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April 2017

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Even more on MillerCoors, Chesbay, and Reyes

Wheee doggie!  That last post, which you can find here, sure hit a nerve or two.  Just remember that just because you don’t want to hear it doesn’t mean you don’t NEED to hear it.  Don’t take potshots at the poor little ol’ messenger ;-)

And it is interesting times… being in play is most definitely interesting… Harry and Benj report that the craft folks might be lining up against the Modelo/ABI deal… at least the US and Crown aspect.  But at the same time I hear rumors that ABI is courting the craft folks to join forces in fighting franchise laws.  I don’t think too many craft people are supporters of strong franchise protection… unless of course there are exemptions for them.

I guess politics really does make for strange bedfellows… but everyone wants the craft folks on their side… they remain the prettiest girl at the dance.  And they get similar favorable treatment.  That’s just the way it is.  Just try not to turn over the keys to your car to them as you court their favor.  You might not like the way it turns out as you look at the twisted and smoking heap that was once your pride and joy.

As a side note, still thinking about an exit this year?  It can still be done (barely) and there are ways one can structure the deal so you get this year’s tax rates… but you had better hurry.  You might not get brewery approval this year but that doesn’t necessarily end the matter.  Want to know how?  Give me a call  ;-)

As for my last post, let me give you a timeline to further explain.  Originally the post was going to be solely about the concept of being in play.  I think that is a profound reality which has the potential to transform this industry… and you’re not going to like all of the potential realities.  Therefore work to make certain the future that comes is the future you desire.  If you sit back and wait, the game will be over before you even knew it had started.

And you have more than a few uphill battles… what I wrote in the last post isn’t what I think, but it is what more than a few folks think.  Recognize that reality or deal with the consequences.

And as a side note, but one which beer distributors should take note of … I have talked to a number of GMs and sales managers since the last post.  They all had a similar epiphany.  First they’d start defending franchise protection and the life-long, multi-generational protections it provides for a handful of families (obviously these folk’s employers).  Then to the person they’d say…

 “gee, why am I fighting for this?  I don’t have any contract… I don’t have any protection.  They could fire me at any time regardless of my performance and I don’t get some retirement-level ransom when I walk out the door.  My kids and grandkids don’t have any job waiting for them at this company.  Why shouldn’t I be granted these same types of “franchise” protections?  My efforts are building these brands a heck of a lot more than the owner’s efforts… to say nothing of their kids.  Yet I’m working for a paycheck and they are sitting back raking in wealth I can only imagine... and I’m fighting for them?  I’m a sap”

And this is from YOUR SENIOR EMPLOYEES!  If they think this way (and they know you and the industry far better than anyone else) how do you think some outsider looks at these things?  You’d better get your pitch prepared because you are going to need it.

Anyhow, as I was spewing that wisdom on being in play the whole MillerCoors, Reyes, Chesbay thing popped up.  I tried to ignore it for a while but was contacted by more than a few who wanted my take on the thing.  I think they all thought I’d unload on MillerCoors.

But I can see MillerCoors’s point in all this.  Forgetting the Reyes’s for a moment… One can understand why MC doesn’t want a single distributor to get “too big”.  One could imagine a future where a very large, very profitable distributor would use their financial strength to in effect purchase the entire distribution tier.  One could envision a future where because of tremendous financial power, a single distributor could become the top bidder in literally every single significant transaction in the country.  Then they use these footprints to spread out and take over, state-by-state.  One might attempt to implement that strategy… I think it’s a pretty good strategy that has merit too.  Look at Southern Wine and Spirits… it’s worked out pretty well for them don’t ya think?

As a side note again… one strategic issue that all businesses must confront is the double-edged sword of being “captured” by a big customer.  On one hand a business is always overjoyed to find a large customer who likes their product or service.  Often times this single customer drives the expansion of the business.  Soon, the business is almost entirely dependent on this one customer, i.e. they have been captured.  And once captured, they will dance to this customer’s tune… whether they like it or not.  Many  businesses NEVER want to have more than 40% of their business coming from any single client… it just puts too much at risk and makes them very vulnerable to changes of heart from this single customer.  And makes them vulnerable to demands from this single customer.  MillerCoors might be thinking in similar terms… strategically they might not want the Reyes operations to “control” too much of their distribution.  So one can understand their position.

As for the Reyes’s… one can understand their position too.  They are MillerCoors distributors in good standing, having won awards on performance, etc.  Although I gave Ray and the brothers a little grief on a couple issues, no one can deny they are pretty dang good distributors.  They simply want to expand their footprint with the acquisition of a willing seller.  They were the ones who stepped to the plate on the price.  Nothing stopped others from beating the price but none did.  How frustrating for the potential buyer!  Go get the Reyes’s to bid on your company, knowing they are willing to pay top dollar, and then sell to whoever else it is that finally is brought to the plate by MillerCoors.  They Reyes’s spend all the time and effort and $$ to bring the deal to fruition and are left at the altar.

Therefore prospective qualified buyers such as the Reyes’s now demand sellers to commit to selling TO THEM… not just to anyone who will match the price.  They force sellers to accept some risk in these transactions too.  Pretty straightforward… you want top dollar?  Then you accept risk too.  And the risk they accept is some type of penalty if in the end the Reyes’s aren’t allowed to be the ultimate purchaser.  If this happens, Mr. or Mrs. Seller has to pay the Reyes’s a fairly handsome sum… for their time, effort, and $$ spent in the effort.  Again, I can’t blame Ray and the brothers… I’d do the same thing.

More sellers think getting top-dollar is a 100% thing… as in they get 100% of what they want.  That’s not the way the real world works.  Far too many sellers want…

  • the highest price ever paid
  • the seller to buy the warehouse at a pre-real estate collapse value
  • purchase all the assets at a premium
  • purchase all the inventory - and let’s just ignore unsalable product between us friends ;-)
  • And an all cash deal

Well welcome to the future.  I think we will see a lot more purchasers start demanding sellers accept some of the risk of the deal not being approved… on both the MillerCoors and ABI sides.  You want top dollar?  Then you will have to give on a few things too.  That’s just the way it is.  And I will make the contract so that you will fight for ME as the final purchaser, not just anybody who will match the price.  No more happily taking the money and leaving your suitor standing alone at the altar.

As for Chesbay… they are discovering the mind numbing speed at which you burn through dollars in a big time business lawsuit.  The first $100K will fly by so fast you won’t even see it go.  The Reyes’s are attempting to join the lawsuit but the question is do they have standing?  We’ll see but I’d guess the odds are against them.  The Chesbay folks might look back at this and wish they’d accepted a lower offer but one that was actually blessed by MC.  But they are in the fight now and the doors are lockedno one’s leaving.

All you other wholesalers need to learn from this company’s pain… these transactions are far from risk free and when they go bad, they can really go bad… in a lot of different areas.

I’m certain the accusations and strong words will flow for some time now.  How (when?) does it end is anybody’s guess.  If the decision is a major one (regardless of who “wins) you can be assured it will be appealed by the other side.  Chesbay might see this thing end in a decade or so – longer wouldn’t surprise me.  If I had to predict I think they will rue the day they ever attempted this sale (although I admit they didn’t do anything wrong).  Perhaps the entire industry will do the same.  Being in play… welcome to it.

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.
It’s because “in-play”rips to shreds the façade that you can actually control your destiny.  Yikes!  Yikes indeed.

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.

Are employees an asset or an expense?

Before we begin the post let’s think one more time about Iran and Israel and what it might mean for your business.  Some pundits think the US presidential election is going to drive the timing/decision of a possible Israeli strike on Iranian nuclear activities.  Their thinking is…

  • If the Israelis think Romney is going to win, they will delay their attack since they believe the Romney administration will be more supportive than the present one.
  • If the Israelis think Obama is going to win, they will attack before the election since they believe Obama will be forced politically to be more supportive than after beginning a second term.

Right now the polls have the presidential race as pretty much a toss-up… what do you think?  If you were the Israelis how much certainty would you need before deciding?  If in their position what would you risk?  If the Israelis attack (and they certainly believe the threats coming from Iran about wiping them off the face of the earth) it could unleash who knows what.  Fuel prices will certainly spike… but for how long?  How high?  What about the rest of the economy?  It all depends what happens after the attack.  Do the Iranians retaliate but not directly or do they unleash the dogs of war?  How will the other countries in the region respond?  There is of course the schism between the Arabs and Persians and the Shiites and Sunnis… is their animosity towards Israel greater than their animosity towards the other?  Do they really want to join the fight or do they instead focus on their own issues?  Will the governments decide or will the mobs?  Or do they see this as the opportunity to once and for all push the Israelis into the sea?  If so, who knows how it all turns out.  Not much you or I can do about it anyway but it could significantly impact your operations.  If the Israelis go before the election, it will probably happen sooner rather than later.  Just something to think about.

And now the post…

Now I don’t want to get too cerebral for you… and for me it is a journey to a far-away land ;-) but think about that, are your employees an asset or an expense?  Are they simply a cost of doing business?  Are they not too different from your electrical or propane costs?  Necessary costs of doing business but just that… in which case you should attempt to minimize these costs just as you would any other business expense.

Or are employees an asset?  The Free Dictionary describes asset as:

  • A useful or valuable quality, person, or thing; an advantage or resource.
  • A valuable item that is owned.
  • Assets - Accounting.  The entries on a balance sheet showing all properties, both tangible and intangible, and claims against others that may be applied to cover the liabilities of a person or business. Assets can include cash, stock, inventories, property rights, and goodwill.

Some have taken the thinking to an extreme and asked if employees are truly an asset, then why aren’t they listed somewhere on the balance sheet?  If you consider the last two definitions the answer to this is rather straightforward… that type of physical asset can be sold or turned into other tangible things of value… since you don’t own your employees you can’t sell them (dang it!), thus they are aren’t a balance sheet item.

But back to the main question, are they assets or expenses?  This question is not as straight forward as one might thing.  In our warm and fuzzy world our quick response is OF COURSE our employees are valuable assets.  But if that is truly the case then why would you want to automate your warehouse?  Why would you get rid of the full-time receptionist and instead install an automated phone system?  Why would you do any action which reduces head count?  Having $10,000 in cash (an asset) is “better” than having only $10.  Having a building worth $10M is “better” than having a building worth only $100K.  If employees are an asset then why isn’t it the same with them? 

First a side note on why I am asking this… I have heard a similar story from multiple sources on multiple occasions regarding the top folks at ABI (and this experience has been repeated multiple times across the country)… and the story goes something like this… one of the big dogs from ABI was visiting a distributor’s warehouse.  The distributor was proud of his operations and his people and put on a dog-and-pony show for this exec.  He showcased all of his beer folks… good ol’ Jim has been with us 45 years… Bill has 30 years’ experience in the beer business… Sue has 25 years, etc. etc.  In all this company has over 200 years (or some such number) of beer knowledge.  After the dog-and-pony the owner and the exec where walking out to the exec’s car… the exec (just in passing) noted that the owner should get rid of all those old employees, they cost too much.  So are employees an asset or an expense?

I am told there aren’t too many folks in St. Louis that are over 30 years old these days.  I think there is just one “old” senior AB guy left.  Assets or expenses?  Since the InBev acquisition ABI has had their share of production issues… assets or expenses?

Actually I think the entire question is wrong… just because we have the ability to construct a sentence doesn’t mean that sentence has any validity… any existence in the real world.  Long ago I had a great management professor who described the evolution of management thought as follows…

First was the Hands theory of management.  Employees where simply hands… and these hand were used to accomplish certain tasks.  And when the hands couldn’t do it anymore, you simply threw them away and got another set of hands.  This time period was the early industrial revolution where the vast majority of employees were involved in physical labor to some degree or another.  This was also the time of the growth in unions (quite rightly in many situations).  But as time went by it became more and more obvious that employees where more than a set of hands and that attempting to manage them as such was simply not effective (we’ll leave the morality out of it for now).

Then after World War II the technological revolution began in earnest.  It was a time of great scientific and industrial advancement… the time of Sputnik and the race to the moon.  Here we evolved into the Head theory of management.  Employees were logical creatures and if we simply presented the logic of our goals/desires, they would happily get in line.  At its core this thinking implied employees where much like the character Spock on the old TV show Star Trek… driven by pure logic.  Unfortunately (fortunately?) people are not like this at all.

Thus bringing on the third phase, the Heart theory of management.  Now the time is the 70’s where the entire culture was undergoing a transformation.  The Heart theory was based on the premise that if we simply all held hands, stared into each other’s eyes and sang Kumbaya all would be well.  Employees and owners would all magically be on the same page as the entire organization marched happily toward success for all.  Unfortunately (fortunately?) people are much more than simply heart… and not all hearts are remotely alike nor carry the love for all.

My management professor’s point was that each was right and wrong at the same time… employees (people) ARE hands… but they are heads too… and they are hearts too.  And to be an effective manager you need to address your employees as such, a complete integrated person where each part is equally important.  Sure some folks are more head than heart; then manage them as such.  Some are more heart than head; then again, manage them as such, etc., etc.

So what does this have to do with the initial question?  It too is both right and wrong at the same time.  Of course employees are assets… trying delivering beer without them.  Of course employees are expenses, they aren’t free and the more you have the more costs you incur… and not all employees are the same.  The very best of the best is worth more than one who can barely meet minimum standards… and please note I state this from a business perspective, not a moral one.  Not to get too Kumbaya on you – as you well know, I am a very sensitive fellow ;-) but from a moral viewpoint, each and every human is just as valuable as the next.  God can sort it out from there.

But from a business perspective not every employee/position has the same asset value as all others.  I have a personal bias (because I think it is the correct choice) that I would rather have fewer but better.  If I am going into battle I’d rather have 50 highly trained, highly motivated soldiers than 150 draftees who would much rather be somewhere else. 

I think the same about business.  There is only so much payroll available… I’d rather have a few less employees but have all top performers.  And yes, top performers get top compensation.  That’s the way the world works.  The employment market is much like a very large auction, you are bidding on a set of skills against other bidders.  If the market price for these skills is $X, you cannot expect to purchase these skills for much less than $X.  You can try, but other than a few “lucky” ones, it ain’t going to happen.  So if you want the best (again, not a moral statement), then you have to pay for the best.  Now you can of course overpay for these skills (a mistake made by far too many), just like you can overpay at the auction, but you cannot consistently underpay.

And these top performers should be across the company.  I want the best warehouse folks I can find… I want the best office staff I can find… I want every employee to be the best I can find.  I have yet to see a business (of any nature) grow and succeed by hiring the least qualified (cheapest) employees they can find, whether it’s flipping burgers or working a truck or writing computer software.  But that’s my bias.

In addition, a business is an integrated system; it is a living breathing organism where each part affects the other… the entire concept of one functional piece being more important than another is simply wrong.  As I have noted before, the space shuttle Challenger exploded soon after takeoff killing all on board.  It was a truly amazing system, costing hundreds of millions of dollars.  The cause of the catastrophic explosion?  The failure of a part which costs $5.00.  Ask those dead astronauts what the most important part of the space shuttle was.  Don’t think a quality receptionist is important?  Have you ever had the unfortunate experience of dealing with a company which has a lousy one?  Everything is important.

So yes, employees are an asset AND an expense… all at the exact same time.  Is the ABI advice correct?  Get rid of those old guys ‘cause they cost too much.  Again, it depends.  If you are simply paying them big dollars because they can still fog a mirror, then you are making a mistake.  If you are paying them big dollars because of the value they bring, then you are making a wise choice (and remember the auction, ultimately you don’t get to determine compensation anyhow, the marketplace does that).  And of course you can never forget that your employees are watching everything.  Loyalty is a door which swings both ways… if you want your employees to be loyal to you, you must be loyal to them… are you listening ABI and MC?

As an example, I had a client who had an older employee who didn’t add that much value to the org.  He might have been a hard charger at one time but he simply wasn’t bringing it to the table anymore.  Everyone knew this… the owner, the management team, the employees.  He was overpaid for what he did.  But years ago this same employee risked his life in fighting a fire at the warehouse.  Without his single actions the warehouse would have burned to the ground.  He risked his life for his boss (as I have noted before, the average person is a magnificent creature).  Guess what, that guy stayed on and retired from that company and EVERY employee knew why he remained around.  And guess what, these employees, new and old alike, knew that this owner took loyalty to heart.  And they gave loyalty in return.  That’s the way the world works.  An asset AND an expense, indeed.

Now that’s the way I look at the world but not all agree… and many have made a ton of money treating employees like an expense, like the Hands theory of management.  For a private business which plans on existing for years and years, I don’t think the expense-thinking can lead to long-term success.  But large public companies are a different matter altogether… professional managers who have no long-term allegiance to anyone or anything (other than perhaps their immediate supervisors)… in 5 or 10 years they might be long gone.  They are much more likely to treat employees like an expense.  That’s one of the reasons I like privately held businesses… I like their natural evolution, bottom-line accountability and flexible operations much more than the public world.

So considering ABI’s production issues, was their house cleaning a good idea or a bad one?  You could ask the same thing over the past few years as Miller and Coors tried to merge their organizations.  Again let us take a side trip to a thing called institutional knowledge.  Institutional knowledge is all the knowledge an organization has that isn’t written down anywhere… it exists in employee’s heads.  To truly understand institutional knowledge it helps to expand one’s thinking to include the 4th dimension, the dimension of time… ‘cause that is ultimately where this knowledge resides… in the heads of folks as they flow through time.  From one to another to another, across years or decades or even farther.  Think of certain children’s songs.  These songs aren’t really written down yet an incredibly high percentage of 6 year olds (or whatever age) know the songs.  It’s as if the songs exist in space/time – now we’re really getting wild! – and 6 year olds simple pass through this point and learn the institutional knowledge from other kids who have already “been there”.  Then they move on as other 6 year olds flow into this space.  If you think about it, not that long ago basically ALL knowledge was institutional knowledge… from when to plant the corn to what herbs to eat to help an upset stomach.  The development of language is another example.  No one directed it.  No one wrote it down.  No one controlled it, yet the language developed and evolved and was shared by all of its speakers.

As an example from this industry, think back to the days of driver-sales.  Generally the driver loaded their truck (or at least directed how it was to be loaded).  He knew how to load it because the guy before him knew how to load it and taught him, etc. etc.  Nowhere was it written how to properly load a truck (putting certain packages curb side or what not to put over the wheels or a hundred other things).  This knowledge existed in employee’s heads.  And it wasn’t written in stone.  One person might find that doing X or Y was an improvement, and if it truly was, that would be added to the institutional knowledge.  A common complaint by delivery drivers in pre-sell organizations (especially early ones) was that the warehouse didn’t know how to properly load a truck.  And they were right, they didn’t.  They didn’t have this institutional knowledge.  It was never imparted to them… although I know of a few situations where the frustrated driver did attempt to impart this knowledge, usually behind the warehouse with more than a little violence. 

Your organization is FILLED with institutional knowledge, much more than you can probably imagine.  Thus when a major organization like ABI cleans house, a great deal of institutional knowledge walks out the door.  And if morale in the organization is poor (which during downsizing it almost always is), many folks who have valuable institutional knowledge simply refuse to share it.  Basically a “screw you” type attitude.  And if the employees choose not to share this institutional knowledge, it is as good as lost.

So are some of ABI’s production (and other) problems caused by this exodus of institutional knowledge?  Of course, it is a certainty.  MillerCoors has experienced it, so did Pabst and Stroh and Heileman and a hundred other businesses.  Although for ABI and MillerCoors, it is obvious the benefits of these moves have FAR outweighed the negatives.  And think about MillerCoors.  How would they like to be competing against ABI as Miller and Coors.  ABI would eat their lunch.

Many of the young craft brewers will discover the importance of institutional knowledge when a key person moves one.  Organizations will generally rediscover and recreate this knowledge, it just takes a while.  Why?  Because it is the truth… there really is a better way to load a truck to make it easier to work on the street.  There really is a better way to do almost everything.  If one can discover it, then one will be more successful.

Which circles us back to the original question… are employees an asset or an expense.  The answer is yes. 

ABI to sell off US operations?

A smart banker?  Is that an oxymoron or what?  A couple years back I was talking to a pretty smart banker; this was right after the InBev purchase of Anheuser Busch.  We were talking about where this might lead and he said the feeling on the street was ABI would sooner or later spin off the US (perhaps North American) operations of ABI… load it up with a lot of debt and either take the thing public or more likely sell it to someone… perhaps Pepsi.

I recently told this story to a group of ABI wholesalers and they expressed more than a little concern.  Thus I called my smart banker friend and asked him what he thought of this earlier guess.  Well Mr. Smart Banker said he’s more confident than ever that this will sooner or later be the end game… and until then ABI treats the US market as the cash cow it is.

Cash Cows are leaders in a market with high share, low growth rates and a mature product portfolio… they generate significantly more cash than they consume… this pretty much defined the old A-B.  Under classic strategy these business units should be “milked,” maintained, then eventually harvested as the company continues taking profits and investing as little cash as is possible. 

Cash cows provide the fuel to drive a lot of the other base-broadening actions of the company including:

  • Providing the needed deep-pockets to turn low market share ventures with high market growth into possible winners and market leaders.
  • Covering company-wide admin, R & D costs, debt service, dividends, etc.

And here’s a final kicker… since Cash Cows generate a relatively stable cash flow, its future value can be projected within a reasonable range. And as the final, final kicker… 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.

It all makes perfect sense from ABI’s perspective; you use the Cash Cow of the US Anheuser-Busch market to fund your growth around the globe.  In addition you now own one of the most important and valuable brand names in the entire world… something you can leverage everywhere you go.

Look at ABI’s actions since the acquisition… they definitely cut the fat.  Thereby increasing the “milk” from ol’ Bessie… A-B.  And they have shown through their actions they will gladly trade a little market share for more profit… a classic Cash Cow maneuver.  There is a rumor they would be willing to lose enough share so they could close a brewery... obviously targeting their least efficient brewery.  Have no idea if this is true or not but it is discussed over beers in the distributor world.  Look at ABI’s recent pricing moves… moves many on the street question at this point in time with this economy.  But from a Cash Cow perspective it makes perfect sense. 

As a side note, but what does it mean to an entire industry when its leader is being run from a Cash Cow perspective.  How will this impact the other players?  – other than everyone making more money, at least for now -  Do the wine and spirits folks gain share as the leader’s focus is primarily on milking the cow and spending the milk on markets with a lot more upside potential in other countries?  Thoughts to be discussed on another day.

And remember, when I say a Cash Cow should be milked, taking profits and investing as little cash as is possible, I’m not saying they will (or should) be stupid about it.  They will of course invest in this business but just not as much as if there were more upside potential.  They don’t want to hurt the Cow… just milk it.

Which returns us to the first point in this blog… that ABI will sooner than later divest themselves of the US market.  So you might ask why would they be willing to sell their Cash Cow?  To which I’d respond, why wouldn’t they if the price was right?  A Cash Cow is a wonderful thing but it has little upside potential… remember it already has high market share in a low growth market… where is there left to go?  Many high share ABI distributors ask themselves the same question.   

For ABI, an international company, where to go is where the action is… like China, India, other places around the world.  And again, if the price is right why not get the heck out of Dodge?  And remember, because the Cash Cow’s cash flows are relatively steady, it is fairly easy to discount these stable future cash flows back to a present value… if the offer is greater than this, Katie bar the door.

Now I’m not certain if this sell option was Brito and Company’s plan from the beginning but I’d be willing to bet a large sum that it has always been a possibility in their planning… remember that whether you like their plans or not, ABI is filled with A LOT of very smart folks who have shown themselves to be pretty good at this chess game. 

Take a fat Cash Cow and turn it into a lean Cash Cow… thus driving the value up by increasing cash flow… in this case significantly.  Use your pricing power to increase margins even more, again increasing cash flow and increasing value.  Then find a strategic buyer who has synergies with the Cow and the value goes up even more… perhaps far beyond the value of the discounted cash flows.  Perhaps someone like Pepsi?

I believe the last couple years have shown something to Brito and Company… the US beer market is a pain in the rear from a supplier perspective. 

  • Brito talks briefly (as I recall it was one sentence) about the potential for ABI to self-distribute up to 50% of their volume (adding some significant milk to the ol’ cow) and what happens?  Laws pop up in state after state ending this possibility. 
  • They attempt to purchase the remaining shares of a distributorship they have owned FOR YEARS and what happens?  A new state law prevents this from happening. 
  • Although the US beer market might seem as one… we all know it is really 50 different legal worlds… and I’d have to guess the folks at ABI find it a tad annoying to have to deal with this battle day after day. 
  • And if it comes down to pure power politics at the state level, the beer distributors will win every single time.  That’s just the way it is and I don’t think it is going to change.

So if you’re ABI what do you do?  You of course continue to milk the cow and attempt to maximize its milk production.  At the same time you look for those strategic buyers who could share some of their potential operating synergies with you via the purchase price… Steve and I do this in our brokerage business all the time.  ABI continues to own the brands and takes them around the world… with a “don’t let the door hit you on the way out” attitude to the US market.

And since it appears that NO strategic buyer would be able to/want to purchase the ABI distribution network in total (even if you all wanted to sell)… … the new strategic buyer/venture partner is probably going to abandon the current ABI distribution network (where possible) and gain tremendous synergies by using one they already have in place… can you say Pepsi.    

I think this was originally part of InBev’s plan… to unlock an incredible cash flow by in effect taking over their own distribution… Brito’s “we can self-distribute 50% of our volume statement”.  This would REALLY get that ol’ Cash Cow a’milking.  Unfortunately (from ABI’s perspective) they have found they do not have the keys to unlock this treasure.  Yes I know, from the distributor’s perspective this isn’t unlocking a treasure but is rather stealing it from its present owners… all a matter of perspective.  So the distributor’s legal actions have taken the keys to this treasure from ABI and in all likelihood, they won’t ever get them.  But the treasure still awaits.  But how to get at it?

It would seem to me that the only way to get this treasure is to find someone who in effect already has the keys… in this case those keys being an already established distribution system.  Thus presenting the opportunity to take this treasure by the simple act of leaving the present distribution system.  Of course there are only a handful of companies who already have these keys… but all it takes for them to gain the treasure is to be willing to share some of it with ABI via the purchase price.  And if history is any guide, treasure always continues to attract those who want to gain the wealth…  and this treasure is just waiting to be had.  Now of course the legal actions taken in various states would impact the new owner just like ABI but perhaps there is a way around it?  The potential savings would be astronomical.  Heck, even if there were NO distribution synergies there are probably enough synergies elsewhere to make it work.  And if no one steps to the plate for this treasure, ABI simply continues to milk Bessie… a win-win for them regardless of other’s desires to unlock a mountain of treasure.

