And as it is with most markets, when the market leader wants to make money (especially via pricing), then everybody makes money.  But like all decisions in life, there are unintended consequences… this strategy has allowed a lot of room for those small, crafty craft brewers to also increase their prices.  Is this price-maximization strategy in effect opening the door to the demise of the big-boy’s mainstream products? 

As we all know, it’s all about brand positioning at retail. Are they actually planting the seeds of their own destruction… as the moth flies too close to the flame?  Is it giving room in the marketplace for marginally profitable small craft brewers to grow and expand their market share?  A situation which might not be possible if ABI were more interested in share and/or keeping overall beer pricing lower?  Would the industry not be seeing as much growth in small craft brewers and the loss of share of stomach to wine and spirits if their pricing strategy were different? 

Looking at this as a case-study, the structure of a market has significant impact on the moves of the participants (and in all honesty, what makes sense).  A market with three major players (perhaps market shares of 50, 30, 20) will in all likelihood be much more price competitive than one with two major players with more equal share (whether volume or GP $).  Why?  Because in the first situation with 3 players, it will probably make sense for one of the smaller two to use strategic price competition as a weapon and a means to grow market share.  Note that the share leader in almost any market will be a fan of the status quo… they’re the leader, why would they want to mess with that?  If those two smaller players would happen to merge (can you say MillerCoors), then the market becomes more balanced between more equal competitors… and price competition becomes less effective in growing share for anyone.  No one has to collude or anything like that… the reality simply becomes one where price competition isn’t as effective for anyone.

So on one hand the present market structure tends towards less price competition… depending on your point of view this might be good or bad… but at the same time the present market structure and the pricing structure it brings allows very fertile ground for young start-up breweries to spring into life across the country… something that would be very difficult if there were aggressive price competition from the big boys.  Take a buck or two off the price of a craft brewer’s 6-packs and their world changes dramatically.  I’m not advocating anything, just analyzing the present market.  I LOVE the craft beer explosion and the excitement it brings to all aspects of the beer business.   Just something to think about.

 

A VALUE-ADDED NEW YEAR’S ACTIVITY

Consider bringing in 2013 by having Conlin and Cook do an objective financial valuation and industry comparison profile for your business.  Many of our wholesaler clients continue to benefit from our high value-added, no-nonsense financial analysis with industry comparisons report.   This isn’t some report you just toss to your accountant.  This report will form the basis of many strategic and tactical moves… for 2013 and many years out.  This is a strategic and operational document.

In some cases, especially for our smaller and medium size wholesalers, it is a real eye opener to properly compare profitability, revenue streams and operating costs to the industry, to actual, to short and long term trends.  Although incredibly valuable for all wholesalers, this analysis is extremely important if you are a high-share ABI distributor (or any size).  Your world is changing dramatically and you MUST be able understand where present trends lead.  This is probably the most important strategic planning tool you can have.

So hope you have a wonderful Christmas and holiday season.  If you want to spread some Christmas cheer might I recommend www.EndtheEducationPlantation.org ;-)  It’s a good cause and I hear the guy running it is a freaking genius (or so his mom tells him).

With what’s going on in DC (and what’s already baked in the cake), 2013 is going to be one wild ride regardless of your political leanings.  So hold on to your beer (crafty or not) and enjoy the show.  One way or another, the sun will still rise.

 

 

The power of your people, other thoughts, and legal weed

Well I hope the Thanksgiving turkey was good.  Steve and I are most thankful for the opportunity and feel privileged to consult with a great group of folks; owners, management, staff, and affiliates… all of whom continue to make the beer business one of the greatest industries in the entire country.  It continues to be a most rewarding experience to say the least! 

Here are a few random thoughts from Littleton…

Your people are what matters.

From one of our associates, The Herman Group – Trend Alert (alert@herman.net), comes notice of something that intuitively has always made too much sense and confirms what we as consultants continue to see as a “game changing paradigm.”

“Finally there is a study that confirms what we have known for a long time: the best way to boost the bottom line is to lead people better. “

The report, by the Boston Consulting Group (BCG) and World Federation of People Management Associations, titled, "From Capability to Profitability: Realizing the Value of People Management," has confirmed that companies with stronger people-management capabilities consistently have significantly stronger financial performance.  Moreover the report found companies had 3.5 times higher revenue growth and 2.1 times higher profit margins than those of companies with poor people management skills. Also emphasizing leadership development, talent management, recruiting, onboarding and retention, employer branding, and performance management and rewards were particularly important.

"[Higher performing companies] take their people investment much more seriously", says Roselinde Torres, senior partner and managing director at BCG. The report examined more than 100 countries worldwide and surveyed over 4,000 managers from human resources and other fields. The study used the corporate managers' ratings of their organizations' people-management capabilities, while BCG conducted independent reviews of companies' financials.

As part of that review, BCG included a review of "Fortune" Magazine's list of the "100 Best Companies to Work For." Those that consistently made the list outperformed the Standard & Poor's 500 eight of 10 years. The software company SAS Institute Inc., based in Cary, North Carolina is one company that has consistently landed on the "Fortune" list every year.  SAS has repeatedly received recognition for its people practices.

SAS demonstrates its sensitivity to the interests and talents of its employees by offering lots of different tracks for employee growth, including "subject-matter expert" and "critical-skills expert".

Though the company has more than 13,000 employees, its turnover rate is only 3.3 percent. HR VP, Jennifer Mann believes that turnover is so low because the company provides opportunities for advancement. It also provides countless extra services, including an in-house health clinic, daycare and fitness centers, and focuses on employees' work-life balance.

Roger Herman’s closing comments are concerning – “Studies like this one will raise the consciousness of executives in corporations worldwide. Their challenge will be to embrace the culture of improvement and develop. Too many corporate leaders are not ready.”

Something to think about when you look in the mirror and at your management team as this New Year begins.  In a nutshell it really comes down to culture… and far too many companies just let their cultures happen rather than actively trying to direct and develop the culture you desire.  Not to brag- I’d never do that ;-) but one of the reasons for my success in helping companies improve is my ability to collectively help forge a common vision and then together building a unified, coherent system to achieve this vision… along the way helping individual employees (and owners) change their ways of thinking.  Give me a call and let’s talk about how Steve and I can help transform your business. 

If you haven’t run for the door yet, I’m guessing you are here to stay.  Might as well get after it and get your company ready for the long-haul too.

More on Chesbay

First let’s think a little about what the Chesbay MillerCoors dustup means.  My last few posts on this got a few folk’s blood pressure up to unhealthy levels ;-)  But my point remains the same… you must be able to make logical, coherent arguments to those who may not think like you do… or know the industry like you do.  We have good, fact-based arguments but each one of you needs to be able to make the case.  This is true whether you like to hear it or not.  I simply gave you some of the objections you are likely to hear.  Like any good sales rep, you need to know every possible objection and have a response(s) for each and every one.  And turning red in the face is not likely a winning response.

In this arena you aren’t the boss who can simply slap the table and say that’s the way it is.  In this public/legal arena you are simply one voice of many… you need to ensure you are prepared for this world.  And lastly, a tip of the hat to Denny and the Virginia Beer Wholesalers.  He told me they had the best franchise protection in the country and he certainly showed it.  And now I owe him big time ;-)  Denny, I’ll be over to mow the lawn once spring gets here.  Glad I didn’t give in on shoveling the dang snow.

And remember, these fights are just like the street.  Just because you won today doesn’t mean the battle is over.  The other side learns from their defeat and comes back tomorrow… and the day after that… and the day after that.  It doesn’t ever end.  So yes, congratulate Virginia but always keep on the offensive.  Don’t let your guard down ‘cause this battle is a constant one.  Make certain you and your company are playing offense at both the state and federal levels… it is not hype that your futures depend on the performance of your state associations and the NBWA.

Some ask why would I do this?  Why not keep my head down and not enter any of these controversial areas?...  Do like most of the other providers to this industry, simply make what I can and stay out of anything which might upset anyone at all.  I refuse to do that because I am a passionate supporter of this industry… and from years of directing business reorganizations and driving corporate change I know that better solutions are always arrived at by vigorous debate. 

Just ask yourself the next time you need a quality valuation or help brokering a deal or help in improving the profitability of your business or consulting support that provides objective, fact-based recommendations… who would you like to have at your side?  A passionate, committed partner who will work with you to help you accomplish your goals… and one who will challenge every assumption you and your management team have… or someone who is quite willing to take your money yet refuses to join the battle?  Perhaps I’m wrong but I know who I’d want on my team.  At least that’s the way I see it.

Portfolio Growth

As for deals… in my last post I noted that my guess is deal flow will dry up for the next few years.  But that is for distributorships… brand deals (both transfers and potential additions) will perhaps become even more abundant.  The dance of the elephants is not remotely close to ending and it is difficult to imagine that ABI, SABMiller, MillerCoors, MolsonCoors and others don’t get some sort of deals done over the next few years… whether with each other or someone else… it’s a very good bet that deals will be happening at the suppler level, both large and small.   And of course these have the tendency to realign brand/supplier/distributor footprints. 

So for all you deal happy folks out there, don’t fret… brand deals driven by supplier acquisitions/divestitures are certain to occur.  Who knows, if quite a few happen it might actually help the footprint/supplier alignment issues… it’s always easier to get a deal done when one is trading brands rather than simply purchasing them.  Few want to sell brands (and I agree with them) but trading is another thing all together.  For those in states with weak brand transfer laws, I guess you need to hope that the brands go your way versus the other guy… or work to get stronger laws enacted for everyone’s benefit… ‘cause the issue is coming one way or the other.

In the Haze

And on a completely separate topic, we here in Colorado are starting a grand experiment in the next few weeks… the legalization of marijuana.  I’ll leave it to others to debate the merits and wisdom of this act but the voters have spoken and they want legal marijuana.  Even though all the big dog politicians from both parties were against it, it passed via referendum quite easily.  Colorado has already had “medical” marijuana for a couple years and the sky hasn’t fallen but this is it full bore… as the supporters note, the goal is to regulate the manufacture, sale, and distribution of weed just like the alcohol industry.

