A new year begins...
Well the year is over and a new one begins. 2010 was an interesting year. Steve Cook and I got quite a few deals done… the latest from this assortment is our announcement here:
John Conlin of Conlin Beverage Consulting and Steve Cook of Great Lakes Consulting, who represented Mark Twain Distributing, would like to congratulate both Mark Adams of Mark Twain Distributing and Greg Lloyd of Lloyd Distributing for successfully completing the recent consolidation of their MillerCoors, craft and import beer portfolios within their new Missouri territories. Best wishes to all and thanks for allowing Steve and I to lend a hand.
As for the deal flow for 2011? I’m at a loss to predict it. The threat of huge tax increases on January 1, 2011 certainly got some folks moving to the door. Now that it looks like the capital gains and income tax situation is settled for the next 2 years (if anything can ever really be settled in today’s political world), will we see a drought of deals? Have all the sellers gone with only the long-term players remaining? I don’t think so but one never knows.
Here’s my quick analysis of how I would think about the sale or stay decision…
- First I’d recommend a financial analysis of you current operations and your family’s financial situation. Let’s take an extreme Armageddon-type situation, i.e. the bulk of the value of your business disappears… are you and the family still OK? (and can you live with that?) If so, then no amount of fear or uncertainty regarding the future should push you unwillingly towards the door. I think a lot be beer wholesalers fall into this category… they might still choose to leave, but it will be a free choice.
- Is the distributorship your “job” or an investment? Or being a family business is it even more?
- Do you have a buy-sell agreement that ensures the perpetuation of the enterprise no matter who the owner(s) are or what their personal motivation and interests are?
- Small market or large market… perhaps counter-intuitively, the smaller market, more rural folks might be better protected if the 3-tier system would begin to crack. Regardless of the size of your market, there are compelling reasons to get bigger… including hedging the financial impact of ongoing operating challenges through economies of scale while attracting suppliers who want to effectively expand their current footprint.
- Overall the 3-tier system has had a number of wins this year… does this continue or will some earth-shattering development occur? Your crystal ball is as good as mine. DSD still provides the most effective distribution method and most efficient way to manage overwhelming numbers of daily retail transactions. Those who want to loosen the 3-tier system are not going to go away – in this fashion they are like the neo-prohibitionists… for the other side there will never be a “compromise” which will be enough to settle the matter… other than our demise.
- Taxes… it’s not what you sell for but what you keep that matters… are tax rates settled for the next couple years? And what about the 2012 political landscape? Are the tea-party folks going to kick butt and push for lower tax rates across the board? Historically, reductions in capital gains taxes have always led to increased revenue. Or does Obama win in 2012? If so, I’d have to hazard a guess that he will keep his class-warfare themes in high gear and try to accomplish through regulation what he can’t accomplish through the legislature.
- What is the short- to medium-term outlook for the US economy? How long can the federal government borrow $0.41 for every dollar it spends? Obama plans for trillion dollar deficits as far as the eye can see. Many states are up against the wall… their diminished revenues, underfunded pensions and other liabilities could cause a crisis of epic proportions… will they fail? Or will the Feds (that’s us by the way) step in and save them? If so, where do the dollars come from? There will be tremendous pressure to raise taxes to find this money from somewhere… and as the famous bank robber Willie Sutton supposedly replied when asked why he robbed banks… “because that’s where the money is”… the tax man is going to be hunting for this money from those who have it.
- Do tough economic times help or hurt the industry? The answer to this isn’t as clear cut as it might seem.
- Fuel prices… they most assuredly will continue to go up as the world economy continues to pick up steam. Recently the ex-president of Shell Oil said $5 per gallon gasoline might be here by 2012. As a nation we continue to unilaterally disarm our own ability to produce energy. At least for the next 2 years this is unlikely to change… in fact it will most likely get worse as the Obama administration uses regulations to hinder oil and gas development… and I have yet to see a green energy “solution” to the diesel engine… an engine which at some point in time moves pretty much every single product bought or sold in this entire country. And oil and gas development is a long-term game… even if the elections of 2012 provide a tremendous shift, getting oil and gas fields up and running takes years, not months. Short-term price increases hurt distribution industries… but is this true for the long-term or can we adapt and turn it to our favor? I’d start planning for higher fuel prices right now.