Harry and Benji can investigate this further from a legal perspective - I’ve got a real job where I make money by actually doing things, not just writing about them ;-) but I don’t see how a new owner could be required to continue to use a network of independent distributors.  And I don’t see how they could be required to offer any type of compensation to any party for this change.  Their argument would be that distributors HAVE ALREADY been compensated for their work… just look at your cumulative income statement over the past 50 years ;-)   Don’t shoot the messenger, I’m just telling you how they will present it.

If this were to happen I’d have to guess the ABI wholesalers might just be SOL.  A scary thought indeed.  And please let’s be sophisticated in all this… nothing ABI can say about this can have much merit.  They are a large publicly traded international company and their words carry much weight… and with the SEC they have to be careful what they say. That’s just the way it is.  So distributors are fundamentally on their own on this one.

Although losing a major supplier (with no compensation) might seem strange and unusual, it is actually fairly common throughout industries which use a separate, independent distribution channel… thus I’d have to guess there is A LOT of case law on the subject… most of it probably being bad news for beer distributors.  One might wish for this not to be true but I don’t see any fundamental business reason why it isn’t.

But then again, maybe my banker friend isn’t so smart and all of this is just a waste of words on a blog… who knows?  I’m just trying to do my job… providing wholesalers with various very real possibilities… whether they want to hear them or not.  And helping them analyze and address the world as it quickly changes around them.  Plus, it makes great water cooler gossip ;-)

Next post… is your distributorship a Cash Cow, a Star, a Dog or for sale?  And what can you do with what you’ve got.



What's Up With Values?

Before we start a brief discussion of values I want to give the Kentucky ABI distributors a tip of the hat for their great hospitality recently in Nashville.  As you might know, Nashville is Music City USA and that point was driven home late one night by a couple stirring karaoke renditions by industry pundit Harry.  First was a gut wrenching version of “Chasing Cars” by Snow Patrol… not a dry eye in the place.  For an encore Harry went with the King’s classic “In the Ghetto”… and just like the King, that stage was littered with women’s undergarments by the time he strutted off the stage ;-)  Gotta love this industry.

Now to values.  Some out there like to say values have declined and sellers simply have to lower their expectations.  We believe this is incorrect.  Beer distributors are rare and precious assets and this has not changed.  In pretty tough economic times this industry has fared quite well.  However, today’s environment has become more strategic and regional.  Wholesalers relying on local economics have become financially more vulnerable while regional consolidators and larger multi-brand operators appear to be well-positioned to move forward.

It is a classic case of “Where you stand depends on where you sit.” We have worked with several wholesalers who continue to move forward by redefining themselves to meet ever changing industry and customer needs. Progressive wholesalers are continuing to leverage their resources by incrementally expanding operations into other categories of beverage products and combining with more one-dimensional wholesalers within the region.

Although deal flow has slowed considerably it was somewhat to be expected.  First, most  who wanted to race to the door have already done so.  Second, there is so much uncertainty from the government that some potential acquirers and sellers have become somewhat frozen in place.  This will probably remain the case until the political situation becomes a little clearer… who knows, in 2012 – 2013 we could see even lower capital gains tax rates – depending on who wins.

But the most fundamental reason for values remaining strong is simple economics. As with any financial asset, why would the present owner accept a selling price which leaves them in a worse financial position?  Unless they predict coming significant negative events, why would they?  The answer is they won’t.

As a simple example, if the financial asset provides $1,000 in annual economic value why would one sell it if after-tax proceeds only provide $600 in annual economic value?  Not going to happen. 

However, there are situations which can have an effect on value.  For some distributors there are more than a few family and extended family members in the business.  What happens to them after a sale?  Unless it is a very large distributor there may not be enough value to allow everyone to walk away with retirement money; grid-lock sets in among the ownership group.  For some smaller operators there could be significant financial risk based potential sales erosion within your current brand portfolio.… These are real issues which have to be addressed.  In some of these situations there is almost no price which works for all interested parties.  Thus the asset isn’t sold… and most assuredly isn’t sold for some declining amount - a lose-lose situation.

We recommend that for potential purchasers and sellers of brands and companies, you think strategic value.  How many of you have made a brand purchase at a price which at the time might have seemed a far too high from an economic perspective?  And how many of you later found out that it was a great deal… the price seemed high but the VALUE to you far exceeded this price, whether you saw it at the time or not.  Think about InBev’s purchase of Anheuser-Busch.  Many thought InBev was paying far too high of a price… but look at the results of this acquisition… InBev knew the value to them far exceeded the price.  And they were right.  The future goes to those who are audacious enough to shape it to their liking… driven by a clear strategic vision.  Don’t simply look at price… look at value to you.  Not the value to the guy down the street, not the value to some abstract “beer distributor”, but look at the strategic value to you.  Whether you like it or not, this is the reality you face if you want to be in this business 30 years from now.

I’m not saying the consolidation wave is over, it isn’t.  I’m not saying now isn’t the time to sell, it might be.  I’m not saying there is a magical number of annual cases you need to distribute to remain long-term viable, there isn’t (if you have little to no debt you can last A LONG TIME in this industry… that might not be the wisest financial move but it can be done).  What I am saying is that unless we see significant reductions in the profitability of beer distributors, regardless of what some others might tell you, you’re not going to see the STRATEGIC VALUES of distributors fall. 

Depending on which side of the fence you are on this may make you happy or sad… but since when did ones desires affect reality?  Start the evaluation process by thinking strategically!

Give us a call if you would like to discuss in confidence your unique situation and needs.  These considerations and many other issues are what Steve Cook and I deal with when representing our potential sellers or buyers… we search for a win-win scenario on value, develop the best deal structure, assist with financing, and work with you on family and key employees issues... to name a few.

2 Big Deals... What Are You Doing?

So Orlando was finally sold and so was Raleigh… one a very large MC distributor whose sale was expected for some time (once the price was met)… and the other a large ABI distributor whose sale surprised quite a few.  In both cases far-sighted wholesalers stepped to the plate and expanded their empires.  In Orlando the Reyes added a large, strategic footprint in Florida, about 13 million cases.  In North Carolina, R.A. Jeffreys continued their acquisition run… adding the important Raleigh market and about 7 million cases.  In a relatively short period of time Jeffreys has become the ABI wholesaler in almost the entire eastern half of North Carolina.  It is a huge geographic footprint with tremendous growth potential for the next 100 years (at least).

 There are many paths to success. However, one can argue the most important first step is to understand your strategic position.  Just the process of this analysis is extremely valuable… done properly it forces you to consider all alternatives and it should force you and your management team outside of your comfort levels.  Just as important, YOU MUST HAVE A VISION AND STRATEGY THAT EXPLAINS TO PEOPLE WHY THEY ARE WORKING. With a vision that employees can trust you can make big changes in a short time.  It’s not about meeting budget, IT’S ABOUT CREATING A BETTER COMPANY.

 So, look in the mirror and ask yourself what are you doing and why? 

  • Do you have a strategic vision which is driving your dynamic business model? The world is rapidly changing and staying in one place simply isn’t an option. 
  • Do the employees feel like they are part of something bigger?
  • Are you leveraging your assets to improve the financial health of your business?
  • Does success mean a better quality of customer service AND higher efficiencies?

We’ve encountered far too many wholesalers who were hesitant to change simply because they didn’t have a coherent vision and management where not on the same page.

Steve and I can assist and support your efforts to build a better company and ensure everyone has a grounded, common vision by providing immediate expertise.  As your transaction representatives and general management consultants, we become a member of your  management team to assist in these needs – sale, acquisition or operational… broad skill sets, lots of “been there, done that”, focused effort, and when the need is over so is the cost.

Far too many players are left out of an acquisition simply because they don’t have the  expertise to truly understand how they can make an acquisition work for both the buyer and the seller… far too many distribs walk away from strategic acquisitions simply because of misperceptions and personal biases that they mistakenly allow themselves to get priced out of the game… quite often the issue isn’t actually price but rather the misrepresenting of operational cash flows and the underestimating of synergies within the new business model.

And of course there are those who are simply “bottom-feeders” who are looking for a great economic deal.  Unfortunately, these economic buyers never get a deal done and in effect they are letting others determine their future.  Although this isn’t my choice, it is a fine strategy IF it is a strategy… if it isn’t then it is a very poor choice.  Guess what, there are a lot of great deals out there but they are not necessarily only price driven! 

When considering any transaction the need for good analyses to drive good decisions is strong, especially in these times of rapid changes.  The quality of the analyses becomes even more important due to the longer-term nature of the potential acquisition opportunities. 

Determining who you are and how much a company is worth to a prospective buyer or seller is a good way to keep your “head in the game.” We recommend as a minimum, a quality “base-line” valuation for any proposed transaction you may consider.  Additionally, many of our clients use our updated versions of these “base-line” valuations to provide insight for ongoing strategic planning and operations analyses since it provides both refreshed industry comparisons and current valuation references.

Please contact Steve Cook or myself if you have any interest in learning how we can help you create a better company and how to apply “base-line” valuations as a strategic tool for transactions and operating modelling.  You’ll be glad you did. 







Plan B - Mergers and Territory Swaps

I have written that you should grab the future by the throat and make certain the future which comes is the future you desire.  I profoundly believe this but just because we can each work to shape our destinies doesn’t mean we get to select our own realities.  Facts are pesky little things which no amount of wishing will alter.  Or to put it another way… you’ve got to play the cards you were dealt. The bigger question is what strategic plan fits you?

 Strategic Plan A: Mergers & JVs.

With this in mind let’s talk a little about mergers and joint ventures.  Are they for everyone?  Of course not.  Are they easy to accomplish?  Not remotely.  Will anyone get 100% of what they desire?  Guaranteed not.  Let’s start with that last point.  In the VAST majority of situations, those considering a merger or joint venture are doing so because their first choice is not available.  Generally the first choice is to purchase the other guy and be done with it.  But if that isn’t an option, mergers and joint ventures can be a solid second choice and does keep everyone’s skin in the game they love. The trick is to learn how to play your new position successfully.

On the financial side they are tax-free (that’s always a plus) and don’t create piles and piles of long-term debt.  On the strategic side they make all parties stronger and more viable over the long haul… or worth more on a future exit.  On the operational side there are always synergies… sometimes huge, as in vertical integrations… sometimes smaller, as in horizontal integrations.  They are complete win-win scenarios except for one area… your family business no longer is a family business.  It is now a corporate entity.  This may or may not be a big deal… but remember, we started this by accepting the fact that this is the second choice since the first choice is not an option.  Those pesky little facts again ;-) 

But this is a profound change.  Mergers are an intimate act, and I mean that in all of its depths.  And you should think of them as a one-way street.  Once done, they are almost impossible to un-do.  It’s much easier getting a divorce than getting out of a merger.  Can we address this rapid evolution from a family business to a corporate entity?  Sure, I do that all the time… but it is still a profound change which requires flexibility from all involved.

And since it seems that a lot of beer wholesalers out there have decided they aren’t going to run for the exits, mergers and joint ventures are something which demand at least a modest examination.  One select group who should consider them in much more detail are those unconsolidated Miller and Coors distributors.  You can fight MillerCoors all you want but sooner or later something will be done with these markets… and mergers allow a win-win scenario which I don’t believe is likely in any of the other scenarios.

Strategic Plan B: Brand Consolidation - Territory Swaps

But of course not all folks are meant for an act as intimate as a merger.  What to do if you look at the other side and simply decide there is no way I want to be in business with them?  There is another Plan B – a territory swap which provides a win-win solution for suppliers, and wholesalers alike by consolidating all brands within a beverage category… not what everyone wants, remember those pesky facts, but still a win-win considering the cards on the table.  In a Miller and Coors territory swap one side trades their Miller (or Coors) territory for the other sides Coors (or Miller) territory… thus each side ends up as a consolidated MillerCoors distributor.

Let’s look at the positives of a territory swap:

  1. Like the merger they can be structured to be tax-free.
  2. There is minimal financial stress associated with consolidating brands. They can generally be designed to be gross profit dollar neutral – thus neither side gains or losses any gross profit.
  3. Operating efficiencies for both wholesalers improve since drop sizes (gross profit and cases per stop) go up.
  4. Territory footprints becomes smaller, thus increasing delivery efficiency and lowering fuel and variable service costs
  5. Your main supplier gets off your back and you can return to arguing about important stuff ;-)
  6. Lastly, each wholesaler gets a opportunity to improve their competitive advantage by gaining market share at retail and leveraging their resources against a smaller customer base

Add these all up and what do you get?  A financially stronger and more competitive distributor positioned for the future.

Yes there might be issues with territories not aligning perfectly and perhaps your warehouse ends up not in the ideal location… but comparing those possible problems to the upsides… sure seems like a solid Plan B to me.

For a modest investment Steve Cook and I can work with you to identify the right opportunities and discuss your workable options.  We are well versed in the business issues, the financial affects on owner’s equity, the company’s operating needs and how proposed changes could impact your current organizational design and staffing.  Or one side can hire us and the other side hire another advisor… but I believe “dueling advisors” in most situations only increase the cost and problems and decrease the odds of actually getting to a win-win for both parties.  But that’s my bias ;-)

Anyhow, whether unconsolidated MillerCoors distributors or just a couple (or more) distributors who want to take steps now to ensure their survival and viability tomorrow, mergers or territory swaps are worth at least a little consideration.  Perhaps not a Plan A… but in some situations Plan A simply isn’t an option… but a solid Plan B for many out there… a way to play the cards you’ve got for a winning hand for all.



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! 


Sales Manager or 3rd Grade Teacher?

As sales management do you ever feel like a 3rd grade teacher?  Holding up a piece of paper in front of the class and repeating (sometimes repeatedly) what is written on it.  And have you poor sales reps ever felt like you’re being treated like a rather dull 3rd grader?... with apologies to all those dull 3rd graders out there ;-)


I have a solution… stop the madness now!  Far, far too many sales meetings – and for that matter meetings of all types – are not only a waste of time but insulting on top it off.  Here’s a thought… how about treating people not only as adults but as professionals.


Meetings should be to highlight an important point or two… communicating and informing a group in ways which can’t be done in writing… to motivate… to celebrate successes and to train and learn.  When was the last time you actually learned some useful sales skill in a sales meeting?  When was the last time you actually left a meeting of any type motivated?  Fired- up and ready to go out and kick butt and take names?


As I have said many times before, the essence of change is just that… change.  This industry is filled with great sales folks… put those skills to use in your meetings.  Quit wasting everyone’s time by reading information which is readily available to your sales team… demand your suppliers do the same.  Whether MillerCoors or ABI, each of you have more than a couple programs going on at any time… do you really want to spend your time reading to the class what each of them says?  Holding their hands and blowing their noses for them too? 


Demand your people act like professionals - or replace them with those who will.  This is a two way street – this requires your sales folks (or people anywhere in your org) to individually actually read, comprehend, and act upon information which is sent to them.  In this electronic age an incredible amount of information can quickly and easily be delivered to your people.  It is their responsibility to take ownership of this info… if they want to stop being treated like 3rd graders; they have to stop acting like 3rd graders. 


And don’t let the lowest common denominator drive this… don’t make the 90% who are professional in effect be punished by the 10% who aren’t.  Guess what… those 10% are the ones who aren’t paying attention to your 3rd grade presentation anyhow.  Either change their behavior or get rid of them.  Trust me, it will only take one to be shown the door to put a whole new motivation in the rest.  And trust me again, those who are professional will thank you for not wasting their time anymore in dealing with those 3rd graders.


I find a useful analogy to describe a lot of the changes confronting distributors is football.  Just because you might be a high school football star doesn’t mean you can play college ball… all those college players were high school stars too.  And just because you are a college star doesn’t mean you can play pro ball… all those pro players were college stars too.  Distributors are walking this same path and so are their employees.  And unlike football, you and your organizations are going to walk this path whether you like it or not. 


If you and your people are professionals, then act like it in all aspects of your business.  A good place to take action and drive change is in how we manage and interact with our teams… how about starting by being the motivational college professor rather than the 3rd grade teacher.  Now there is nothing wrong with 3rd grade teachers, they have a valuable role to play… just not in your business.  Just a thought.


And on a completely different subject… and one on which I should probably keep my mouth shut (I’ve never been too good at that)… the recent fights around brewers owning and running distributors.  As any reader of this blog knows, I’ve taken more than a few swings at the brewers.  It’s not that I’ve got anything for or against them, they are our partners but I only work with distributors so that’s the team I play for.  Nothing personal, it’s just business.


But as I read in Benj and Harry, I fear wholesalers are again making foolish and short-term decisions in this fight.  I first wrote about this insanity in a gently worded piece titled “Have Some Out There Lost Their Minds?”  You can find it by clicking here.  Now I hear the same thing in Illinois as they make their case why it will be the end of the world as we know it if ABI can purchase the remaining shares of a distributor they already partially own.  I’ve worked in Chicagoland… A-B has had a branch there for a long freaking time.  I understand the fear of Brito versus the 3rd or 4th (and I think that fear is well founded), but that’s something we have to deal with in an intellectually sound manner.


In a recent post I noted I would race to my state legislature to help pass laws to ensure ABI (and by extension MillerCoors and all brewers) could not own distributorships.  I understand the issue quite well.  But once again, when OUR industry has to resort to sounding like a freaking neo-prohibitionist zealot, we have to pull back and ask ourselves what the hell are we doing. 


Why does it seem almost every time the beer distribution industry faces some challenge we run to arguments which would make a neo-prohibitionist proud?  Is our argument so weak, so pitiful that we have to wail that if ABI owns a distributorship (which they already own and operate more than a few), society as we know it will end and drunks will take over the streets, raping and pillaging with abandon… OK, that’s a little embellishment on my part ;-)


I have a difficult time seeing this as anything but penny wise and pound foolish.  How do we in the future go talk to these same legislatures and not have our own words thrown back at us?  Do we have to act like whores who will do and say anything to support our narrow interests?  Regardless of where this might lead?  We can make a strong case for our side without throwing away all integrity… I know wholesalers VERY well and I don’t think most of this is coming from them, it’s coming from their “advisors”… but don’t let the freaking single minded (and short-term) attorneys drive this process.  They do believe in winning at any cost.  They don’t care about anything but that.  Hopefully we do care about a little more than this.  Deep in your hearts do you really believe that we’ll race back to pre-prohibition days if ABI continues to own a distributorship in Chicago?  Or Louisiana… or wherever?


How can we as an industry on one hand make the case that lower prices are extremely bad (that’s one of the arguments on what supplier owned branches will lead to) yet at the same time argue that the federal excise tax should be lowered?  If lower prices are bad, then aren’t higher prices good?  Then why not RAISE taxes… is it only that beer wholesalers want to pocket the money rather than the government?  These are dangerous arguments which carry very real long-term peril. 


I recently spoke to Craig in DC, right after my Slaughterhouse piece came out, and he was telling me how distributors were cheering me… he also honestly noted to some of these same folks that a couple years back they were cursing me as I was busting their (NBWA’s) chops.  Please note, I am an equal opportunity chops-buster.  If you want to read what got some NBWA board members in a tiff… the first one’s titled “Political Soapbox – 1 (Oh no!  He’s numbering them!) which can be found by clicking here.  The second titled “Political Soapbox - 2 (digging the whole deeper) can be found by clicking here.  Noting these posts again will probably cost me business, but sometimes you’ve got to do what you’ve got to do.  We must stop this foolishness.  Beer wholesalers have great relationships with their state and federal-level governments.  For the vast majority of the folks in the legislatures and up on the hill we are known as pretty good folks – and it is true! … long-term family businesses, not short-term opportunists.  Let’s not forever damage this by our short-sighted arguments… I agree with the cause but there is a better way.  Now all those who want to shoot the messenger please form a line over here…


And don’t forget, there was some useful business advice at the beginning of this thing too.


What would you do for a billion dollars?

First some geology (trust me)… a massive earthquake in Peru… smaller but significant earthquakes around the world… volcanoes in Iceland and across the globe.  Is the big one coming for California?  Will Yellowstone let loose?  Are we entering a stage of increased geologic activity or merely seeing the normal workings of a very active planet?  And we do live on a very active planet, whether we know it or not.  The earth’s surface is composed of major physical features call tectonic plates.  They cover the surface and fit together like a giant, moving jigsaw puzzle.  And move they do. 


On a geologic time frame, they zip around the planet at an astonishing pace… for us mere humans, they move a few centimeters a year.  Sea floor is created in the centers of the oceans, races across the ocean floor and grinds under continents.  Continents float around like a bit of flotsam, all over the planet.  Earthquakes… volcanoes… mountain ranges… they are all driven by these moving plates.  Like a lot of science it is often difficult to get your mind around the actual workings of the world and the universe.  But one thing is certain, the only constant is change… a continual flow… a continual movement.


What the heck does this have to do with beer wholesaling?  Wait.


For those who don’t know, I actually have an undergraduate degree in geology.  My focus then was hard rock exploration… we’re the ones who find mineral deposits.  I always enjoyed geology for a number of reasons.  First the science is a meld of earth sciences with almost very other field of hard science; chemistry, physics, biology, astronomy, cosmology, mathematics and engineering… you have to be a well-rounded generalist to become a geologist.  Second, especially in hard rock exploration, you have to be a master of deductive reasoning.  Generally you don’t have the benefit of actually seeing things as they occur… instead you are presented with a jumbled mish-mash of major events which span millions and millions of years.  It’s up to you to figure how that all occurred to get where we are today.  These personal traits are what makes me such a wiz-bang consultant… if I do say so myself ;-)


Just as the tectonic plates of the earth continue to move, sometimes fast and sometimes slow, so do the tectonic plates of the beer and beverage industry.  Is this a time of rapid movement or slow movement?  In the end, does it really matter? 


The best we can do is to influence what we can and forecast and adjust to our advantage for those things that we can’t. 


What we don’t want to do is to follow the classic military advice:


            When in trouble, when in doubt… run in circles, scream and shout


So a tip of the hat to all those state associations and NBWA for attempting to influence what we can.  From strengthening state laws to the ever going battles at the federal level, we don’t just need to remain vigilant, we need to always be pro-active… moving ahead of the curve and shaping the curve, not simply responding to it.  Responding to it is generally a loser’s game.  And shaping it for beer distributors… no one else.


The biggest tectonic plates in our world are Mr. Brito and ABI, MillerCoors, and of course our friendly governments, at all levels.  But there are plenty of smaller plates too, and they can wreck just as much havoc as the big ones.  MillerCoors took their beating over their recent contract… although that one is far from over and I’m not certain they didn’t in the end win most of those rounds.  Right now MillerCoors is sitting back and letting ABI get all the attention… and they are getting some attention.


Read what this major tectonic plate is saying in an interesting cover article from a Brazilian magazine, EXAME titled:


Budweiser.  Brazilian style at the largest brewer in the world.   Aggressive goals.  Cost cuts. Tough negotiations.  Promises of millionaire bonuses.  Behind the scenes at InBev’s Brazilian management of Anheuser-Busch, an American icon.  Not even they expected so much capitalism. 


It can be found by clicking here.  It is a must read.  Lot’s of interesting stuff.  Did you know that the top 40 executives at ABI stand to split a bonus of $1,000,000,000 (perhaps as high as $2,000,000,000… that’s $2 billion dollars) if they can achieve their goals?  And what goals might that be?  To reduce their level of debt.  Understand that… not to maximize sales… not to build brands… but to reduce their level of debt.  $2 billion divided by 40 is $50 million each.  Not a bad pay day… and perhaps coming very soon.  What would you do for your share of a billion dollars?    


Most of you have a family business where you think in terms of generations… ABI is a public company where their top-dogs think in terms of quarters… and they are focused on cutting debt.  A few years down the road none of them might even remain in this industry.  Heck, they might pocket this bonus in the next year and be on the beach after that!  Do you think they are overly concerned about the state of their business or brands five or ten years down the road?  Of course they are to some degree but right now the big prize is on one thing and only one thing.  Answer the following question honestly… if you were in their shoes with that sole goal and that potential payoff, would you care about all those other things?  Or would you be very short-sighted with your eyes on the prize?  I think we all know the answer to that… these aren’t moral issues, just the realities we each face. 


And remember the big dogs in this industry are all now international in scope.  We might think of the good ol’ US of A as the center of the universe, they most certainly do not.  Nor in fact should they.  Who knows, a few years down the road ABI might spin off their US operations and not even be associated with US Anheuser-Busch (more on this in later articles)


The author of the Brazilian piece has these thoughts towards the end of the article


“In face of the drop in sales, ABInBev executives will have to find new ways to achieve their performance goals… From now on, no one doubts that cutting costs will be an even more difficult task than last year… One possible source of savings is an attack on the enormous and powerful network of Anheuser-Busch's independent distributors. The company can try to increase the amount of beer it sells directly to retail.”


Something to think about.  Also note those last two sentences are not discussing the same thing… they are two separate possible courses of action.  In an earlier press conference when asked about ABI’s plans to purchase the remaining shares of a distributor in Illinois and whether they planned to take over the distribution of beer in this country Brito said: “For now, A-B InBev will continue to rely on its independent distributors.”  For now?  For now!  Brito is the head of a large public company… he cannot mislead in his public statements without exposing the company to tremendous liability.  This isn’t beating up Brito, all public executives must couch their words and often hide their true objectives.  Is this what Brito is doing?  I have no idea but it certainly does get one’s attention.


I think I’d be heading to my state capital to ENSURE the “for now” becomes when hell freezes over.  And just because you’re a MillerCoors guy don’t think this doesn’t affect you.  If ABI would be successful, MillerCoors will be right behind them.  I would be… wouldn’t you?  Let ABI be the spear catcher and if it works, race to follow them.


The tectonic plates of the beer and beverage business (this is MUCH larger than just the beer business) continue their inexorable journey.  Fortunes will be made… and fortunes will be lost… some quickly, some over time.  I repeat my wise counsel one more time – a bad habit my wife regularly points out ;-)   either take your chips off the table and run to the door (if so, let me and Steve help) – this year - or prepare your business and your industry for long-term survival (again, if so let me and Steve help... we are experts at both… that’s what makes our expertise so unique)  Either one is acceptable… nothing else is. 


Those plates are going to move… either use it to your advantage or get out of their way.  As I noted in previous post, here… “was ain’t is”.  Quit hoping and start acting.  This is far from bad news… it is simply news.   Use your knowledge of these plate shifts to be the one who makes a fortune, rather than the one who loses it.

The Slaughterhouse – A Follow-Up

First, my strategic partnership with Steve Cook continues to provide growth opportunities in wholesale mergers.  Steve and I would like to recognize and thank our clients for which we provided consulting support services in yet another successful merger


Stephen Cook of Great Lakes Consulting Associates, LLC and John Conlin of Conlin Beverage Consulting, Inc. want to thank each of the new merger partners, namely  I. H. Caffey Distributing Co., Cunningham Wholesale and Rudisill Enterprises for the opportunity to provide our pre-merger valuation services and financial analyses in support of your newly formed MillerCoors operations, Carolina Premium Beverage LLC in the Charlotte, NC area.  Thank you for your consideration and best wishes. 


