MillerCoors, Chesbay, Reyes and an industry in play
For those who follow the public equity markets you have probably heard of the phrase “in play”… as in when a company is “in play”. Companies are often put in play by a hostile takeover bid. In general, most companies’ senior management team don’t want to be in play… for once in play they often lose control of the situation.
Why is this? Well every company has competitors and when one of them makes a move it requires the others to analyze this move. “if it makes strategic sense for them, we’d better take a hard look too”. It often brings new people into an area… folks with different backgrounds… folks with different expertise and different goals. These interloping folks will most certainly view the company (and opportunities) differently than the present management team. And since we’re talking about public companies, most of the present senior management just wants to enrich themselves anyhow and will do what it takes to protect their present situation.
What does this have to do with beer wholesalers? Everything.
This “in play” thought has been bouncing around my head ever since I heard of the pending purchase of Columbia Distributing by the Meritage Group. I don’t mean that Columbia Distributing was put in play… I mean that our entire industry IS in play.
That’s right, not a single company but an entire industry is in play. Where does it all end up? I have no idea but it is an absolute certainty that it will be different than it is today.
So when did this industry get put in play?
- Was it the audacious purchase of AB by InBev? As a side note, I’d bet that AB would have been put in play by InBev’s move even if InBev had not been able to complete the transaction. Once InBev made the move, AB was never going to be the same.
- Was it the creation of MillerCoors in the US?
- Was it the merger of Coors and Molson to form MolsonCoors (I have to admit, I sometimes even forget about this one)
- Was it when Bond purchased Heileman?
- Was it when Phillip Morris purchased Miller Brewing Company?
- Was it when Miller Brewing Company purchased Meisterbrau to get their hands on Meisterbrau Light… the parent to Miller Lite.
Was it literally hundreds of other moves? In all honesty, heck if I know… I just know this entire industry is in play TODAY and pretty much every assumption you have needs to be reexamined.
As beverage wholesalers, you are now in the process of discovering why companies (management teams) don’t like being put in play…
- not just because they lose control over the situation,
- not just because things can come out of left field and surprise the heck out of you,
- not just because things that you KNEW could never happen will happen.
So let’s see where things stand at the moment…
- ABI has been quite clear that they plan to “harvest” substantial additional profit from their distribution network. MillerCoors has better PR (well up until recently I thought so) but they would be fools to not do the same. In many situations the only reason MillerCoors doesn’t follow ABI (like for branches) is they simply don’t have the market share to make the moves work… trust me if they did, you’d see MillerCoors branch operations around the country. Again, I would if I were in their shoes.
- Both MillerCoors and ABI are in the ongoing process of “cleansing” undesirable distributors from their ranks. ABI has a list (I’m told from pretty good sources) and I’d be shocked if MillerCoors didn’t also (I would if I were them). They want the remaining wholesalers to be pliable (especially pliable), less profitable, but happy to still be kicking (and in all honesty, still making a boat-load of money for work that is far from rocket science). Many of you are reading this and saying, not me… never! Well trust me, plenty of you will agree to these terms. Plenty.
- You now have at least one large private equity group in this industry. If you think they will be the last you are living in a dream world. In the past month I’ve had 3 calls from various Bloomberg reporters looking for information about this industry. That pretty much screams the industry is in play.
You’ve all probably seen that visual joke where a line of people are asked for volunteers to step forward to do some undesirable task. But rather than anyone stepping forward, everyone but a couple saps take a step backwards… leaving them out in the cold as the only volunteers. As an industry I think a similar thing is occurring… LOT’S of other industries have taken this step backwards (mainly due to tough financially times and in some cases the complete erosion of their business model… think newspapers, travel agencies, even Microsoft and their PC-based world… it’s funny just I was writing this Bloomberg sent out the following headline… Google Inc. has surpassed Microsoft Corp. to become the world’s second-largest technology company as computing over the Internet reduces demand for software installed on desktop machines.). So a heck of a lot of industries have taken a step backward and who’s left standing out there with their backsides exposed to the wind? Hello beer distributors!
