Cash Cows and Beer Distributors
In a recent post, which can be found here, I discuss the possibility that ABI might spin off their US/North American operations. In it I write how InBev saw A-B as a fat cash cow just waiting to be had. But what of distributors? How do you all fit in the world of Cash Cows and Question Marks?
First a little background on the genesis of the Cash Cow matrix… years ago the Boston Consulting Group came up with a simple matrix for portfolio planning for a company’s business units. It has fallen out of favor, but it remains a useful tool when analyzing trade-offs between business units in a single company or a stand-alone business versus its competitors.
The matrix measures two factors…
- Relative market share – a proxy for how much cash that unit can produce
- Market growth rate – a proxy for cash usage
There are 4 combinations within this matrix…
- Cash Cows – high market share with low market growth rates… can you say A-B in the US market? Can you say high mix of domestic beer products?
- Stars – these already have a high market share (power) in a quickly growing market (opportunity)
- Dogs – low market share with low market growth rates… the worst of both worlds
- Question Marks – low market share with high market growth rates… the market is growing but will this low share business unit be a winner or a wannabe? Many (most?) craft beers might fit in this category.
Dogs are generally candidates for divestiture depending on their unique geographics and product portfolio… sell or harvest the dang thing since the money tied up in the business has little potential.
Question Marks are just what the name implies, a question. To grow them will require significant cash and if they turn into Stars it will be money well spent… or after years of consuming cash do they turn into dogs when the market growth slows? Thus the question… again using craft beers as an example, this is perhaps the reason few seem willing to invest significant resources in a craft beer until the picture becomes a little more clear. Sure the craft beer market might be a winner, but will this or that specific brewer be a winner… that’s a tougher question.
Stars generate a lot of cash because of their market share but also consume a lot of cash due to the fast market growth rate. Ideally a Star maintains its large market share and becomes a Cash Cow.
Cash Cows are leaders in a mature market… they generate more cash than they consume… this pretty much defined A-B which generated A LOT more cash than its’ operations consumed.. Under classic strategy these business units should be “milked”… taking profits and investing as little cash as is possible. Cash cows provide the cash to drive a lot of the other actions of the company
- Providing cash to turn Question Marks into market leaders
- Cover company-wide admin, R & D costs, debt service, dividends, etc.
And since Cash Cows generate a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of the cash stream using a discounted cash flow analysis. That is EXACTLY what InBev did with great accuracy. In addition, InBev not only saw a Cash Cow just waiting to be had in A-B, they saw a Cash Cow that was EXTEMELY fat… thereby increasing the potential cash flow to anyone willing and audacious enough to go after it. And that they were.
So let’s circle back to viewing distributors through this prism… first what about market share? Most markets in the US have evolved to a two distributor world. Historically the AB folks had the higher market share but in the past decade or so the MillerCoors folks have pulled even or even exceeded AB in the perhaps more important market share of gross profit dollars. In short, in many markets the ABI distrib sells more boxes of beer but the MillerCoors distrib generates more gross profit dollars… obviously helping their bottom-lines and increasing their clout with retailers. Thus for this analysis one might put both distributors in the high market share category.
And what about market growth rates? Again, both distributors play in the same market and thus confront about the same market growth rates… which sure look to be flat to low growth as far as the eye can see. So we’ll put both distributors in the low growth category… which ends up with beer distributors in general being a Cash Cow-type entity. That’s a real surprise, eh? ;-) Add the fact that they operate with exclusive territories and Ol’Bessie becomes even more of a reliable cash cow.
Distributors can be money machines… generating A LOT more cash than they consume. Throw in the fact that many are decades old with little or no debt (generally the only significant debt most wholesalers have is from acquisitions or new warehouses), and you have distributors being significant Cash Cows. Thus distributors sell for fairly significant multiples…
- Steady cash flow streams which can be relatively easily and with pretty good accuracy projected far into the future – fuel prices are probably the largest outside unknown
- Exclusive territories with strong state and federal legal protections
- Distributes a recession-resistant product
How many beer distributors do you know of who have gone belly up? I can only think of a few and in all cases they were idiots… sorry for the tough love but that’s the way I see it. It is amazing how long a small, low market share, well run distributorship can continue to provide a very nice income stream.
