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« Some thoughts on Acquistions | Main | More management wisdom »

What's Up With Values?

A question on many distributors’ minds… what’s up with values?  Some are predicting they are headed south, but on this one I am a contrarian.  As I have noted before, I had thought values would have decreased some time ago but I was wrong.  Read that last sentence again… yes, I was wrong.  As a side note and as part of my never-ending attempt to help all become better managers ;-) take that concept to heart.  All good managers and supervisors (to say nothing of spouses) should learn the high-art of admitting when you were wrong.  It really isn’t that tough and it can have an amazing affect on your relationships… often disarming arguments before they even start… plus as I remind folks in sales training, the best sell is always the truth.  And if you were wrong about something (and we all are… it is a statistical certainty), simply admit it and move on.  Analyze why you were wrong and what you can learn from it.

 

Following my own spot-on advice, why do I think values are not headed south and why was I wrong in the past?  On the financial side, profits have held up remarkably well.  Total house margin compression has not been happening, in fact in many situations total gross profit percent has increased.  After a short (but painful) run of very high fuel prices, costs are generally being contained… and the pain of these fuel costs drove many wholesalers to make changes to their service policies which were probably long overdue.  Wholesalers used this pain to become lean and meaner… and most importantly, smarter.

 

The financial side of the equation is where I got a little of it wrong, but the non-financial side is where I really missed the boat.  I thought too much about the fundamental essence of value… the present value of future discounted cash flows… and not enough about THE non-financial, but incredibly powerful and valuable aspect of beer wholesaling… exclusive territories.

 

This is like the game of Risk, it’s all about controlling real estate… and there is very little real estate available… thus the bidding process for these very rare assets continues to drive prices up, not down… and I see nothing on the horizon to change this reality.  The bottom-line is that if you want to be a significant beer distributor in the US (long-term sustainable?), you have to be aligned with one of the big two, ABI or MillerCoors… and that footprint on the ground is what drives everything.  You can leverage this legally protected distribution footprint in whatever direction you desire… but first you have to own the dang thing… once that happens, you don’t have to worry about more “normal” competition coming from anywhere but your competitor beer wholesaler… and perhaps at the fringes from the wine and spirits folks.  And the value of this legal right has shown amazing resiliency and for at least the near-term, is not heading south at all.

 

Of course once you have this distribution footprint, you can leverage it in many directions and thus define your competitors in different ways… but first you have to have the real estate.   Unless and until this is changed… and I sure would fight like hell to ensure it doesn’t… the value of beer distribution rights won’t be going south for quite some time… the assets are far too unique and far too valuable.  In many ways the sale of a distributorship is like an auction for some very rare and precious asset… there aren’t many around in the first place… they come to market only rarely… if you pass, you might never get another shot at it… and of course for a distribution business, the strategic implications of these legal footprints cannot be over-stated.  Mix that all up and it points to values remaining high, not heading south any time soon.

 

That’s my very public prediction and I’m sticking to it.

 

 

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