John and Steve


Second a very public tip-of-the-hat to Dave Peacock for being a stand-up guy.  To say that my last post got a little attention is a slight understatement… for those who missed it you can find it by clicking here.  I have a feeling that goats and slaughterhouses have just become a permanent piece of beer wholesaling lingo.  100% of the wholesalers I talked to (both ABI and MillerCoors) backed me up on the piece.  Many went out of their way to express their support and gave me high marks for relevancy.


For those who are not yet aware, at the recent NBWA Legislative Conference ABI put on a 2 hour meeting with their wholesalers.  About halfway through Dave’s talk, he moved to the next slide and lo and behold it was a picture of a goat.  I hear it was a good looking goat as far as goats go.  I also heard (no pun intended) it was quite easy to see who reads my stuff and who doesn’t.  At the meeting those in the know let out a hearty chuckle when the goat appeared, those in the dark wondered what the commotion was about.


Dave made his comments about my piece and where ABI stands on a number of issues… including ABI needing to do a better job communicating their vision to the distributor network… his points were not surprising.  I think he noted I’m some type of attention-seeking consultant… or some such thing.  Who I am to argue?  ;-)  But I will note that I very publically state my opinions and beliefs on many subjects… and I live by them.


After the goat-scapade, I introduced myself and got a chance to speak to Dave – he didn’t even take a swing at me ;-) and I offered Dave a chance to respond on this blog, but he declined.  Dave that is an open invitation anytime you want to take it.  In fact if any of you beer/beverage folks (brewers/suppliers, distributors or even retailers) have something you need to get off your chests or wisdom you want to share, give me a call or email and I’ll post your wit and wisdom too. With attribution or anonymously… your call. 


Also if you are a new reader to this blog, send me an email and I’ll put you on my email list.  I always send out an email letting folks know when a new article has been posted.  That is all your email address will be used for.


But back to business… first we need to understand that a lot of this is nicely captured by the classic mob line, “it’s nothing personal, just business.”  Keep that in mind.  Of course when it’s your legs that are being broken this is a lot easier said than done!  Kind of depends on which side of that quote you are on… the giving side or the receiving side… on the receiving side it is quite personal.


But being happily uniformed (or ill-informed) is the most certain way to be headed in the slaughterhouse before you even know what has hit.  The continuation of a full-scale independent beer distribution industry is far from a certainty – you have no god-given right to exist… there are many other models which would work (we’ll talk about ABI and their on-going dance with Pepsi in future articles).    


So a number of distributors have asked me, “OK Mr. Smart-Guy, what should I do”.   I’ll repeat my wise counsel one more time… either take your chips off the table and run to the door – this year - or prepare your business (and your industry) for long-term survival.  Either one is acceptable… nothing else is.


Some might mistakenly see these as contradictory positions.  Nothing could be farther from the truth.  They are very much symbiotic.  First, some of you are in the game regardless of your desires.  So be it.  Some of you are in the game because you choose to be, i.e. you think it is the best financial and personal choice you have.  Again, so be it.  If that’s the case prepare your company for long-term survival… a high-performance and high-demand organization which brings substantial value to your suppliers and retailers while at the same time maximizing the cash-flow to the bottom-line.  These are not mutually exclusive goals. 


As a note on the service side, there are A LOT of folks out there who deliver things… we need to keep our eye on continuing to add substantial value… but remember this is not the same as defining service by how many times a week your truck is parked at a store. Quality service is MUCH more than just delivery frequency, quality service is an operating philosophy and process that holds wholesalers accountable for best-in-class retailer satisfaction while growing market share and increasing profitability.  Never forget, the first step in being a high financial performer is control of your service policy.  From this you balance all of the functional aspects of your operation including sales, merchandising, warehousing, delivery and admin. 


Everything flows from your service policy. 


In most situations, being larger helps accomplish these goals and gives one a stronger strategic foothold by leveraging economies of scale, thus becoming more efficient and more effective.  Much like war, controlling real estate (especially in a world of exclusive territories) is of utmost importance.  Thus the inherent drive to grow through consolidation – either outright purchases or mergers – either one works. 


In most situations acquisition of additional real estate sure looks to be a requirement for continuing in this industry.  And with the upcoming changes in tax law, this is the year when futures will be made or lost.  If you want out this sure looks like the year to do it, at least for the near-term


This reality fits perfectly with those who think now is a good time to cash out their chips… whatever their reason for doing so.  So we have one group of folks who in all likelihood need to grow their real estate and another who for whatever reason want to sell their real estate.  That’s how deals get done.  Decide which one you are and get moving… remember a great quote “Change is the law of life.  And those who look only to the past or the present are certain to miss the future”.  As I have said repeatedly, work to make certain it is a future you desire.



PS –  As my wife will freely tell you, I’m ALWAYS on my soapbox.  To read a couple published pieces on how I would start to solve the health insurance crisis, other than the road to socialism, click here and here






The Price Wars of 2010

“I love the smell of napalm in the morning”… a classic line from the movie Apocalypse Now.  I don’t know about napalm but I detect the odor of gasoline and folks are beginning to play with matches… this doesn’t generally end well.


Many wholesalers across the country had a horrendous January, a pretty bad February and the near-term outlook doesn’t seem too rosy.  Many ABI folks have been hit hard… the economic downturn… their over-indexing in c-stores, which are taking a beating… and to be politically incorrect, the disappearance of many illegal immigrants who have headed back home (who also often over-index to ABI and those c-stores) – those who work the street know this is true in many parts of the country.  This reverse immigration has also hit the Corona numbers hard in these same parts of the country.  The MillerCoors folks have taken the same hits, but in many situations not to the same degree.


When you’re down double digits in volume, a certain panic can set in.  First let’s pause and look at the reality we find on the ground.  Many wholesalers ended 2009 with down volumes but fairly flat profitability (more than a few up).  That’s a pretty good thing when you consider the economic conditions (and fear) of 2009.  2010 isn’t starting off like gangbusters but why should it?  With the position of the Super Bowl, you’ll really have to combine February and January to get a true read on the start of the year.


I still won’t be surprise to discover that volumes are tough in 2010.  It is difficult to see how the economy will be rocking-and-rolling… but remember this isn’t ultimately about volume, it is about profitability.  Now is not the time to throw away hard earned price increases to chase the fleeting ghost of short-term volume.  Have we so soon forgotten the price wars of 2005?


And if we have the price wars of 2010, they will be even worse.  Why?  Whether you remember it or not, the economy was doing pretty dang good in 2005.  Nationwide unemployment was running just a tad above 5%.  Today it is around 10% (that’s a 100% increase!), 17% if you include those who have simply quit looking for work.  The economic situation is tremendously different today and the damage done by crazy price promotions will be much worse and longer lasting.


Even in good economic times, look at how long it took for you to recover from the 2005 price wars… how long it took to re-set in the consumer’s mind what a case of premium beer “should” cost.  If we as an industry go down in this economy, we risk re-setting this price in the consumers mind at a level which will be extremely difficult to change.  If we go down in an undisciplined manner, be prepared for the price to remain there for A LONG time.  Once this price is re-set… in today’s economy it will be staying there… count on it.


Whether you’re an ABI or MillerCoors distributor, you have a full range of products which cover the gamut in styles, flavor profiles, packaging, AND price.  You are already offering that value-focused consumer a wide assortment of products and packages.  You don’t need to drop your drawers.  One of the worst things one can do in business (or for that matter in your personal life) is to pay twice for the same thing… especially when the price is high.  You have already gone through the pain of the recent price increases… why give them up and then have to re-live the pain again when someday you try to get these prices back up?  


I have seen this in failed attempts at re-organizations… whether because of poor design and execution or just the normal friction of change… once some flak starts flying the company retreats… they take all the pain and give back whatever gain they had hoped for.  When they sooner or later attempt the change again… the pay the price AGAIN… often times it’s even higher.  You already paid once… and your bottom-line thanks you… don’t give it back.


If you find yourself in a tough situation, focus on containing your costs and retail execution, NOT on trying to purchase volume.  Focus on company-wide execution.  Focus on building a high-performance organization.  These will serve you well today, tomorrow and well into the future.  Generally purchasing short-term volume only leads to pain.  Yes, in addition to helping with mergers and acquisitions Steve Cook and I help companies change and become this type of organization… that’s why our services are superior for both ;-)  Use our services or don’t… but in these times it is FAR wiser to focus on your organization than on short-term volume gains which often leads to long-term problems.


Yes the smell of gasoline is in the air… so is the smell of fear.  Put those matches away.  Otherwise it generally ends in burns, pain and scar tissue which won’t quickly disappear.  Remember… I warned you.  Please feel free to forward this to all of your supplier friends ;-)  They often have a strange fetish for flame.


Compensation Drives Behavior

Compensation drives behavior… fairly straightforward and not really that complicated.  But many still make foolish decisions when thinking about it… with their employees and even their service providers.


Let’s start with service providers - since I’m one and I get to write this thing ;-)  Often when discussing a re-organization with an owner, they think they’ll get me to “put-up or shut-up” by suggesting my billing should not be based on my normal weekly rate, but rather on some percent of actual increased profits that my assistance drives to the bottom-line.  I always smiling knowingly and tell them that I will GLADLY accept this compensation structure… it gives me the opportunity to put A LOT more money in my pocket and I know the financial results of “pre-Conlin” and “post-Conlin” in every re-org I’ve ever done… I’ll gladly step to the plate on this…


I then proceed to explain to the owner why they don’t want to pay me in this manner and why it would be to their detriment to do so.  A compensation system won’t actually manage anyone, but it should align people in the same direction… get them to at least a broad outline of win-win for various actions.  But if you pay me based on putting more money to the bottom-line, that’s exactly what I will do… whether it is in your best interest or not.  It gives me a strong financial incentive to think only short-term and to cut as deep as is possible.  Now I might not do so, but the compensation design points me in that direction. 


Each of you have probably heard of these horror stories about a re-organization… huge cuts are made and great promises given… unfortunately, the service provider hacked away, quickly met the goal and took the money and ran… and then the wheels fall off in 6 to 9 months causing great organizational turmoil AND all those wonderful savings prove to be illusionary… everyone then gets religion and realizes that “going cheap is expensive”… often costs increase to deal with the turmoil of the failed change.  The cost cutting task was completed but as I remind people, any fool can cut costs… you simply walk around and point at various people telling them they no longer work here!  To properly do this, you have to build a new and more efficient system from the ground up.


But that’s what happens when you don’t design an organization well and you cut too deep… for a while it will work as employees suck it up and some “non-critical” tasks simply don’t get done.  But sooner or later it all catches up and comes tumbling down… generally all at once.  But of course the service provider has the all purpose “get out of jail free card”… it was working when I left… meaning of course that any failures couldn’t be their fault, it must by yours.


You don’t want to pay me (or anyone) in this manner since it gives an incentive, in fact it directs behavior to do things which might be in my best interest, but not in yours.  Instead you want to design my compensation system so that our interests are completely in line… a win-win. My goal is to provide value-added service which pays for itself many times over and maximizes the benefits to my clients.


The same silliness happens in joint ventures and mergers… some service providers suggest billing on a “success” fee… the question is, who’s success?  Under this scenario they don’t get paid unless the joint venture or merger actually happens.  Think about it… what incentive does this give them?  Clearly it is to get the deal done… period.  They most certainly aren’t looking out for any party’s interests other than their own.  This can lead to bad outcomes for everyone other than the service provider.


A similar situation exists in residential real estate… here in Colorado they had to add a law so that if you use a broker in the search for a home, the broker has to explicitly explain to you that they DO NOT represent your interests… they are simply showing you homes but you’re on your own in protecting yourself.  The law was implemented because there were too many screwed home buyers who rightly thought the person they hired, “their” broker was actually looking out for their interests.  Seems like a reasonable belief when you hire someone, but that’s not always the way it is.  You don’t want to make the same mistake in analyzing and building a joint venture… better to have someone who is looking after everyone’s interests rather than just their own.  Think about the incentive the compensation structure is providing.


A joint venture or merger is without a doubt one of the most profound business decisions you can make… a wise attorney once told me to pick my partners with more care than I would in picking a wife… I’ll spend a lot more time with my partners than my wife and ultimately they will most likely have a much more significant impact on my business and personal success.  Wise counsel.  You can’t start a successful JV without completely open and honest discussions… not a blind desire to get a deal done so that I can pocket a boat-load of cash!


I had one attempted 3-way merger where after my initial one-on-one interviews with each party it was clear that their individual desires were in too much conflict for the thing to have any chance of working.  I told the group my reasoning and we ended it there.  Would the incentive have been the same were I hoping for a “success” fee?  All three parties subsequently took different paths, all to their individual gain.


In another situation I had a reluctant merger partner who just couldn’t (wouldn’t?) accept the reality on the ground.  Although I told him I thought it was a serious mistake to do so, my advice to him was unless or until he could more fully embrace the merger in total, he should walk away.  Otherwise I was quite certain he would not be happy with the results of the merger.  That was my heartfelt advice to him… it was not in my best interests but it was the truth as I saw it.  Would the incentive have been the same were I hoping for a “success” fee?


Some of this “success” fee confusion comes from mixing things which are fundamentally different.  A success fee in a brokerage transaction – selling or acquisition – makes perfect sense.  If I can help sell your business for $40M versus $30M, that’s a good thing and an incentive to do so makes perfect sense.  But a joint venture’s value is what it is… my efforts won’t change this.  Sure my re-organizational wizardry will help you design an organization which maximizes both sales and profits, but this has noting to do with the concept of a merger or joint venture.  In a joint venture one is simply analyzing if the various parties can actually come to some agreement and if so, helping to structure ownership, the operational organization and the corporate design of this new entity.  A success fee in this makes no sense… unless you want “your” service provider to only care about getting a deal done at any cost…and remember, the cost is solely yours.


Remember, compensation drives behavior.  If your sales force is a generalized one, i.e. a single sales rep calls on off-premise and on-premise, do you pay a different (and higher) commission rate for on-premise volume?  You should.  Otherwise what is your compensation system telling your employees?  Whether you know it or not it is telling them to place much less emphasis on the on-premise business.  Think of it from a sales rep’s perspective… if I have an extra 15 minutes in my day, what should I do with it?  I can go to a local on-premise establishment and perhaps make a placement and sell a few cases.  Or I can go to my local chain grocery and perhaps sell a hundred.  Even if I just pull-up the store I can probably make more money than by stopping at the on-premise account.  But we all know this is short-term thinking… those on-premise cases build brands which sooner or later flows over to larger off-premise sales.  To hope your sales reps take this long-term view is generally wishful thinking… this isn’t a knock on them, it’s just human nature AND the incentive your compensation system is giving them… let me repeat, your compensation system is quite directly telling them to do this.  Therefore adjust your compensation system so the on-premise business remains an important part of a sales rep’s mindset. 


To effectively address these significant differences both in product mix and account types for many sales reps, some wholesalers have eliminated the variable commission component of the company’s sales compensation plan in lieu of providing more performance based incentives.  A revised base plus incentive structure could ensure proper alignment of activities. Individual incentives would then be tailored to integrate unique individual goals for each sales person as part of overall company goals for sales and distribution. Again a WIN/WIN when properly designed and thought out.


Some distributors have retained a driver-sell mentality in their compensation systems.  In a driver-sell world, generally cases and effort went hand in hand… with compensation following.  But in a pre-sell world this is not the situation.  With bulk/dock deliveries, often the driver who delivers the most cases actually has the easiest work-load… yet if you retain a driver-sell mentality, these routes will make the most money.  Let’s see… easiest work load and the most money… compensation drives behavior… and what behavior does this drive?  Everyone and his dog wanting to get on these easiest routes… and whining about working harder… demoralizing… damaging team building… a lose-lose across the board.  In a physical job like a delivery driver, compensation should match both the skill required and the physical effort the job requires… it could be that the lowest volume route is the highest paid.  There is more to it than simply volume.


Whether in sales or delivery or even management, compensation should match the skill-level and effort the job requires… adjusted of course for the availability of these talents in your local marketplace.  Taking orders is not the same as selling… why pay them the same?… especially when compensation drives behavior.  Make certain it drives them, whether they are employees or service providers, in the right direction.


The Massachusetts senate race and beer wholesaling


The Massachusetts senate race and beer wholesaling… what, if any impact?  For anyone not paying attention, there was a significant special election in Massachusetts last Tuesday to fill the US senate seat which was held by Teddy Kennedy for almost half a century.  To general amazement, the Republican candidate, Scott Brown won… in perhaps the most liberal state in the country… in a state where only about 12% of the electorate are registered Republicans… the freaking district which continues to elect Barney Frank went for the Republican!  No matter which way your political beliefs lean, this was an incredible result.  A brief summary of my political beliefs and biases follows at the end of this post… in case you wondered ;-)


I’ll leave it for others to analyze what this means to big picture politics… for us, let’s concentrate on what it may mean to the beer distribution industry.  First, since distributor values seem to be on everyone’s mind… at least those who talk to me… I think this is a strong positive to support values.  Warning… shameless sales pitch coming… and yes, if you are considering a sale or acquisition, give me a call. 


Why do I think this is generally good for our industry, and therefore values?  One word… fear.


If a no-new-taxes and no nationalized health care conservative Republican candidate can win in Massachusetts, no politician of any stripe is safe as of today… and that’s a good thing for every person in this country.  A certain amount of fear is a good thing in all politicians… it tends to focus their minds and hopefully keeps their words AND their actions in better alignment.


In addition, last week saw the Supreme Court strike a blow for free speech and tore down decades of limiting the free speech of corporations… they rightly ruled the First Amendment does not allow the government to silence its critics… read the governments arguments… that they have the right to ban books, movies, web material – freaking scary.  But now your company can freely join in the debate… your state associations can now freely join in the debate… NBWA can now freely join in the debate.  You can actually now criticize a politician and not be threatened with a federal felony—punishable by five years in prison—for using corporate funds to criticize a candidate for federal office within thirty days of a primary election or sixty days of a November general election… amazingly that was law of the land before this landmark ruling.


Since pretty much every politician or wannabe is vulnerable, a tremendous opportunity presents itself in the 2010 and 2012 elections.  The Massachusetts result is most likely a serious break on the crazed spending of the past years… it was bad under Bush and the Republicans (a shocking failure of living up to their supposed beliefs), and under Obama and the Democrats it has started out as spending on steroids… in less than 20 months the Obama administration will have racked up as much debt as all 8 years of the Bush administration… and the Bush admin was freaking terrible! 


Right now for every $1.00 the federal government spends, they borrow $0.43 of that!!!!  You don’t have to be an economic wizard to understand that can’t go on forever… even if you do have the ability to print your own money.  And the populace is beginning to understand that raising taxes isn’t the solution… it’s not that taxes are too low, it is that spending is too high.  All those upcoming tax increases from the expiring tax cuts just got a lot less certain.  Good for this industry… and all industries.


These are the reasons I believe this is overall good for beer wholesales and good for values.  Blindly raising taxes just got harder… for Republicans and Democrats.  Government intrusion into every aspect of our lives just got harder… but don’t fool yourself… those who want to do so still lurk in both political parties.  The pressure to cut spending just got bigger.  There are still plenty of problems out there and the desire to do foolish things hasn’t magically disappeared… but the headwinds have shifted significantly.  The fear is now thick… let’s make certain it stays that way.  This is good for this industry.


As an industry let’s not let this perhaps once in a life-time opportunity pass us by.  As an industry let’s not let this chance be squandered by ignoring our convictions and beliefs and behaving as a belief-free special interest… something in the past I have occasionally beat up NBWA for.  That’s what Bush and the Republicans did… we can strongly support and defend this industry without becoming just one more special interest whore.  The beliefs of smaller, less intrusive government… individual freedom and responsibility… these beliefs fit hand-in-glove with our industry.


In the next 2 – 4 years we can take steps which will reverberate for generations.  NOW is the time to step to the plate… personally and professionally.  Have you ever thought about running for office?  NOW is the time to do it.  Get active and support candidates who share these beliefs… not just some schmuck who says they are a friend of beer wholesalers simply because you’re the one in the room with them right now… not some schmuck who only supports us because they think it is in their best interest to do so… for now.  IF the candidates share these basic beliefs, I can guarantee you they will support beer wholesalers. 


Now is the time to get your company and your state association focused… again not focused on being the most effective whore in town… but rather focused on supporting those who share these basic beliefs… their support for this industry will naturally follow.  We don’t need to care if they have a D or R after their names… what do they believe and will they vote to support these beliefs?  We don’t sell canned peas and a regulated industry like ours is in no way a contradiction to economic and individual freedom.


Make our voices heard… not just on beer… but on the much more important areas of freedom and limited government… to say nothing of sane fiscal and monetary policy.  The future of beer wholesaling just got a whole lot brighter – which is good for sellers,  good for buyers, good for employees, good for suppliers, and even good for good looking, sharp-dressed consultants ;-)  


Now let’s grab the future by the throat to make certain the future we want to happen is the one that actually comes about.

End of post on this subject but if you’re bored, here is a summary of the biases I freely admit…


A local radio talk show host has a saying when he begins a discussion… he likes to note where people sit before hearing where they stand… in other words before the debate begins, what beliefs (and therefore biases) do you bring to the table?  With that in mind, let me explain where I sit… quite simply I believe each and every one of our lives is an incredible gift… a gift of profound and almost unimaginable proportions.  A universe which exploded from nothingness about 13.7 billion years ago, today ends up with each and every one of us.  An unbroken string… a raging river of reality which ends up with us.  Amazing.


I freely admit I don’t have the eloquence to have my writing adequately capture this reality.  Some consider our individual lives a gift from God, others simply a gift from evolution (I believe the former), but regardless they are ours and no one else’s.  The most profound of all private property is that of our selves.  Our lives are our own.


It seems to me that if one truly accepts this reality, then one has to accept that governed within a broad set of laws which protect everyone, individuals should pretty much be able to live their lives as they see fit.  This thus leads to a conviction of individual freedom… freedom as expressed in an economic system is market-based… freedom as expressed in a political system is constitutional republic/democratic.  Many before me have expressed these ideas better… Friedrich Hayek for one.  His “Road to Serfdom” is a must read.  As he notes repeatedly, someone has to decide… the only question is who.  All evidence points to the fact that things work best for everyone when individuals decide for themselves, rather than having some group of elites deciding for everyone else.


There is a direct correlation between freedom and prosperity which is indisputable.   


In addition to this belief system, I have also been running and re-organizing business for my adult life.  As you analyze and build systems you see the results of effective designs and ineffective designs… stable systems and unstable systems.  And this again points one in the direction of individual freedom.  These non-profit organizations we call government simply aren’t designed to accomplish some of the tasks… the question often is SHOULD government attempt to do this or that, when rather it should be the more fundamental CAN government do it.  In most cases the answer is it can’t with any efficiency or effectiveness.  The system of the federal (or state or local) government is simply not designed to run things like an economy (or a health care system or a car company or almost anything else).  This point isn’t from any political viewpoint, it is simple business analysis.  It is not designed to do so… and it can’t do so in any remotely effective manner… that’s just the way it is.


Raw statistics clearly prove this point.  To make a case for federalism think of the federal government in a trivia contest against the 50 states.  The federal government will  NEVER win the trivia contest.  In fact it won’t even be a contest… it is a statistically certainty.


To make the math easy, let’s assume all participants are basically coin-flippers… 50% of the time they are right, 50% of the time they are wrong.  What are the odds of the federal government beating the states team? 


The odds of the federal government being correct on any single question is .5 or 50%.  The odds of the 50 state team being correct on any single question is 1 minus .5 to the 50th, or 99.9999999999999%!!!  I think most people would take these odds ;-)  Assuming the states and the federal government have similar skills and abilities, there simply is no way for the federal government to win the contest.


That makes a strong case for state’s rights and federalism but if one takes it to the next step… an individual state competing against thousands and thousands of individuals… again there is simply no statistical way for the state to outperform the sum of the individuals. 


It is a structural, organizational reality that government will basically NEVER outperform the private sector.  It is the nature of the beast.  It is a design certainty which no amount of effort will overcome.  This is simply the reality of these non-profits.  A few against hundreds and hundreds will never win.  The hundreds and hundreds have far more information, are much quicker in responding to the results of their actions, and are generally quite driven by the profit (i.e. survival) motive.  The non-profit’s employees (that’s the government) would require god-like abilities to overcome these realities. 


This is not a political bias based on anyone’s views, it is a statistical certainty.  This is not a Republican or Democrat issue. It is the nature of these non-profit organizations. They are not designed to, nor can they accomplish these goals.


It is truly amazing that we still are having these discussions in 2010.  If these non-profit organizations we call government could create wealth… would there be any poor countries?  If these non-profit organizations we call government could create jobs… would there be any unemployed?  It is time to put these childish notions behind us.  Just as new-born kittens take a few days to open their eyes, it is time for us to collectively open our eyes to these realities… whether we like them or not.  I do not exaggerate when I state that the future of the country and indeed, the future of the world depend on it.  That’s where I sit and where I stand.













More management wisdom

The Wall Street Journal recently ran a remembrance piece on a management philosopher, Russell Ackoff.  He was called an evangelist of the big picture… he tried to help his clients by “reimagining their challenges as opportunities to restructure.”  Something many in the beer industry should take to heart… and no, that isn’t just some cheap pitch of my services ;-)… but it is a healthy mindset to keep in both our business and personal lives.  The challenge is a fact; it cannot be changed since it is probably beyond our power to control… so why not think of it as an opportunity?  Much healthier and might even turn out to help! And if it doesn’t, what was lost? 


The piece notes he was an expert in conceptualizing problems and liked to say they came in three flavors: problems, messes, and puzzles, and each needed its own unique toolkit to fit.  Here is one of his great quotes which I think applies to many of our business practices…


“All of our social problems arise out of doing the wrong thing righter.  The more efficient you are at doing the wrong thing, the wronger you become.  It is much better to do the right thing wronger than the wrong thing righter!  If you do the right thing wrong and correct it, you get better!”


