Are ABI and MillerCoors Planning to Grab Consolidation Synergies?
I think I’m becoming a shill for Harry - the check IS in the mail, isn’t it Harry? ;-) This time please have the zeros on the LEFT side of the decimal, OK? ;-) but he reports on some interesting comments from Mike Mazzoni in his March 5th edition of Beer Business Daily.
I’ll quote Harry extensively since I think he lays the groundwork for a paradigm changing strategy… the strategy being mine, the ground work his… sorry Harry, you’re “just” a reporter… I’m a wisdom-spouting, idea-generating management consultant ;-)
Harry writes: (underlining and bold are mine)
…consultant Mike Mazzoni made a compelling case for system consolidation and why the big suppliers [MillerCoors now and ABI later] are going to push hard for it… His rationale for consolidation? Of course it's the money…
But first, a little perspective. The ABI and consolidated MillerCoors systems control more than 80% of the U.S. beer volume. When you add in the unconsolidated Miller/Coors house, that number increases to about 90% of the volume. A-B distributors and MC consolidated distributors, says Mike, "appear to be at parity" on average case volume sold. However, and this is big, he says that "while they appear to be at parity, something is going on here."
MEGA-DISTRIBUTOR MATH. That something is the "mega-distributor phenomenon, and this is really a game-changer," says Mike. He defines a mega-distributor as a consolidated MillerCoors distributor which has been able to put together a huge high margin portfolio around the MC system. "It's not the size," says Mike, but rather it's the "high end portfolio that they've been able to cobble together....and they've been able to use that portfolio to fuel their next acquisitions.....because they have significantly higher margins per case....sometimes 20 to 25% higher margins ." Those mega MC distributors have been able to "reverse A-B distributors' dominance in the marketplace....that they built over the years as they grew toward 50% market share." Mega-distributors also have "broad territories which allow for seamless execution, which is something A-B used to be able to leverage in the past." Consequently, the ABI system is "in my view, under attack."
In fact, the mega-distributor model works so well, says Mike, that MillerCoors is actually going to distributors which have already consolidated and asking them to sell out to mega-distributors, "which was a surprise to me." Mike says there are 15 to 20 mega-distributors out there who are either "solidly entrenched in the market or in the evolution stage." Of those, the top ten control about 10% of the total U.S. beer volume, and they control about 30% more of the gross profit pool than they do of the volume pool. "That's huge," says Mike.
It's huge because those top 10 mega-distributors overlap about 90 to 100 Anheuser-Busch wholesalers. "I'm not saying that a MillerCoors mega-distributor is better than a corresponding Anheuser-Busch distributor, that's not my intent and it's not the issue. What I'm talking about is relative scale and competitive capability." Still, Mike says that "something is out of balance.....there's an awful lot of room for A-B distributors to catch up to be more competitive." How did this happen? " The bad timing of A-B's 100% share of mind initiative. I'm not saying it was bad, but the timing was bad, because it drove the high end products that were growing into the non-AB system."
REACH IN. Okay, so enough history that most of you already know. Here is where it gets really interesting. While A-B says it doesn't have a distributor consolidation strategy, Mike says "they should" because the resulting increase in profitability gives ABI the ability to "reach in and improve its own margins.....If I can see it, they can see it."
Listen to what Mike is saying… “If I can see it, they can see it.” Repeat that 3 times. “gives ABI the ability to "reach in and improve its own margins”… where are they reaching in and improving their own margins??? Your world my dear friends, your world.
WE WILL HAVE FEWER DISTRIBUTORS. "I believe these two companies [AB and MC] will accelerate distributor consolidation," says Mike. In 3 to 5 years, he predicts that a third of A-B distributors will be sold or merged, and MillerCoors, which is already 70% consolidated, will consolidate another 20%, so that 90% will be consolidated. So under that scenario we would lose about 150 A-B distributors, lose 200 stand alone Miller and Coors distributors, and get a net gain of only about 50 MillerCoors consolidated houses, because there will be several multiple acquisitions. As for the all other distributors, they will lose some of the 350 million cases to the AB and MC distributors.
...AND THIS IS WHY. Mike estimates that the entire beer distributor network in the U.S. earns about $2.75 billion in operating profits system-wide. If Mike could consolidate 30% of the system immediately by snapping his fingers, and achieve 30% synergies on those consolidations, the operating income would go up to about $3.7 billion, or an increase of nearly a billion dollars. Mike says achieving 30% in synergies is about average for contiguous market consolidations (buying your neighbor).
Let me interject here… 30% synergies is pretty dang good for contiguous or horizontal consolidations. In many situations this is not the case. To achieve 30% synergies you pretty much have to keep just the street-level sale, delivery, and merchandising operations. Almost everything else goes. This is sometimes possible but far from possible in every situation.
But what if, instead, you buy your competitor? In vertical market consolidations you could achieve 50% synergies. If you get 50% synergies, you get to about $4.2 billion in operating income, or a $1.45 bump in earnings (before interest, taxes, depreciation, or amortization, of course). That's a lot of money. "Over a fairly near term, there is the potential to create this kind of value in the system. This what consolidation is all about," he says.
Again let me interject… although the 30% number above is fairly aggressive, the 50% synergies for a vertical (or over-lapping) consolidation is pretty conservative… often this number is closer to 70%... i.e. 70% of the gross profit of the acquired entity can be driven to the bottom-line.
OH, SO IT'S A PROFIT DEAL? "I just don't believe that the major suppliers are going go let all of that money fall to the bottom line of the distribution system...even if they reach in and only pick up half," ads Mike. "It would be bad business." And keep in mind, Mike reminds us, that this is a recurring benefit. Not a one time payment. This money is generated "year after year after year."
