Consolidation? A contrarian view.
Is consolidation in the beer distribution industry a certainty? Or even more importantly, is it a good idea… and will it “work”. I recently spoke to one of the smartest distributors I know and he again reiterated why he believes this rush towards consolidation is perhaps a fool’s errand. He questions the supposed financial benefits and whether it is good for suppliers and the industry.
Please note, for this discussion I am not talking about (nor was he) vertical consolidations… i.e. purchasing brands within the territory you presently service. Those make a ton of sense. As every consolidated MillerCoors distributor can attest too, these can drive A LOT of extra money to the bottom-line. For this discussion we are talking about consolidation of distributors who do not share territory… they may be right next to each other or they may be far apart. And for other than those few unconsolidated Miller and Coors distributors, that’s the only type of significant consolidation left.
Obviously our major suppliers are behind consolidation. They make no bones about it. From their perspective it makes a lot of sense… or does it? From strictly a spreadsheet viewpoint it is a no-brainer - how’s that for using technical terms? Think of it in terms of your business… would there be some financial impact if you could cut the number of retailers you service in half while still selling the same volume? Of course. It would be huge. Although not to the same degree, this also occurs at the brewery-level.
But I often mentally go back to my old MBA days where we examined the business school thought of the 1960’s. Those were the days of the corporate conglomerate… when it was thought that the synergies of the consolidation of every type of business were so great that soon there would only be a handful of world-wide companies who in effect produced and provided almost everything. Didn’t matter what a company did… merge it with another company, which also didn’t matter what that one did, and synergies flowed like honey to the bottom-line. The history of business conglomerates didn’t quite work out that way.
As with a lot of things, just because it works on a spread sheet doesn’t mean it will actually work in the real world. Often times you can’t even put your finger on why it doesn’t work… it just doesn’t. This industry isn’t immune to these types of things… can you say Eagle Snacks. Sure looked good on paper. And many of you have had similar experiences with other beverages… on paper bottled water works every time. In reality it is often quite different.
Recently there has been a lot of talk of beer on Coke and/or Pepsi trucks (or vice-versa). Sure works on a spread sheet… in the real world? We’ll see. And of course there is the model of combining beer with wine and spirits (something which I am a strong proponent of under the right model – state-wide associations which I discuss in a three part series here, here, and here and a stand-alone piece on beer, wine and spirits here).
It too works on paper. And as a side note, a tip of the hat to J.J. Taylor for pushing new business models with their recently announced joint venture with Southern Wine and Spirits. That’s one way to get around the problem of actually building a state-wide association… you don’t have to convince reluctant wholesalers to actually work together to take a chance with a new concept.
But does consolidation in beer distribution – beer folks simply getting bigger - make sense anywhere other than on a spreadsheet? One analysis of consolidations in a wide range of industries found that only about 30% actually generated revenue growth but almost 60% did create some cost savings… very few generate both… some neither.
This contrarian wholesaler makes at least 5 points on why consolidation is not such a sure-fire winner, especially for the big brewers…
1. Debt loads – in almost all situations the new organization is saddled with considerable debt. For the first 10 years (at least) only the bankers make out on the supposed synergies. Compare this to the smaller, debt-free wholesaler who has much more financial flexibility… and isn’t making business decisions solely on bank covenants. This is a good point. But as a side note, this is why I’m also a fan of mergers… you get all the benefits of consolidation (if there are any) but whatever synergies are produced go into the principal’s pockets, not the bankers. Plus you can create new organizations without the need for someone to leave the industry (who probably doesn’t want to leave).
2. Labor risks – this is an interesting point. As organizations become larger and larger, in all likelihood the risk of unionization increases. Is this in either the wholesalers OR the suppliers best interest. AB knows what labor unrest can do to a company. What would happen if an extremely large organization’s drivers went out on strike? A smaller distributor is less likely to attract unionization efforts and if a strike did occur, would be better able to continue delivery operations with other staff… something a larger organization would find extremely difficult.
3. Politics – this too is not insignificant. This industry’s political power is at its maximum when there is a family-run beer distributorship in every congressional district… just ask the teacher’s unions about this type of power. As consolidation occurs, our points of contact at both the state and federal levels of government become less and less.
4. Local execution and dedication – generally the local person does a better job… for one thing they own the dang thing as opposed to being an employee. And as I explain to owners all the time, your employees will never be as committed as you are. Why should they be? They can give their heart-and-soul and make a few more bucks come pay day. You on the other hand with this same performance might be putting millions in your pocket. Nothing wrong with this… just don’t expect them to care as much as you do. The potential rewards are not remotely the same.
5. Will the synergies prove to be real? - As noted above, a heck of a lot of business consolidations end up not living up to their promises. But is this the nature of consolidation or the result of poor planning and execution? Or poor strategy? Or the future they planned for wasn’t the one that came down the pike?
6. This sixth is more about branch operations and one point why they aren’t a good idea for the supplier – the wholesaler can play a valuable role of a buffer between large retailer and brewer… the wholesaler can be the bad cop and take some of the body blows the larger retailers throw. With retailer power growing, this is not an insignificant point.
So that’s some of what this contrarian thinks. His market share? VERY high. One of his pet peeves is how wholesaler performance is measured. The present (and simplistic) “how much are you up” simple doesn’t work in his case… when you are at the top of the mountain there isn’t any “up” left. As many a wholesaler knows, if you want to be “number one” in your state next year, be last in your state this year. But that’s a post for another day. In addition, under present thinking this wholesaler is also probably more of a consolidatee rather than a consolidator… so that might color his opinion a little.
What do I think? I think these are some valid points. Trust me; this guy doesn’t make a point that isn’t well thought with a lot to back it up. But in the end, I don’t see any of these points, valid as they may be – or the sum of them – ending the push for consolidation. It is simply going to continue. Sometimes fast, sometimes slow… but it marches on. There will be fewer wholesalers down the road than there are today. That is neither good nor bad… it simply is. Some consolidators will find cost savings at the end of the road… some revenue gains… a lucky (or good?) few will find both… and of course some will only find a pile of stones. But my strong bet is it will continue.
His point on debt loads is a good one and it won’t be going away (which is good news for potential sellers). To drive this consolidation buyers have to present a financial package which makes sense for the seller… at least for the near-term you won’t be seeing distributor values decreasing. This is probably the biggest anchor on the consolidation wave that there is. In many cases the potential purchaser simply isn’t making a valid financial argument to the seller. If the value of keeping the asset exceeds the net after-tax value of selling, one doesn’t sell. Simple as that. If you’re one of those wholesalers… run a tight ship and drive as much money as is possible to the bottom-line. If someone steps to the plate with an acceptable offer, great. If not, maximize your profitability and diversify your investments.
As I’ve noted before, God isn’t making any more real estate or any more ABI or MillerCoors distributors. If you want to be a consolidator, you’ll have to pay a price that is adequate from a seller’s financial perspective. That too is neither good nor bad… it simply is. But is consolidation going to continue to roll along? Sorry to disagree with my very smart friend, but on this one he’s wrong. He may end up being right about some of the negatives (in fact I’d bet on it), but those will only become apparent after the consolidation wave is over, not before.