He was a legend as a management philosopher… but more importantly, he was a beer-guy!  He worked with Anheuser-Busch for over 30 years, beginning in the 1960s.  Sorry all you non-AB folks, but we’ve got to give him his due.  At least the author of this remembrance credits him with helping A-B achieve national dominance.  He helped A-B design a new expansion strategy that included building new breweries and warehouses based on computer modeling, a cutting edge approach at the time.  He studied A-B’s marketing strategy and came to the conclusion that increasing advertising budgets had little effect on sales… neither did taste, which he found through blind taste tests… hang on all you craft beer lovers, this was in the 1960s and 70s… although it is difficult, I will fight the urge to make some sarcastic but spot-on comment about this time frame ;-)


Bill Finnie, a former director of strategic planning for A-B states, “This was incredibly valuable.  It gave A-B the confidence to maintain its marketing budget flat from 1961 to 1976.  We quadrupled sales”.  According to Bill, reduced marketing costs were passed on to the consumer, making Budweiser inexpensive compared with local brands that had dominated the market through the 1950s.


Russell must have had some good ideas, in his 30 years of work with A-B their national market share went from 7% to 40%.  There are plenty of beer folks out there today who where on the winning or losing side of that historic transformation.


But for our purposes, one of his more profound breaks with conventional thinking was his proposition that to improve a system (and your business is a system), you must analyze and address it as that, a system… not a collection of parts.  Until that insight, most thought the way to address a problem (or improve an organization) was to break it down into its component parts, fix those parts, and then put the thing back together again.  Think of your organization in these terms… using this type of thought, you first break your organization into its “parts”… sales, delivery, warehousing, admin, etc., fix or improve each of them and then put the thing back together again.  Ackoff said this was folly.  This quote captures the problem with this parts or mechanical approach…


“The characteristic way of management that we have taught in the Western world is [to] take a complex system, divide it into parts and then try to manage each part as well as possible. And if that’s done, the system as a whole will behave well. That’s absolutely false, because it’s possible to improve the performance of each part taken separately and destroy the system at the same time.” Edward Deming


I’ve encountered that situation many times… some policy or procedure works great for one department, but it absolutely destroys the workings of another.  Put enough of these together and the entire organization will turn into circular firing squad.


Instead Ackoff developed systems thinking where improvements in an organization are driven by the design and workings of the entire system.  Innovation and improvement comes from total system improvement, not just improving certain parts.  I use this same reality in my operational consulting and perhaps surprisingly, in my brokerage activities as well.  Since I am frequently asked, yes I do help sell and purchase distributors.


Ackoff describes what he is talking about


“…the development of synthetic thinking, which provides better understanding of complex systems than analytical thinking does. Synthetic thinking is a way of thinking about and designing a system that derives the properties and behavior of its parts from the functions required of the whole. The whole has properties that none of its parts have.  Analysis of a system reveals how it works but synthetic thinking is required to explain why it works the way it does. Systems thinking integrates the two.  Analysis breaks a system down into its parts, tries to explain the behavior of these parts, and then attempts to aggregate this understanding into an understanding of the whole. It cannot succeed because when a system is taken apart it loses all its essential characteristics and so do its parts. A disassembled automobile cannot transport people and a motor taken out of it cannot move anything, even itself. Analysis, applied to systems, and therefore corporations, can only yield knowledge of how the system works, but never an understanding of why it works the way it does.”


I’ve often had a soon-to-be client call and ask me to come in and help them improve their compensation system or warehouse operations or whatever… I always tell them that is not possible, we must first analyze the entire system, then we can begin to address the various integrated parts.  I know more than a few thought I was just trying to sell them a bigger job, but they would soon reframe their thinking and view their organization as an integrated system, a “whole”… the first step to improvement.


With that, I leave you with two thoughtful quotes… the first from Edward Deming


“No one has to change.  Survival is optional”


Think about that one over beers.  You may not want to sell.  You may not want to purchase.  You may wish for all this change to go away… as Deming states, the choice is yours… your survival is most definitely optional.  And choices you make today (or don’t make), will set the course of your future for years to come.  I sometimes shake my head at people passing on acquisition opportunities… in many cases they are simply setting the stage for their exit from this industry sometime down the road… sadly, without even knowing they are doing so.


The second is from that management guru, Albert Einstein


"The specific problems we face cannot be solved using the same patterns of thought that were used to create them."


As you address the first quote, keep the second in mind.




What's Up With Values?

A question on many distributors’ minds… what’s up with values?  Some are predicting they are headed south, but on this one I am a contrarian.  As I have noted before, I had thought values would have decreased some time ago but I was wrong.  Read that last sentence again… yes, I was wrong.  As a side note and as part of my never-ending attempt to help all become better managers ;-) take that concept to heart.  All good managers and supervisors (to say nothing of spouses) should learn the high-art of admitting when you were wrong.  It really isn’t that tough and it can have an amazing affect on your relationships… often disarming arguments before they even start… plus as I remind folks in sales training, the best sell is always the truth.  And if you were wrong about something (and we all are… it is a statistical certainty), simply admit it and move on.  Analyze why you were wrong and what you can learn from it.


Following my own spot-on advice, why do I think values are not headed south and why was I wrong in the past?  On the financial side, profits have held up remarkably well.  Total house margin compression has not been happening, in fact in many situations total gross profit percent has increased.  After a short (but painful) run of very high fuel prices, costs are generally being contained… and the pain of these fuel costs drove many wholesalers to make changes to their service policies which were probably long overdue.  Wholesalers used this pain to become lean and meaner… and most importantly, smarter.


The financial side of the equation is where I got a little of it wrong, but the non-financial side is where I really missed the boat.  I thought too much about the fundamental essence of value… the present value of future discounted cash flows… and not enough about THE non-financial, but incredibly powerful and valuable aspect of beer wholesaling… exclusive territories.


This is like the game of Risk, it’s all about controlling real estate… and there is very little real estate available… thus the bidding process for these very rare assets continues to drive prices up, not down… and I see nothing on the horizon to change this reality.  The bottom-line is that if you want to be a significant beer distributor in the US (long-term sustainable?), you have to be aligned with one of the big two, ABI or MillerCoors… and that footprint on the ground is what drives everything.  You can leverage this legally protected distribution footprint in whatever direction you desire… but first you have to own the dang thing… once that happens, you don’t have to worry about more “normal” competition coming from anywhere but your competitor beer wholesaler… and perhaps at the fringes from the wine and spirits folks.  And the value of this legal right has shown amazing resiliency and for at least the near-term, is not heading south at all.


Of course once you have this distribution footprint, you can leverage it in many directions and thus define your competitors in different ways… but first you have to have the real estate.   Unless and until this is changed… and I sure would fight like hell to ensure it doesn’t… the value of beer distribution rights won’t be going south for quite some time… the assets are far too unique and far too valuable.  In many ways the sale of a distributorship is like an auction for some very rare and precious asset… there aren’t many around in the first place… they come to market only rarely… if you pass, you might never get another shot at it… and of course for a distribution business, the strategic implications of these legal footprints cannot be over-stated.  Mix that all up and it points to values remaining high, not heading south any time soon.


That’s my very public prediction and I’m sticking to it.



Some thoughts on Acquistions

Acquisitions… something on almost every beer wholesaler’s mind, although the present national economy and tighter credit market has a few rethinking their plans.  But the march towards consolidation and fewer distributors seems to be a foregone conclusion.  I have talked to quite a few small to medium-sized distributors who make the case this consolidation actually leads to a net decrease in street-level wholesaler performance. 

In many cases these wholesalers are correct; especially in smaller markets… having a hands-on owner/management team on the street will always have a positive impact.  And in a smaller market there are generally fewer retailers to influence and personal relationships are often more important than in major metropolitan areas.  In addition, if you sell 500,000 annual cases, each case is relatively more important than if you sell 15,000,000, and they are treated as such (and that is an on-going challenge for the larger distrib).

These distributors might have a valid point but my response is, “so what?”  That all may be true but I certainly don’t see it having any impact on the reality of consolidation.  Sorry folks, but as I’ve noted many times, our desires don’t change reality… and there is nothing on the horizon which would indicate anything to change this.  The net benefits of consolidation seem to outweigh whatever costs there might be.

So that circles us back to acquisitions… without these, consolidation has no meaning.  So do you play in this game or wait on the sidelines?  First you need to look in the mirror and decide what you want… my belief is that if you want to remain in the beer distribution business for the long-term, you have no choice but to play and to play aggressively.

Since you are already in the game you are already shouldering the risks, whatever they are.  This is true regardless of whether you’re MillerCoors or ABI (or even one of the remaining stand-alone Miller or Coors distribs).  Think of that again… whatever system-wide risks face the beer distribution industry, you already have these risks.  Period.  The only difference an acquisition makes is that you put more capital at risk.  Yes, I know… you “only” put more capital at risk.  Easy to say when one’s name isn’t on the note ;-)

But if that is the way you feel then you’re probably not in this game for the long-term, regardless of what you might tell yourself.  If you find yourself in this position I recommend you review your business and professional long-term goals.  In actuality you might be more of a seller (or holder) than buyer.

My associate Steve Cook has a great analogy for what faces many beer wholesalers. He likens it to professional sports franchises.  To win at the pro level, these owners perpetually investment spend on players, facilities, etc. to ensure they have the most competitive franchises. To succeed, these owners have a shared vision while all the time reevaluating their plans, players, resources and performance. Similarly, for wholesalers it’s about having the vision, financial resources, players, and operating models needed to sustain the franchise in the long run.  Not all owners do this in sports or beer wholesaling… but ALL the owners who want to win the title do.

So that’s one of the first questions… do you truly want to win a title and will you do what is necessary to achieve this goal?  Too many wholesalers are still fooling themselves with the old… “I’ll make an acquisition if I can steal it.”  Wishful thinking… and these folks NEVER get a deal done.  How many sports franchise owners build a title-winning team by only trying to get the cheapest talent available?  Simply doesn’t work that way.

If you are going to stick around and get larger, you have to be willing to step to the plate and get deals done.  Might you have to pay more than you “want”?  Sure… so what?  These are generally strategic deals and they need to be viewed from a strategic perspective.  This is a very large, ever-changing chess board with many players.  There is not a remote guarantee that you will achieve your goals even if you play your game well… but it is an absolute certainty that you won’t achieve them if you don’t try.

Many acquisitions are going at a price which requires a fair amount of additional capital, that’s where the folks with debt-free operations are at a substantial advantage.  They can take the cash-flow from one operation to fund another for a couple of years until the new acquisition can cover its debt load.

So looking at this landscape, what should a wholesaler do?  First and foremost, every beer distributor should focus on putting as much money as is possible to the bottom-line.  Read that again 3 times and think of it every day.  If in so much debt that it limits your ability to make acquisitions, pay it down.  But if you believe significant inflation is coming our way (and it is difficult to see how it isn’t), being in debt is not necessarily a bad thing.  Debtors “win” during times of rampant inflation.  But too much debt limits your flexibility… find the right balance for you and your organization.

Run a high-performance, high-demand organization… don’t let your personal lifestyle expand until it is consuming all of your cash flow.  Let your spouse and kids read that last one.  You have no operating and acquisition flexibility if your lifestyle consumes everything your organization generates.  Maximize your short- and long-term profitability.  Even if values decrease (which I’m not certain is eminent), ensure you pocket more money than the decrease in value.  If a strategic acquisition presents itself… get the deal done.  If not, keep harvesting the cash-flow of your organization… thus you present yourself with as much a win-win scenario as is possible… regardless of what future comes racing your way.

Next post – are values heading south?  I think not.




Now for something completely Positive!

I guess my Johnny Sunshine reputation is getting the best of me… because for some reason I’ve had a couple responses which generally state “can’t you say something positive for a change!”


And my reply is… Yes I can!  Years ago a friend was attempting to categorize my twisted mind and she finally nailed it… she said I was “positive in a negative sort of way”.  I think she got it right on the mark.  And I am positive… I am thankful for every breath I take… if I’m still kicking, I’m a happy camper.


First and foremost, the beer/beverage distribution business is a great, great business.  Yeah we all hear how it’s not as fun as it used to be, but it’s still pretty dang fun… and more importantly, pretty dang profitable and stable.


And as we all know, people are going to continue to drink beer… and someone is going to have to warehouse, sell, deliver, and merchandise the product to all those licensed accounts out there.  Until we get to the Star Trek world where matter can be transported from here to there, someone is going to have to do this.  In addition, the feds and the states are never going to tire of the tax benefits of beer… thus guaranteeing a fairly firm hand on the movement and sale of this product.  They like their tax dollars and they are not going to let anyone else in on their pot of money.


I often hear from wholesalers grousing about critical mass… and I can understand their frustration.  It’s like chasing a moving finish line.  You have to be at least a 1 million case distributor to be sustainable… then 2 million… then 3 million… and it seems on and on it goes.


But let’s get real.  I was recently talking to a high market share distributor who does around 5 million cases per year and he was concerned about his future.  My response was it would take the freaking Armageddon to create a situation where a distributor like that wasn’t viable.  In effect the entire beer distribution business would have to almost cease to exist for him to become a non-viable entity.  This is true for almost any distributor of size with an adequate share of the gross profit pool.


Heck, there are A LOT of small distributors out there who have no debt (that’s a huge plus) and who are very profitable… and will likely remain so for as far as the eye can see… and many more who might not be that profitable but who are still earning a pretty good living for themselves and their family.  Now might everyone’s profitability decrease?  Sure.  Might this also drive a corresponding decrease in values?  It theoretically should BUT, and this is a big but, these are very strategic assets.  This is a very long-term chess match and passing on almost any move can have serious repercussions down the road… thus it sure looks like values for most distributors will remain high… or counter-intuitively, actually increase in value… especially where there is more than one player for the strategic asset. 


I would have thought they would have come down some time ago but I have to admit I underestimated the strategic value each distributor has… imagine a giant and very fluid jigsaw puzzle… each piece is very important and if you pass on one, the odds are you will never get another chance at it… and the entire shape of the puzzle changes, permanently.  If you want to grow, you have to play.  Will there probably be fewer beer distributors tomorrow than there are today?  Sure.  But this is neither good nor bad, it simply is.


In addition, beer distributors have an incredible distribution machine whose frequency of contact at licensed retail exceeds any one else… and you already have the cost structure in place to support this.  Maybe, and this is a big maybe, in some markets someone else might match your service to large grocery chains (most likely only bottlers) but in smaller chains, c-stores and on-premise, you are the undisputed king.  This is a tremendous asset which can be leveraged in many directions.  Toss in your investment in fixed assets, technology, working capital, market knowledge, and your people, and you have a freaking astounding and powerful beast.  People are looking in every direction to leverage this asset… and many non-beer manufacturers are opening their eyes to the power of the beer distributor.  Truly who knows what the future holds?


Will all of this lead to change?  Of course!! Change is the only constant.  It occurs all the time, whether we know it or like it.  What is the “right” course?  That depends on the future that comes.  If the future goes one direction, a decision you made might make you look like the smartest guy on the planet.  If the future goes in another, the exact same decision will now make you look like a fool.  Don’t lose sleep over it… make you best call and move on. 


My goal as a professional advisor is to help analyze these possible changes and ensure you move forward with your eyes wide open… whether it is the sale of your business, a merger, an acquisition, or just a re-organization... ahem, all of which I can help you with ;-)… yes, a shameless plug for my services. 


Whether I agree with your decisions is not important… what is important is that you are knowingly making these decisions… not just letting things happen to you… preparing for our best bet of the future before it gets here… and having contingency plans just in case another future shows up on our door steps one day.


Also, please remember the nature of what I am paid to do.  When I used to do an analysis of a distributor (I generally don’t any more since I find them of little value for my clients… other than as a tool to sell additional consulting services… that’s a fact, Jack!)… Anyhow, when I’d present my report my client and their management team would often get rather gloomy… “geeze, it seems we aren’t doing anything well”.  I would remind them that they are paying me to come in and focus on problems… on areas of potential improvement.  Therefore the tone of the report is generally negative… not necessarily as a reflection of their performance… but as a reflection of the focus of the effort.  If you’re kicking butt and taking names in area X, I’ll note it.  But the bulk of my discussions will be on where you are getting your butt kick or missing the ball… thus skewing the “negativity” of the report unless you realize this up front.  As I remind them, if you want me to spend a week cruising the market, drinking beer, and telling you how great you are, I’m your man!  But generally people baulk at paying me to do this.  Guess I need to work on my sales skills.


The same is somewhat true on my blog.  I paint with a very broad brush and attempt to get people to think about the future… not just next week but next year and 10 years beyond that.  What information do we have today which can help us prepare for whatever comes down the pike?  How can we use this to our advantage, today and tomorrow?  And very importantly, I refuse to let people hide behind happy thoughts like that can’t happen to me or that will never happen.  I don’t know what will or won’t happen… all I can do is be as prepared as is possible for every possible future that might come my way.


There… are you happy?  Now can I get back to my curmudgeonly self?  ;-)

A Political Rant

For this post we are going to take a brief detour from the beer and beverage worlds to enter that most daunting of all arenas… politics.  I realize in polite company this is one of the few topics which should be avoided at all costs… and I probably should heed that advice.  But sometimes you need to scream I’m mad as hell and I’m not going to take it anymore… so damn the torpedoes and full speed ahead.  If it costs me a client or two, so be it.


And please don’t think I’m cheerleading for either major political party… they both have more than enough faults.  Both political parties use raw partisanship to play us as saps… to blind us to what is really happening.


What has brought this rant to a head?  Well last week was the annual NBWA Legislative Conference in DC, our annual suck-up to lesser men and women who have far too much power over all of us.  This is not a knock on Craig and NBWA, I think they do a pretty dang good job and sadly, ANY industry in this country had better be in DC (and every state capital)… if you are not you are a fool.  That’s just the way it is today.  In a regulated industry like ours, the imperative is even greater.


But I also spoke to MANY distributors who had to bite their tongues and not tell their esteemed Representatives and Senators how they really felt about what is going on in DC right now… DC currently being the most dangerous place in the world for the well being of the entire planet.  Once again, not a knock on Craig, the purpose of these visits are to accomplish the industry’s goals and Lobbying 101 says stay on target and only on target… but it sure is tough.


The entire episode has me disheartened and distressed... and yes, mad as hell.  The weather was beautiful so I walked about and visited many of the awe inspiring memorials.  The words of Lincoln, Jefferson, and Kennedy echoed in my mind.  The horrors of the Holocaust museum brought more than a few tears to my eyes.  The honor, courage, and sacrifice of those represented at Arlington, the Vietnam Wall, Korea, WWI and II memorials brought even more tears… and a questioning of my own worth and gratitude for these others.  That these individuals gave their all for this country, in most cases for the freedom of others shook me to my core.  It is one thing to fight for your own freedom; it is a damned sight different thing to fight and die for another’s freedom. 


Yet today we hear from many elected representatives that we must change the very foundation of this country… that we voted for “change” and the old rules don’t apply.  I have yet to understand how going from having 95% of the country employed to having 91.5% of the country employed (the national rate as of 04/03/09), a difference of 3.5%!!, is cause for a remaking of the very fabric of our society.  That we can spend our way to prosperity.  Churchill famously said


I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.

Seems fairly obvious to me.  Has any society ever taxed its way to prosperity?  Or regulated its way to prosperity?  Or borrowed its way to prosperity?  If it were possible would there ever be a country which wasn’t prosperous?  Look around.  Look at history.  Is this the case?  Why doesn’t government just send us all a check for a million dollars and then we’d all be rich?  There are realities we confront, whether we like it or not.  Just as science is a constant search for the truth, the focus of our political system should also be the search for the truth, not raw political power.  But politics and government today operate with a truth be damned-type of mindset.  Our very lives are put at risk by this arrogance.  The entire planet is put at risk by this arrogance. If you spend the time and effort you will find that every economic problem we are currently facing has government’s fingerprints all over it.  Let us never forget Tolstoy’s statement:


Government is an association of men who do violence to the rest of us.


Or that font of wisdom, P.J. O’Rourke...


Giving money and power to government is like giving whiskey and car keys to teenage boys


The old Soviet Union failed because its economic system failed.  It simply didn’t work because it contradicted reality… and reality is a pesky little thing which bends for no person… regardless of how much one might hope and dream.  China is successful because it has embraced free (er) markets.  Some have suggested that the US is heading towards European-style socialism (with some looking forward to it and some dreading it).  Both miss the mark.  Without the US being the US, European socialism isn’t possible in Europe, let alone the US!


Let us take a little stroll down memory lane.  At the end of World War II, the US had a tremendous transfer of wealth to Western Europe.  They have used this to luxury to build social systems which are forecast to be unsustainable in only a number of years… from handouts of hundreds of millions of dollars to unsustainable social welfare in a little over 60 years!  They have allowed this social system to become a wealth consuming beast… Western Europe doesn’t even have money (or desire) to even defend themselves!  They basically have given up having any type of effective military, instead being happy to hide under the protective cover of our military might.  Defense of the country is one of the primary reasons to even have a federal government.  Instead they fund an unsustainable social system as they race towards the abyss.


In the 1970’s began another huge transfer of wealth to the oil producing nations, generally in the Middle East.  A lot of these dollars were recycled back to Europe, thus helping them sustain their socialist life style.  Around the same time the Detroit automakers (and the wonderful UAW) were in the process of committing industrial suicide by their construction of some of the worst cars ever produced in this country (along with completely unsustainable union contracts).  Thus began another tremendous transfer of wealth to Japan and later to the Asian Tigers.  At least these countries used this wealth transfer to create successful, modern, and wealthy economies.  And again, a lot of this wealth was recycled back to Europe.  And this oil related transfer continues to this day… again feeding the European social disaster.


Take the US economy out of this equation and NONE of this is possible.  If we become European socialists, the whole world-wide equation changes… and not for the better anywhere on the freaking planet.  You probably often hear about how the US consumes a great deal of the world’s energy… what you don’t hear is how much of the world’s wealth is created here.  Medicine, technology… things that make the entire world a better, wealthier, healthier, and more peaceful place. 


That’s a fact, Jack.  And what of this thing we call government?  We seem to forget that words matter.  Our emotions, our opinions, our very integration with the world around us are all influenced by words.  But words are just that, words.  No matter how much one might hope, they have no influence on the real physical world.  Yet we often use words as though they represent real, physical things.  Government is such a word.  Both political parties habitually speak of government doing this or that… often in almost mystical terms; much like God intervening in our puny little lives and magically transforming reality.  Government will do this, government will solve that.  But this thing we call government is an abstraction. 


In this fashion it is just like a corporation, an artificial entity created by other words.  Lord Haldane’s classic quote regarding corporations says it all:


"My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation."


This also defines the government.  This is not a moral statement but rather a physical fact. Governments don’t do anything since they don’t exist… the people who are either elected or work for governments do these things.  Again a fact.  These people are held to the same natural laws which exist for the rest of us—and they have no higher wisdom or moral authority.  In fact you could make a strong case that far too many of them are moral and intellectual inferiors.  William F. Buckley noted…


I'd rather entrust the government of the United States to the first 2,000 people listed in the Boston telephone directory than to the faculty of Harvard University.


Well I know beer distributors and I’d rather entrust the government of the United States to ANY 2,000 owners or employees than to the present band of clowns we both elect and hire to operate the government of this great nation.  The next time you read about how government is going to do this or that, replace the word with any company name, like Microsoft and see if you think it still makes sense.


This is not to imply that governments or corporations are static, passive things.  Far from it.  Although they are artificial entities, once created they behave much like a living entity.  They seek to sustain themselves, to protect themselves, and to grow.  A for-profit corporation’s existence is limited by profit… how effectively they can convince individuals to freely part with their money.  Government knows no such bounds. 


Many years ago, H.L. Mencken noted the reality of government (and sadly our current situation… especially the last quote)…


“The government consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can't get and to promise to give it to them. Nine times out of ten that promise is worth nothing. The tenth time is made good by looting A to satisfy B. In other words, government is a broker in pillage, and every election is sort of an advance auction sale of stolen goods”


The legislature, like the executive, has ceased to be even the creature of the people: it is the creature of pressure groups, and most of them, it must be manifest, are of dubious wisdom and even more dubious honesty. Laws are no longer made by a rational process of public discussion; they are made by a process of blackmail and intimidation, and they are executed in the same manner. The typical lawmaker of today is a man wholly devoid of principle—a mere counter in a grotesque and knavish game…. If the right pressure could be applied to him he would be cheerfully in favor of chiropractic, astrology or cannibalism.”


"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary”


Unfortunately for us all, our governments and political processes operate as though they are immune from any reality other than pure political power and the proper spin of the masses.  Today we hear how government is going to stimulate the economy.  So this abstraction called government is going to stimulate (whatever that means) another abstraction called the economy.  The economy is the sum of literally billions and billions of individual decisions and transactions made each and every day.  How do a handful of government employees plan to “stimulate” these transactions?  How do they know better than the individuals voluntarily making the transactions?  Hayek called this “The Fatal Conceit”.  It seems government can either:

·                    Take money from someone and give it to someone else, or

·                    Borrow money and give it to someone, or

·                    Print more money and give it to someone


I fail to understand how any of these will “stimulate” these billions of transactions which make up the economy.  


We seem to be in the process of voluntarily giving away the freedoms (and the wealth and prosperity these freedoms allow to be created) that our forefathers gave their very lives to create and defend.  Will future generations curse us for the damage we did?  Will they wonder how we could so casually abandon the freedoms that exist no where else on the entire planet?  Is our generation going to be the one which proves the following quote…


A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. The average age of the world's greatest civilizations from the beginning of history has been about 200 years. During those 200 years, these nations always progressed through the following sequence:

·         From bondage to spiritual faith;

·         From spiritual faith to great courage;

·         From courage to liberty;

·         From liberty to abundance;

·         From abundance to complacency;

·         From complacency to apathy;

·         From apathy to dependence;

·         From dependence back into bondage

Is our time up?  Our going back to bondage will leave the world aflame.  May God have mercy on our souls is we allow this to pass.  Perhaps some late night, when all the tourists have abandoned the memorials, our political “leaders” of all stripes should sneak down and have a quiet talk with John and Abe and Thomas.  Read what they said… what they did.  Perhaps they should run their hands over the names on the Wall.  Perhaps they should weep at Arlington.  The words are right there:

“Let every nation know, whether it wishes us well or ill, that we shall pay any price - bear any burden - meet any hardship - support any friend - oppose any foe to assure the survival and the success of liberty”

“In the long history of the world, only a few generations have been granted the role of defending freedom.  In the hour of maximum danger I do not shrink from this responsibility, I welcome it”

“… It is for us the living rather to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us--that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion--that we here highly resolve that these dead shall not have died in vain…”


“We hold these truths to be self-evident that all men are created equal, that they are endowed by their Creator with certain inalienable rights, among these are life, liberty, and the pursuit of happiness, that to secure these rights governments are instituted among men. We...solemnly publish and declare, that these colonies are and of right ought to be free and independent states...And for the support of this declaration, with a firm reliance on the protection of divine providence, we mutually pledge our lives, our fortunes, and our sacred honor.” 


