Is the consolidation wave over?
What IF the consolidation wave is over? As I noted in my last post, it sure seems that the clutch has been put in regarding the drive towards distributor consolidation. I mean if the upcoming tax increases, the Obama administration, ABI and/or MillerCoors, and the tough economy hasn’t got folks running towards the exits, perhaps they don’t plan to run. And if they don’t, what about all those supplier hopes and dreams of “sharing” in the synergies of these predicted consolidations? What business models will have to be revamped if distributor consolidation slows to a crawl?
Many in this industry have talked about consolidation as a foregone conclusion… the only question being how it finally shakes out. Look at the soft drink world… the wine and spirits world… all have seen massive consolidation. But has our collective crystal ball been out of focus?
First a side note on distributor consolidations… in this post I’m not talking about unconsolidated MillerCoors distributors. The economics of those consolidations are overwhelming and whether by merger or sale/acquisition, they make a whole lot of sense… and MillerCoors is going to do everything in their power to get them done. They don’t want their brands to be treated as competitors in the marketplace… completely understandable. But I don’t work for them so I don’t really care what they want but that’s a post for another day.
Back to distributor consolidation. I too had thought we would see a torrent of deals this year… but that has not been the case. I’ve been thinking about this for a while now and my gut tells me a lot of folks have simply looked in the mirror and decided that they are beer distributors and they plan to stay that way. Simple as that.
There are many examples throughout history where the collective wisdom was correct… right up until the moment when it wasn’t anymore. Is this such a time? What if the drive towards consolidation has had its run and now we are entering a prolonged period of status quo?
Let’s look at it from various perspectives:
Some brokers have stated the reason for the lack of deals is the gap between buyer’s and seller’s prices… with the implied assumption that sellers need to adjust their expectations downward. Of course there is always some friction between what a buyer wants to pay and what a seller wants to get… that’s the nature of horse trading. But I don’t agree with the proposition that this is the primary reason deals haven’t been happening.
Consider my associate Steve Cook, who doesn’t think consolidation has run its course. He reinforces that the ongoing reason for the industry to continue to consolidate wholesalers and for potential acquirers to continue to pay premiums – it is called more cash flow. Steve mentions that from the latest NBWA productivity report there seems to be a direct correlation between sales volume and profitability…bigger annual sales is better for generating more cash! Steve footnotes that despite the smallest market share wholesalers reporting the highest growth rates, these wholesalers are still on the bottom of the sales volume ranking and continue to be the least profitable based on total return on assets. Steve’s best estimate is everyone in the supply chain continues to go full speed ahead to capture footprint synergies from brand consolidation/swapping and that wholesaler consolidation proceeds at a more natural frequency based on the usual motives and circumstances from wholesalers.
I agree with Steve’s logic but I’m not so certain that’s the way it will shake out in the near-term. As I ended my last post… my recommendations and what I predict will happen are not remotely in agreement… and I also know more than a few guys who make a pretty good living with a 500,000 case distributor.
So let’s look at profitability. All in all, the past few years have been pretty good. Even in these tough economic times, many wholesalers are seeing volumes flat to down but profitability flat to up (or down slightly)… how does that compare to A LOT of industries out there? Pretty dang good. Wholesalers around the country are every day getting better and better at controlling costs while still providing superior service. So unless something significant changes this… on either on the cost or gross margin side… most wholesalers won’t be facing pressure to sell based on profitability.
This profitability, and what is often undervalued, this stability significantly impacts selling price. Potential sellers must think about their after-tax proceeds and re-investment opportunities… of course all adjusted for risk. Most things out there are historically much riskier than the beer business.
Wholesalers are also getting a lot stronger when standing up to their major suppliers. Over the years they have discovered that when push comes to shove, this is a business relationship… nothing more. And they have to look out for their own interests. Just because ABI or MillerCoors wants something doesn’t mean “their” wholesalers will simply roll over… like many did in the past.
On the ABI front, sure many wholesalers are concerned about Brito and his long-term desires… but they are only concerned. They freaking FEARED Three Sticks… and for pretty good reasons. Three Sticks could have talked a lot of wholesalers out the door… I don’t think Brito has remotely the same level of fear. They might fear his strategies but they don’t fear the man.
On the MillerCoors front, they have had a couple kicks in the groin from wholesalers who weren’t too happy to see a MillerCoors state-wide dream consolidation map with them noticeably absent. Trying to force folks to sell their business simply because you want them to leave clearly doesn’t work… so they’ve pulled in their horns and at least for the short-term would be happy to at least consolidate those unconsolidated Miller and Coors territories. As for fear… forget about it. Winning most of these fights have given many wholesalers a second wind and I don’t see them backing down any time soon.
On the buyer side… there are a lot of willing buyers out there, but it takes a willing seller too. Some buyers have reduced their multiples but this simply ensures that a deal won’t get done… few sellers are going to run to the door for something which doesn’t make both short- and long-term financial sense. Thus consolidation based on the financial side grinds to a halt.
Toss in the stability of this industry, the emotional and family aspects, and you get a situation where the much discussed, almost preordained consolidation forecasts might just be completely wrong. Who knows… counter-intuitively you could actually see a situation where values increase rather than decrease in this environment.
If consolidation does slow to a crawl, what does it do to both major suppliers and their plans to share in these now illusionary consolidation synergies? How does it impact their bottom lines and how forceful will they be in trying to re-start the consolidation engine? Heck if I know. Probably will be directly related to how important these synergies are to their business plans.
As for me, I haven’t changed my opinions. If someone is willing to pay a premium for my business I’d be heading for the door. I still believe it will be a mistake to sell later rather than sooner. Perhaps I’m wrong but that’s my crystal ball.
If you’re in the game for the long-haul (and that’s the decision being made, whether you know it or not), I still think you’ll have to get bigger (see Steve’s comments above)… thus you’re going to have to get deals done one way or another. And waiting for prices to fall and to hopefully “steal” one is most likely not going to happen.
Interesting times in this industry… that’s for certain!