- The Middle East – this one isn’t going away and the rare good news is sadly always balanced by the much more frequent bad. It sure looks like the Obama administration is going to accept a nuclear Iran (Europe has already done so)… it is difficult to see how that works out well for anyone, anywhere on the planet.
- Values… are they going up or down? Some have stated they think deals will start moving when sellers lower their sights on price… I think this is absolutely backwards. Deals happen when strategic buyers step to the plate and pay a price which makes sense to the seller to exit. These purchasers rely on economies of scale to cover the deal over a longer estimated payback period. Meanwhile, economic buyers over the past couple years have pulled in their horns for one primary reason… uncertainty. As this uncertainty fades, purchasers have a little more confidence about what the future holds and can pay accordingly. But if you look at this industry and the way it has weathered a pretty poor economy, you’d be a fool to sell your business for any low-ball amount.
- So still a lot of possible bad news out there but bad news has always been around. The sun will still rise tomorrow.
- In summary, these are the reasons I tend towards being a seller rather than a buyer - but I’m looking at the world through my checking account ;-). I’d be looking to lock in and preserve the wealth which has been built by perhaps generations, but if you’ve already got the wealth then the analysis is much different. But if you’re one of those folks who has determined they are probably a seller, but in a “few” years, I recommend you go NOW. What upside is there in waiting? What good news is going to head down the pike? Which has a higher probability… good news or bad news in the next few years? Sure seems like bad news is a distinct favorite.
On a broader front, are you looking to improve the value of your business by finding some extra profit? Here are a couple of easy ones which are better than finding change in your couch…
* If you offer 4 day per week service, go back to the more efficient and effective 5 day per week. You won’t cut 20% of your delivery costs but 10%-15% are waiting to be had. Add up the cost of a class A driver – salary, payroll taxes, worker’s compensation, health insurance… depending on your market a single driver will cost you from $50,000 (at the very low end) to over $100,000. How about the cost of a tractor/trailer or truck? Lease cost per year, fuel, tires, oil, maintenance, licensing, insurance, technology… another $40,000 to $50,000 per year? Taking a truck/driver off the road saves at minimum $100,000 per year… most likely closer to $150,000. It’s just waiting for you.
* Another way is to better balance your delivery and sales work-loads. Having unbalanced routes is inefficient and adds to the number of vehicles/drivers/sales reps. If you look at a tractor/trailer as a machine, the mathematically certain way to need the fewest number of machines is to maximize their capacity. Having routes that are 1,500 cases one day and 400 another is a waste of that delivery capacity. Want the fewest number? BALANCE. Although we often blame retail for our balancing problems, I find most of the time it is simply the way the routes are built. Will we have to fight retail occasionally? Yes, that’s the essence of change. Is it worth it? Is in my book… and IF our sales staff performs, the vast majority of these “problems” will simply fade away.
Once you’re running the most efficient operation you can, the only way to grow is to take market share away from someone else or hope for population growth in your territory. Thus if you want to direct your growth and leverage your channels of distribution, expanding your beverage portfolio into other beverages categories is definitely worth looking into; more gross profit per stop. You have a sales and distribution machine; leverage what you already have to drive continued business growth. Because of the need for supplier efficiencies, a broader more state-wide distribution is a must for many of these products. I’ve written about forming state-wide (and even multi-state) distribution co-ops to leverage your collective sales and distribution machine. It’s a great idea which only needs willing participants… so far that has been the problem as many folks don’t want to help “strengthen” a distributor they hope to one day purchase. Short-sighted in my book but not everybody plays by my book.
Mergers are always a way to make more money and strengthen all parties. But they aren’t for everybody and it takes willing partners to make these work.
For unconsolidated MillerCoor operations, merge if that works, if not do a gross profit dollar neutral territory swap with your fellow MillerCoors distributor… everyone ends with a smaller footprint and makes more money… and NO ONE loses anything! Repeat that last note… no one loses anything and all parties make more money… what is wrong with that?!
2011 will be a great year for some; a not so great year for others… as I’ve said before, grab the future by the throat and make certain the future you desire is the future that comes by increasing the value of your business enterprise… in every possible way.