There won’t be folks lighting up on the streets, public consumption remains illegal… but of course how much enforcement effort will this get?  Private establishments, like bars and restaurants and cafes can decide whether they will allow lighting up or not.  I’m thinking about starting a chain of pubs called Weed and Feed ;-)  Or perhaps a Starbucks-type place, Buzzed and Confused.  As you can see, the possibilities are endless.

Possession of under an ounce will be legal and everyone can have 6 plants of their very own… perhaps the big opportunity is for the garden centers?  Perhaps I need to become a “grow” consultant?  In addition, individuals can form co-ops and combine their six plants with others into large growing operations… as long as they don’t sell anything they grow.

How it will affect beer consumption and this industry?  I have no freaking idea.  None.  Will it be successful?  Again, no freaking idea.  Is this the start of a national legalization?  Again, no idea but the trend is in that direction.  Is there a ground floor opportunity to become a weed distributor?  Seriously.  Who the heck knows.

I’d guess if it is successful here (and in Washington which also voted to end the weed prohibition) it will probably spread around the country.  The feds still say weed is illegal under any circumstances… yet one can drive around Denver and find medical marijuana stores in abundance so it can’t be all that illegal... and the “medical” threshold was pretty low… “can you fog a mirror?  Then you are eligible to purchase this medicine.” 

Down along the industrial section of the South Platte River, I hear there are already large warehouse growing operations plugging away (as they have for a few years) and the feds haven’t closed them down either… they have threatened their bankers though.  This is an interesting point of attack… think about how you’d do business if no financial institution would accept you as a client?  If you support the feds position, not a bad strategy.  But your guess is as good as mine as to what course the feds will ultimately take.  My gut is federal officials, from the Pres on down simply don’t want to touch this issue.  Either way they go they know they are in a lousy political position.  Thus kicking the can down the road (and doing nothing) is a politician’s usual action when confronted with this type of issue… see spending, debt, entitlements, taxes, etc.

I heard from a lawyer friend that he had a buddy making $80K per month (profit) from his medical store… so there is definitely legal money to be made in the ganja industry.

There is only one area which I feel pretty confident about making a prediction. This is a somewhat unique situation where unlike the end of alcohol prohibition where it was a national act, only 2 states in the nation will soon have legal smoke.

I’d guess visits to our fair state will increase substantially… the ski areas will love it… (some craft brewers might find an opportunity here too… rather than just tap rooms, tap and toke rooms?... high quality craft beer and high quality ganga?) and almost all of these new visitors will drive.  And when they head home they’ll all have a trunk-full of high-quality weed tucked safely away.  It remains a felony to mail the stuff and I’d have to guess that taking a bag or two on an airplane is probably not a wise idea. 

This industry is quite familiar with the market response of having a large dry area next to a wet area.  In effect Colorado and Washington are the only 2 completely “wet” areas in the entire country … does the entire state become like that wet retailer who sits right across the dry boundary?  Of course this will be illegal but are the feds or surrounding states really going to try to stop every car and truck heading out of the state?  I don’t think so.

And just in the local paper today is another issue this raises… off-duty use of weed.  A case is pending before the Colorado Court of Appeals on whether employers will be able to fire workers who smoke marijuana off duty.  This one started under medical marijuana laws… a medical marijuana patient was fired from his job after testing positive for marijuana, even though there was no evidence he was impaired on the job.  With full legalization one can expect a torrent of these cases.  Can someone be fired from their job for doing something off duty which is legal? 

For this industry a similar argument would be that an employee could be fired for drinking on the weekends.  The legal argument allowing the termination for off-duty marijuana use is that since marijuana is illegal under federal law, it is illegal period.  As with far too many things in our lives, some judge will ultimately determine this.  But before that I’d guess a lot of Colorado and Washington beer distributors will be caught up in many lawsuits regarding off-duty smoking.  Are Class A CDLs a cover?  I guess we will find out… but what about all the other positions in your organizations? 

So there are three experiments here…

• First the legalization
• Second the impact of having only two wet areas in the entire country.  But 18 other states already have medical marijuana so maybe it isn’t as dry as one might think.
• Third how does an incremental bottom-up change in drug laws affect a whole range of other laws… laws which will most certainly be in conflict with each other.  

Stay tuned and we’ll see how it all turns out.  What do you think?  Click the comment button at the end of this post and let us know your thoughts.  Good idea?  Crazy as hell?  Somewhere in between?  What’s your prediction on how it all works out?

Now I’ve got to get out to my garden ‘cause planting season is just around the corner ;-)  Dang wife won’t let me turn the garage into a hydroponic wonderland!

 

 

Prepare for Opportunity

Well the election is over and it seems new tax rates (and new taxes) are coming one way or another.  I assume all distributors who wanted to leave have already done so.  Therefore if you’re still here, you’re probably in the game for at least the next 4 years.  I could be wrong (wouldn’t be the first time) but I can’t see anyone racing for the door until capital gains tax rates come down, and in all likelihood that won’t be happening under this administration.  Perhaps sanity will rule the day since every time capital gains rates decrease, revenues increase... but I wouldn’t hold my breath or bet the farm that sanity will rule the day.

So all you hoping for an acquisition, you need to change to a longer-term strategy to be well positioned once deals start happening again.  Pause and think about that… the odds are there will be few if any acquisition opportunities over the near-term, then prepare so that when the time is again ripe, you and your organization are ready.  PREPARE FOR OPPORTUNITY.

Unless something fundamentally happens to this industry, I’d have to guess values are going nowhere but up… I’ve been wrong too many times thinking values are coming down.  I’m a convert now, values are up and staying up ;-)… unless something very fundamental would happen.  What that might be, I don’t know… but want to give myself a backdoor just in case I need it ;-)

Something every distributor out there should be doing is… focusing on improving the internal operations capacity and bottom line profitability of your company. 

So start with a plan so that you and your organization are financially and organizationally prepared if and when an opportunity presents itself a few years down the line. 

• Obviously this means dealing with whatever debt you have.  If a distributor has little to no debt (and that is an important factor), they can remain in this business almost as long as they choose.  That’s just the way it is.
• Evaluate and restructure your management team…

 Do you have the team in place to deal with a major acquisition?  If not, start the process of changing this.

• Retool and update your business systems and processes…

The Reyes Beverage Group are perhaps the best in this industry on this front.  They have a proven, dynamic template which they bring to every acquisition they make.  Can you do the same?  Would you even want to export what you are doing to the acquired company?  Take a very hard look and improve what you are doing now… it’s a double win.  Your present organization’s operations will improve and if/when an acquisition presents itself you will have an internal template which you can quickly and easily export to the acquired organization.

• Improving warehouse performance (Steve Cook excels at this), you should get after it and drive more dollars to the bottom line....

Most beer distributor’s warehouses simply weren’t designed for the present world of lots of relatively low volume SKUs.  A great deal of cost (or cost savings) can be found here, in addition to greatly improving the overall flow of the business.  It has been said that “when Mom’s not happy, nobody’s happy”… well the same is true about your warehouse, “if the warehouse ain’t working well, then nothing is probably working well.”

This issue is not going anywhere anytime soon.  And even if your warehouse isn’t filled with craft beers, your major suppliers will give you plenty of SKUs, seasonal packages, new brands, etc. to make the operations of your warehouse a key factor in the operations (and profitability) of your entire company.  The warehouse is becoming THE factor in the entire performance of your company.  Make certain you have the design, processes, AND personnel to keep this important, but far too often overlooked, aspect of your business running at peak performance.

And no, this doesn’t mean you have to automate your warehouse.  In many (most?) situations Steve and I find there are much better, more effective solutions than spending millions and millions on automation.

Fifty-five percent of warehouse labor is travel time in the facility! Reconfiguring the layout typically provides a quick payback.  Think of that… a lot of bang for a little buck.  Trust me, it’s worth giving Steve Cook a call.

And speaking of peak performance… a simple but useful mantra is to do it right the first time.  Whether it’s taking a correct order or loading the right product or a million other things… transform your organization to one where it is ALWAYS done right the first time.  It is incredible the manpower, frustration, and very real cost associated with not doing it right the first time.

The age old cliché still applies: “Why is it there is never the time (and money) to do it right the first time, yet there is always the time to do it over?” (and sometime over and over and over again)

And not to toot my own horn… I’d NEVER do that ;-)  But long ago I wrote a 4 piece blog on time management from a corporate perspective.  The wisdom in these pieces amazes even me.  They were written in 2006. You can find them here and here and here and here.  The second one deals directly with the issue of why it is so important doing things right the first time… but I’d recommend you give all 4 a read.  Implement the thoughts covered in these posts and you will be a long ways further down the road towards preparing your business for whatever opportunity that may come your way.

And lastly I must call BS on the subject that you must get bigger to survive.  I was once in this camp of thinking but have since tossed it in the dustbin where it belongs.  I have witnessed the national, regional and local diversity among distributors and how they can stay in business (and live very nice) even on surprising low volumes.  One can pontificate how they must get bigger to survive but that simply is not historically correct, and I see nothing on the horizon to change this.

I appreciate the economics of consolidation as well as anyone but just because it makes financial sense on paper it does not mean that paper will someday actually reflect reality.  People like this industry and almost all of the remaining folks plan to stick around. 

Sure ABI and MillerCoors are going to harvest your profits and shift costs but for the pain to reach the level that debt-free smaller distributors are simply not financially viable?  For that level of pain to occur, the entire industry will be experiencing Armageddon… and I don’t see Armageddon coming anytime soon.

So yes I’d love to get the brokerage work by selling these smaller distributors who aren’t “financially viable” but that simply is not the case nor do I think it will be the case anytime soon.  That’s not to say that from a strictly financial perspective many of these folks shouldn’t have sold already… guess what, these are not strictly financial businesses (few if any are) and other factors outweigh the financial concerns. 

My best advice is to prepare your business so you can take advantage of an opportunity whenever it may present itself.  And in the process maximize profitability and strengthen your team for both today and tomorrow. 