And speaking of erosion of business models…
Do you really think this industry is immune? State-based alcohol regulation does not mandate a bunch of beer wholesalers making a great deal of money. One does not demand the other.
Although I haven’t had any recent channeling experiences, go back and read my Tough Love from the Other Side, which you can find here…
- It’s not big news that most suppliers (big and small alike) think you make WAY more money than the value you bring. I don’t really care if this is right or not, that’s the way they see it. But you might consider the reality that the owner of a medium sized distributor probably makes more money annually than all but the most senior executives at the major suppliers. And trust me, their jobs are just a little more difficult than yours.
- You’ve got the craft brewers (still the prettiest girl at the dance) who have been very successful in getting exemptions from various laws and taxes, based solely on their volume. And of course once they grow and cross this volume threshold they want the volume limits increased to continue their exemptions. These are permanent erosions that are far more likely to expand than contract.
- Big retail isn’t going anywhere and they still don’t think you add all that much value to the game… oh and wait, as the self-life of beer gets longer and longer… your value in many situations gets less and less. Other than the regulatory nature of the product it is becoming more like a can of vegetables.
And lastly you have the little dust up between the Reyes’s and MillerCoors over the acquisition of Chesbay… yes I’m getting to this. As my dad would say, “hold your horses.” But you might not like my take… make certain you’ve taken your blood pressure medicine before continuing…
Many different angles on this one… I’ve heard rumors from years back when the industry was going through some crazy price competition that the Reyes brothers weren’t overjoyed with some of these decisions and flexed their muscle. The rumors were that both Miller and Coors were not too happy with this muscle action and they decided the Reyes’s would not be allowed to get any larger. But of course they have been “allowed” to make acquisitions since then so either the rumors were wrong or they weren’t set in stone. This whole thing could be as simple as that… from the MillerCoors perception, the Reyes operation is as large as it is going to get and that’s that. And they are using whatever means possible to ensure this is the case. It might be no more complicated than that.
Or it could be that and other factors. Here is a quote from a long response from the Reyes’s regarding this…
...”MillerCoors' agenda is clear. It aims to seize control over, and convert for itself the value from, its vast nation-wide distribution network.”
Well as my son would say, duh! OF COURSE this is their agenda. If you ran MillerCoors wouldn’t it be your agenda?! As for MillerCoors changing their tune… again, duh. Circumstances change. People change. Commitments change. Many have had the sometimes heartache and sometimes euphoric experience of a divorce. … well stuff happens. That a major corporation changes its mind is really not too surprising. Necessity dictates a change of heart and thinking. In addition, MillerCoors faces a new reality, ABI rather than just AB. Operating decisions which might have made sense versus AB might not make as much sense versus ABI.
And don’t be naïve… just as I emphasize that your true partners are your fellow beer distributors. For ABI and MillerCoors, at some level they are partners too. Simple fact.
Then there is the performance issue… here goes one really BIG potential client… I just must be in the mood to piss people off – see End the Education Plantation, www.EndtheEducationPlanatation.org ;-).
I have always been amazed at what Miller and Coors (now MillerCoors) has let Reyes operations get away with. I’m all for minimum order quantities (whether in dollars or cases) but Reyes operations appear to be extremely aggressive and potentially in conflict with MillerCoors expectations when applying retailer service policies and minimum order quantities. I would love to implement levels like that when I help re-organize a distributor… it makes it a lot easier to drive a ton of money to the bottom-line. But MillerCoors (or ABI for that matter) would have come down on my client and me like a ton of bricks if we had tried. So that could be sticking in MillerCoors’s craw too. I’m not upset with the Reyes’s, just jealous ;-)
In some ways it seems like the Reyes business model and corporate strategies are becoming less aligned with MillerCoors… perhaps representing more of a logistical model than a DSD/value model. If you’re the size of the Reyes operations (and considering their other endeavors which ARE logistical) a logistical model might make the most financial sense. But does it make sense for MillerCoors? Perhaps that’s part of the fight too. And as a side note, does a logistical model make sense to all you other beer wholesalers out there? I certainly don’t think so. I think turning your businesses into a logistical-based system is a path to your demise. There are A LOT of companies out there who can deliver stuff. Becoming more one-dimensional decreases the customer value proposition. If you become just one of many then you probably cease to exist.