So the next question is what do you do with this nice cash cow you own?
- Do you use it to grow?
- Within the industry through acquisitions?
- Is this seriously an option? I have one client who has a very nice, very profitable 2M+ case operation… unfortunately their territory is contiguous to two other distribs… one being multi-state mega-distributor and the other a very large distributor. The odds of my client being able to grow through contiguous acquisitions is basically zero. Thus the strategy they are following is to run a lean operation (maximize the milk) and to use the proceeds to invest in other businesses/industries. Of course they are looking for new products to help provide even more gross profit (who isn’t?) but even there, their ability to solely significantly impact a desirable supplier is pretty low.
- They are following the growth outside the industry model… keep the cash cow and use it to fund “other stuff”.
- Within the industry through acquisitions?
- Do you “have” to grow? We all know the mantra… you must get bigger to spread your fixed costs over more and more boxes. You have to be 5M cases to be long-term viable… or some such number. If this even true? I don’t believe so. I don’t believe there is some magic number of cases you must achieve to be long-term viable. I have another high share 2M case client who has a very tight territory with a small account base. As we have joked together, it would literally take the end of beer distributing for this distrib to not be long-term viable. There are folks who do 400K annual cases who will be around as long as they choose to be… not everyone fits in this category but there are plenty who do.
- Do you “have” to sell? Most of those who “had” to sell have already done so… so in general, you don’t “have” to sell, but is it a wise financial choice? As usual, that depends. ;-) Ignoring all the non-financial reasons for not selling, ultimately the sell decision comes down to one thing… the price being offered… ask A-B about that. I had a fairly large, very profitable client - thanks to me ;-) who gave me a call a while back. He had an unsolicited premium top dollar offer and wondered what to do… … the story ends with me losing a client and him pocketing a boat-load of cash. This was a true win-win… the acquiring wholesaler made a great strategic acquisition with a quite livable payback period.
- On the other hand I have a client who is looking at an acquisition opportunity… problem is he’s an economic buyer and is being advised that 5-6 times EBITDA should be the max to pay. I don’t know of ANY “cash cow” distributor who would sell their business for these values… it simply doesn’t make financial sense. There is no reason not to sell a cash cow… but it IS a cash cow and the transaction prices must reflect this reality. InBev understood this… and they remain laughing all the way to the bank for significantly “over-paying” for Anheuser Busch. Accept this reality or go home.
- Do you fund the Question Marks? Question Marks are always a puzzle… if they work out you’re a genius… if they don’t, well let’s just say you’re not. Is putting a lot of dollars into a craft beer operation a good idea? Or is it better to just let those products be serviced by your normal operations? Ben E. Keith has started an operation distributing craft beers around the entire state of Texas… and those are some serious miles out there… is that a good use of the milk? Or is it part of a larger strategic move to drive more acquisitions? Eagle Snacks was a serious Question Mark and we all know how that turned out… sucked up A LOT of milk. But if it had worked… Or do you fund Question Marks in other industries? Or do you start a non-alcoholic division? In the past many have found these to be Dogs, but not all. Or expand into wine and spirits? These are all Question Marks that may or may not be a good use of your milk. Think, plan and execute regardless of the path you take.
In summary, you’re sitting on a valuable asset, namely a Cash Cow… what you do with it and the milk it produces? That depends. The only certainty is that you should strive to run a lean, high performance/high demand organization. Regardless of where the Question Marks and Dogs and Stars may lead, you can never go wrong with constantly striving for a lean, mean, efficient and effective fighting machine.
Most wholesalers know how to be efficient; however, being effective requires focus and innovation. Take the “old school” approach with the “new school” spin and laugh all the way to the bank!