And lastly, unless you are paying for my consulting advice, don’t listen to anyone telling what you must or must not do.  Now if I’m saying it… that’s another matter altogether ;-)

 

 

Chesbay, MillerCoors, City Beverage and Freedom

First a quick note about the Chesbay dustup and the Illinois Liquor Commission’s decision on allowing ABI to continue their ownership in City Beverage.  That decision which some have called surprising and confusing is EXACTLY the reason I counsel against legal actions like the Chesbay dustup.

As a regulated industry, as much as is possible we need to stay out of courtrooms.  For once in the courtroom, one person’s judgment (whether right or wrong) can forever change the industry.  And surprising and confusing decisions happen all the time.  Putting 79 years of post-prohibition regulation in a single person’s hands is simply a risk not worth taking. 

So Chesbay gets to exit this year with their money (less legal expenses)… Reyes Beverage Group gets to complete a transaction which makes perfect strategic sense… and MillerCoors gets to extract some type of performance commitment from the Reyes’s and get out of a legal battle where most sides were against them.  And the industry wins because this thing goes away.

As for the City Beverage decision… who knows.  AB has had that stake for many years and the world hasn’t ended… and it is Chicago and Illinois… unfortunately a world of political pay-to-play if there ever were one.  I’m not saying this decision was that… just that it is rather sad that the fine people of the state of Illinois allow this level of political corruption to continue.  It sullies every decision, whether corrupt or not since one can never be certain.  One would hope that sooner or later the folks in Illinois will tire of seeing their governors and other elected officials cooling their heels in jail… and as has been noted before by some cynical types… only the stupid and greedy politicians get caught in the first place (we have one of those, ex-governor Blago sitting in a prison here in Colorado at this very moment).  The “good” ones simply never get caught.  Perhaps free people should demand more from our elected officials.

And on that note a couple points.  First, many folks out there think I’m crazy for putting my beliefs out there in front of all (my associate Steve Cook being one).  They think it is bad for business and one should never do it.  I take a longer view… how do we expect the incredible bounty and freedom each of us enjoys to continue if we are afraid to speak up?  I realize it can be dangerous to enter the culture wars (where both sides are generally wrong) but speaking in favor of freedom is never wrong.

Which brings me to my second point… it seems that good ol’ Guinness is not only a great beer, the lineage of the Guinness line has produced a pretty good thinker too…

Following is a brief interview from National Review Online (http://www.nationalreview.com/articles/332478/have-drink-guinness-interview) with the great grandson of the founding Guinness.

It is worth the read (I haven’t read the book yet) to hear what a foreigner has to say about the freedoms of this great country and the risks to them.

Have a Drink of Guinness

November 5, 2012 3:00 A.M.

"Like a precious family heirloom, freedom is not just ours to enjoy, but to treasure, protect, and pass on to future generations,” says Os Guinness in an interview with NRO’s Kathryn Jean Lopez. Guinness, great grandson of that famous Dublin brewer, has recently written a book, A Free People’s Suicide: Sustainable Freedom and the American Future. Here, the social critic helps remind us of what’s special about the United States.

KATHRYN JEAN LOPEZ: What concerns you about freedom in the United States as you watch us right before a presidential election?

OS GUINNESS: I am a longtime admirer of the U.S. and its enormous significance for the world. But as your presidential elections have become more and more of grand popularity contest, dominated by money to an obscene degree, they have less and less to say about the real “state of the Union.” One of the recent conventions, for example, was well described as “more Pat Boone than Winston Churchill.” The present condition of American freedom is only one of many themes that are conspicuous by their absence in this election.

LOPEZ: “Suicide,” in the title of your new book, is a bit strong, isn’t it?

GUINNESS: The title comes from Abraham Lincoln: “As a nation of freemen, we must live through all time, or die by suicide.” On the one hand, he was referring to the open-ended challenge of what George Washington earlier called “the great experiment” — and experiments are always open-ended. On the other hand, he was echoing a point made by many historians: Strong free peoples bring themselves down. It won’t be the Nazis, the Soviets, or Islamic extremists who bring America down, but Americans and American ideas.

LOPEZ: From an outsider’s perspective, are you saying, “Who do you Americans think you are”? Do you think we overestimate our importance in the world?

GUINNESS: I would caution against the tone of hubris that is so common in American rhetoric, especially after the collapse of the Soviet Union in 1989 — hubris being not only overweening pride but also the illusion of invulnerability. References to “American exceptionalism,” the “second American century,” and the like roll off the tongue easily and send patriotic shivers down the spines of American audiences. But when they are used as a litmus test of patriotism, they inoculate Americans against thinking seriously about the real health of the Republic and America’s true standing in the world in the global era.

LOPEZ: “Freedom must be guarded vigilantly against internal as well as external dangers,” you say. How can we do this?

GUINNESS: Awareness of domestic dangers was a characteristic emphasis of the Founders, and they learned it from their reading of classical writers, such as the Greek historian Polybius and the great Roman orator Cicero. Curiously, the Founders actually downplayed the danger of external enemies and emphasized the menace of internal enemies, such as Polybius’s notion of “the corruption of customs.” The present generation of Americans, on the other hand, has done the opposite, and so concentrated on external menaces (Homeland Security, and so on) that it has almost completely ignored internal dangers. In the long run, the internal dangers will prove the more important.

LOPEZ: How is freedom the greatest enemy of freedom?

GUINNESS: The rewards of freedom are always sweet, but its demands are stern, for at its heart is the paradox that the greatest enemy of freedom is freedom. There are several reasons for this, but the deepest concerns a simple moral fact: True freedom requires ordering, and the only ordering appropriate to freedom is self-restraint, yet self-restraint is precisely what freedom invariably undermines when it flourishes. So the most common way to lose freedom is to allow it to slide down into permissiveness and then license.

LOPEZ: What do mean when you say that freedom could prove to be “America’s idol”?

GUINNESS: By “idol,” I mean the Jewish and Christian understanding of the term as something of great human importance and value that is elevated into being a supreme ground of trust and then an object of devotion, when it should not be asked to bear that weight and it will always disappoint its devotees. Freedom is often idolized like that in the U.S., as if it were supreme, self-evident, and self-sustaining. I refuse to take part, for example, when Americans sing the hymn about freedom’s “holy light.” I have lived under totalitarian Communism, so I prize freedom as much as anyone and have long fought for freedom of conscience and speech. But freedom must be understood and guarded with great realism, and we must never forget its limits and its duties.

LOPEZ: What is “sustainable freedom”? It sounds as if it might have something to do with green jobs.

GUINNESS: “Sustainability” is a vogue term today. People talk about sustainable pretty well everything — sustainable development, sustainable capitalism, sustainable environments — but curiously no one talks about sustainable freedom. The American Founders, in contrast, knew that they faced three tasks in establishing this great Republic: winning freedom (the Revolution), ordering freedom (the Constitution), and sustaining freedom (or “perpetuating our institutions,” as they put it). Needless to say, the third task is ours today, but I have only ever heard one American (John Gardner), and not a single national American leader, address the need to renew freedom in every generation. That is amazing because the Founders’ view of how to sustain freedom is probably the most brilliant and audacious proposal the world has known, but at the very moment they most need it, modern Americans ignore it.

LOPEZ: What do you mean by the “golden triangle of freedom?”

GUINNESS: “The golden triangle of freedom” is my term for the means by which the Founders believed they could create a free society that could stay free forever — which, if you think about it, was and is an extraordinarily daring idea. Alexis de Tocqueville called it “the habits of the heart,” but the Founders themselves never gave it a name. It runs like this: Freedom requires virtue, virtue requires faith of some sort, and faith of any sort requires freedom — which in turn requires virtue, and so on ad infinitum. From orthodox and conservative Christians such as George Mason right across to deists and freethinkers such as Thomas Jefferson and Ben Franklin, there was virtual unanimity over this emphasis. But it nearly goes without saying that all three legs of the triangle are either contested or openly dismissed today. But if the Founders’ system is abandoned, what will go in its place? I have never heard anyone give a moment’s thought to that question.

LOPEZ: How is the problem of freedom the “problem of the heart”?

GUINNESS: From St. Augustine to Machiavelli to John Kenneth Galbraith, many commentators, despite their very different worldviews, have blamed the instability of free societies on the restlessness of the human heart. This is made worse today because of the way our consumer societies are deliberately fuelled through stoking restlessness. We have replaced the notion of the good life with our consumer ideal of the life with goods, and in the process we have plunged ourselves deeper and deeper into debt, and we cannot stop. Have you ever pondered the irony of the prevalence of addictions and recovery groups in the land of the free?

LOPEZ: How have Americans become their own worst enemies?

GUINNESS: There are many varieties of freedom in America today, but they share a common characteristic: In Isaiah Berlin’s terms, they are essentially positive and not negative. This means that Americans have both abandoned the Founders’ view of sustainable, negative freedom (the freedom not to be interfered with) and espoused notions of positive freedom (the “freedom” to have various guaranteed benefits) that are unsustainable in their essence. Thus it is only a matter of time before American freedom will undermine itself. If things go on as they are now, the time will come when, as the designer of the Titanic said, it will be a mathematical certainty that the ship will sink.

LOPEZ: How can we be better stewards of freedom? Why should we be?

 GUINNESS: In today’s climate of atomistic individualism, we rarely think of our ancestors and even less of our children’s children. (“What has posterity ever done for us?”) But like a precious family heirloom, freedom is not just ours to enjoy, but to treasure, protect, and pass on to future generations. The missing key to sustainable freedom is civic education and transmission. It used to be understood that in a free society, everyone is born free, but not everyone is capable of it. Citizens have to be educated for liberty, which was once called liberal or civic education. Yet this practice has disappeared all over the Western world, and certainly in American public education since the 1960s. Without civic education, freedom can never become a “habit of the heart.”

LOPEZ: You write: “Unless America succeeds in revaluing citizenship, in restoring civic education, and in revitalizing education that proves as powerful as the potency of mass entertainment and consumer advertising, the American unum will no longer be able to balance the American pluribus, and America’s freedom itself will continue to wither.” We can’t exactly do that before November 6, can we?

