2009 and Beyond
As the year has just ended, let’s pause for a moment and see what insights we can gather. First, it was a heck of a year. It is perhaps overused but that old Chinese curse again seems appropriate… may you live in interesting times. And they certainly are interesting. Imports have been hammered… mega-brands have taken a few body shots… and crafts continue to roll.
Volumes have been hit as one would expect but if you actually put the volume declines in perspective with the overall economy, beer has remained incredibly resilient. I know this will shock those who think I am too much gloom-and-doom, but in this perspective beer has actually had a pretty darn good year.
Most importantly, profits remain strong for most distributors… this fact is missed in too many comments on various volume decreases. Remember that ultimately it is about gross profit dollars (and net profit), not cases. And perhaps surprisingly, price increases have pretty much stuck around the country. As usual, we can all pray that no one does anything stupid in the coming year ;-) Strategic price competition can make sense but broad scope reductions which simply force everyone to follow are the path to ruin… we all know this yet is seems to happen again and again. Are we collectively smarter this time? Sure hope so.
If you are thinking of price reductions, ask yourself why… if you are successful what will the competition do? If your success simply drives them to match you, what have you gained? If instead the answer is they can’t do anything, then perhaps move forward. Or if the answer is it hurts us a little, but hurts them A LOT, then perhaps also move forward. But generally I’d rather help myself than try to hurt my competitor… once you start swinging, people generally swing back. But of course in the distribution business most of these decisions are made by suppliers and all you can do is curse and hope they won’t be too stupid.
Although we see profits decreasing for some brands and minor
suppliers, I think wholesaler enterprise values will remain strong. As I’ve mentioned before, these are rare and
unique assets and this isn’t going to change.
As has been noted in real estate… God isn’t making any more land… and
neither is he making any more beer distributors – at least of the big-two
variety. I do think we will see an up
tick in deals in 2010, since the capital gains tax is scheduled to go up 5% in
January 2011… but with this
It also looks like the few “mega-distributors” out there are pulling in their horns and a much more numerous, second-tier group are seriously stepping to the consolidation plate. I think we will see this accelerate in 2010 as the Bush tax incentives expire… … sitting on the sidelines is probably not a viable long-term strategy and wholesalers will need more “consolidated” profit dollars to help fund the expected operating cost increases.
For those unconsolidated Miller Coors folks, the pressure isn’t going to disappear (and this makes perfect competitive sense from MillerCoors perspective)… so you need to decide a path to take. Here’s a 100% certain forecast… this will take compromise… and it will be in the best interests of all parties involved. There are far too many folks out there making dumb decisions based far more on ego than brains… and trying the screw the other guy seldom gets the deal done. The only thing worst than this is making a decision without knowing what your real options are. It is always wiser to at least examine your options prior to discarding any of them.
I’m still a big fan of joint ventures of all types but these too take compromise and thinking from the head, not just ego. I think it makes a lot more sense to grab hands and create a financial asset which will reward your heirs for generations to come rather than going down with the ship… or attempting to ride out the future in a much smaller and more vulnerable ship… but I seem to be in the minority with this opinion ;-) Remember a great line which is true across the board… there is plenty to go around. It is amazing the things one can accomplish with this mindset. In the real world, often all the choices suck and the only option is to find the one which sucks the least… how’s that for professional commentary? ;-) I’m good, but I’ve got no solution for stupid and/or greedy.
The biggest risks facing this industry? Fuel costs and federal and state governments. As the global economy heats back up, expect fuel costs to increase (and of course the weak dollar will also push fuel costs up). I’ve written about the Iranian nuclear situation and I still don’t see this ending well. I’d look to hedge my future fuel costs in whatever manner I could.
As we all know, elections have consequences and the next few years will be dicey. The feds pumped a ton of money to the states in 2009… in 2010 it will hit the fan as these freebies disappear and many states face significant shortfalls. Expect them to aggressively look for revenue. The feds are always dangerous on almost every front… that won’t be changing.
But I have traveled this country extensively over the past 30 years and know it is filled with decent and even magnificent people. Sure there are a certain number of schmucks but the vast majority are amazing… you know this to be true since the vast majority of your employees (and even retailers!) fit this description. Sadly, due to the failures of our public education system over the past 40 – 50 years, many of these same people have no understanding of economics and are gullible to foolish and dangerous government policies promoted by self-serving politicians. But they are smart enough to sooner or later understand snake-oil when they see it. This is always the case.
Perhaps counter-intuitively, I predict a renaissance in the coming years… though not without pain… as the vast majority of the population once and for all discards foolish and whimsical beliefs about the wonders and magical powers of these non-profit organizations we call government. The ex-communists of Eastern Europe and quasi-communists (the Chinese) have already learned this… low to no capital gains tax rates… low corporate tax rates… low and flat individual tax rates… they have discovered through much pain that lower tax rates almost always lead to higher net tax receipts… and a much more robust economy. Better yet, I predict these types of changes will be championed by both major political parties… politicians like one thing more than all others… that’s getting elected and re-elected. If your concern is helping the poor… there are two things which are guaranteed to work wonders… a strong economy and the chance for a good education. Provide these to people and then just step back and let’er rip.
Whether the politicians like it or not, there is reality and sooner or later the chickens will come home to roost – to quote a famous spiritual advisor of a prominent politician ;-0 This intellectual transformation will not be painless… but sometimes a democracy needs a big, steaming pile of what it thought it wanted before it can open its eyes and discover the truth. For the long-term, this present economic and fiscal insanity is just what the doctor ordered. For the short-term, the medicine is going to taste like hell. Although there will be fewer than there are now, all in all a pretty good long-term future for beer distributors. How’s that for Johnny Sunshine? ;-)