Re-read that last quote.   The individuals who formed this country really did risk those things.  But today, do our political “leaders”, who swear a sacred oath to this country – not to this or that political party – actually believe those words?  Or have those words simply become a suckers game?  Where the creation of and fight for political power is all that matters?  Where sacred honor is laughed at?  Where fortunes aren’t to be risked but rather to be made?  And where only those who believe such outdated sentiments put their lives and honor on the line?  Disheartening indeed.


For those who take the path of handing over their very lives to the lesser men and women whose only claim to greatness is their ability to get elected, I leave you with the words of a famous American patriot (and home brewer!) who did put his life, fortune, and sacred honor on the line, Samuel Adams…

If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace. We ask not your counsel of arms. Crouch down and lick the hands which feed you. May your chains set lightly upon you, and may posterity forget that ye were our countrymen

I for one will lick no hands.  I will not live in servitude.  I will never forget or forgive those who casually attempt to take my God-given rights away.  Nor should you.


Are ABI and MillerCoors Planning to Grab Consolidation Synergies?

I think I’m becoming a shill for Harry - the check IS in the mail, isn’t it Harry? ;-)  This time please have the zeros on the LEFT side of the decimal, OK?  ;-) but he reports on some interesting comments from Mike Mazzoni in his March 5th edition of Beer Business Daily. 


I’ll quote Harry extensively since I think he lays the groundwork for a paradigm changing strategy… the strategy being mine, the ground work his… sorry Harry, you’re “just” a reporter… I’m a wisdom-spouting, idea-generating management consultant ;-)


Harry writes: (underlining and bold are mine)


…consultant Mike Mazzoni made a compelling case for system consolidation and why the big suppliers [MillerCoors now and ABI later] are going to push hard for it  His rationale for consolidation?  Of course it's the money…


But first, a little perspective.  The ABI and consolidated MillerCoors systems control more than 80% of the U.S. beer volume.  When you add in the unconsolidated Miller/Coors house, that number increases to about 90% of the volume.  A-B distributors and MC consolidated distributors, says Mike, "appear to be at parity" on average case volume sold.  However, and this is big, he says that "while they appear to be at parity, something is going on here."  


MEGA-DISTRIBUTOR MATH.  That something is the "mega-distributor phenomenon, and this is really a game-changer," says Mike.  He defines a mega-distributor as a consolidated MillerCoors distributor which has been able to put together a huge high margin portfolio around the MC system.  "It's not the size," says Mike, but rather it's the "high end portfolio that they've been able to cobble together....and they've been able to use that portfolio to fuel their next acquisitions.....because they have significantly higher margins per case....sometimes 20 to 25% higher margins ."  Those mega MC distributors have been able to "reverse A-B distributors' dominance in the marketplace....that they built over the years as they grew toward 50% market share."  Mega-distributors also have "broad territories which allow for seamless execution, which is something A-B used to be able to leverage in the past."    Consequently, the ABI system is "in my view, under attack."


In fact, the mega-distributor model works so well, says Mike, that MillerCoors is actually going to distributors which have already consolidated and asking them to sell out to mega-distributors, "which was a surprise to me."  Mike says there are 15 to 20 mega-distributors out there who are either "solidly entrenched in the market or in the evolution stage."  Of those, the top ten control about 10% of the total U.S. beer volume, and they control about 30% more of the gross profit pool than they do of the volume pool.  "That's huge," says Mike.


It's huge because those top 10 mega-distributors overlap about 90 to 100 Anheuser-Busch wholesalers.  "I'm not saying that a MillerCoors mega-distributor is better than a corresponding Anheuser-Busch distributor, that's not my intent and it's not the issue.  What I'm talking about is relative scale and competitive capability."  Still, Mike says that "something is out of balance.....there's an awful lot of room for A-B distributors to catch up to be more competitive."  How did this happen?  " The bad timing of A-B's 100% share of mind initiative.  I'm not saying it was bad, but the timing was bad, because it drove the high end products that were growing into the non-AB system."


REACH IN.  Okay, so enough history that most of you already know.  Here is where it gets really interesting.  While A-B says it doesn't have a distributor consolidation strategy, Mike says "they should" because the resulting increase in profitability gives ABI the ability to "reach in and improve its own margins.....If I can see it, they can see it."


Listen to what Mike is saying… “If I can see it, they can see it.”  Repeat that 3 times.  gives ABI the ability to "reach in and improve its own margins”… where are they reaching in and improving their own margins???  Your world my dear friends, your world.


Harry continues:


WE WILL HAVE FEWER DISTRIBUTORS.   "I believe these two companies [AB and MC] will accelerate distributor consolidation," says Mike.  In 3 to 5 years, he predicts that a third of A-B distributors will be sold or merged, and MillerCoors, which is already 70% consolidated, will consolidate another 20%, so that 90% will be consolidated.  So under that scenario we would lose about 150 A-B distributors, lose 200 stand alone Miller and Coors distributors, and get a net gain of only about 50 MillerCoors consolidated houses, because there will be several multiple acquisitions.  As for the all other distributors, they will lose some of the 350 million cases to the AB and MC distributors.


...AND THIS IS WHY.  Mike estimates that the entire beer distributor network in the U.S. earns about $2.75 billion in operating profits system-wide.  If Mike could consolidate 30% of the system immediately by snapping his fingers, and achieve 30% synergies on those consolidations, the operating income would go up to about $3.7 billion, or an increase of nearly a billion dollars.  Mike says achieving 30% in synergies is about average for contiguous market consolidations (buying your neighbor).


Let me interject here… 30% synergies is pretty dang good for contiguous or horizontal consolidations.  In many situations this is not the case.  To achieve 30% synergies you pretty much have to keep just the street-level sale, delivery, and merchandising operations.  Almost everything else goes.  This is sometimes possible but far from possible in every situation.


But what if, instead, you buy your competitor?  In vertical market consolidations you could achieve 50% synergies.  If you get 50% synergies, you get to about $4.2 billion in operating income, or a $1.45 bump in earnings (before interest, taxes, depreciation, or amortization, of course).  That's a lot of money.  "Over a fairly near term, there is the potential to create this kind of value in the system.  This what consolidation is all about," he says.


Again let me interject… although the 30% number above is fairly aggressive, the 50% synergies for a vertical (or over-lapping) consolidation is pretty conservative… often this number is closer to 70%... i.e. 70% of the gross profit of the acquired entity can be driven to the bottom-line. 


OH, SO IT'S A PROFIT DEAL?  "I just don't believe that the major suppliers are going go let all of that money fall to the bottom line of the distribution system...even if they reach in and only pick up half," ads Mike.  "It would be bad business."  And keep in mind, Mike reminds us, that this is a recurring benefit.  Not a one time payment.  This money is generated "year after year after year."  


WOULD THEY DO IT?  Mike asks why wouldn't they do it?   "You gotta ask yourself, what are they [ABI] going to do?  I believe there's a reasonable probability that they will do it.....we haven't seen anything yet, it's too early in the transition, but we do have history."


You each should also ask yourself… why wouldn’t they do it?  Would you if you were in their shoes?


As Carlos noted in my last post, InBev, now ABI has a culture of dominance and although they haven’t shown this face to their distributors (yet?), they have to their other business “partners”.  Think of 120 day payment terms… that’s 1/3rd of a year!  You do work for them or provide some good or service and 1/3rd of a year later they pay you!  Yikes!  ABI says no one should worry since they have a great history of paying their bills… but using that logic why not go to 360 day terms?  Don’t worry, you’ll be paid… just 12 months after you do the work… and of course since the terms you get from your business providers is probably 30 days at most, you’ll have 11 months of unreimbursed bills you have already covered.  Kind of a little hit on the ol’ cash flow.


So where do we stand with this and the last post?  Carlos believes AB distributors are "in denial" about AB InBev's ability and desire to transfer wealth to their own majority shareholders, largely at their expense.”  ABI has a "culture of dominance over competitors, employees, suppliers, retailers, and minority shareholders .....They run with a wealth creation agenda for the controlling shareholders..... He ends with "given the ABI that I know, it's not a partnership mentality about growing the pie " but rather a "zero sum game."


Then Mike comes along and makes a strong financial case for why consolidation is going to continue and why suppliers are going to try to grab a big chunk of these consolidation synergies… i.e. cold, hard cash.  Double yikes!!  If you believe Carlos and Mike, distributors are in for a little short-end of the stick time… I’d be more graphic but this is a family publication ;-)


So what to do?  How about changing YOUR paradigm?  If everyone else is going to try to change the game – and they are whether you like it or not -  you’d be foolish to play it under the old rules.  In fact you are destined to lose if you continue to play by the old rules while everyone else is dramatically changing the entire game.  This is simply strategy 101.


Carlos screams sell, and Mike says the day of the mega-distributor is here.  But what if you’re not already a mega-distributor?  What if you simply don’t want to go running towards the exit?


You could of course attempt to purchase other wholesalers and become a mega-distributor.  Of course you need willing sellers… and the financial strength to pull it off… not easy on either front.  And the time frame to pull this off is many, many years… probably decades.  Will the external realities you now face allow you this amount of time?  This isn’t 1980.


Or you can change the way you view your family business.  If you think of your business as more than solely a family business but also as a financial asset, then the path of mergers is a strong possible solution to the realities Carlos and Mike think you face.  With mergers you can create a mega-distributor in a matter of months… with mergers you could conceivably roll-up an entire state… if you have a couple hold-outs (or folks you don’t want to include), who cares?… once the thing is significantly done, they’ll have no place to go anyhow… sweet!  That’s what strategy can do for (and to!) you.  Thus there is significant value in being a “first-mover” and being involved in the construction of these mega-distributors right from the start.


With mergers geared toward the mega-distributor…


·                    Huge organizations formed in very little time… months not years in creating incredibly powerful and profitable organizations

·                    Cash-free (and tax free) transactions with little to no debt – putting those $$ synergies in the principal’s pockets rather than making the bank happy for the next 10 year…

·                    No financing limitations to growth… in fact the financial power of the entity only grows with each additional merger partner

·                    No one is forced to leave the industry… instead everyone continues to share in the financial rewards of this industry, for you and your family for generations to come… still perhaps the best financial investment out there

·                    If your suppliers want to operate from a “culture of dominance”, bring it on!  With power comes the ability to protect yourself.  Without it they pick you off one by one… pitting one against another… all while laughing all the way to the bank… and all while permanently changing the distributor’s world until the game is over before you even know it.  Two can play the culture of dominance role… and guess what, if one is going to… the other damn well had better plan to… or just get out the lubricant and ask, “please sir, can I have another” ;-) 

·                    And lastly, set a path to the golden ring, the long ball, the hat trick – you get the idea ;-) … public ownership of distributors… open up the public equity markets for both a source of financing and an exit strategy.  Yes, I can hear you now… but John, the suppliers won’t allow that!  That’s what a freaking paradigm shift is all about… changing the fundamental nature of the equation.  And you do that with power.  And the way you get power is with size and profitability… and the way to quickly build the size and power is through mergers.  Even if this objective is never achieved, the merged mega-distributor strength will still be far superior to any other option.


The paradigm is going to change… that is a fairly safe bet.  You can attempt to play by the old rules and most likely lose (and like a chess match, the game might be already over before you even know it has started)… or you can grab the freaking paradigm by the throat and make it yours… or at least go down fighting with an aggressive, dynamic plan rather than a passive, “gee, I hope it all works out for me and my family” plan.  Sometimes an attitude of “just don’t do something, stand there” is a good choice… this sure doesn’t seem to be that time.


The choice is yours.  I sure the heck know which one I’d choose. 


And as a side note, I’ve heard from a couple of wholesalers who think this whole paradigm shift, culture of domination, merger push, massive consolidation forecast are all just ruses for consultants, analysts and service providers to make money ( but trust me, none of these are the non-preferred wholesalers in unconsolidated Miller Coors markets)…


“nah, none of this is happening, it’s all being driving by those greedy outsiders… nothing changing in my world”


To which I respond…………………………………………………. Have a nice day.  If you are that out of touch with your own business and the industry in which you operate, there is no reason for me to try to change your mind.  Let’s just go have a beer and we’ll see whose predictions come true… unfortunately (and sadly), I’m afraid I’ll be winning this bet.  I’d truly rather not have any of this happen (it is not in my long-term interest)… but I long ago learned that what I want has very little impact on the reality I face.  Such is life.

Is ABI Planning to Harvest Distributor Profits?

Holy Guacamole!!  And people call me Johnny Sunshine ;-)  Did you hear (or read) what Credit Suisse beverage analyst Carlos Laboy said at Harry’s Beer Business Daily Beer Industry Summit.  I’ve got a real job so I couldn’t attend… sorry Harry, I enjoy drinking on your tab ;-)  Harry summarizes it in his March 3 Beer Business Daily (a must read)


Harry writes:


“Carlos makes the case that lots of global beverage industry constituencies, from Modelo to Coca-Cola to A-B distributors to even their own minority shareholders, are "in denial" about AB InBev's ability and desire to transfer wealth to their own majority shareholders, largely at their expense.”  All bold and underlining emphasis are mine.  


"They challenge every industry preconceived notion with financial logic.  Nothing is sacred to that financial logic."  Carlos says they also have "exceptional strategic vision" as well as having "focusing on one thing at a time".  And he has seen them "conquer every next frontier that they have set upon to conquer" by maintaining a "culture of dominance over competitors, employees, suppliers, retailers, and minority shareholders .....They run with a wealth creation agenda for the controlling shareholders.....


Can you say 120 day payment terms for any company that now wants to do business with ABI?  How would you like that to be crammed down your throat?  Talk about a culture of dominance!  Harry continues:


WHAT ABOUT DISTRIBUTORS?    What about U.S. beer distributors, are they in denial?   Carlos says, "wake up and smell the coffee.....There are many family firms who have mis-estimated their vulnerability to ABI's wealth creation agenda."   Carlos points to Brazil where ABI went from 1,500 distributors to 200 in four years, though he acknowledged there aren't any franchise laws there, but "they still have transfer pricing on their side," meaning that they can control distributor profitability.  


OK folks, now read the next paragraph slowly and truly attempt to answer his challenge:


Carlos then looked out into the audience and asked, "What is your conviction that ABI will not challenge the old notion that this distributor system is optimal, that they won't try to transfer distributor wealth to their own shareholders, that they will not impose their dominance culture on you?  What upside are you holding out for?  What options are you pondering."  


Let me repeat, holy guacamole!  He might be wrong but there certainly seems to be some hard facts and logic behind his opinion.  Harry continues:


Later, during the Q&A when I asked Carlos if he was an A-B wholesaler, would he be a buying or selling, he said immediately, "I'd be selling.  ABI is not coming in to make you richer or add to your profit pool or, in five years, to make your slice of the pie bigger.  We'll be having this conversation five years from now and there will be a slide showing how the distributor slice of the profit pie has shrunk."   When I responded that perhaps ABI may wish to increase the size of the pie thereby giving  distributors more profits, Carlos responded that "given the ABI that I know, it's not a partnership mentality about growing the pie " but rather a "zero sum game."


For those who wonder, a zero sum game means a situation in which a gain by one person or side must be matched by a loss by another person or side.  A zero sum game doesn’t have a win-win situation possible.  Now Harry and AB think that ABI would be crazy to go after distributor profitability for a number of reasons… but is this simply whistling past the graveyard?  Or on AB’s part, selling the distributors a bill-of-goods to keep them from turmoil? 


Are past strategies an indication of future actions?  They did spend $52 BILLION to purchase A-B, about twice what the market value would have been at the time of closing… I wonder what the value of the old A-B would be in today’s equity markets?... and without a doubt, the A-B wholesaler network is a powerful and valuable asset… but as Carlos notes, why should we simply assume that ABI will view the present wholesaler situation as optimal?  This could be a fatal (or at least a very costly) assumption. 


Perhaps InBev paid that much BECAUSE they saw the opportunity to “harvest” an incredible annual stream of revenue from their distributor base.  Perhaps they saw this harvest as providing a tremendous annual revenue stream to help fund their future acquisitions and international growth… their own internal financing source that was just waiting to be put to their own use… all at basically no cost!  I have no idea if this is the situation but one could certainly make the case for it. 


And no MillerCoors distributor should be cheering this possibility… if ABI does decide to harvest distributor profitability; MillerCoors would be foolish not to follow, at least to some degree.  I’d let ABI be the spear catcher but I’d be following a few steps behind.


As I’ve said for over the past few years, if you are going to sell, now is the time to do it.  And this wasn’t just trying to sell my brokerage services – although Steve and I provide the best value in this industry… yes that is a shameless plug for them ;-)… it was my best consulting advice.


Oh but wait, that was in the past… can we do a Superman thing and go back in time?  If you know how, please call me immediately… I’ve got a few things I’d like to do differently ;-)  Unfortunately we are in the here and now and the here and now has more than just a few issues. 


Many wholesalers are in the game whether they like it or not.  The financial value and benefits they receive from their distributorship FAR exceeds the benefits they could reap after a sale, paying taxes, and finding other places to invest these funds.  I had a large A-B wholesaler’s CFO call me awhile back to discuss my coming in to spend a day or two discussing whether they should consider selling or not… we spoke a brief period and I told him to save the money – I’m an idiot in that way ;-),.. I seriously doubted if a sale could remotely make financial sense at almost any possible price.  He responded he was glad I said that, his analysis indicated that after paying taxes his boss would have to generate a 25% annual return to even get close to the financial benefits he was presently receiving… and that was before the various proposed increases in taxes!  In addition, this was before AB became ABI.  Perhaps the downside is beginning to outweigh the upside… for this guy I still don’t think so… but Carlos might disagree.  Unless you see Armageddon coming, lots of you are in the game.


And of course even if you want to sell (or buy), someone has to get financing… and that is FAR from an easy thing today.  Unless you have incredible relations with your bank, most banks won’t lend out for more than 3 years right now… money is simply too cheap and they don’t want to tie in those rates for any length of time… and there is SO much uncertainty throughout the business world that the banks don’t like doing anything that is remotely long term.  Pretty tough to make an acquisition of any size and have 3 year financing work for you.


So, you either race to the door… assuming someone will be there holding it for you at a price you can both live with (and finance) or you’re in the game whether you like it or not.  And what about values?  The public equity markets are down almost 50%.  Housing across the country is down significantly… do you really think values for distributorships haven’t been affected by the financial and economic situation we now confront?


So what to do?  Rather than looking out and seeing the adjacent or overlapping wholesaler as your next meal… perhaps you would be wise to look at them as your next partner.  In these financial and economic environments, mergers make a lot of sense.  They are not affected by the decline in values… so what if wholesaler values have dropped 30%?  In a merger it is the relative value that matters… and if each wholesaler’s value declines by 30%, the relative value doesn’t change a bit.  No one is hurt by this decline.


Mergers are generally cash-free transactions and are done with pre-tax money and incur little to no debt… we don’t need to worry about financing and excessive bank covenants from folks who are worried about their hides, not yours.  Mergers drive synergies, i.e. cold, hard cash to the bottom-line… sometimes a lot, sometimes less… but always some.  Mergers allow everyone to remain in this industry and reap the long-term benefits that this industry provides… it is still one of the best financial investments one can make.  Mergers allow organizations to upgrade staff across the board… creating a stronger and higher performance company.  Mergers give the new entity much more power when dealing with suppliers (both old and attracting new) and drive better purchasing power across the board.  Mergers create larger organizations where fixed costs are spread over many more cases… providing some economic protection if ABI and MillerCoors do attempt a path of harvesting distributor profitability.  Mergers can ensure that all parties have a piece of an entity which is viable for both the short- and long-term. 


Whatever the risks in this industry, you are already shouldering them… whether you know it or not.  Sure you can race for the door – and for some that is probably the best course of action (but you should have already done so!) – or you can do nothing.  This is always an option and it is occasionally even the best choice ;-)  Or you can seriously consider a merger.  In less than a week we can investigate a merger and discover if there are willing players and if it makes sense to continue the process… is a few days of my billing worth investigating a profoundly important corporate move?  I sure think so… but I’m kind of biased in this ;-)


Next post, more on consolidation and the $$ that will continue to drive it.

Broken Windows Theory of Management – Part 2

OK, for those with a short memory (like me) you might want to review the previous post on broken windows.  I was discussing how the same processes which drive the theory behind the crime fighting strategy of broken windows can also be applied to the management of your organization.  Although I prefer to take credit for these earth shattering insights ;-), in reality this is of course true since the entire theory is based on social realities… on the very nature of how we interact with other’s and our environment.

Remember that we are powerfully influenced by our surroundings, our immediate context, and the personalities of those around us.  We are acutely sensitive to even the smallest details of everyday life… whether we know it or not.  Rather than being a passive player in how these interactions take place and there influence on your employees, you can consciously work to manage this… you can consciously work to shape then. 

Consider change in your organization as attempting to start an epidemic… perhaps a “positive” epidemic… a positive emotion that jumps from one person to the next until everyone is infected.  You can do it and you can control it.  One of the rules in this is that in order to create one contagious movement, you often have to create many smaller movements first.  Small, tight knit groups have the power to magnify the positive impact… and spread an epidemic of success.  That tight knit group is you and your senior management team.

A recent client complained that his organization has a terrible habit of attempting change but having it just fritter out… nothing seems to stick.  A symptom of broken windows.


Another has a culture of a sense of entitlement… a broken window.


A culture of old beer, an acceptable amount… a broken window.


A culture of minor theft… a broken window. 


Solving the same problem over and over… a broken window


Not being able to make a decision… a broken window.  Remember that action is always better than inaction… action gives you feedback.  Even if you are going in the absolute wrong direction, you will know it.  Staying in one place and doing nothing tells you nothing since you don’t receive any feedback… and a year from now you will still be in the same place with the same information.


Don’t believe that others can drive our behavior?  Let’s think about a simple situation I bet we’ve all been in.  You and your lovely (or handsome) spouse are visiting a new city and are out taking a stroll to see the sites.  Being a fine, upstanding citizen (and in no desire to end your life on the hood of a taxi) when you first walk up to an intersection you wait for the cross walk to come on and then cross.  But then a person comes along… clearly a local yokel… takes a look in both directions and crosses the street against the light.  The light changes and you continue your stroll to the next intersection.  Again you wait for the light but LOTS of people just cruise on through against the light.  How long before you are doing the same thing?   When you’re standing there and 30 people jay walk, pretty soon you’re doing it with the best of them.  In a matter of a few minutes the behavior of total strangers has completely changed your behavior.


That was the situation in NYC with jumping turnstiles on the subway.  One person did it, then another and another and pretty soon you had middle aged guys in business suits jumping the turnstiles… remember the Chump School of Management I discussed in previous blogs?... well these folks thought they were chumps for paying the toll… just like sooner or later you think you’re a chump when everyone and their dog is ignoring the cross walk signals… or not taking a case or two out of the warehouse… or showing up on time… or ???


As a side note, this power is one of the reasons that your children’s peers are so important.  Modern research states that who your children hang out with will have a much more profound impact on who they grow to be than any impact a parent might have… why?  Because ALL behavior is contagious, it acts like an epidemic… it can be caught.  Help chose your kid’s friends very carefully.


Think about it in your business… how you treat your equipment determines how your employees will treat it.  It the warehouse is dirty, do you really think employees will go out of their way to ensure things are kept up?  You send messages and contagious behavior through your actions… make certain they are what you want.


Here are some “minor” things that cause incredible damage to your organization:

·                      Having the owner (or anyone) consistently showing up to meetings late… this is not a little issue, it is a huge deal.  You just don’t see it.

·                      Holding employees to different performance demands.

o       a driver who always is late.

o       office staff who gets away with disruptive behavior… as a side note, the office is almost always the least managed of any department.

o       I’d guess most of you have been on some sort of team in your life, a sports team or academic team.  You have a feeling for the dynamics of those that work and those that don’t.  If you want to destroy a team, hold team members to different performance standards.

·                      BS.  I always remind owners and managers that people generally have pretty good BS meters… they can tell when they are being fed a bunch of BS.  One of the most damaging behaviors you can spread is untruthfulness (don’t think you are so slick they won’t know, they will)… and if you do it, it will spread.  Companies violate this one all the time…

o       Quality is job one – yeah, until it costs the company some extra money to live up to it… remember your people are ALWAYS being influenced, whether they know it or not.

o       Customer service is number one – yeah, until it interferes with some senior person’s day

o       The list is long… don’t violate your own stated beliefs… it is FAR better to just never state these supposed beliefs than to state them but violate them when they don’t fit your immediate desires.


Take these ideas to heart.  Put them to use today.  Put them to use tomorrow.  Look for broken windows… in every management meeting.  As you walk around the warehouse or office.  And most importantly, when you look in the mirror.  Implement a high performance and high demand company.


None of these things are difficult… you just have to do it.  They don’t cost money, in fact in most cases there is not cost.  Focus on those things you can actually control… and ultimately the primary thing is your organization… make it the absolute best you can.

Broken Windows Theory of Management – Part 1

In 1982 a crime fighting strategy called Broken Windows gained prominence when criminologists George Kelling and James Q. Wilson published a lengthy article on the subject in The Atlantic Monthly. Their theory holds that people are more likely to commit crimes in neighborhoods that appear unwatched and uncared for by residents and local authorities. Criminals, Kelling said recently, are ''emboldened by the lack of social control."

The crux of Wilson and Kelling's argument was that perceptions affect reality-that the appearance of disorder begets actual disorder-and that any visual cues that a neighborhood lacks social control can make a neighborhood a breeding ground for serious crime. As Kelling and Wilson put it in The Atlantic, ''one unrepaired broken window is a signal that no one cares, and so breaking more windows costs nothing."

Kelling and Wilson argued the way to fight serious crime was to not to wait for assaults and murders and then catch the bad guys, but to repair the first broken window-literally and metaphorically.  Help stop the bad guys from becoming bad guys in the first place.

Fast forward to 1993 when Rudolph Giuliani was elected Mayor of New York City on a quality of life platform… a platform of reducing crime throughout the city.  If you recall those days in NYC, many were considering the city basically ungovernable and the rampant crime pretty much unsolvable… it was just the way it was.  At that time, NYC was averaging five murders a day (1800-2200 murders a year between 1989 and 1993) and 10,000 felonies a week. Property crimes had essentially been decriminalized, with car owners displaying flags of surrender such as “radio already stolen” to prevent further break-ins. Roving packs of thugs ruled the streets and subways. 


Instead Giuliani and his police chiefs implemented this policing strategy, Broken Windows.  It had already been tried with considerable success in Boston and other cities. Guess what?  Rates of both petty and serious crime fell suddenly and significantly and continued to decline for the next 10 years.  On Giuliani's watch, overall violent crime was cut in half and the murder rate went down a stunning 70 percent. 