GUINNESS: No, restoring civic education and forming the habits of the heart will take at least a generation, and it will have to start with serious leadership that America so obviously now lacks. But unless such a restoration happens, the consequences will be severe, for E pluribus unum is not only America’s motto but also its greatest achievement and its greatest need. The American unum has been lost since the Sixties. If this continues, there will soon be no unifying American identity and vision to balance the pluribus, and the days of the Republic will be numbered.

LOPEZ: Does all this matter to Europe in a particular way?

GUINNESS: Your Founders called America the novus ordo seclorum, and historians termed the U.S. “the first new nation,” but the rest of the world went on its ancient way unimpressed. Today in the global era, however, almost all the world is experiencing the gale-force winds of modernity that the U.S. faced and answered — mostly with striking success — more than two centuries ago. Seen this way, never has America been more relevant to the world than now. Thus the European Union now talks of “unity out of diversity” instead of E pluribus unum. But at the very moment when the American model is more relevant than ever, America has lost its sense of identity and lost confidence in its own way. The brilliant settlement between religion and public life, for example, which James Madison called “the true remedy,” is being squandered through the now-50 years of fruitless culture wars. Yet who dares say “a plague on both your houses” and then find a way forward in the interest of all Americans? No one, to my knowledge.

LOPEZ: Could today’s time of testing be as decisive as the Civil War?

GUINNESS: The crisis of freedom touches the very heart of America, and as it is deepened and intensified by the many movements coming out of the 1960s, it will prove more decisive for America than the depression years of the 1930s, and it may even rival the Civil War era for the decisive stamp it puts on America.

LOPEZ: “No self-respecting American will ever be opposed to freedom any more than to love” — you have hit on the problem there, haven’t you? Who is going to believe that the Obama administration is truly eroding religious freedom? Who will believe that the president doesn’t value it as we have in the past? He must obviously value it on some level, by definition.

GUINNESS: The Obama administration has been talking, but not walking its own talk. If you listen to the president’s remarks on religious freedom, and even more to the powerful speech by Secretary of State Hillary Clinton, you would hear statements worthy of Roger Williams and James Madison. But their health-care mandates tell a different story. Kowtowing to the LGBT agenda, this administration stands in shame as perhaps the greatest official violator of freedom of thought, conscience, religion, and belief in American history.

LOPEZ: If Americans would immediately appreciate only one thing about our freedom, what would you hope it would be?

GUINNESS: I would hope that Americans would thank God for their freedom and celebrate the achievements of their great pioneers of freedom — with an equally frank admission of the egregious blind spots and shortcomings. But at the same time, they need to reexamine the subtle challenges of freedom, and in particular face up to the tough requirements of what it takes to sustain freedom. The American Founders got slavery and the place of women badly wrong from the start. But the world has never seen a more brilliant and daring answer to the instability and transience of freedom than theirs. The question today is whether, as their heirs, you are worthy of that gift and are able to keep it going. I hope and pray you are and will.

— Kathryn Jean Lopez is editor-at-large of National Review Online.

 

Something to think about from the descendent of a great beer-man.  You might know my thinking on this… this can only be solved by fixing this country’s K-12 public education system.  Until that is done, all is for naught.  www.EndtheEducationPlantation.org

 Still accepting checks and money orders ;-)  And we do NEED the money.  How’s that for blatant pan-handling?

 

 

 

MillerCoors, Chesbay and assorted ramblings

Well the 75^th NBWA convention has finished up and a good time was had by all… at least I think it was.  Based on distributors who came up to speak to me, from 80 – 90% liked my past couple posts and 10 – 20% thought I’d lost my mind.  For me, that’s pretty good! 

 

So let’s tumble through some random thoughts from warm and sunny San Diego.

• First, one more time on my last couple posts, which you can find here and here.  My point was (and is) very simple… if franchise protections are going to be put in play, then you had better be prepared to address some of the issues surrounding them.  A look of a deer in headlights is not the correct response when some reporter (or elected state official) asks you why you deserve these special privileges… and trust me, they are special privileges… whether you like or accept that reality or not.  You had better have a clear, concise and honest answer.  If at their root all you have is some protectionist goal, then long-term you are going to lose.  Don’t shoot at me, that’s the way I see it and I don’t see any error in this reasoning.

 

• And regarding the MillerCoors and Chesbay lawsuit.  Let us step back and attempt to look at this in a completely unbiased, don’t have a dog in this fight view.  First, I’m at a loss to see how MillerCoors’s desire to retain the right to control which independent wholesaler distributes their products is a threat to the independent three tier system… and as my readers know, I regularly beat MillerCoors and ABI corporate like a bongo, so I don’t think I’m being a stooge for these two. 

 

Let us try to think about this just as a business student in an MBA class.  Is our position that a manufacturer of some product which chooses to go to market through an independent distribution channel can lose all rights to who actually distributes THEIR product via state law?  That once they choose a distributor in that state, that distributor now controls who distributes that product?  Forever?  And you wonder why the craft folks aren’t fans of this?!

 

I think I know beer distributors pretty dang well and I don’t know a one of you who would willingly accept this if you were the manufacturer.  I can hear each one of you now… “It’s my damn product!  I make it!  I own it!  Who are they to try to take this right away from me?”  Tell me I’m wrong here.  I think the logic and “rightness” of this is a stretch.  Could it be worse?  Maybe.  Some non-beer beverage suppliers, i.e., Gallo, take a more “pay-for-performance” approach. They control and own the distribution rights, which are not for sale and can’t be transferred!  Meanwhile, the lucky wholesaler gets the opportunity to add more gross profit per stop and improve their bottom line on an exclusive territory basis if they continue to meet the suppliers expectations.

 

I realize we’re all beer distributors (or black hearted mercenaries like me serving the industry) so we cheer for our side but again, pulling back and trying to look at this thing objectively… why is MillerCoors the bad guy in this?  Why isn’t Chesbay the trouble-maker here?  They were going to get their money… they were going to be made whole and lose nothing… so why didn’t they just take their money and leave?  They got rich in this industry and were getting paid wealth that will go on for generations in their exit… so why isn’t a “don’t let the door hit you on the way out” attitude acceptable?  Isn’t it their action which is the root cause of this dustup?  A dustup which like ripples on a pond may spread to who knows where with results none of us can predict?  They are leaving the industry so why put the entire industry at risk for their personal needs?  Isn’t that logic just as valid as MillerCoors being some rotten SOBs trying to destroy the independent three tier system?

 

None of us outside of the participants know all the facts but it would seem a possible reason this fight is occurring is because of a “binding agreement” Chesbay signed with the Reyes Beverage Group.  Perhaps the merger and acquisition advisor who “helped” Chesbay should be horse whipped – and I know just the horse to do it ;-)   Perhaps all of this boils down to some pretty bad advice?  All I know is the results speak for themselves. 

 

It will be interesting to watch it all play out and many in this industry may find they rue the day this whole thing started.  I’ve got nothing against the Chesbay folks but this is like any type of conflict, there is more than one valid opinion here and the reality is often much more complicated (and twisted) than any of us will ever know.  Once things are put in motion, one never can be certain where they will end up.  Perhaps we need to be more careful about what we put in motion. 

 

• And as a side note, you are all asking A LOT of your state association execs.  You want them to defend franchise protections which many of you find difficult to produce coherent, logical and NON-protectionist arguments for… and trust me, getting upset at Conlin is not an argument ;-)  For many states, these franchise laws were written and enacted a relatively long time ago… when your political power was MUCH greater than today.  Many states have term limits for their state-level elected officials, so many of this industry’s friends… folks who actually understood this industry and knew why it was a good idea… they are long gone.  With term limits the education process is a continual one… in effect the game never ends… and this industry’s very valid points take more than 15 seconds to explain.  In addition your execs are attempting to deal with an exploding craft beer industry which is just beginning to flex their political muscle. 

 

Right now you have more money but they have everything else.  Long term that is a problem (and short-term ain’t that good either).  And of course you have large suppliers who plan to harvest your profits… yeah, the life of a state exec is a cake-walk ;-)  And we want to get into a fight for Chesbay and get all this crap in play?!  What are the odds things get better?  What are the odds things get worse? Have at it state execs ;-)  We’ll blame you (and Conlin) when it doesn’t work out that well.

 

And a side, side note about supplier owned branch operations… some might think they see a discrepancy with my recent posts and my vocal support of outlawing branch operations.  No such discrepancy exists.  I’m against allowing branches for two reasons:

1.         At a higher level, I’m against them on philosophical grounds.  How can one support a three tier system and think branches are acceptable?  To my simple mind you can’t have a true three tier system and branch operations.  It is simply the merging of two tiers… and thus the three tier system is somewhat of an illusion.  I think that is a dangerous course to walk, “kind of” having a three tier system while at the same time accepting the disappearance of the distribution tier in many locations.  There is a legal doctrine where if over time you refuse to exercise your rights, you lose them.  We don’t want to go there.

2.         At a nuts-and-bolts level, I’m against allowing branches since it permanently changes the dynamics at the elected state level.  Once a branch enters a state, the reality at the state legislature changes.  Unanimous distributor support for wholesaler-friendly legislation generally won’t happen again… the branch is a subsidiary of the supplier, not an independent distributor, and will thus vote accordingly.  If the supplier supports the legislation, the branch will too.  But if the supplier does not support the legislation, guess what?  That branch isn’t going to be supporting it either. 

 

And this makes the life of an elected official MUCH more difficult.  These folks can’t be experts in every freaking industry.  And with term-limits, their depth of understanding shrinks ever further.  Thus they often look to unanimous support from all members of the state association to help them make decisions on whether to support or oppose specific legislation.  For them it is much easier to punt on the decision when there isn’t unanimous support, i.e. it makes it more difficult for state execs to move the legislation along.

 

And think about the actual dynamics… the 21st amendment dictates state-based regulation of alcohol.  Thus there is no more important area for this industry than state legislatures.  Since disagreements with suppliers are certain to occur and often laws/regulations will be the solution… this industry practices unilateral disarmament at the state level when it allows branch operations.  In effect it gives away (or severely weakens) this route to address conflicts with suppliers when they allow a branch operation to take root.  It’s a poor move anyway a distributor looks at it.