But as a tip-of-the-hat to Ray and the brothers – I’ve got to try to get out of this hole at least a little bit ;-)… they have been executing a superb long-term strategy. They have owned a number of large distributors for quite some time. I would assume these are basically debt-free and therefore throwing off a ton of free cash. And they have used this cash flow to fund some serious acquisitions. Ray and the brothers aren’t bottom-feeders; they step to the plate and get deals done. When other folks cry “I can’t pay that much” (which is really saying I don’t want to pay that much), these guys step to the plate. It’s not their fault that others don’t play the game as well as they do… or have the huevos to write the big checks and accept the longer payback periods.
And since I seem to have the shovel out and am digging furiously, why not add a little more to the hole? As I upset you with the following please don’t forget the basis of this post… this entire industry is in play. I’m just going to tell you what you don’t want to hear but what many of these new players might think.
Again I will quote from the Reyes response…
The MillerCoors lawsuit has nothing to do with trademarks. It amounts to a foreign invasion of our laws and our values and yes, our US Constitution.
"We appreciate the incredible outpouring of support over the past several days and we promise you one thing above all else: with your continued support, we will not let MillerCoors take our business, or yours."
Man, that sounds like I could have written it! First I think it is a little hyperbola to state that MillerCoors is trying to take their business. I think MillerCoors is simply refusing their bid to get larger within the MillerCoor network.
But the big dog, the elephant in the room is the impact on state franchise laws. Here comes some tough love. I believe an intellectual case could be made that franchise laws are simply the result of the political power of a small group of politically connected businesses… businesses whose goal is to simply enrich themselves (don’t shoot the messenger!) by crafting state laws which gives them multi-generational rights to distribute the products of others. In some ways these laws are based on an argument that once you have these distribution rights, they are yours forever… unless YOU decide to do something with them. Have you ever heard of a distributor walking away from almost any significant brand? Nope, these laws are for one side and one side only. And please note, you don’t need franchise protection/laws to have an independent three tier system. These laws are for your benefit and few others (again, I’m just telling you what you are going to encounter).
Now the distributor will of course respond with the argument… I worked hard to build these brands and I should be protected and rewarded for doing so. Again a little tough love… I remember back in the days when Corona was rocking, up 30+% annually in many markets. I’d be having a beer with a distributor and sooner or later he’d start pounding his chest about how he is kicking booty with Corona. On and on it’d go about what a great a job this distributor was doing. After a while I’d note, gee so-and-so north of you is up just as much as you… in fact so-and-so south of you is up even more… so are the distribs east and west.
So how can it be that these Corona trends are based on your spectacular performance? These other distributors aren’t you and they match your trends. In fact the trends are pretty much the same around the country. There must be a little more to it than your spectacular performance. In fact I don’t think I’ve been to too many markets where one distributor is rocking with some major brand and his adjacent distributor’s sales of the same brand are terrible. Take out demographics, population trends, etc. and generally the sales trends are pretty even… that’s not saying distributors can’t/don’t have an influence but it is more in the single digits. That’s just the way it is today.
So when you are pounding your chest about building these brands one could ask, then why are they performing similarly across this area? So perhaps you didn’t build those brands as much as you would like… perhaps your “ownership” of these brands is much less than you acknowledge. Perhaps you didn’t really “build” these brands at all; you simply followed the demand generated by the supplier and the general marketplace. Perhaps any decent distributor would have generated the same outcomes… the facts seem to support this proposition. And as for all the “investments” you made in these brands… they all generated a positive rate of return so you have already got your rewards… what are you crabbing about? ;-) Remember, tough love?