At its base Broken Windows is an epidemic theory of crime… that crime is contagious… it can start with a broken window and spread to an entire community.  Now most of you are probably thinking, what the heck does this broken windows thing have to do with my company?  I knew I should start blocking those dang emails! ;-)


Well I believe you can have a Broken Windows Theory of Management.  The same processes are occurring in your company each and every day… not crime but interactions… people choosing to act in this way or that… that behavior, all behaviors, not just crime, are a function of social context.  Broken windows says that what really matters is the small things.  You don’t have to solve all the big problems… often solving the little problems make the big ones disappear… to quickly fix problems when they first occur.


Not to get too psychological on you but what we consider our inner states – our emotions, our perceptions, how we feel about this person or this job or this company – are the result of our outer circumstances.  The power of situation and context is much more than most of us imagine.  And we are all tuned much more into personal cues, i.e. how someone behaves, how they act or how tense they are, than contextual cues, i.e. what someone actually says. 

We are powerfully influenced by our surroundings, our immediate context, and the personalities of those around us.  We are acutely sensitive to even the smallest details of everyday life… whether we know it or not… and in about 99.9% of the cases, we don’t know about it… but that doesn’t mean it still isn’t happening.

We often think people are who they are.  That their character is something which is struck in stone.  This isn’t the case.   People can radically transform their beliefs and behavior.

So again, how the heck does this have anything to do with my business?!  It has everything to do with your business… because rather than being a passive player you can consciously work to manage this… you can consciously work to shape it.  Let’s abandon “normal” thinking and leap outside the everyday… think about it, you can start and manage honesty epidemics… productivity epidemics… giving a damn epidemics… things that once they take hold, can and will profoundly alter the very foundation of your business… forever.

Next post – more on Broken Windows

Plenty to go around

Since I’m still in the holiday spirit I thought I’d let my warm and fuzzy side out for another stroll… always a scary and unpredictable affair.  As many have noted, the beer business changed more in 2008 than in the sum of the past 40 years.  Truly a time of astounding change.  Where will it all lead?  Who can really know?  Will things get better or worse?  The most certain answer is yes.


But rather than fret over things over which we have no control, why not take a brief respite and think about changing the only person on the planet which we can most assuredly change… ourselves.  I ask you to consider making a liberating leap of faith… a change in your personal and professional way of thinking… a change from a mindset of scarcity to a mindset of there is plenty to go around.  One of the speakers at last year’s NBWA convention spoke of this… and the incredible liberation (and business and personal success it can drive) in making this mental adjustment.


A mindset of scarcity sees the world as a very fixed and static place… where one person’s gain must almost by definition be accompanied by another person’s loss.  It is a battleground where there isn’t enough for all and everything must be fought over… with the goal being to “win”, because the alternative is to “lose”.  This mindset will permeate every action and thought one might have… whether managing employees, dealing with other wholesalers and suppliers, or even deciding where to take the family to dinner.  It is an incredibly limiting mindset… and on closer analysis in most situations it is fundamentally flawed and in no way reflects reality.


An alternative state of mind is simply stated as “there is plenty to go around”.  The “plenty to go around” mindset (PTGA) sees the world as a dynamic, growing, and bountiful place where one person’s gain can quite often be accompanied by another person’s gain.  A win-win world of possibilities rather than a win-lose world of constant struggle… see, I told you once you let the warm and fuzzy out, you never know where it will lead ;-)


In my consulting world, rather than fighting for each job instead I reach out and join hands with my associate Steve Cook, turning one plus one into a net plus four… there is plenty to go around.  Think of the beverage alcohol industry… locked in a mindset of scarcity.  The spirits folk’s primary goal seems to be to raise taxes on the beer folks.  It won’t directly help them but it will hurt the beer folks… thereby indirectly helping spirits… talk about blinded by a scarcity frame of mind!  If you lose then I might gain!!  So very limiting and in the end, so very ineffective and counter-productive.  Think of the change if the beer, wine, and spirits suppliers instead had a mindset of PTGA.  The entire regulatory, taxation and competitive landscape would change overnight… to everyone’s benefit.  But I won’t hold my breath for this one to happen.


But how about things we can change… the beer distributors around the country.  Very few wholesalers want to leave this industry.  This is completely understandable on a number of fronts; personal, financial, professional.  And of course everyone is a buyer and no one is a seller… which makes it really difficult to get deals done ;-)   And thus we are stuck in a scarcity mindset… a you must lose for me to win straightjacket.


Liberate your mind to a PTGA way of thinking… and a whole world of options materializes.  As a single example, rather than being in a death struggle to outlast the guy(s) you want to purchase… perhaps a win-win course of action is possible.  Many who have taken the leap to PTGA find that mergers are a natural response to this liberation.  EVERYONE makes more money.  EVERYONE’s business becomes stronger, more powerful and more viable… creating business entities which will survive long into the future.  EVERYONE wins… continuing to share in the rewards of this industry for generations to come.  What a concept!


Of course the nature of the asset changes in a merger… it is no longer solely “yours”… you now own a piece of a much larger, stronger entity.  This is the leap from scarcity to PTGA… from “I want it all for myself!” to there is plenty to go around... and we all win in the process.  Entire state-wide entities, even multi-state monsters become possibilities… with everyone winning. 


Concerned about jobs for your children?  Why?  These merged entities will be much larger… there will be plenty of job opportunities for all… with far superior advancement possibilities for every single employee.  Want to pay your worthless son-in-law a hundred thousand more than he’s worth?  - sorry to all the son-in-laws out there ;-)  Again, no problem… it can be taken care of.  Concerned about your position as an owner?  Don’t.  With a PTGA frame of mind, all of the principals and their desires can be taken care of… often with surprising ease.


Even if a merger isn’t in the cards for you… and they are not remotely right for everyone… tremendous value can be gaining with a little PTGA thinking.  It all starts with a little leap of faith… it’s all in your mind… is everything a scarce commodity or is there plenty to go around?  Your answer to this question can and will have a profound impact on your personal and professional life.  It’s just past the holidays and the start of a brand new year… a perfect time to take a leap. 


Well enough of that… I’ve better get back to caring for sick kittens and injured song birds… danged warm and fuzzy!  ;-) 

More on Valuations and Mergers

OK, OK, OK… the messenger really does get shot at.  The conflicts between market price and real value to the holder of the asset… and forced (not market driven) consolidation are why mergers are making more and more sense.  Don’t blame me because the actual concept of economic value doesn’t fit into your personal desires.  Here are a few points straight from finance 301 - it is a little more advanced than 101 ;-)


·                    The economic market value of a financial asset is set by the marketplace.  This does not mean that this value is the same for every individual on the planet.  If your personal economic value for this asset is below that set by the marketplace, you won’t move on the asset… i.e. it is a “bad” deal.  On the other hand if your personal economic value for this asset is above that set by the marketplace, you just might move on the asset… i.e. it is a “good” deal.

·                    What in statistics are called outliers, do not determine the market value of an asset, the marketplace does that.   The value of an asset does not skyrocket just because for one person on the entire planet that financial asset is worth far more than the market price.  Think about this one again.  Today, far to many values placed on distributorship rights are based on the value to some statistical outlier, not on some general market value. 

·                    Ability to pay is not the same as market value.  These are mistakenly being combined in many people’s thinking.  As an example, think about getting your home appraised (valued).  If the market value is $500K but because of some unique situation for one individual in the entire country, your house can have an economic value of $2M to him, what is the appraised value of your home?  It is $500K. 

·                    Let us use the stock market for publicly traded companies as an example.  Millions of shares of stock may be traded on any single day… some are buyers, some are sellers (it takes two to tango).  In this dynamic process a general value is determined.  For privately held businesses arriving at a value is a much more difficult task since there aren’t all these market-determining transactions.  And of course in this industry, the suppliers retain tremendous power in determining who gets the opportunity to operate a distributorship.  But still, for any proposed sale I can find 50 willing qualified buyers… these buyers will have different visions of the future, different comfort levels regarding risk, and various other variables, but their offer prices will in general be grouped in a certain range… this sets the true market value.  Now if some adjacent or overlapping wholesaler can pay far more than this market value and still make the deal work, this has no influence on the market value of this asset.  These people are statistical outliers who do not set the market price… like the home buyer above.  One person’s situation does not set the market value.  The seller might attempt to sell to this person and set their price accordingly, but this again has no influence on market value.  In fact there is really no financial reason for the prospective purchaser to pay more than market value plus $1… you can make a strong case that there is no need to share ANY potential savings based on synergies to the seller… none.  Of course this assumes a willing seller, something that might not be the case.

·                    Obviously if the economic market value of a financial asset is BELOW the financial value that the present holder of that asset (the owner) receives, then the owner won’t sell the asset.  Right?  The marketplace says it’s worth $20 but the present owner gets $30 worth of value from it… then why would the owner sell?  This is the crux of the issue facing many beer wholesalers.  For MANY wholesalers, this market value is not enough to justify the sale of the asset.  After paying taxes, the remaining dollars simply cannot produce enough economic value to equal what the original asset produced.  Therefore market value is thrown out the window and instead the selling price is attempted to be set by these statistical outliers for who the asset has much more value.  But from the buyer’s perspective, why should they pay many times the market value for the asset just because they can?  And in many situations, the seller is attempting to take ALL of the operating synergies, leaving the buyer with the worst of all worlds… paying far more than the market value but in the end receiving none of these outlier benefits… plus sitting on a pile of debt and having all the financial and operational risk on their shoulders.  But our friendly suppliers want to shrink the number of their wholesalers but market realities aren’t driving this.  That one issue is causing a lot of these problems.  Get wholesaler gross margins to an average 18% and then you’ll see market realities driving these sales and consolidations.  Just kidding guys… put down the gun!

·                    Intersection – Remember your old geometry class where you learned about unions and intersections of sets?  Hold on, this is a good concept… no reason to doze off ;-)  The intersection of 2 sets is the set of elements which are in BOTH sets.  In a venn diagram, imagine 2 circles that overlap each other to some degree… this area of overlap is the intersection of these circles… Now think of these two circles as a buyer and a seller.  Within the buyer’s circle are all those prices which they are willing to pay.  Within the seller’s circle are all those prices which they are willing to sell for.  If these circles don’t overlap, then no deal will get done… there is no intersection of these sets.  But if these circles do overlap, there is potential for a deal to get done… and it is defined by the amount of this overlap.  Now the seller will want to pull the price towards one end of this intersection and the buyer will want to pull the price towards the other end of this intersection, but all successful negotiations MUST by definition occur within this area of overlap.  Once one side leaves this area, a deal cannot be accomplished.  That’s just a mathematical reality.  Far too many brokers seem to have no grasp of this concept.

·                    Since many of these consolidations are not market driven, merging is making more and more sense.  Obviously a merger changes the nature of the financial asset but other than that, there is only upside.  Some compelling reasons to consider a merger include:

o       You “invest” pre-tax money versus after-tax money.

o       Your primary financial asset remains in the beer business, and for at least the foreseeable future, there are few business with the financial rewards and security of this industry.

o       You share in the synergies of these operations, increasing the profitability for everyone involved.  Let me repeat, everyone makes more money.

o       You don’t end up sitting on a pile of debt where only your heirs will see the financial benefits of a purchase… until then it is only the bank that rakes in the additional money (IF you find some one to finance the deal).  Or if you are the seller, you pay a pile of taxes and then try to find another investment with the upside potential of the beer business… good luck.

o       The surviving entity is much larger and thus has more power in pricing, purchasing, negotiations with suppliers and retailers, desirability to suppliers, etc..  In addition, this larger entity will offer your employees much more potential career advancement and can attract higher-caliber employees across the board.  It becomes a virtuous circle where good things only drive even more good things.

o       Your family can still participate fully in the business even though it will no longer be a single “family” business.

o       Since very few want to leave this industry (it does not make market-driven sense), it is a wonderful compromise for all involved.  You might not have 100% of what you want, but you end up with 80% of what you want and that 80% is most likely FAR GREATER than the non-merged 100%.

o       Fighting produces winners and losers, and generally both end up bloodied and battered (and often the “loser” ends up being the “winner” in the long-haul).  Joining hands and coming together only produces winners.  Something to think about over the holiday season.

What is going on with beer values?

What is going on with values for beer brands?  Recently in the trade press there has been an on-going discussion of distributor and brand values.  If you are a regular reader of Harry’s newsletter (and you should be), you have been reading about this.  Let us pull back a little and examine this from a bit more distance.


In order to take advantage of these once-in-a life opportunities, many brand transactions are becoming overvalued (sounds like the sub-prime mortgage debacle). In many cases these consolidations (both vertical AND horizontal) should have been done a long time ago for a variety of economic and supply-side reasons… and yes, supplier strategy has changed significantly in the past 15 years and has sadly left many wholesalers holding the bag.  A true statement but the past is just that, past.


However, the affected wholesalers always thought they would be able to go out on their terms.  As a result many wholesalers are NOT willing sellers. Because of these extraordinary forced circumstances, the intent of some valuations take on an entirely new meaning.  Those wholesalers who are forced to sell hope there is some retribution in the end.  And the buying wholesaler “gets” to pay a premium to execute the transaction to remain in good graces with the brewery who reassigns significant earning power to them… or at least for the present owner’s heirs since for many of these deals, only the bank is going to be seeing any increase in profitability for the next 15 or so years.


It is easy for client support professionals engaged in these activities to lose perspective. The focus can easily move to self-serving.  For the selling wholesaler, turning a Lose proposition into a Win by receiving extraordinary value justifies the transaction. Additionally, the buyer feels pressure to execute the deal at any cost.  As a result the surviving wholesaler is stretched to the financial max by awarding all the economic synergies to the seller through the asset purchase.


In addition, IMHO (that’s in my humble opinion for you none texters) my buddy Andy Christon (and Joe) works aggressively to keep prices high.  I might be wrong but it sure seems Andy (and Joe) are almost always on the selling side, and don’t really give a damn about whether the thing actually works for the buyer.  I’m both a financial and operational guy and work with many buyers.  Whether it works for the purchaser is a big deal for me… I’m not happily whistling to the bank at the end of the deal, I’m in the trenches trying to make certain the planned synergies actually come to fruition.


Let us take a look at some of the issues happening right now in this wave of brand and wholesaler consolidation:


·                    In many cases brokers get in the way of getting a deal done.  Deals are going to arbitration in Colorado and California (and probably more).  They set the seller’s sights on some incredibly high number… generally to get the job… and thus poison the deal.  I’ll bet in almost every situation, the seller is going to regret going to arbitration and will actually lose money off the deal…  What I have found is that in many of these deals, especially with a fairly sophisticated wholesaler, is that they have the in-house expertise to model the deal.  They don’t need someone to give them a “value”, they can calculate that.  They don’t need a broker to find a buyer, the potential buyers are all easily identified… often being just one distributor.  What is needed is a facilitator, someone who works to get a deal done for both sides.

·                    Golden Cases – God bless Andy for being creative in selling his services but please.  ALL cases are golden.  This economic theory is completely flawed on closer examination… regardless of where Andy has sold the concept.  Fixed costs and even many variable costs go up in stair steps.  These steps come in all sizes… from very small to very large.

Think about your business.  You don’t get to purchase one tenth of a truck, you have to buy the whole dang thing.  Same is true with employees.  Thus you get a general stair-step function where volumes (or account base) can increase a certain amount with almost no increased cost, but when a threshold is crossed there is a rather abrupt increase in cost… completely exceeding the relatively small volume which pushed it over the limit… much like the saying of the straw that broke the camel’s back.  Some of these costs can be rather steep, like a new warehouse.  Should those few extra cases which force you into a warehouse expansion be allocated the entire cost of the new warehouse?  If so, you’d be better off decreasing your sales than getting these extra boxes… yes I know, a foolish and quite plainly wrong analysis.


So I guess the pitch for a Golden Case is that as they are magical cases which only reside on the flat side of the stair graph.  The riser part of the stair, i.e. the step up in cost, all belong to some other non-magical cases.  The golden case theory seems to make sense from an operational view-point... you can add a certain number of cases and have almost no increase in cost… thus these cases can be very valuable, operationally.  Or from the opposite view-point, if you subtract a certain number of cases you might have almost no decrease in cost.  This is an operational reality which holds true for EVERY CASE YOU SELL.  But from a value view-point, ultimately they all can’t be golden cases… Going back to my crusty MBA finance professor, talk about measuring with a rubber yardstick!  Sometimes these cases are golden and thus have a tremendous multiple, in other times these exact same cases are not golden and thus have a much lower value.  Every freaking case can’t be golden but this flawed analysis sets them up to be. 


This golden case analysis takes a relatively simple operational reality which is true in most businesses and attempts to extend it to the value of specific brands.  Heck, Andy is now taking this thinking even further and stating that if the removal of a brand makes the company not viable, the value of those brands is the value of the entire distributorship!  So if 10,000 cases from a certain supplier is keeping my head above water, the true market value of those brands is the value of my entire company?!  Think of this from a supplier perspective… this thinking and attempting to codify it into law may cause tremendous damage to the entire three tier system as incredible values are placed on almost any brand… thus effectively tying the brands to the present distributor forever.  This will not bode well for the three tier system.   


·                    Multiple madness… it depends.  Again we are getting a very superficial analysis and not very deep thinking.  Yes you can pay very high multiples for some craft or import brands… why? 

o       Growth potential… many of these brands could see 50% to 100% increases in volume.  So a 5 or even 7 times multiple in actuality is much less.  The infamous pay-back period is much shorter than the GP multiple might imply.  Look at Corona numbers; does any one think they are going back to 20% growth days any time soon?  What does flat to down volumes (and potentially shrinking margins) mean to the multiple?  A freaking lot!  Look at Coors versus Miller.  In many markets one can reasonably expect Coors to increase in volume, perhaps for some time.  Can you say the same about Miller?  Of how about A-B?  If you’re sitting on 70 share, do you really think this is going to increase?  It is much more complicated than pulling some multiple (whether EBITDA or gross profit or whatever) out of some body orifice and saying someone else paid this over there so it must be the value over here.  Wrong.  Yes, as a broker it will get you the contract but in the end it screws up the deal because it never gets done.  Or the broker uses the pie-in-the-sky to get the contract and then actually sells the thing for much less.  The seller might not be too happy but the broker is ;-)  And of course the seller leaves the industry so they won’t be around to bad mouth the broker regardless!  

o       The case volume is relatively low.  You might not want to, but you can pay a high multiple for a small volume.  This is not the case as the volume increases.  If Corona is 10% of a deal is much different than if it is 50% of a deal.  It simply doesn’t work to pay the same multiples, the deal won’t cash flow.  Also from a risk factor, a deal with 50% Corona is MUCH riskier than one with 10%.  It’s just the way it is.    


There is more at stake than most realize.  It was the wine industries inability to deal effectively with these needed transitions that led to a weakening of their wholesaler relationships.  We need to reward loyal wholesalers for their commitment while maintaining the ability to improve its business model.  Everyone needs to be part of the solution.  Take the high road to a successful transaction… hire a facilitator who knows all the implications for both the seller and the buyer.  Make your transaction a win/win.  Each transaction is unique and has its own personality and idiosyncrasies… applying general rules and values is not in everyone’s best interest.









How to improve your operations

OK, you’re not going to merge with anyone or jump on the shared services bandwagon (see the 2 prior posts)… then what?  Or I guess, even if you are ;-)


Simple.  Build and operate the most efficient and effective organization you possibly can.  Here are some things to think about in no specific order.


·                    The world changes… are you allocating your payroll dollars appropriately?  This is especially true in your sales area.

·                    Flat, flat, flat… the flatter the organization the better.  Look at your management levels… do you really need them all? (sorry folks) What is the ROI on some of these positions?  Do you have $75K level people doing $30K level work?  It is much easier to manage an organization like this but it is rather expensive.

·                    Build better managers.  We promote “doers”, people who are great at getting things done.  You know the type, you give them a task and never think about it again since you know they’ll get it done and get it done right.  Then we make them managers… where they have to accomplish tasks through others.  This is not what has made them stand out… this is not the personality trait where they have excelled… in fact in many ways it is in contradiction to the very things which made them superior.  That’s the reason many managers and supervisors in this industry don’t truly manage at all… they help.  They think their job is to help their people accomplish their daily tasks… and they do so by physically helping them, rather than managing them.  Help your managers make the profound transformation from being a doer to a manager.

·                    If it doesn’t help sell beer, why are you doing it?  Ask yourself this one every single day.

·                    The office is almost always the least (worst?) managed department in a distributorship.  There often aren’t great payroll savings here (but there might be), but a lot of operational friction can start here.  Make certain that all departments work together seamlessly… that each department’s actions support and smoothly integrate with the other departments.  Often one department does something in a certain way, not knowing it causes great headaches for another… and a simple solution is available if they just communicated about it.

·                    Getting too specialized in delivery is generally a poor ROI move.  Specialization in sales has a better chance of generating a positive ROI but be careful here too.  Some wholesalers have gone a little overboard with this… make certain the benefits exceed the costs.

·                    As an analogy, the past years in beer distribution has been like going from playing high school ball to college ball to pro ball.  How many superstars in high school can play at the college level?  A lot get weeded out when everybody else is pretty darn good too.  And how many college stars can play at the pro level?  Look around (and in the mirror)… is your team ready to play at the pro level?  If not, get it in gear and start down a path towards that goal.  Train, coach, help your people get better.  And where this isn’t possible, replace them with someone who can play at the pro level.  These things aren’t moral issues, just the essence of building a winning pro team.  Keep your high school team if you desire… but I’ll bet on the pros every time.  Just as I’ll bet on the beer drinkers when it’s 3rd and 10 over the milk drinkers (I stole and modified that last one from the old Miller Lite sports quotes)

·                    Get rid of stove-pipe thinking… that’s when each department focuses solely on their own little world and don’t communicate beyond their stove pipe.  Force cross-departmental communication and integration.  Your organization is a system.  No part of a system is more or less important… in fact the concept doesn’t even make sense when thinking of a system.  You need to ensure the entire system works.  A great example of the truth of this system thinking is the space shuttle Challenger… that’s the one which exploded soon after takeoff.  It was a very complication system with a total cost of hundred’s of millions of dollars.  Yet it exploded and killed everyone on board because a five dollar O-ring failed.  Ask those dead astronauts what’s the most important part of a system… they all are.

·                    Don’t be afraid of change… embrace it.  This is a mindset, not just a slogan… help it spread throughout your organization.  Now don’t go mindlessly chasing change but try to wake every day and see the world (and your organization) anew.  If something can be done better, then do it.  One caveat here though… don’t be constantly changing the design of your organization.  Employees don’t handle constant change very well… once every 3 - 5 years or so take a hard look at your organization… the rest of the time spend your efforts improving the execution of what you’ve got.

·                    Look in the mirror – are you consistent?  Nothing destroys management and employee commitment more than owners and senior management flip-flops… or bull****.  Make certain you don’t say one thing but down the road when this creates some conflict, you take the easier path.  And as a side note, from my experiences whether in management or even child rearing, most of the time the easiest choice is the wrong path.  Quite often, tougher choices today make for much better results tomorrow.    

·                    Take good and make it better… take great and make it greater.  Never be satisfied.  Except with your sharp dressed and black hearted management consultant ;-)

Does a duopoly lead to shared services?

I’ve written about shared services before and many are giving them another look.  First let us take a stroll down Economics 101 to discuss why they might now make more sense than in the past.


In economics, a market for a good or service is defined by many features and a primary feature is the number of competitors (sometimes thought of as sellers or producers) in that market.  On one end of the continuum is perfect competition… I won’t get into the details but for our thinking just assume a lot of producers, each kind of doing their own thing... so to speak.  At the other end of the continuum is the famous monopoly… only one producer.


Beer distributors (and our friendly brewer partners) operate in what is called an oligopoly.  It is a definition of a market’s structure.  In general an oligopoly is a market in which there are only a few producers and each one can influence prices and affect competitors.  That is a key feature of oligopolies… because of their limited number each oligopolist (that’s you!) is aware of the actions of the others. The decisions of one firm influence, and are influenced by the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. This causes oligopolistic markets and industries to be at the highest risk for collusion… or so the lefties and big government types claim ;-) 


From my experiences, generally the opposite is true… competition between sellers in an oligopoly is often quite fierce.  Everybody knows what everybody else is doing… and no one is going to let the other guy get the upper hand.  Look at this industry when wholesalers compete on service… I”LL be here two times a week!  Well then I’LL be here three!  Well then I’LL be here 7!  Well I’LL lose more money coming to see you than my competitors will.  No way… I’LL lose even more.  It is difficult to gain any competitive advantage because the other players are generally aware of what you are doing and if financially and operationally possible, they can match you.  You all have lived this in servicing retailers, pricing, weekend pulls, special events… you name it.


But in most markets (and at the major supplier level), this oligopoly has changed or is changing to a special type of oligopoly, a duopoly… a duopoly is a market structure where only two producers exist in one market.  And this change is what might make shared services deserve another look.


Think about the differences… imagine a market where one dominate player has 50 share (or higher), the next perhaps 30, and the next the remaining 20 share… and even perhaps a fourth small player.  In this type of market structure, although each player might be aware of what the others are doing, the largest player has significant dominance… think average cases per stop which drive significant profit advantages.  Frequency of service to retail, frequency and quality of delivery, frequency and quality of merchandising, quality of workforce, number of feet on the street, special events, level of compensation, benefits, rolling stock, warehousing, technology … all are areas of potential competitive advantage for the larger player.  Why would this market leader be willing to go to shared services?  They have advantages the other two competitors will have a difficult time matching.  In fact if they are wise, they have advantages the other two competitors have no way of matching.  This was the general market structure in the US for the past few decades.  And I think you have to admit, A-B distributors were laughing all the way to the bank.


Of course during this time period shared services might make sense for the two (or three) smaller players, but quite often they are too busy fighting over the crumbs to get along.  In addition, each wanted to purchase the other so why would they join hands and help keep the other guy in business?


Fast forward to today… and our duopoly.  Now due to consolidation, the market structure is two dominate competitors.  Yeah the A-B guy might have more market share (but often not by that much), but when you think about the gas that runs the machine – gross profit dollars – often the MillerCoors distributor has a bigger chunk of this pool than his A-B competitor.


In our new world, basically anything one can do, the other can match.  They might choose not to, but if they want to they can.  This changes the entire competitive dynamic.  In today’s world, most distributors run quality sales, delivery, merchandising, and warehousing operations.  Although everybody feels their team is better than the other guy’s (and sometimes they are actually right!), generally what each takes to retail is not too different from the competition.


In this situation, shared services might just make a heck of a lot more sense than it did a few years back.  Chain power isn’t going to go away and you will be merchandising these stores at a high frequency, whether you like it or not.  Why not a shared merchandising force?  The same could be said for delivery and warehousing.  You can still fight like heck on the street in the sales arena but share services where the competitive reality is at a draw… and is likely to remain so for the foreseeable future.  In these situations there is no competitive impact with shared services since there is no competitive advantage either side holds… the competitive impact of sharing is zero but the cost savings can be rather substantial.  Worth a look?