 

• And lastly but certainly not least; a couple posts ago I made some comments regarding some customer service issues regarding the Reyes’s operations.  Ray Guerin (he’s the guy who runs the Reyes Beverage Group) had some exceptions to these comments.  Ray brings a tremendous commitment and passion to his job (and I have to admit some impressive credentials and results too… and to this black hearted mercenary, ultimately results are ALL that matter).  Rather than attempting to throttle me, he invited me and my associate Steve Cook to tour their joint venture in San Diego, Crest Beverage.  Crest is a joint venture between the Reyes’s and the Sourapas family.  Great story there… one was the Coors distrib, the other the Miller distrib and both wanted the other to leave (with their respective supplier lined up behind each)… but when it was clear that wasn’t going to happen they instead went to Plan B and formed a very successful partnership.  Something many distributors could learn from.  Although I’m not intimate buddies with the brothers, I’ve known Chris and Jude for years and have met all the brothers over the years.  From what I hear you can take their handshake to the bank… and in my book that is about as important as it can get. 

 

Anyhow, Ray drove us to Crest and we got a great presentation on how they go to market and a tour of their operations.  Their go to market strategy is world class and they really know how to use their size, power, and technology to their advantage.  It’s all about eliminating waste and holding themselves accountable to doing things right the first time.  Something we can all learn to do a better job at. Perhaps more fundamentally, it is obvious they grow great managers… without them, the rest is meaningless.  Many a management team could learn a thing or two from Dean McMillan’s Crest team.  I’m certain I’ll still piss Ray and the brothers off now and then – it’s my gift ;-) but they run great business and are a class act.  Here’s a very public thank you… and now you owe me a beer or three next time we meet ;-)

 

• And just to end by letting my warm and fuzzy side out for a walk… this past summer I was invited to speak at several state annual conventions.  At one such state convention they had a pirate-themed reception prior to dinner which proved to be an epiphany for me.  And by epiphany I don’t mean the Christian festival but rather the other meaning. 

 

Def: epiphany - A sudden manifestation of the essence or meaning of something or a comprehension or perception of reality by means of a sudden intuitive realization

 

All from some pirate-themed reception at a beer convention?!  Yep.  There was pirate stuff for all… bandanas for pirate head coverings… pirate hats… eye patches… earrings… a plastic sword or two… gold coins.  As the reception got going EVERYONE was sooner or later in pirate garb… grandchildren had grandparents on the run – until those crafty grandparents did a rear-guard action and turned the tables and had the kids on the run… there were at least 4 generations in the room… laugher and sheer silliness were everywhere (and I am a big fan of silliness).  And it grew and grew.  The Bud folks and the MillerCoors folks simply disappeared… suppliers and distributors gone… all that was left was a multi-generational party of happy, loving people… all that was left was simply joy.  Wearing my bandana, I pulled back and watched this in awe.  I think I saw it clearer than the others because I often observe outside myself, but this really was the essence of joy… I wish I could bottle it. 

 

After the convention I wrote to these distributors asking them to remember this time, this moment in space when this joy was like an exploding firecracker.  I reminded them that conflicts are certain to occur… often times with both sides having very valid points… but to hold fast to this memory, to hold fast to this joyous occasion when these points of friction occur.  To remember that just because we might disagree, that doesn’t mean the other side is evil or bad… we just disagree.  To hold fast to this joy because each one of you… whether owner, employee, supplier or black hearted consultant… has something very special here.  And you’d be foolish to put it at risk over some temporary disagreement which in the end will most likely prove to be ephemeral.  If this industry wants to see another 75 years, it could do worse than to stand back and learn a thing or two from these wild and crazy pirates.

Even more on MillerCoors, Chesbay, and Reyes

Wheee doggie!  That last post, which you can find here, sure hit a nerve or two.  Just remember that just because you don’t want to hear it doesn’t mean you don’t NEED to hear it.  Don’t take potshots at the poor little ol’ messenger ;-)

And it is interesting times… being in play is most definitely interesting… Harry and Benj report that the craft folks might be lining up against the Modelo/ABI deal… at least the US and Crown aspect.  But at the same time I hear rumors that ABI is courting the craft folks to join forces in fighting franchise laws.  I don’t think too many craft people are supporters of strong franchise protection… unless of course there are exemptions for them.

I guess politics really does make for strange bedfellows… but everyone wants the craft folks on their side… they remain the prettiest girl at the dance.  And they get similar favorable treatment.  That’s just the way it is.  Just try not to turn over the keys to your car to them as you court their favor.  You might not like the way it turns out as you look at the twisted and smoking heap that was once your pride and joy.

As a side note, still thinking about an exit this year?  It can still be done (barely) and there are ways one can structure the deal so you get this year’s tax rates… but you had better hurry.  You might not get brewery approval this year but that doesn’t necessarily end the matter.  Want to know how?  Give me a call  ;-)

As for my last post, let me give you a timeline to further explain.  Originally the post was going to be solely about the concept of being in play.  I think that is a profound reality which has the potential to transform this industry… and you’re not going to like all of the potential realities.  Therefore work to make certain the future that comes is the future you desire.  If you sit back and wait, the game will be over before you even knew it had started.

And you have more than a few uphill battles… what I wrote in the last post isn’t what I think, but it is what more than a few folks think.  Recognize that reality or deal with the consequences.

And as a side note, but one which beer distributors should take note of … I have talked to a number of GMs and sales managers since the last post.  They all had a similar epiphany.  First they’d start defending franchise protection and the life-long, multi-generational protections it provides for a handful of families (obviously these folk’s employers).  Then to the person they’d say…

 “gee, why am I fighting for this?  I don’t have any contract… I don’t have any protection.  They could fire me at any time regardless of my performance and I don’t get some retirement-level ransom when I walk out the door.  My kids and grandkids don’t have any job waiting for them at this company.  Why shouldn’t I be granted these same types of “franchise” protections?  My efforts are building these brands a heck of a lot more than the owner’s efforts… to say nothing of their kids.  Yet I’m working for a paycheck and they are sitting back raking in wealth I can only imagine... and I’m fighting for them?  I’m a sap”

And this is from YOUR SENIOR EMPLOYEES!  If they think this way (and they know you and the industry far better than anyone else) how do you think some outsider looks at these things?  You’d better get your pitch prepared because you are going to need it.

Anyhow, as I was spewing that wisdom on being in play the whole MillerCoors, Reyes, Chesbay thing popped up.  I tried to ignore it for a while but was contacted by more than a few who wanted my take on the thing.  I think they all thought I’d unload on MillerCoors.

But I can see MillerCoors’s point in all this.  Forgetting the Reyes’s for a moment… One can understand why MC doesn’t want a single distributor to get “too big”.  One could imagine a future where a very large, very profitable distributor would use their financial strength to in effect purchase the entire distribution tier.  One could envision a future where because of tremendous financial power, a single distributor could become the top bidder in literally every single significant transaction in the country.  Then they use these footprints to spread out and take over, state-by-state.  One might attempt to implement that strategy… I think it’s a pretty good strategy that has merit too.  Look at Southern Wine and Spirits… it’s worked out pretty well for them don’t ya think?

As a side note again… one strategic issue that all businesses must confront is the double-edged sword of being “captured” by a big customer.  On one hand a business is always overjoyed to find a large customer who likes their product or service.  Often times this single customer drives the expansion of the business.  Soon, the business is almost entirely dependent on this one customer, i.e. they have been captured.  And once captured, they will dance to this customer’s tune… whether they like it or not.  Many  businesses NEVER want to have more than 40% of their business coming from any single client… it just puts too much at risk and makes them very vulnerable to changes of heart from this single customer.  And makes them vulnerable to demands from this single customer.  MillerCoors might be thinking in similar terms… strategically they might not want the Reyes operations to “control” too much of their distribution.  So one can understand their position.

As for the Reyes’s… one can understand their position too.  They are MillerCoors distributors in good standing, having won awards on performance, etc.  Although I gave Ray and the brothers a little grief on a couple issues, no one can deny they are pretty dang good distributors.  They simply want to expand their footprint with the acquisition of a willing seller.  They were the ones who stepped to the plate on the price.  Nothing stopped others from beating the price but none did.  How frustrating for the potential buyer!  Go get the Reyes’s to bid on your company, knowing they are willing to pay top dollar, and then sell to whoever else it is that finally is brought to the plate by MillerCoors.  They Reyes’s spend all the time and effort and $$ to bring the deal to fruition and are left at the altar.

Therefore prospective qualified buyers such as the Reyes’s now demand sellers to commit to selling TO THEM… not just to anyone who will match the price.  They force sellers to accept some risk in these transactions too.  Pretty straightforward… you want top dollar?  Then you accept risk too.  And the risk they accept is some type of penalty if in the end the Reyes’s aren’t allowed to be the ultimate purchaser.  If this happens, Mr. or Mrs. Seller has to pay the Reyes’s a fairly handsome sum… for their time, effort, and $$ spent in the effort.  Again, I can’t blame Ray and the brothers… I’d do the same thing.

More sellers think getting top-dollar is a 100% thing… as in they get 100% of what they want.  That’s not the way the real world works.  Far too many sellers want…

• the highest price ever paid
• the seller to buy the warehouse at a pre-real estate collapse value
• purchase all the assets at a premium
• purchase all the inventory - and let’s just ignore unsalable product between us friends ;-)
• And an all cash deal

Well welcome to the future.  I think we will see a lot more purchasers start demanding sellers accept some of the risk of the deal not being approved… on both the MillerCoors and ABI sides.  You want top dollar?  Then you will have to give on a few things too.  That’s just the way it is.  And I will make the contract so that you will fight for ME as the final purchaser, not just anybody who will match the price.  No more happily taking the money and leaving your suitor standing alone at the altar.

As for Chesbay… they are discovering the mind numbing speed at which you burn through dollars in a big time business lawsuit.  The first $100K will fly by so fast you won’t even see it go.  The Reyes’s are attempting to join the lawsuit but the question is do they have standing?  We’ll see but I’d guess the odds are against them.  The Chesbay folks might look back at this and wish they’d accepted a lower offer but one that was actually blessed by MC.  But they are in the fight now and the doors are locked…no one’s leaving.