And lastly, the main goal of franchise protection, to ensure these brands can’t be taken away without cause and that you are fairly compensated for all your past work and effort in building these brands. As for the building of the brands, read the last few paragraphs (other than a new craft beer it simply probably isn’t the case). As for ensuring you are rewarded/compensated… some might say you have already been rewarded by the gross profit dollars and net profit you have made for years and years… some might say your years and years of some big dollar profits have already rewarded you for these brands… some might say that in effect state franchise laws are an attempt to have beer distributors paid twice for the same thing… and to ensure the gravy train is never interrupted for a handful of lucky folks. Look at your financials over the past 20 (60?+) years… some might say you have been rewarded nicely, especially when compared to the “average” family business. I’ll trade checking accounts any time ;-)
Even the “without cause” aspect is open for argument. Whose brands are they in the first place? Why does a suppler give up their right to control their brands forever once they go with some distributor? Why can’t they have whoever they want distributing their brands?... without paying a large ransom to get them back (or more likely finding someone else to pay the large ransom).
Let’s go even further and think about what these franchise laws mean to a supplier. EVERY time a transaction occurs, who in reality is paying for that transaction? Distributors will of course say, well I am you oaf. But what are you paying it with? With the gross profit dollars of that very supplier. So in effect a deal that is priced at 3 times gross profit means that in a very real sense, for that supplier for the next three years every dollar of gross profit provided in that territory is being used to further enrich someone who is no longer even associated with that supplier. Think of that… for three years not a single gross profit dollar provided to that distributor is helping them build or sell their brands! It is really rather remarkable. What about the 5 and 6 times gross profit deals?!
In a very real sense the supplier is paying for you to make these acquisitions and pay the ransoms. It’s their hide, not yours. Yeah, I know the risk is yours but I’m trying to make a point ;-)
But of course these deals are structured over a much longer time period than that. So a more accurate reality is that after a transaction, a not insignificant portion of the gross profit dollars their brands bring to the table will be drained off for the next 15+ years to further enrich someone who is no longer associated with their brands. If you were in their shoes would you celebrate this use of YOUR gross profit dollars… for decades?!! And it happens with EVERY transaction. It might be an interesting exercise to add up all the deals done over the past few years and calculate the net gross profit dollars which are being drained away from suppliers. I think it would be a staggering amount.
And lastly think about numbers… in some situations I think there are more craft brewers in a state than beer distributors. As the number of beer distributors shrinks, your political power also shrinks (unless you all consciously fight to keep it). When this franchise protection is only for the benefit of literally a handful of businesses in a state filled with millions of businesses, one has to ask how long (or if) it is long term viable.
Perhaps instead of our much discussed “erosion of the independent three tier system” the real challenge will come from the destruction of state franchise laws? Remember being in play… one loses control of the situation. Perhaps MillerCoors, ABI, other major suppliers and small ones too, new entrants, and even a few beer distributors will see this as the opportunity to rid themselves of onerous franchise laws. Perhaps they will see this as the opportunity to re-set the system so that THEIR gross profit dollars are used to actually sell their brands (or kept in their profits rather than yours), rather than providing multi-generational wealth to a handful of lucky folks. Perhaps they will push to make the paradigm one where you make money while in the business, not when you exit.
And perhaps the Chesbay dustup will present (force?) this unplanned opportunity on MillerCoors? (and by extension ABI and other suppliers of all sizes) These players might ultimately look at this as similar to getting rid of a union… if the opportunity presents itself, you know it will be painful for a while but think it will be worth it in the end. I might think that way. And they might just join hands and present a united front in this assault… the pain might be less for all if they did. Remember again, at some level, big or small, brewers are partners. The suppliers could keep a heck of a lot of money either in the market or in their pocket if they made a hard run at state franchise laws. And many of their arguments are not without merit.
Many of you won’t like the above paragraphs of this post. Guess what? A LOT of people are going to think that way. A LOT of people are going to be making these types of arguments. Some will say, so what if MillerCoors or ABI can reassign these brands to someone else? They are THEIR brands and you’ve already been nicely rewarded. You haven’t earned nor are you owed any additional payment. New entrants to this business might be quite happy to operate without franchise protection… somehow the wine and spirits folks make do… as do the vast majority of wholesalers in a wide range of industries. Look in the mirror, you have no special right to be a wealthy beer distributor whether you like that reality or not. If these debates enter the mainstream, you in all likelihood will lose.
How do you plan to respond? That is the next challenge. You are going to learn why no company wants to be put in play.