We often bring the past with us in our day-to-day thinking.  Don’t let your past 40 years of competing in a certain way determine the correct way to address the future… the market structure has fundamentally changed and this will drive change.  It might not seem like much, but it truly is a profound change.  Shared services aren’t for everyone but for some, they may deserve a second look.

Even more on mergers

You’ve heard it before and it is true… this industry has experienced more change in the past 12 months than in the decades before.  And the amazing thing is that it is not yet remotely over.  Many of these changes are driving interest in mergers to a record level.  So let’s think a little about mergers…


First, those unconsolidated Miller and Coors houses.  Obviously if it were easy in these markets, something would have been done a long time ago.  There is a reason why so many Miller and Coors distributors have consolidated… it simply makes sense.  And along the same lines, there is a reason why they haven’t consolidated in other markets.  Generally the reason is that neither party was willing to “give”… i.e. sell.  The A-B guy has loved this situation and has been laughing all the way to the bank.  Please read that last sentence again.


So what to do?  I think there are at least four options:

1.                  Neither side give… basically playing a game of chicken on who ultimately will get the brands.  I’ve never liked the game of chicken because with strong and/or stubborn players, generally both sides lose… see A-B laughing all the way to the bank above.  But it is an option… and one which MillerCoors could live without.

2.                  The Miller distributor purchase the Coors distributor.

3.                  The Coors distributor purchase the Miller distributor… points 2 and 3 make sense but as I mentioned above, it would seem if this were going to voluntarily happen, it would have already occurred.  And yes, if I’m the purchaser I want to purchase all the brands… none of this crap where you try to sell only the major and keep the imports and crafts and compete against me.  Can you say non-compete?  No one worth his salt is going to buy without this clause in the contract… get over it.

4.                  Both parties accepting the reality they face and instead seeking a win-win compromise… and in many cases this compromise is a merger of some sort.


Let’s look at the four options in greater detail… I believe the worst course of action for both parties is probably the game of chicken.  Of course you might win, but then again you might lose.  Long, drawn out lawsuits… if you haven’t had the “pleasure” of a business lawsuit you don’t know what you’re missing.  You’ll blow through $50K in the first two weeks… plan for hundreds of thousands in legal fees… the magic million dollar mark is easily attainable.  And again, you may just lose.  This is kind of the nuclear option… to be used as the last resort. 


Either party purchasing the other… as I mention, if this were going to happen it probably would have happened some time ago.  But if you want to give this one last shot, you’ll have to make a high offer.  Don’t waste everyone’s time trying to get a low-ball deal now… step to the plate and give the other party a reason to take the money and run.  Of course even with a high offer there is no guarantee the other party will accept it – this is often about far more than money… but you have to start with a premium offer.


Or the fourth option… both parties looking in the mirror and saying I want to stay and I can’t force them to leave… therefore what can we do that will work for both of us? Ahhh, that magic word… compromise.  80% of something is much better than 100% of nothing.


There is a study on the analysis of strategy with nicely captures the reality these unconsolidated markets face… the Prisoner’s Dilemma… (note much of the following has been liberally plagiarized).  A guy named Tucker first came up with the Prisoners' Dilemma to illustrate the difficulty of analyzing "certain kinds of games." His simple explanation has since given rise to a vast body of literature in subjects as diverse as philosophy, ethics, biology, sociology, political science, economics, and, of course, game theory.  It’s an interesting area for reading.


The Prisoner’s Dilemma can be stated as:

Suppose two burglars, Bob and Al, are captured near the scene of a burglary and are given the "third degree" separately by the police. Each has to choose whether or not to confess and implicate the other. If neither man confesses, then both will serve one year on a charge of carrying a concealed weapon. If each confesses and implicates the other, both will go to prison for 10 years. However, if one burglar confesses and implicates the other, and the other burglar does not confess, the one who has collaborated with the police will go free, while the other burglar will go to prison for 20 years on the maximum charge.

The strategies in this case are: confess or don't confess. The payoffs (penalties, actually) are the sentences served. We can express all this compactly in a "payoff table" of a kind that has become pretty standard in game theory. Here is the payoff table for the Prisoners' Dilemma game:















 The table is read like this: Each prisoner chooses one of the two strategies. In effect, Al chooses a column and Bob chooses a row. The two numbers in each cell tell the outcomes for the two prisoners when the corresponding pair of strategies is chosen. The number to the left of the comma tells the payoff to the person who chooses the rows (Bob) while the number to the right of the column tells the payoff to the person who chooses the columns (Al). Thus (reading down the first column) if they both confess, each gets 10 years, but if Al confesses and Bob does not, Bob gets 20 and Al goes free.

So: how to solve this game? What strategies are "rational" if both men want to minimize the time they spend in jail? Al might reason as follows: "Two things can happen: Bob can confess or Bob can keep quiet. Suppose Bob confesses. Then I get 20 years if I don't confess, 10 years if I do, so in that case it's best to confess. On the other hand, if Bob doesn't confess, and I don't either, I get a year; but in that case, if I confess I can go free. Either way, it's best if I confess. Therefore, I'll confess."

But Bob can and presumably will reason in the same way -- so that they both confess and go to prison for 10 years each. Yet, if they had acted "irrationally," and kept quiet, they each could have gotten off with one year each.

Now I’m not claiming the unconsolidated Miller and Coors distributors are like criminals, it’s just that the decisions they face are much like Bob and Al.  There are many iterations of this game, going in all directions.  For our Miller Coors distributors, they get to “play” the game many times over… it’s not just a one-time affair.  This makes the benefits (and warm fuzzies) of cooperation even more enticing.  I believe if most of these wholesalers made a decision table like the one above, they would quickly see the tremendous upside to cooperation… and this cooperation is spelled by one word… merger.


How this merger might work, protecting each parties interests, various individual’s roles… these and a hundred other things will need to be decided, but they can be decided down the road.  The first step is opening your minds to the concept of merger… and the multi-interactions and ability to communicate which tweaks the strategy of the Prisoner’s Dilemma.  Give me one week and we can quickly determine if a merger will work in your specific situation with your specific merger partner(s).


Other types of mergers… There is also a great deal of interest in mergers all across the board… small guys wanting to get bigger… large wanting to get larger… horizontal mergers (overlapping territory)… vertical mergers (adjacent territory)… you name it.  The interest in these types of mergers is in many ways like the Miller Coors discussed above… wholesalers who are analyzing the landscape and expected future operating environment and coming to the conclusion that some degree of compromise is a wise and necessary business decision.


If you’re a 1.5M case A-B wholesaler… are you big enough to be long-term sustainable?  Think about the Prisoner’s Dilemma… sure seems a course which should at least be examined would be some sort of compromise where you become long-term sustainable.  Or perhaps you’re a 4M case distributor… is there a possible model where you could become part of a 20M case operation?  With all the benefits and power that come along with it?  The problem always comes back to “that other SOB won’t sell”.  Of course don’t’ forget that you’re the “other SOB” from the other guy’s perspective.  So do we play chicken with all the risks that entails?  Or do we at least consider a win-win compromise which sets all parties up for long-term success and sustainability?  I can tell you a lot of folks are reconsidering their feelings on this subject.  And of course all suppliers LOVE mergers since in the end they get a larger, stronger distributor who is not sitting on a mountain of debt.  They really love that aspect and supplier approvals should not be a concern.  This lack of debt ain’t a bad thing for the merger partners either…


If you are interested, I can get us a long way down this road in a week’s time.  I start with confidential one-on-one interviews with all parties… discovering their goals, ideas, objectives, concerns, lines-in-the-sand.  After that we get together as a group and discuss if there is any reason to proceed… our first go / no go decision (and there will be many more in the process).  In this process I don’t represent any one distributor’s interests but I represent ALL distributor’s interests… all of the parties become my client and in effect I work for this yet to be formed entity.  Do we always move forward?  Heck no.  In fact in many cases after the initial interviews it becomes apparent the merger can’t work with the parties various demands.  At least these fundamental conflicts are then out in the open and all parties can decide whether to change their minds… or to let the thing set for now.  Either way, a great deal of value can be gained in a relatively short time.


Is a merger for you?  Heck if I know.  But in many cases they make tremendous sense… everyone wins and in situations where no one wants to leave, they may be the only real solution… other than sitting back, playing chicken and just seeing how it all works out in the end.  If it were mine, I wouldn’t willingly choose the chicken option.

The Concept of Value and Other Whimsical Things – Part 3

Continuing our voyage to value, don’t ever forget that purchasing anything in a market economy is basically participating in an auction… whether you are aware of it or not.  This is true whether you are buying or selling a distributorship.  Even the employment market is basically an auction… you desire a certain skill set and the market (the auction) tells you what the price of this skill set is as of today in your specific geographic territory.  It might change tomorrow but as of today this is what it is.  And just like an auction, you can always overpay but other than those few times when you are lucky and can find a deal, you can seldom underpay.  And when do you find a deal?  Generally when there are few, if any who want to purchase what you are bidding on at that time.  Just like buying or selling a distributorship. 


Although this is a rather crass example, it is a great illustration of this real-world economics in action.  I had a friend who was in the Army stationed in San Diego in the late ‘60s.  All the Army guys hated it when the Navy made port since it drove up the price of… well let’s say it drove up the price of certain commodities… and even after they left town it would take some time before these prices decreased back to more “normal” market prices.  Economics always works, whether we like it or not – unless of course that thing we call government intervenes but that’s a rant for another day ;-)


This factor (no, not the Navy… the reduction in potential purchasers) is one of the concerns of the recent MillerCoors contract… it certainly seems to shrink the pool of potential purchasers substantially… thus potentially lowering values by a significant amount.  Whether this truly comes to fruition is another matter entirely.  There still are A LOT more buyers than sellers and this always puts upward pressure on price (see the Navy above).  Distributorships are fairly unique entities and there really aren’t that many around – i.e. limited supply.  Throw in all the other non-financial considerations I’ve talked about in the beginning of this article and it is difficult to truly decide which directions values might go.  If you are considering selling or buying, my attitude is just get the deal done.  Waiting to see what the future may or may not hold is generally a poor strategy.


In fact it seems that in many situations, the ultimate determinate of value is becoming can you get the deal financed?  Even though the buyer and seller might agree to the value, if the deal requires debt, the bankers might hold the cards.  In theory the value of any financial asset is not determined by the means used to purchase it.  An asset doesn’t have value A if it is purchased with no debt, and value B if it is purchased with debt.  A crusty old MBA finance professor used to call this attempting to measure with a rubber yardstick.  But unfortunately the real-world occasionally raises its ugly head and slaps what is “right” about the head and face.  Maybe availability of debt financing doesn’t have anything to do with value, but it certainly does have a lot to do with ability to pay… and if it impacts everyone’s ability to pay, then it must impact ultimate value.


Since few folks have ten’s of millions of cash laying around just waiting to be used to purchase a distributorship… and government subsidizes debt… i.e. you can deduct your interest payments, this leverage makes purchasing any significant asset with some degree of debt a wise financial choice.  Therefore the banker does come into the picture… both from a willingness to lend perspective and from a cash-flow perspective.  The banker could give a hoot about whether you overpay for an asset, but they very much want to ensure the cash flow is sufficient to cover the debt payments and not strangle the company it the process… at least until they get all of their money back ;-)


In summary, what have we discovered about value?  That it is a very fluid and flexible concept which is impacted by a great many factors… some are hard facts and some (many?) are very soft and emotional.  This isn’t to say that getting a valuation done for your company is a bad idea - come on!  I do them so of course they are a great idea!  ;-)… in fact the valuation is often the first step in many transactions… it’s just that as a “consumer” of this product, a valuation, you should be aware of the nature of the concept of value so as to maximize the value it brings to you.


As a completely off the wall side note… I had a crazy finance professor in my MBA studies who taught a class on investments.  And he began the class with asking what seems to be a very simple question… what is the difference between gambling and investing?  Or is there one?  It’s not as clear as one first might think… his belief was that they are a continuum.  Most would agree placing a bet on a complete game of chance is gambling.  But what about a person who studies dog racing and places bets based on the “superior” knowledge.  The prof liked dog racing over horse racing since those pesky jockeys can easily influence a race.


One could make the case that because of this superior knowledge, this is closer to investing than gambling.  Just think, instead of telling your wife you’re off to the track or betting on your favorite football team… perhaps perceived as a bad thing, you should be telling her that you are investing… of course a good thing!  ;-)  Reading the sports pages? … Investment prep work.  Weekly poker games? … investment in action!  What does this have to do with value and buying and selling distributorships?  I’ll leave that for you to decide ;-)



The Concept of Value and Other Whimsical Things – Part 2

Continuing our voyage to the meaning of value, let us think about some of the non-financial aspects of what a distributorship is “worth”.  Although it is fundamentally financial in nature, people’s desires or expectations for a return on investment are different.  Perhaps you want a 15 year pay-back, and I’m happy with 25 years.  Is there a strategic implication for the deal?  Does it ensure my organization’s long-term viability?  Are there operating synergies?  What is it worth to continue the family business your grandfather started?  What is it worth to have your sons and daughters continue in the business?  What is it worth to be the beer-guy in town with all the perks that come with it?  What is it worth to have a nice cash-flow friendly business?  What value – both economic and non-economic - does my family (and extended family and friends) take from the business and is it remotely possible to replace this value?


I’ve been told more than once, “John, I’ve got more wealth than I could ever spend.  My family is set for generations regardless of what happens to this distributorship.  I’m not leaving no matter what.  If it goes down in flames I’m still OK.”  Kind of hard to argue with that!  ;-)  I’ve encountered this thinking when purchasing too… “yeah I know I’m over-paying but I’ve got my reasons (son or daughter or long-term viability or whatever) and my family and I are protected even if it goes south.”  I like those folks when I’m on the selling side!  ;-)  The price doesn’t matter to them as much as getting the deal done… the infamous; no one will remember what we paid 30 years from now.  And there is some truth to that statement… unless of course the debt payments bring the entire thing crashing down.  In that case no one will remember what you paid since you will be long gone and someone else will own the dang thing.


I was recently on a project (attempting to complete a complicated merger) and the owner was somewhat disparaging one of the other parties, as in it’s all about the money to him… nothing else.  My response to this was “great!  I can deal with money-driven issues… those are relatively easy.  It’s the emotional side which causes the problems.  The emotional side is where logic is thrown out the window… and that makes the situation much more difficult to navigate to a successful win-win conclusion.”  And the emotional side can and does have a tremendous impact on this thing we call value.  This is true from both a buyer and seller’s perspective.


“Value” is also impacted by the nature of the marketplace.  Valuing a pure financial object, say a share of Cisco common stock, is relatively easy since the market does it for you.  Millions of shares of stock trading daily in millions of transactions will quickly determine the value.  The marketplace will speak and set the value… regardless of any individual’s wants or desires.


When you have an asset which is traded much less frequently, arriving at a value is much more difficult.  Some of you may have experienced this in trying to get rid of an old warehouse… it’s difficult to arrive at an appraised value when nothing similar has been sold in the area in the last 10 years.  Obviously beer distributorships fall into this second category.  Even though the pace of deals has increased to a record level… record pace is still very few for decisively determining “value”.  Throw in differences in state laws (and market share/relative strength, demographics, population trends, etc.) and the very few get even smaller.


Uniqueness of an asset also makes valuing much more difficult.  A handful of territories around the country are true gems… there are few other places which present the demographic mix, population growth, etc. that these gems do.  How does this impact value?  I’ve known people whose primary (in some cases sole) consideration when looking to purchase a distributorship is do they want to live there.  Once again, ‘I’ve got more money than I can ever spend and my quality of life is the most important factor”.  I can’t argue with it. 


And of course the ultimate determinate of value is what someone is willing to pay for it.  That’s where the rubber meets the road.  You might think your house is worth $1M, but if no one will pay more than $500K for it, then that is its value in the market today… regardless of yours or my wishes.  And one of the primary factors of this (in many cases the only factor) is how many potential purchasers are in the market.  Is there only one person in the entire world which makes sense to purchase this asset?  If so, the price might be less than desired… of course then again, how bad does this party want the asset?  How important is it to them?  It could lead to a stupendous “value”… especially if the potential seller does not have to sell the asset.   Let me emphasize again, just because there is only one buyer does not automatically mean the value will be low… it might be or it might not be.  Or there may be many people interested… and perhaps the direction the deal goes sets the chess board for years to come… if not forever.  In that case you are almost assuredly looking at a high value.


I’ve been involved in 2 recent Miller deals.  In one the price was just over one times 12 months gross profit (happily I was on the buying side of this one) and in the other the price was just under five times gross profit (and happily again, I was on the selling side of that one).  Since I hate politicians who claim credit when things go well (generally through no action of theirs) and then blame others when things go bad (generally because of their actions), I won’t claim any great credit in either of these deals.  In each situation the amount paid was right for those specific circumstances… for both parties.  As I joke with my clients, I won’t take any credit… all I ask them to do is to look at their financials or business situation and compare pre-Conlin with post-Conlin… there is always an amazing correlation to good things ;-)  And with that bit of self-promotion, I’ll end this post until the next… a continued discussion of value.

The Concept of Value and Other Whimsical Things – Part 1

The concept of value is a topic for which many trees have given their all, yet there remains much confusion.  First let’s rid ourselves of the fantasy that there really is some fixed, determined value for anything… there is no value god who magically comes along and determines the proper value for this and that… although some financial consultants will try to tell you (and sell you) something different ;-)  Neither they, nor even I, have the keys to this secret vault of value.


Rather the concept of value is very fluid, influenced by many factors.  In most situations diamonds have a much higher value than water… but if you are dying of thirst this value equation might just change dramatically.  Although that is an extreme example, it makes the point that many factors determine the value of anything and these factors can change dramatically… often in a relatively short period of time.


The value of any financial asset is the sum of expected future cash flows discounted back to a present value.  This is a relatively easy calculation for a pure financial asset, like a CD or bond or some such instrument… although it is still open to significant subjective inputs.  What will be the expected inflation rate over the respective period of time?  Government T-bills are often used as a proxy for this number.  These are used since they are assumed to be risk-free… although as the recent financial melt down shows, even the concept of risk-free is more subjective than many had thought.  And this aspect, the relative risk factor is the other part of the discount rate… discount rate = expected inflation rate plus a risk factor… i.e. if the expected inflation rate is 3% and the risk-factor is 5%, the discount rate is 8%.  Using a relatively simple formula, you use this discount rate to determine the present value of these future cash flows… the process is kind of like calculating reverse inflation.


But alas, again there is no risk god who magically determines the correct risk factor… and differences in this risk factor will have a significant impact on the present value of these cash flows.  And using this same process for non-pure financial assets, you usually must also determine a terminal value.  Conceptually these future cash flows go on in perpetuity but rather than attempting to calculate future cash flows years and years out, some terminal value is place on the asset and this value is discounted back to a present value.  Of course what this terminal value should be is also open to considerable flexibility.


There are of course other proxies for discounted cash flow… but fundamentally they all are based on the same premise… that the economic value is based on discounted cash flows… kind of even makes sense if you think about it.


Some of these proxies might be some multiple of gross profit dollars, i.e. this is worth 4.2 times trailing 12 months gross profit.  The advantage of this proxy is that the multiple is easily transferred from one distributor to another… you all have gross profit dollars and multiplying it by some number isn’t too dang tough ;-)  That’s the reason I like it.  This proxy is good for just general conversation  (is it a “high” deal or a “low deal) and for sellers.  Sellers don’t give a hoot about how the buyer is going to make it work, as long as they get their money.  Buyers on the other hand have to make certain the deal actually works in the real world and thus they might make offers of X time 12 months gross profit, but that’s not how they arrived at the value.


EBITDA (earnings before interest, taxes, depreciation, and amortization) is also used to measure worth.  This proxy is commonly used to compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.  But there is no absolute standard on what items companies can include in EBITDA, thus it is not completely transferable from one company to the next, or even for the same company from one financial period to the next.


As many finance wizards will warn, EBITDA does not represent cash earnings… it is a tool to measure profitability, but not cash flow. EBITDA ignores the cash required to fund working capital and the replacement of capital equipment… and in distributorships these may or may not be significant.  But this method is still a useful proxy for value, as in it is worth 14 times EBITDA.


EBIT (earnings before interest and taxes, also called operating profit) is also used.  It too eliminates the effects of financing and accounting decisions but includes the non-cash items of depreciation and amortization.  There are many other EB…’s that can also be used, each with its own strengths and weaknesses.


You could even just look at payback period… i.e. how long will it be before I get my dang money back?  This of course ignores the time value of money and the timing of “getting my money back”.  It makes a big difference if you get 90% of your money back from an investment in the first year… or if you get 90% of your money back in year 15.  But it is sometimes useful to think in a payback period fashion, but only for broad brush stroke type discussions.


Heck, some folks even talk value as X dollars per case.  But again, this might work from a seller’s perspective, but the buyer needs to build the operational and financial model prior to “backing into” a number like this.  Regardless of how you choose to look at it, the value of a financial asset is still going to be determined by future cash flows discounted back to a present value.


But of course this is only the beginning.  There are many other factors which influence value.  My vision of the future and yours might be very different.  I might forecast tremendous population growth, you a flat market.  I might envision margins going up, you see them falling rapidly.  I might envision a strengthening of my state’s franchise laws, you might see them crumbling in the next few years.  I might expect market share growth, you a shrinking market share.  In fact we might disagree on every internal and external factor which can influence a distributorship in a respective territory.  This will have a tremendous impact on the value we assign to this distributor and its distribution rights.


And of course distributorships are not just financial assets, they are much more than that.  But since I have been told repeatedly that I am long-winded (and this from friends!), you’ll have to wait for the next post to read more on non-financial aspects of distributor value.

Bringing a knife to a gun fight

Well the convention in San Fran was a good one.  Pretty darn good attendance for a non-trade show year… the fear and concern were evident throughout the place.  So with that in mind, here is a little rough love… er, I mean tough love ;-)   Please don’t shoot the messenger.  I hate the sight of blood… especially my blood.


Since it seems everyone and his dog asked me about the MillerCoors contract, here’s my quick read of the situation.  You may have heard that old joke which ends with “I hate it when someone brings a knife to a gun fight”.  I hate to break the news to you but in some ways it is more like you are bringing a plastic spoon to a gun fight… OK, maybe you’ve got a plastic spork ;-)  Had to throw that in there, gotta love the spork.


So, being the black hearted mercenary consultant that I am, here’s what would happen if I were on the other side of the table… and thank goodness for all that I’m not.  First, of course it depends on which state you’re in.  State law is almost always going to trump those parts of the contract which are in conflict with the law.  This doesn’t impact the remainder of this contract, it’s just that generally state law wins… except perhaps in the arbitration versus federal or state court aspect.  But the bad news here is that this breaks against the wholesaler and perhaps sticks them with arbitration regardless of the state franchise statute.


Next, please get rid of the silly (but quaint) notion of fairness.  Of course we might talk this way but in the end why would I be concerned with fairness?  The whole concept of fair is extremely situational.  What is fair always depends on which side of the issue you are on… fair to one party might be considered getting seriously screwed by the other.  Thus, fair is determined by power and the willingness to use it… please see the plastic spoon example above.  You A-B folks will want to keep this in mind as A-B InBev begins to implement their changes.  If nothing else it prepares you for unhappy events.  Ignore the happy talk; this is ultimately about business and nothing else.


Some were surprised MillerCoors took the parts of their separate contracts which were more in their favor and built the contract around them.  Why would this surprise anyone?  And if I were InBev, I would be following right down the same path.  For any wholesaler who gets an attitude and chooses not to aggressively represent my products, I’d have one word… good-bye… or is that two words?


Obviously MillerCoors plans to take a much more active role in consolidation of “their” network.  From their perspective it makes absolute sense.  And it gives them the ability to toss some pretty nice bones to those wholesalers who earn their good graces.  Power and the willingness to use it.  I’m guessing the A-B folks will be learning this lesson too, real soon… actually I think they may already know it pretty well ;-)


Now a lot of folks talk about not signing the contract… again you are bringing a plastic spoon to a gun fight.  To those who refuse to sign I’d have a very simple response.  Either sign the contract and get over it and move on, or sell your business… we’ll even bring you a willing purchaser.  Two simple choices.  I just don’t see how your plastic spoon is going to win this one.  This doesn’t mean don’t fight… I’m cheering for you but betting against you. 


And don’t ignore the economic statement of what willing purchasers means.  I’ve had wholesalers explain that the supplier(s) can’t do this or that because it would put them out of business.  My initial black-hearted response is so what?  What does that have to do with anything (other than of course your individual business).  From a strictly economic perspective, the marketplace is telling you that this industry is still very desirable, regardless of your wants and desires.  There are still a lot more buyers than sellers… this is an economic statement.  When there are no buyers or only buyers at a steep discount, then and only then will whining about your profitability be economically justified.  Sorry, but from a solely financial viewpoint, that’s the way it is.  For those in doubt, check out the last few weeks from Wall Street… that’s what it looks like when the markets make a bad economic statement against a company or industry.


As I was sucking down free beer in the MillerCoors hospitality reception, I talked to many wholesalers about the recently concluded MillerCoors meeting… how it went, what was said, the general feel.  Obviously just a little tension in air, on both sides of the podium… some tap dancing.  To be expected.  But I do tip my hat to the MillerCoors folks.  The top dogs made themselves available for the entire reception… no running and hiding… a touch of class.


If I ran the meeting here’s how it would have went…


“There has been a fair amount of grumbling about the recent MillerCoors contract.  We believe it is both fair and equitable.  We have no intention of changing anything in it.  For those who don’t believe they can sign it, we hold no animosity.  For those who have no intention of signing it, please form a line to my right and we will gladly start the process of finding you buyers for your businesses.  Let us part as friends.  That, or sign the contract and get over it.  We look forward to working with our remaining distribution partners today, tomorrow and far into the future… now let’s get on with the meeting and selling beer…”


Sorry guys and gals, I’m on your side and everyday I work to make wholesalers stronger, better, and more successful.  I don’t just write this wisdom (this is just marketing), my real job is being the management consultant to the beer distribution industry. 