All you other wholesalers need to learn from this company’s pain… these transactions are far from risk free and when they go bad, they can really go bad… in a lot of different areas.

I’m certain the accusations and strong words will flow for some time now.  How (when?) does it end is anybody’s guess.  If the decision is a major one (regardless of who “wins) you can be assured it will be appealed by the other side.  Chesbay might see this thing end in a decade or so – longer wouldn’t surprise me.  If I had to predict I think they will rue the day they ever attempted this sale (although I admit they didn’t do anything wrong).  Perhaps the entire industry will do the same.  Being in play… welcome to it.

MillerCoors, Chesbay, Reyes and an industry in play

For those who follow the public equity markets you have probably heard of the phrase “in play”… as in when a company is “in play”.  Companies are often put in play by a hostile takeover bid.  In general, most companies’ senior management team don’t want to be in play… for once in play they often lose control of the situation. 

Why is this?  Well every company has competitors and when one of them makes a move it requires the others to analyze this move.  “if it makes strategic sense for them, we’d better take a hard look too”.  It often brings new people into an area… folks with different backgrounds… folks with different expertise and different goals. These interloping folks will most certainly view the company (and opportunities) differently than the present management team.  And since we’re talking about public companies, most of the present senior management just wants to enrich themselves anyhow and will do what it takes to protect their present situation.

What does this have to do with beer wholesalers?  Everything. 

This “in play” thought has been bouncing around my head ever since I heard of the pending purchase of Columbia Distributing by the Meritage Group.  I don’t mean that Columbia Distributing was put in play… I mean that our entire industry IS in play.

That’s right, not a single company but an entire industry is in play.  Where does it all end up?  I have no idea but it is an absolute certainty that it will be different than it is today.

So when did this industry get put in play? 

• Was it the audacious purchase of AB by InBev? As a side note, I’d bet that AB would have been put in play by InBev’s move even if InBev had not been able to complete the transaction.  Once InBev made the move, AB was never going to be the same.
• Was it the creation of MillerCoors in the US?
• Was it the merger of Coors and Molson to form MolsonCoors (I have to admit, I sometimes even forget about this one)
• Was it when Bond purchased Heileman?
• Was it when Phillip Morris purchased Miller Brewing Company?
• Was it when Miller Brewing Company purchased Meisterbrau to get their hands on Meisterbrau Light… the parent to Miller Lite.

Was it literally hundreds of other moves?  In all honesty, heck if I know… I just know this entire industry is in play TODAY and pretty much every assumption you have needs to be reexamined.

As beverage wholesalers, you are now in the process of discovering why companies (management teams) don’t like being put in play…

• not just because they lose control over the situation,
• not just because things can come out of left field and surprise the heck out of you,
• not just because things that you KNEW could never happen will happen.

It’s because “in-play”rips to shreds the façade that you can actually control your destiny.  Yikes!  Yikes indeed.

So let’s see where things stand at the moment…

• ABI has been quite clear that they plan to “harvest” substantial additional profit from their distribution network.  MillerCoors has better PR (well up until recently I thought so) but they would be fools to not do the same.  In many situations the only reason MillerCoors doesn’t follow ABI (like for branches) is they simply don’t have the market share to make the moves work… trust me if they did, you’d see MillerCoors branch operations around the country.  Again, I would if I were in their shoes.
• Both MillerCoors and ABI are in the ongoing process of “cleansing” undesirable distributors from their ranks.  ABI has a list (I’m told from pretty good sources) and I’d be shocked if MillerCoors didn’t also (I would if I were them).  They want the remaining wholesalers to be pliable (especially pliable), less profitable, but happy to still be kicking (and in all honesty, still making a boat-load of money for work that is far from rocket science).  Many of you are reading this and saying, not me… never!  Well trust me, plenty of you will agree to these terms.  Plenty.
• You now have at least one large private equity group in this industry.  If you think they will be the last you are living in a dream world.  In the past month I’ve had 3 calls from various Bloomberg reporters looking for information about this industry.  That pretty much screams the industry is in play.

You’ve all probably seen that visual joke where a line of people are asked for volunteers to step forward to do some undesirable task.  But rather than anyone stepping forward, everyone but a couple saps take a step backwards… leaving them out in the cold as the only volunteers.  As an industry I think a similar thing is occurring… LOT’S of other industries have taken this step backwards (mainly due to tough financially times and in some cases the complete erosion of their business model… think newspapers, travel agencies, even Microsoft and their PC-based world… it’s funny just I was writing this Bloomberg sent out the following headline… Google Inc. has surpassed Microsoft Corp. to become the world’s second-largest technology company as computing over the Internet reduces demand for software installed on desktop machines.).  So a heck of a lot of industries have taken a step backward and who’s left standing out there with their backsides exposed to the wind?  Hello beer distributors!

And speaking of erosion of business models…

Do you really think this industry is immune?  State-based alcohol regulation does not mandate a bunch of beer wholesalers making a great deal of money.  One does not demand the other. 

Although I haven’t had any recent channeling experiences, go back and read my Tough Love from the Other Side, which you can find here…

• It’s not big news that most suppliers (big and small alike) think you make WAY more money than the value you bring.  I don’t really care if this is right or not, that’s the way they see it.  But you might consider the reality that the owner of a medium sized distributor probably makes more money annually than all but the most senior executives at the major suppliers.  And trust me, their jobs are just a little more difficult than yours.
• You’ve got the craft brewers (still the prettiest girl at the dance) who have been very successful in getting exemptions from various laws and taxes, based solely on their volume.  And of course once they grow and cross this volume threshold they want the volume limits increased to continue their exemptions.  These are permanent erosions that are far more likely to expand than contract. 
• Big retail isn’t going anywhere and they still don’t think you add all that much value to the game… oh and wait, as the self-life of beer gets longer and longer… your value in many situations gets less and less.  Other than the regulatory nature of the product it is becoming more like a can of vegetables.

And lastly you have the little dust up between the Reyes’s and MillerCoors over the acquisition of Chesbay… yes I’m getting to this.  As my dad would say, “hold your horses.”  But you might not like my take… make certain you’ve taken your blood pressure medicine before continuing…

Many different angles on this one… I’ve heard rumors from years back when the industry was going through some crazy price competition that the Reyes brothers weren’t overjoyed with some of these decisions and flexed their muscle.  The rumors were that both Miller and Coors were not too happy with this muscle action and they decided the Reyes’s would not be allowed to get any larger.  But of course they have been “allowed” to make acquisitions since then so either the rumors were wrong or they weren’t set in stone.  This whole thing could be as simple as that… from the MillerCoors perception, the Reyes operation is as large as it is going to get and that’s that.  And they are using whatever means possible to ensure this is the case.  It might be no more complicated than that.

Or it could be that and other factors.  Here is a quote from a long response from the Reyes’s regarding this…

...”MillerCoors' agenda is clear. It aims to seize control over, and convert for itself the value from, its vast nation-wide distribution network.”

Well as my son would say, duh!  OF COURSE this is their agenda.  If you ran MillerCoors wouldn’t it be your agenda?!  As for MillerCoors changing their tune… again, duh.  Circumstances change.  People change.  Commitments change.  Many have had the sometimes heartache and sometimes euphoric experience of a divorce. … well stuff happens.  That a major corporation changes its mind is really not too surprising. Necessity dictates a change of heart and thinking.   In addition, MillerCoors faces a new reality, ABI rather than just AB.  Operating decisions which might have made sense versus AB might not make as much sense versus ABI. 

And don’t be naïve… just as I emphasize that your true partners are your fellow beer distributors.  For ABI and MillerCoors, at some level they are partners too.  Simple fact.

Then there is the performance issue… here goes one really BIG potential client… I just must be in the mood to piss people off – see End the Education Plantation, www.EndtheEducationPlanatation.org  ;-). 

I have always been amazed at what Miller and Coors (now MillerCoors) has let Reyes operations get away with.  I’m all for minimum order quantities (whether in dollars or cases) but Reyes operations appear to be extremely aggressive and potentially in conflict with MillerCoors expectations when applying retailer service policies and minimum order quantities.  I would love to implement levels like that when I help re-organize a distributor… it makes it a lot easier to drive a ton of money to the bottom-line.  But MillerCoors (or ABI for that matter) would have come down on my client and me like a ton of bricks if we had tried.  So that could be sticking in MillerCoors’s craw too.  I’m not upset with the Reyes’s, just jealous ;-)

In some ways it seems like the Reyes business model and corporate strategies are becoming less aligned with MillerCoors… perhaps representing more of a logistical model than a DSD/value model.  If you’re the size of the Reyes operations (and considering their other endeavors which ARE logistical) a logistical model might make the most financial sense.  But does it make sense for MillerCoors?  Perhaps that’s part of the fight too.  And as a side note, does a logistical model make sense to all you other beer wholesalers out there?  I certainly don’t think so.  I think turning your businesses into a logistical-based system is a path to your demise.  There are A LOT of companies out there who can deliver stuff.  Becoming more one-dimensional decreases the customer value proposition.  If you become just one of many then you probably cease to exist.

But as a tip-of-the-hat to Ray and the brothers – I’ve got to try to get out of this hole at least a little bit ;-)… they have been executing a superb long-term strategy.  They have owned a number of large distributors for quite some time.  I would assume these are basically debt-free and therefore throwing off a ton of free cash.  And they have used this cash flow to fund some serious acquisitions.  Ray and the brothers aren’t bottom-feeders; they step to the plate and get deals done.  When other folks cry “I can’t pay that much” (which is really saying I don’t want to pay that much), these guys step to the plate.  It’s not their fault that others don’t play the game as well as they do… or have the huevos to write the big checks and accept the longer payback periods.

And since I seem to have the shovel out and am digging furiously, why not add a little more to the hole?  As I upset you with the following please don’t forget the basis of this post… this entire industry is in play.  I’m just going to tell you what you don’t want to hear but what many of these new players might think.