WOULD THEY DO IT? Mike asks why wouldn't they do it? "You gotta ask yourself, what are they [ABI] going to do? I believe there's a reasonable probability that they will do it.....we haven't seen anything yet, it's too early in the transition, but we do have history."
You each should also ask yourself… why wouldn’t they do it? Would you if you were in their shoes?
As Carlos noted in my last post, InBev, now ABI has a culture of dominance and although they haven’t shown this face to their distributors (yet?), they have to their other business “partners”. Think of 120 day payment terms… that’s 1/3rd of a year! You do work for them or provide some good or service and 1/3rd of a year later they pay you! Yikes! ABI says no one should worry since they have a great history of paying their bills… but using that logic why not go to 360 day terms? Don’t worry, you’ll be paid… just 12 months after you do the work… and of course since the terms you get from your business providers is probably 30 days at most, you’ll have 11 months of unreimbursed bills you have already covered. Kind of a little hit on the ol’ cash flow.
So where do we stand with this and the last post? Carlos believes AB distributors are "in denial" about AB InBev's ability and desire to transfer wealth to their own majority shareholders, largely at their expense.” ABI has a "culture of dominance over competitors, employees, suppliers, retailers, and minority shareholders .....They run with a wealth creation agenda for the controlling shareholders..... He ends with "given the ABI that I know, it's not a partnership mentality about growing the pie " but rather a "zero sum game."
Then Mike comes along and makes a strong financial case for why consolidation is going to continue and why suppliers are going to try to grab a big chunk of these consolidation synergies… i.e. cold, hard cash. Double yikes!! If you believe Carlos and Mike, distributors are in for a little short-end of the stick time… I’d be more graphic but this is a family publication ;-)
So what to do? How about changing YOUR paradigm? If everyone else is going to try to change the game – and they are whether you like it or not - you’d be foolish to play it under the old rules. In fact you are destined to lose if you continue to play by the old rules while everyone else is dramatically changing the entire game. This is simply strategy 101.
Carlos screams sell, and Mike says the day of the mega-distributor is here. But what if you’re not already a mega-distributor? What if you simply don’t want to go running towards the exit?
You could of course attempt to purchase other wholesalers and become a mega-distributor. Of course you need willing sellers… and the financial strength to pull it off… not easy on either front. And the time frame to pull this off is many, many years… probably decades. Will the external realities you now face allow you this amount of time? This isn’t 1980.
Or you can change the way you view your family business. If you think of your business as more than solely a family business but also as a financial asset, then the path of mergers is a strong possible solution to the realities Carlos and Mike think you face. With mergers you can create a mega-distributor in a matter of months… with mergers you could conceivably roll-up an entire state… if you have a couple hold-outs (or folks you don’t want to include), who cares?… once the thing is significantly done, they’ll have no place to go anyhow… sweet! That’s what strategy can do for (and to!) you. Thus there is significant value in being a “first-mover” and being involved in the construction of these mega-distributors right from the start.
With mergers geared toward the mega-distributor…
· Huge organizations formed in very little time… months not years in creating incredibly powerful and profitable organizations
· Cash-free (and tax free) transactions with little to no debt – putting those $$ synergies in the principal’s pockets rather than making the bank happy for the next 10 year…
· No financing limitations to growth… in fact the financial power of the entity only grows with each additional merger partner
· No one is forced to leave the industry… instead everyone continues to share in the financial rewards of this industry, for you and your family for generations to come… still perhaps the best financial investment out there
· If your suppliers want to operate from a “culture of dominance”, bring it on! With power comes the ability to protect yourself. Without it they pick you off one by one… pitting one against another… all while laughing all the way to the bank… and all while permanently changing the distributor’s world until the game is over before you even know it. Two can play the culture of dominance role… and guess what, if one is going to… the other damn well had better plan to… or just get out the lubricant and ask, “please sir, can I have another” ;-)
· And lastly, set a path to the golden ring, the long ball, the hat trick – you get the idea ;-) … public ownership of distributors… open up the public equity markets for both a source of financing and an exit strategy. Yes, I can hear you now… but John, the suppliers won’t allow that! That’s what a freaking paradigm shift is all about… changing the fundamental nature of the equation. And you do that with power. And the way you get power is with size and profitability… and the way to quickly build the size and power is through mergers. Even if this objective is never achieved, the merged mega-distributor strength will still be far superior to any other option.
The paradigm is going to change… that is a fairly safe bet. You can attempt to play by the old rules and most likely lose (and like a chess match, the game might be already over before you even know it has started)… or you can grab the freaking paradigm by the throat and make it yours… or at least go down fighting with an aggressive, dynamic plan rather than a passive, “gee, I hope it all works out for me and my family” plan. Sometimes an attitude of “just don’t do something, stand there” is a good choice… this sure doesn’t seem to be that time.
The choice is yours. I sure the heck know which one I’d choose.
And as a side note, I’ve heard from a couple of wholesalers who think this whole paradigm shift, culture of domination, merger push, massive consolidation forecast are all just ruses for consultants, analysts and service providers to make money ( but trust me, none of these are the non-preferred wholesalers in unconsolidated Miller Coors markets)…
“nah, none of this is happening, it’s all being driving by those greedy outsiders… nothing changing in my world”
To which I respond…………………………………………………. Have a nice day. If you are that out of touch with your own business and the industry in which you operate, there is no reason for me to try to change your mind. Let’s just go have a beer and we’ll see whose predictions come true… unfortunately (and sadly), I’m afraid I’ll be winning this bet. I’d truly rather not have any of this happen (it is not in my long-term interest)… but I long ago learned that what I want has very little impact on the reality I face. Such is life.