Again I will quote from the Reyes response…

The MillerCoors lawsuit has nothing to do with trademarks. It amounts to a foreign invasion of our laws and our values and yes, our US Constitution.

"We appreciate the incredible outpouring of support over the past several days and we promise you one thing above all else: with your continued support, we will not let MillerCoors take our business, or yours."

Man, that sounds like I could have written it!  First I think it is a little hyperbola to state that MillerCoors is trying to take their business.  I think MillerCoors is simply refusing their bid to get larger within the MillerCoor network. 

But the big dog, the elephant in the room is the impact on state franchise laws.  Here comes some tough love.  I believe an intellectual case could be made that franchise laws are simply the result of the political power of a small group of politically connected businesses… businesses whose goal is to simply enrich themselves (don’t shoot the messenger!) by crafting state laws which gives them multi-generational rights to distribute the products of others.  In some ways these laws are based on an argument that once you have these distribution rights, they are yours forever… unless YOU decide to do something with them.  Have you ever heard of a distributor walking away from almost any significant brand?  Nope, these laws are for one side and one side only.  And please note, you don’t need franchise protection/laws to have an independent three tier system.  These laws are for your benefit and few others (again, I’m just telling you what you are going to encounter). 

Now the distributor will of course respond with the argument… I worked hard to build these brands and I should be protected and rewarded for doing so.  Again a little tough love… I remember back in the days when Corona was rocking, up 30+% annually in many markets.  I’d be having a beer with a distributor and sooner or later he’d start pounding his chest about how he is kicking booty with Corona.  On and on it’d go about what a great a job this distributor was doing.  After a while I’d note, gee so-and-so north of you is up just as much as you… in fact so-and-so south of you is up even more… so are the distribs east and west. 

So how can it be that these Corona trends are based on your spectacular performance?  These other distributors aren’t you and they match your trends.  In fact the trends are pretty much the same around the country.  There must be a little more to it than your spectacular performance.  In fact I don’t think I’ve been to too many markets where one distributor is rocking with some major brand and his adjacent distributor’s sales of the same brand are terrible.  Take out demographics, population trends, etc. and generally the sales trends are pretty even… that’s not saying distributors can’t/don’t have an influence but it is more in the single digits.  That’s just the way it is today. 

So when you are pounding your chest about building these brands one could ask, then why are they performing similarly across this area?  So perhaps you didn’t build those brands as much as you would like… perhaps your “ownership” of these brands is much less than you acknowledge.  Perhaps you didn’t really “build” these brands at all; you simply followed the demand generated by the supplier and the general marketplace.  Perhaps any decent distributor would have generated the same outcomes… the facts seem to support this proposition.  And as for all the “investments” you made in these brands… they all generated a positive rate of return so you have already got your rewards… what are you crabbing about? ;-)  Remember, tough love?

And lastly, the main goal of franchise protection, to ensure these brands can’t be taken away without cause and that you are fairly compensated for all your past work and effort in building these brands.  As for the building of the brands, read the last few paragraphs (other than a new craft beer it simply probably isn’t the case).  As for ensuring you are rewarded/compensated… some might say you have already been rewarded by the gross profit dollars and net profit you have made for years and years… some might say your years and years of some big dollar profits have already rewarded you for these brands… some might say that in effect state franchise laws are an attempt to have beer distributors paid twice for the same thing… and to ensure the gravy train is never interrupted for a handful of lucky folks.  Look at your financials over the past 20 (60?+) years… some might say you have been rewarded nicely, especially when compared to the “average” family business.  I’ll trade checking accounts any time ;-)

Even the “without cause” aspect is open for argument.  Whose brands are they in the first place?  Why does a suppler give up their right to control their brands forever once they go with some distributor?  Why can’t they have whoever they want distributing their brands?...  without paying a large ransom to get them back (or more likely finding someone else to pay the large ransom). 

Let’s go even further and think about what these franchise laws mean to a supplier.  EVERY time a transaction occurs, who in reality is paying for that transaction?  Distributors will of course say, well I am you oaf.  But what are you paying it with?  With the gross profit dollars of that very supplier.  So in effect a deal that is priced at 3 times gross profit means that in a very real sense, for that supplier for the next three years every dollar of gross profit provided in that territory is being used to further enrich someone who is no longer even associated with that supplier.  Think of that… for three years not a single gross profit dollar provided to that distributor is helping them build or sell their brands!  It is really rather remarkable.  What about the 5 and 6 times gross profit deals?!

In a very real sense the supplier is paying for you to make these acquisitions and pay the ransoms.  It’s their hide, not yours.  Yeah, I know the risk is yours but I’m trying to make a point ;-)

But of course these deals are structured over a much longer time period than that.  So a more accurate reality is that after a transaction, a not insignificant portion of the gross profit dollars their brands bring to the table will be drained off for the next 15+ years to further enrich someone who is no longer associated with their brands.  If you were in their shoes would you celebrate this use of YOUR gross profit dollars… for decades?!!  And it happens with EVERY transaction.  It might be an interesting exercise to add up all the deals done over the past few years and calculate the net gross profit dollars which are being drained away from suppliers.  I think it would be a staggering amount.

And lastly think about numbers… in some situations I think there are more craft brewers in a state than beer distributors.  As the number of beer distributors shrinks, your political power also shrinks (unless you all consciously fight to keep it).  When this franchise protection is only for the benefit of literally a handful of businesses in a state filled with millions of businesses, one has to ask how long (or if) it is long term viable.

Perhaps instead of our much discussed “erosion of the independent three tier system” the real challenge will come from the destruction of state franchise laws?  Remember being in play… one loses control of the situation.  Perhaps MillerCoors, ABI, other major suppliers and small ones too, new entrants, and even a few beer distributors will see this as the opportunity to rid themselves of onerous franchise laws.  Perhaps they will see this as the opportunity to re-set the system so that THEIR gross profit dollars are used to actually sell their brands (or kept in their profits rather than yours), rather than providing multi-generational wealth to a handful of lucky folks.  Perhaps they will push to make the paradigm one where you make money while in the business, not when you exit. 

And perhaps the Chesbay dustup will present (force?) this unplanned opportunity on MillerCoors? (and by extension ABI and other suppliers of all sizes)  These players might ultimately look at this as similar to getting rid of a union… if the opportunity presents itself, you know it will be painful for a while but think it will be worth it in the end.  I might think that way.  And they might just join hands and present a united front in this assault… the pain might be less for all if they did.  Remember again, at some level, big or small, brewers are partners.  The suppliers could keep a heck of a lot of money either in the market or in their pocket if they made a hard run at state franchise laws.  And many of their arguments are not without merit.

Many of you won’t like the above paragraphs of this post.  Guess what?  A LOT of people are going to think that way.  A LOT of people are going to be making these types of arguments.  Some will say, so what if MillerCoors or ABI can reassign these brands to someone else?  They are THEIR brands and you’ve already been nicely rewarded.  You haven’t earned nor are you owed any additional payment.  New entrants to this business might be quite happy to operate without franchise protection… somehow the wine and spirits folks make do… as do the vast majority of wholesalers in a wide range of industries.  Look in the mirror, you have no special right to be a wealthy beer distributor whether you like that reality or not.  If these debates enter the mainstream, you in all likelihood will lose.

How do you plan to respond?  That is the next challenge.  You are going to learn why no company wants to be put in play.

Are employees an asset or an expense?

Before we begin the post let’s think one more time about Iran and Israel and what it might mean for your business.  Some pundits think the US presidential election is going to drive the timing/decision of a possible Israeli strike on Iranian nuclear activities.  Their thinking is…

• If the Israelis think Romney is going to win, they will delay their attack since they believe the Romney administration will be more supportive than the present one.

• If the Israelis think Obama is going to win, they will attack before the election since they believe Obama will be forced politically to be more supportive than after beginning a second term.

Right now the polls have the presidential race as pretty much a toss-up… what do you think?  If you were the Israelis how much certainty would you need before deciding?  If in their position what would you risk?  If the Israelis attack (and they certainly believe the threats coming from Iran about wiping them off the face of the earth) it could unleash who knows what.  Fuel prices will certainly spike… but for how long?  How high?  What about the rest of the economy?  It all depends what happens after the attack.  Do the Iranians retaliate but not directly or do they unleash the dogs of war?  How will the other countries in the region respond?  There is of course the schism between the Arabs and Persians and the Shiites and Sunnis… is their animosity towards Israel greater than their animosity towards the other?  Do they really want to join the fight or do they instead focus on their own issues?  Will the governments decide or will the mobs?  Or do they see this as the opportunity to once and for all push the Israelis into the sea?  If so, who knows how it all turns out.  Not much you or I can do about it anyway but it could significantly impact your operations.  If the Israelis go before the election, it will probably happen sooner rather than later.  Just something to think about.

And now the post…

Now I don’t want to get too cerebral for you… and for me it is a journey to a far-away land ;-) but think about that, are your employees an asset or an expense?  Are they simply a cost of doing business?  Are they not too different from your electrical or propane costs?  Necessary costs of doing business but just that… in which case you should attempt to minimize these costs just as you would any other business expense.

Or are employees an asset?  The Free Dictionary describes asset as:

• A useful or valuable quality, person, or thing; an advantage or resource.
• A valuable item that is owned.
• Assets - Accounting.  The entries on a balance sheet showing all properties, both tangible and intangible, and claims against others that may be applied to cover the liabilities of a person or business. Assets can include cash, stock, inventories, property rights, and goodwill.

Some have taken the thinking to an extreme and asked if employees are truly an asset, then why aren’t they listed somewhere on the balance sheet?  If you consider the last two definitions the answer to this is rather straightforward… that type of physical asset can be sold or turned into other tangible things of value… since you don’t own your employees you can’t sell them (dang it!), thus they are aren’t a balance sheet item.

But back to the main question, are they assets or expenses?  This question is not as straight forward as one might thing.  In our warm and fuzzy world our quick response is OF COURSE our employees are valuable assets.  But if that is truly the case then why would you want to automate your warehouse?  Why would you get rid of the full-time receptionist and instead install an automated phone system?  Why would you do any action which reduces head count?  Having $10,000 in cash (an asset) is “better” than having only $10.  Having a building worth $10M is “better” than having a building worth only $100K.  If employees are an asset then why isn’t it the same with them? 

First a side note on why I am asking this… I have heard a similar story from multiple sources on multiple occasions regarding the top folks at ABI (and this experience has been repeated multiple times across the country)… and the story goes something like this… one of the big dogs from ABI was visiting a distributor’s warehouse.  The distributor was proud of his operations and his people and put on a dog-and-pony show for this exec.  He showcased all of his beer folks… good ol’ Jim has been with us 45 years… Bill has 30 years’ experience in the beer business… Sue has 25 years, etc. etc.  In all this company has over 200 years (or some such number) of beer knowledge.  After the dog-and-pony the owner and the exec where walking out to the exec’s car… the exec (just in passing) noted that the owner should get rid of all those old employees, they cost too much.  So are employees an asset or an expense?

I am told there aren’t too many folks in St. Louis that are over 30 years old these days.  I think there is just one “old” senior AB guy left.  Assets or expenses?  Since the InBev acquisition ABI has had their share of production issues… assets or expenses?

Actually I think the entire question is wrong… just because we have the ability to construct a sentence doesn’t mean that sentence has any validity… any existence in the real world.  Long ago I had a great management professor who described the evolution of management thought as follows…

First was the Hands theory of management.  Employees where simply hands… and these hand were used to accomplish certain tasks.  And when the hands couldn’t do it anymore, you simply threw them away and got another set of hands.  This time period was the early industrial revolution where the vast majority of employees were involved in physical labor to some degree or another.  This was also the time of the growth in unions (quite rightly in many situations).  But as time went by it became more and more obvious that employees where more than a set of hands and that attempting to manage them as such was simply not effective (we’ll leave the morality out of it for now).

Then after World War II the technological revolution began in earnest.  It was a time of great scientific and industrial advancement… the time of Sputnik and the race to the moon.  Here we evolved into the Head theory of management.  Employees were logical creatures and if we simply presented the logic of our goals/desires, they would happily get in line.  At its core this thinking implied employees where much like the character Spock on the old TV show Star Trek… driven by pure logic.  Unfortunately (fortunately?) people are not like this at all.

Thus bringing on the third phase, the Heart theory of management.  Now the time is the 70’s where the entire culture was undergoing a transformation.  The Heart theory was based on the premise that if we simply all held hands, stared into each other’s eyes and sang Kumbaya all would be well.  Employees and owners would all magically be on the same page as the entire organization marched happily toward success for all.  Unfortunately (fortunately?) people are much more than simply heart… and not all hearts are remotely alike nor carry the love for all.

My management professor’s point was that each was right and wrong at the same time… employees (people) ARE hands… but they are heads too… and they are hearts too.  And to be an effective manager you need to address your employees as such, a complete integrated person where each part is equally important.  Sure some folks are more head than heart; then manage them as such.  Some are more heart than head; then again, manage them as such, etc., etc.

So what does this have to do with the initial question?  It too is both right and wrong at the same time.  Of course employees are assets… trying delivering beer without them.  Of course employees are expenses, they aren’t free and the more you have the more costs you incur… and not all employees are the same.  The very best of the best is worth more than one who can barely meet minimum standards… and please note I state this from a business perspective, not a moral one.  Not to get too Kumbaya on you – as you well know, I am a very sensitive fellow ;-) but from a moral viewpoint, each and every human is just as valuable as the next.  God can sort it out from there.

But from a business perspective not every employee/position has the same asset value as all others.  I have a personal bias (because I think it is the correct choice) that I would rather have fewer but better.  If I am going into battle I’d rather have 50 highly trained, highly motivated soldiers than 150 draftees who would much rather be somewhere else. 

I think the same about business.  There is only so much payroll available… I’d rather have a few less employees but have all top performers.  And yes, top performers get top compensation.  That’s the way the world works.  The employment market is much like a very large auction, you are bidding on a set of skills against other bidders.  If the market price for these skills is $X, you cannot expect to purchase these skills for much less than $X.  You can try, but other than a few “lucky” ones, it ain’t going to happen.  So if you want the best (again, not a moral statement), then you have to pay for the best.  Now you can of course overpay for these skills (a mistake made by far too many), just like you can overpay at the auction, but you cannot consistently underpay.

And these top performers should be across the company.  I want the best warehouse folks I can find… I want the best office staff I can find… I want every employee to be the best I can find.  I have yet to see a business (of any nature) grow and succeed by hiring the least qualified (cheapest) employees they can find, whether it’s flipping burgers or working a truck or writing computer software.  But that’s my bias.

In addition, a business is an integrated system; it is a living breathing organism where each part affects the other… the entire concept of one functional piece being more important than another is simply wrong.  As I have noted before, the space shuttle Challenger exploded soon after takeoff killing all on board.  It was a truly amazing system, costing hundreds of millions of dollars.  The cause of the catastrophic explosion?  The failure of a part which costs $5.00.  Ask those dead astronauts what the most important part of the space shuttle was.  Don’t think a quality receptionist is important?  Have you ever had the unfortunate experience of dealing with a company which has a lousy one?  Everything is important.

So yes, employees are an asset AND an expense… all at the exact same time.  Is the ABI advice correct?  Get rid of those old guys ‘cause they cost too much.  Again, it depends.  If you are simply paying them big dollars because they can still fog a mirror, then you are making a mistake.  If you are paying them big dollars because of the value they bring, then you are making a wise choice (and remember the auction, ultimately you don’t get to determine compensation anyhow, the marketplace does that).  And of course you can never forget that your employees are watching everything.  Loyalty is a door which swings both ways… if you want your employees to be loyal to you, you must be loyal to them… are you listening ABI and MC?

As an example, I had a client who had an older employee who didn’t add that much value to the org.  He might have been a hard charger at one time but he simply wasn’t bringing it to the table anymore.  Everyone knew this… the owner, the management team, the employees.  He was overpaid for what he did.  But years ago this same employee risked his life in fighting a fire at the warehouse.  Without his single actions the warehouse would have burned to the ground.  He risked his life for his boss (as I have noted before, the average person is a magnificent creature).  Guess what, that guy stayed on and retired from that company and EVERY employee knew why he remained around.  And guess what, these employees, new and old alike, knew that this owner took loyalty to heart.  And they gave loyalty in return.  That’s the way the world works.  An asset AND an expense, indeed.

Now that’s the way I look at the world but not all agree… and many have made a ton of money treating employees like an expense, like the Hands theory of management.  For a private business which plans on existing for years and years, I don’t think the expense-thinking can lead to long-term success.  But large public companies are a different matter altogether… professional managers who have no long-term allegiance to anyone or anything (other than perhaps their immediate supervisors)… in 5 or 10 years they might be long gone.  They are much more likely to treat employees like an expense.  That’s one of the reasons I like privately held businesses… I like their natural evolution, bottom-line accountability and flexible operations much more than the public world.

So considering ABI’s production issues, was their house cleaning a good idea or a bad one?  You could ask the same thing over the past few years as Miller and Coors tried to merge their organizations.  Again let us take a side trip to a thing called institutional knowledge.  Institutional knowledge is all the knowledge an organization has that isn’t written down anywhere… it exists in employee’s heads.  To truly understand institutional knowledge it helps to expand one’s thinking to include the 4^th dimension, the dimension of time… ‘cause that is ultimately where this knowledge resides… in the heads of folks as they flow through time.  From one to another to another, across years or decades or even farther.  Think of certain children’s songs.  These songs aren’t really written down yet an incredibly high percentage of 6 year olds (or whatever age) know the songs.  It’s as if the songs exist in space/time – now we’re really getting wild! – and 6 year olds simple pass through this point and learn the institutional knowledge from other kids who have already “been there”.  Then they move on as other 6 year olds flow into this space.  If you think about it, not that long ago basically ALL knowledge was institutional knowledge… from when to plant the corn to what herbs to eat to help an upset stomach.  The development of language is another example.  No one directed it.  No one wrote it down.  No one controlled it, yet the language developed and evolved and was shared by all of its speakers.

As an example from this industry, think back to the days of driver-sales.  Generally the driver loaded their truck (or at least directed how it was to be loaded).  He knew how to load it because the guy before him knew how to load it and taught him, etc. etc.  Nowhere was it written how to properly load a truck (putting certain packages curb side or what not to put over the wheels or a hundred other things).  This knowledge existed in employee’s heads.  And it wasn’t written in stone.  One person might find that doing X or Y was an improvement, and if it truly was, that would be added to the institutional knowledge.  A common complaint by delivery drivers in pre-sell organizations (especially early ones) was that the warehouse didn’t know how to properly load a truck.  And they were right, they didn’t.  They didn’t have this institutional knowledge.  It was never imparted to them… although I know of a few situations where the frustrated driver did attempt to impart this knowledge, usually behind the warehouse with more than a little violence. 

Your organization is FILLED with institutional knowledge, much more than you can probably imagine.  Thus when a major organization like ABI cleans house, a great deal of institutional knowledge walks out the door.  And if morale in the organization is poor (which during downsizing it almost always is), many folks who have valuable institutional knowledge simply refuse to share it.  Basically a “screw you” type attitude.  And if the employees choose not to share this institutional knowledge, it is as good as lost.

So are some of ABI’s production (and other) problems caused by this exodus of institutional knowledge?  Of course, it is a certainty.  MillerCoors has experienced it, so did Pabst and Stroh and Heileman and a hundred other businesses.  Although for ABI and MillerCoors, it is obvious the benefits of these moves have FAR outweighed the negatives.  And think about MillerCoors.  How would they like to be competing against ABI as Miller and Coors.  ABI would eat their lunch.

Many of the young craft brewers will discover the importance of institutional knowledge when a key person moves one.  Organizations will generally rediscover and recreate this knowledge, it just takes a while.  Why?  Because it is the truth… there really is a better way to load a truck to make it easier to work on the street.  There really is a better way to do almost everything.  If one can discover it, then one will be more successful.

Which circles us back to the original question… are employees an asset or an expense.  The answer is yes.