Remember I started this post talking about a little tough love… and I hope I’m wrong about everything I just wrote, but this black hearted mercenary doesn’t think so.  I just don’t think your plastic spoon in this gun fight is going to be enough.  Power and the willingness to use it.  And for you A-B folks, I’d have to guess the same prospects are racing your way.  And they call me Johnny Sunshine ;-) 


Oh but wait.  As my regular readers know, I am a strong believer in the power of connectivity… the amazing transformation which can occur by the simple act of reaching out and joining hands… from many, one… E Pluribus Unum.  Can these single plastic spoons come together and form an army of spoons?  Together can the plastic spoon battalions win the gun fight?  Can the spoons stick together or will short-term interests turn spoon against spoon?  Or will the individual spoons sit on the sidelines and just be glad (for now) it’s happening to someone else and not them?  The entire power situation can profoundly change by using this collective power… power and the willingness to use itnow it’s up to you.



Let’s Make a Deal

The deal offers and ideas are coming a mile a minute out there in beer wholesaler-land.  Some people are racing to beat the forecast increase in capital gains taxes (and other taxes).  Others are attempting to beat the MillerCoors contract and get things done before signing.  Still others in unconsolidated Miller Coors territories are trying to get something done before the ultimate “tap on the back” comes… of course some are playing chicken with neither side willing to give.  On the other side of the fence, you’ve got some A-B folks getting out while the gettin’s good… leaving before InBev gets in the picture.  Other A-B people see the future differently and are moving to acquire and consolidate… both horizontal consolidations and just picking up distributors wherever they can find them… building the dynasty one wholesaler at a time.


I don’t think there has ever been a time like this in the beer distribution industry.  So with all this deal making going on, here’s some simple advice.


·                    If you are attempting to combine or merge in any manner, always focus your discussions on where you agree, not where you disagree.  Especially at the beginning of these discussions, spending all of your energies on where you disagree will generally only lead to not getting something done.  Of course at some point in time you will have to address the areas of disagreement but not at the beginning!  In many cases you will find that the supposed area of disagreement will disappear as you progress down the continuum of building the new organization.  At the beginning, just start a list of issues which at some point in time will need to be addressed… kick this can far down the road.  If you do, you just might actually succeed.

·                    Pigs get fat, hogs get slaughtered.  In the stock market you can never time the exact high’s and the exact low’s… it can’t be done and usually attempting to get that “just one more penny” can end up being very costly.  I won’t tell you how to play your poker hand but is winning (and getting a deal done) the goal?  Or is wringing absolutely every penny from the deal the goal?  The second strategy will often cost the entire deal… think very long and hard about the costs and benefits of these actions, especially as you near the end of the road.

·                    If you are on the purchasing side… no one will remember what you paid in 10 or 15 years.  These are profound strategic decisions.  In many cases the decisions you make now will determine whether you even exist in a few years.  Passing now because the game got more than you want to pay can change the entire layout… and once passed, there is no going back.  This is the time to set your foot print and ensure your long-term survival.  Passing on a strategic deal over a few million will look like a dumb idea in 10 years. 

·                    Compromise is almost always required.  Regardless of which side you are on, it is the rare situation where you can get 100% of what you want.  Whether a sale or merger or shared services or whatever, be prepared to compromise.  If you want everything 100% your way, don’t even start and waste everyone’s time.

·                    If some type of combination is being considered, put the whole concept of control in a closet and lock the door.  Everyone throws around the word control but what exactly does it mean?  Everyone can’t own 51% of the dang thing.  There are many types of control and many ways to control… don’t get hung up on this idea.  Good corporate attorneys have been protecting minority rights for over 100 years.  If you can agree to it, it can be done.  And since I doubt if you are an attorney, don’t argue and debate what can and can’t be done.  Decide what you want, take it to an attorney and tell them to make it so.  Remember, by definition some type of merger or shared services is a reduction in control… it must be.  Although control of various actions is of course important, ultimately you want to protect your financial resources.  Keep your eye on that ball and you can get the thing done.

·                    Is a merger right for you?  Take a hard look in the mirror.  You’ll have new partners.  Can you work with them?  Do you want to?  From my experiences the hang-ups on mergers are seldom if ever operational in nature… rather the problems are emotional.  If we can overcome the emotional issues, putting together a win-win operational merger is a piece of cake.  Is it about making a lot more money, being much more attractive to various suppliers, having better purchasing power on almost everything, and ensuring your long-term viability?  Of is it about ego?  Only each of you can decide that.


These are incredible times in the beer distribution world.  This is no time to be timid.  If you want to be around for future generations you had better force your way on to the table.  If you’re still waiting around to find a “good” deal, i,e, attempting to low-ball one, you might as well get out now.  The people who are playing understand the stakes… this is most definitely the time to either run with the big dogs or to go back under the porch.  Your call.  But a call must be made because doing nothing is simply not an option. 

Was ain’t is

Talk about concise and to the point… was ain’t is.  Recently in a local paper there was an article on the life of a 107 year old western wear pioneer.  Rather an amazing life story but what really caught my eye was one of his favorite sayings… anytime someone would be pining for the “good ol’ days” he would set them straight with “was ain’t is”.  For those who appreciate brevity and on target observations, there’s not a wasted word in it… was ain’t is.  During his memorial his granddaughter elaborated what he taught her: “Change is the only constant.  Understand it.  Get over it.  Move on.”

Now think of the change this person experienced in his life.  Born in 1901…  the depression, the wars, advances in science and technology, changes in people and how they lived.  He saw a whole lot of change.  Selling western wear since the mid 1940’s.

I don’t think I really have to explain why these three words are VERY appropriate for the beer industry in general… as change comes crashing along… at an ever accelerating pace.  It truly wasn’t that long ago that many markets had 8 separate beer wholesalers, each selling a beer which few today have even heard of.  Was ain’t is.  It truly says it all.

Of course not everyone is pining for the good ol’ days.  I have been amazed at what is being thought and tried out there.  This is most certainly a creative industry.  Outside the box thinking?  They’re so far outside the box that the box doesn’t even exist anymore.  Paradigms are falling so fast that the entire concept of a stable paradigm is being tossed in the trash can of history.

Will they be able to pull it off?  Who knows.  If they do, will it work?  Again, who knows.  Will you still be in business in 30 years from now?  Who can say.  But there is one thing we can say with certainty… was ain’t is… never was… never will be.

Instant Communication and Poor Management

As I rail against the damage instant communication can do to building managers, let us expand our scope… and offer some management suggestions.  First you have to identify why something is happening.  In this process always follow a great rule…   “focus on why rather than who”.  The process should be to indentify the reasons for ALL problems or issues… this should be the goal, not simply assigning blame.  Assigning blame does nothing to solve the core problem.  And if all the “why’s” lead to the same “who”, then perhaps you make a change.

Using this mental framework… why is this constant, instant communication necessary?  Is it because management is afraid to make decisions?  And why might this be?  Are they weak managers or have they had their chops busted in the past for making decisions and now take the much smarter role of letting the boss make all the calls?  People always make rational choices… if you are punished for making decisions what is the rational thing to do?  To stop making decisions.  Or don’t they want to take the risk?  Or…?

So first start by gathering and analyzing data… do you receive (or make) multiple phone calls to the same person(s) in the same day?  Why?  I’m not talking exceptions here, but rather day-to-day activities.  Why is this “necessary”?  Perhaps instead practice better personal management skills and save this communication for one call per day.  Or if possible better yet, for one personal meeting per day for this communication.

Again looking at this from a time management perspective, there is generally no such thing as a 30 second interruption.  Most interruptions cost anywhere from 5 – 10 minutes before you can fully return to what you were doing before the interruption.  Assuming an 8 hour word day… I know, who in this industry works 8 hour days but let’s use the number anyhow… and assume you get 6 interruptions per day (for many of you, this would be a VERY low day’s count).  If the interruptions are of the 5 minute variety, these waste 30 minutes, or over 6% of your day.  If they are of the 10 minute variety, it’s an hour and 12.5% of your day.  That’s a significant percentage of a work day wasted due to interruptions that probably did not need to occur.  If I told you that you could increase your workforce’s productivity by 10+% without spending a dime, I think you would jump on it… please send checks to Conlin Beverage’s corporate offices ;-)  This is easily within your power to control.

And how about that other instant communication tool, the wonderful email (or for those on the cutting edge, the text message).  Again ask yourself, do I receive (or send) multiple emails to the same person(s) in the same day?  Why?  A LOT of time is spent on email messages… checking, responding, checking again… responding again.  What is your company policy for internal email use?  Email is an incredible tool but can these multiple emails be condensed into one?  Help your employee practice better personal management, better planning, rather than the spur of the moment “management” these tools allow.  Not to beat a dead horse but you only purchase so many minutes per day… you can use them wisely or waste them… they will tick away whether you like it or not.  And most of these solutions must begin at the top of the organization.  If you don’t operate this way, then neither will your employees. 

But don’t perform this analysis in solitude, take the time with your management team… or even in departmental meetings to discuss the overall issue.  What are time wasters?  How can we use our technology in a more productive manner?  Develop general company policies… not struck in stone policies but general policies.  Think of them as sign posts to give your employees guidance when confronting a decision. 

Keep in mind there are two general factors of any action item… importance and urgency.  If we simplify these items you could think of it in this manner.  Either an item is important or not.  Either an item is urgent or not.  Then you end up with four possible combinations:

1.                  Items that are important and urgent… do them NOW!

2.                  Items that are important but not urgent… since they are important they need to be done, and if you don’t do them they will sooner or later become urgent… therefore place them in second priority and attack them as soon as all #1 items are completed.

3.                  Items which are not important but are urgent… these are time busters… put then off until you have time or until they fade away.  Or better yet, just cross them off the list.

4.                  Items which are not important and not urgent… why do them?  Put them to rest quickly and quietly.

As your departments do a post-mortem of the last week or two regarding communication technology, try to place the items in these types of general categories to discover whether organizationally we were wise in how we spent our time.

And of course a tremendous organizational time waster is our friendly suppliers… often asking for information that they already have somewhere in their organization.  Their employees could spend their time finding the information or simply send an email and put the time burden (and associated cost) on us… I personally don’t like it when other people spend my time (or my employee’s time).

Here’s a suggestion you can pass on to your suppliers.  They need to produce a Frequently Asked Questions section on their internal network for their employees to peruse BEFORE they contact a distributor asking for some piece of information.  This will tell their employees what information they already have from their distributors and where to find it… rather than simply requesting the wholesaler generate and send the information ONE MORE TIME.  Distributor personnel often spend FAR too much time sending information to a supplier when the supplier ALREADY has the exact information.  Here’s a nice rule of thumb… if you aren’t paying for the employee’s time, then you have no right to waste that precious resource.  Suppliers, get your act together and quit wasting other people’s time!  And wholesalers, if this problem persists, you need to intervene and give your employees permission to refuse to generate the same data time and time again for various supplier personnel.

The same is true for emails… how many emails a day do you get from a single supplier?!  Prior to email… which remember was only a few years ago… somehow the process worked without 30 contacts/requests per day.  This again is just a symptom of poor management skills and letting instant communication capabilities further engrain a sad lack of planning.  I suppose you can’t force your supplier personnel to develop better planning skills but you can quit responding to their lack of planning.  Whether for the distributor or supplier, I don’t think it is a huge management burden to send out 1 informational email per day rather than 8 (or more).  Remember and enforce another great quote - for both your employees and your suppliers…

            A lack of planning on your part does not create an emergency on mine

The rapid advancement and more importantly, implementation of technology has altered the way we conduct business.  In many ways it has driven important advancements, but the instant and immediate nature of this communication has opened the door for extremely poor planning and management.  In addition it has driven significant issues with inter-personal communications… never forget that face-to-face is always best, for all parties. 

Remember that just because this technology can, doesn’t mean it should.  Make the effort to control and shape how these technologies are used in your organization.  Don’t just let them happen.  In far too many cases, good management practices will be shredded in the process… and once lost, they will be far more difficult to regain.


Technology and Building Managers

With all the distractions of the past few weeks, let us get back to focusing on things we can actually control.  I have written and spoken about the process of building and becoming a manager many times.  Becoming a manager can be, and usually is, a profound personal transformation.  I do not say this lightly.

But before I begin this rant, let me note that I am not some modern day Luddite.  I have started 2 high-tech companies (the first in 1980) and have a fairly good understanding of many technologies at a high level.  I was on the Internet before there was much of an Internet to be on.  That said, I firmly believe technology, specifically communication technology is seriously impairing the development of quality managers in all industries, all across this great country.  Well actually it’s not the technology that does this, it is what the technology allows and how many choose to use it.

I thought of this again as I sat at the recent NBWA Legislative Convention… watching owners and GMs almost constantly emailing their companies… always calling the office.  Responding to this or that emergency.  Oh but wait, were they actually responding to any emergency?  Or were they simply in almost constant contact with their offices?  We all know the answer… in about 99.9% of the cases they were simply in constant contact with their offices.  I’m certain in most cases this is the same process that occurs when they are in their offices.

This might help them feel warm and fuzzy that all is well and that they are running the show but what does it do to the growth and nurturing of quality managers?  This immediate and all pervasive ability to communicate often destroys management growth.  In far too many cases, managers never make any decisions (at least any halfway significant ones)… they simply call the boss and the boss tells them what to do.  In far too many cases, all decisions flow up to one or two people… not because they need too but just because they can.  Generally this was never a conscious decision, it just happened because the technology allowed it to happen.  But it wasn’t that way in the past.

Well my firm belief is to make a conscious decision and decide if this type of management process is best for both the short- and long-term success of your business.  If the top dog makes every decision how will managers grow?  How will they learn?  There is a general rule in snow skiing… if you aren’t falling at least a little, you aren’t learning.  We often learn much more from our mistakes than from our successes.  And I want my managers and supervisors learning and growing by making small, little mistakes… so that when they have moved up the organizational ladder and are charged with making significant decisions, they are ready, they are seasoned... they understand the process of analyzing situations and quickly arriving at a sound decision.  For this to happen, you must let them make decisions and accept that some decisions will be mistakes.  – but let’s not get too carried away with the concept of mistakes… is every decision you make a winner every time?  I doubt it ;-)

How will you be able to discover who is a better manager if they never get the chance to manage?  Instead you fill your organization with higher and higher paid individual performers… all filling a job position which supposedly calls for management skills.  Unless you are in high-end sales (or pro sports), strong individual performers are only worth so much… they earn their serious pay when they become managers and leverage their skills and spread their magic throughout the organization… when they achieve their goals by working through others.  That’s what makes a $70K plus person worth $70K (or $100K or whatever).

And the flip side of this situation is that not allowing supervisors and managers to actually manage can be extremely un-motivating.  Not every employee will give a damn about their job but the vast majority will… give them proper motivation, treat them well.  People are social beings and like to be on a team… help them join your team.  But often bad management beats them down until they just don’t give a damn.  You don’t want your quality managers taking that attitude… saying “they don’t let me manage anyhow, so when they tell me what to do I’ll do it”.  Letting people make decisions, throughout your organization, also helps build employee buy-in and ownership… two important features for any dynamic company.

But for actual management to occur throughout your organization, you have to let it occur… or in some cases even force it.  Just because recent technology advances allow something does not necessarily mean it should be used in that fashion.  And the glaring disconnect is that we are often in this constant phone/email communication frenzy while at the same time complaining about how swamped we are by constant phone calls and an avalanche of emails.  As Pogo said… “we have met the enemy and he is us”  Make a conscious decision to end it.  Make a conscious decision to let (or force) your management team to make decisions.  Not “bet the farm” decisions but decisions.  Let them learn… let them succeed and let them fail… then your job becomes one of helping them grow, not making decisions for them.  Helping grow better managers (and identifying the best managers for promotion and further growth) can have a profound affect on your organization… don’t unknowingly let technology damage this process simply because it exists.

Next post… more on management and technology

Cage Match and Happy Couple... Inbev A-B and Miller/Coors

Following are some random thoughts for this time of significant change in the beer distribution business.

A-B Wholesalers

First, other than cheering from the sidelines there is little you can do regarding the InBev move.  Whichever side wins, and I know who you are all cheering for, A-B will exit the process as a different company.  Please note that different does not necessarily mean weaker… it means different.  Significant cost-cutting is going to occur no matter who is running the show.   This too isn’t necessarily good or bad, it depends on how it is done.  I have re-organized many, many companies and in almost every case we build better, more effective and efficient organizations which operate at a much lower cost.  Stronger sales organizations, delivery, warehouse, office… everything.  It can be done.

And if the 4th and his team do fend off InBev, they will have a relatively short window of opportunity.  It’s going to be all about stock price – as it is with all public companies – and this is going to be a difficult game.  Facing a very down stock market, high energy costs, and the prospect of a significant world-wide economic slow down, the 4th and his team most definitely have their work cut out for them.  This cost cutting is a major piece of their strategy to increase the value of A-B.  From my far removed perspective, A-B has always retained what I would describe as an old, successful, wealthy business culture.  Most large, successful companies in this country once had the same culture, which can generally be summed up as… when there is a problem, throw people at it.  The vast majority of large companies have already had this culture beaten out of them by market realities.  Trust me, they didn’t willingly get rid of it.  A-B has in many ways forced this same culture on to “their” distributors.  Got a problem or issue?  Throw a body or two at it.  Sure it costs a lot but it generally makes the problem disappear… not necessarily go away, just disappear.  A sub-culture of these types of organizations is that they are far from frugal.  If you’re willing to throw bodies at every problem that comes along, your culture isn’t going to embrace counting pennies over expense accounts or travel or office supplies or whatever.  Just not going to happen.  Those are products of different corporate cultures and culture is all pervasive.

Since there isn’t a dang thing you or I can do about this A-B versus InBev cage match, what should you do?

·                    In almost every A-B distributor I’ve ever been in, there is a some degree of organizational fat.  Use the upcoming supplier-level cost cutting as cover and do the same to your organization.  Now.  Not some day, but now.  Far too many A-B distributors have also historically thrown people at problems.  Far too many A-B distributors pay $60K plus employees to do $30K work.  It might make it easier to run an organization in this fashion but it is awfully expensive.  Step back and look at your organization anew – of course with my expert assistance – how would it be designed and operated if it just became yours today?  A completely new organization… the roads are where the road are, the retailers are where the retailers are… how would you design your organization to face the reality which confronts you?  I’ll bet you it wouldn’t look like the organization you’ve got today.  With the cost cutting that is coming, regardless of who wins,  use it as cover and remake your organization… stronger, better, more efficient and for less cost.  It can be done.  Call me and let me help… the payback for my services is generally measured in the months.

·                    Don’t over-react.  Now is not the time to panic and make unwise financial moves.  Now is not the time to make decisions based on emotions.  I have no idea what an InBev win means to the A-B distribution network, and neither do you.  One can guess but that’s all it is, a guess.  They aren’t going to pay almost $50 billion only to actively work to hurt what they just paid a boatload to acquire.  I have no idea what an A-B win means to the A-B distribution network, and neither do you.  The status quo is out the door regardless.  The old A-B simply doesn’t exist anymore.  In times of great change clear thinking, good strategy, and flawless execution are what is required.  Park your emotions at the door and think and plan.

·                    That said, the A-B distribution network is quite ready for serious consolidation.  Since that requires both a buyer and a seller, perhaps now is a good time to take the money and run.  Start with a simple analysis with your financial advisor (or me)… compare the financial benefits you (and your family) are presently receiving with the expected after-tax proceeds from a possible sale.  Why would you sell a financial asset if the sale of that asset results in less $$ over both the short- and long-term?  Of course you have to factor risk into this analysis but it shouldn’t be too difficult to arrive at a broad brush range.  In fact you can use this analysis to “back into” a floor for a possible exit price.  On the buying side, dynasties are going to be built as this consolidation occurs.  And exits will happen because some folks are going to want to leave, whether InBev wins or not.  Learn from the Miller Coors folks… consolidation is a big, long-term chess match and passing on opportunities today most certainly will bite you tomorrow.  These choices have extreme long-term impact.  Not wanting to pay the price has positioned many MillerCoors distributors as exiting the business at some point in the future… whether they are aware of it or not.  It is a sad day when they finally open their eyes and see that they are screwed.  Don’t let it happen to you.

MillerCoors Wholesalers 

You too have little to no say in the Miller Coors joint venture.  Although A-B is hyping the upcoming disruptions, I don’t see why there will be any.  In any significant change there will always be some problems… you are dealing with complicated systems and people.  There is bound to be a hiccup or two along the way.  But significant disruptions?  Unless someone really screws up there shouldn’t be any.  Of course the contract is a big issue.  I’m asked what my guesses are all the time.  If I was writing the thing it would be very one sided in my favor.  ;-)  Step out of being a wholesaler and put yourself in their shoes… wouldn’t you write it in the same way?  And if any of the terms are just too much for you to take, I’m certain they can find a willing buyer to relive you of your contractual obligations ;-)  Such is life.

But overall one has to believe this new entity is going to be a significant net plus for Miller Coors distributors – other than of course those unconsolidated markets where somebody is going to be shown the door.  Who knows, they might even try to force some additional consolidation in other markets too.  Supplier level on- and off-premise chain performance has got to improve.  Just as a passive observer, A-B has kicked butt in chain sets for quite some time now.  Marketing dollars will probably go up as MillerCoors puts some of those savings back into marketing.  Might even be a few good employee opportunities as they shed excess bodies.  Of course merging cultures will take some time… imagine shooting at an enemy for years and years and then overnight being told the enemy is now part of the team.  It takes awhile to adjust for all sides.  Most of you have experienced this before with past brand acquisitions.  It takes some time and there will be dust-ups and hurt feelings but as time rolls along, these things too shall fade.

Other than the contract which is still an unknown, the MillerCoors JV should be a strong plus for the Miller Coors distribution network.  So what to do?

·                    For most of you it won’t be a major change.  But now might be a good time to step back and re-examine your organization.  Over the past few years many of you have had some great profits, mainly due to an increase in GP % driven by imports and crafts.  Too often organizations also expand as their gross profit pool grows.  This puts them in a precarious position if and when gross profits decrease… a slight decrease in gross profit % can cause an immediate and significant decrease in profitability.  Some of you have far too much specialization… see above about throwing bodies at problems.  All specialization comes with additional costs… make certain these benefits exceed the costs.

·                    Regardless of your gross profit, strive to run a lean organization.  There are many benefits, both tangible and intangible in molding a lean, efficient culture. 

·                    If you have any acquisition plans at all, pay down debt.  Opportunities generally just appear.  You don’t have years and years of lead time to prepare… so you have to have an organization (and financial capabilities) that are ready to take advantage of whatever comes your way.  You might only get one chance and being burdened with debt takes away a great deal of flexibility.  How do you pay down debt quicker?  See the first two points above.

·                    Examine the changes the JV will bring to your organization… take the time to consciously examine every area which changes in your organization... ensure the time savings are put to some new use, not just absorbed into normal day-to-day work flow.  If you don’t, most of these time savings will simply disappear.   I doubt if most of you can save any bodies, but perhaps.

Lots of change in the beer business and if history is a guide, there are probably more shoes to drop.  Once these consolidation dances start, often almost everybody becomes involved in one way or another.  But as distributors there is only so much you can do.  Focus on what you can control… ultimately it always come down to the same thing… running an efficient and effective organization. 



A-B + InBev + Miller + Coors = Change

It seems no matter what side of the fence you are on, significant change awaits.  A-B distributors are anxiously waiting to see what happens next.  And regardless of the results of the InBev offer, A-B will exit this process as a different company.   It could be stronger… it could be weaker… that page is yet to be written.  Miller and Coors distributors are experiencing the same.  From forced exits (and forced purchases) for some, to a new contract for all, MillerCoors will also be a different company.  Heck, significant change is hitting the wine and spirits folks too.

And that is the key word… no, not heck… but rather change.  Here is some free advice for dealing with these realities.

1.                  We are not talking opinions here.  We are not making moral statements.  We are talking about cold, hard facts.  And from my experiences and observing the world… choosing to ignore facts generally ends poorly.

2.                  As distributors, you have almost no power at all to influence these changes.  They will be what they will be. 

3.                  You don’t have to accept the changes but they will still happen.  Therefore rather than fight (and complain) against things over which you have no power to influence, you should instead accept and embrace them.   You have to deal with the realities you confront.  This is not a philosophy… it is a fact.

4.                  Therefore the wisest course of action is to embrace change.  Welcome it - it’s coming anyhow so you might as well ;-)

5.                  Grab change by the throat and take advantage of it… for with change, also comes opportunity.  All change presents opportunity somewhere… every single time.  The change – whatever it may be – is coming whether you like it or not – the only question is how you can use the change to your advantage.

6.                  Now I am not implying you will like all the change coming… so?!  What does one’s liking have anything to do with it?  Don’t think about change as whether you like it or not - especially if you can’t control it anyhow.  Instead examine all change and potential change from both an offensive and defensive position. 

a.       Offensive – how can I take advantage of this?  How can I make it work for me and my organization?  Even if it requires a reexamination of the very foundations of your business.

b.      Defensive – how can I minimize the pain this change is going to inflict?  What steps can I take to protect myself and my organization?

 I’ve written about the process of change here, I think it’s an insightful piece, well worth re-reading… what a surprise, eh?

Look at the landscape… I most definitely don’t have a dog in the InBev – A-B cage match, but assume it occurs.  What opportunity for A-B distributors!  There is incredible opportunity for consolidation of the A-B distributor network… position yourself to be the Southern Wine and Spirits of the A-B wholesaler network!  If InBev wins, the game might change significantly on buying and selling distributors.  Even if they don’t win, the game might change significantly.  Take advantage of it! 

If you’re a seller, you might see distributor values actually going up… A-B has always historically worked pretty hard to keep values low… and in most markets there are plenty of buyers… who if they are thinking strategically will jump on the prospect.  10 or 20 years down the road no one will remember what you paid, but the strategic moves you make now will determine whether your company is viable entity 20 years out… whether long-term you are a buyer or a seller. 

Opportunity for all… if you have the vision and courage to grab it and make it yours.

As for MillerCoors, who knows what magic they have up their sleeves?  A stronger, more efficient supplier will flow to their distributors.  They will have more say in the buying and selling of “their” distributors… this isn’t good or bad… it simply is.  What opportunity does it present to you?

Take the time to peer down the road and examine all potential futures.  Have a plan for all of them and adjust as the future flows into the present.  Might you be wrong?  Of course.  The difference between a good idea and a bad idea is almost always the future.  Choice A might be great if the future turns out one way… the same exact choice might be terrible if the future turns out another.  Do what you can do.

Analyze, plan, and set course… adjust as you receive additional feedback.  That’s all you can do.  But change is coming with a vengeance… don’t cower from it, make it yours.







Consolidation of the MillerCoors Markets

About a week and a half ago, the Miller Coors joint venture was approved by the feds.  Right on the heels of this announcement the new MillerCoors organization let distributors know… we will drive consolidation in unconsolidated markets and we will let you know who the preferred wholesaler is.  This will be done before the end of the year.

Speaking as a black hearted mercenary who works all sides of the street, one generally doesn’t have to be a genius to decide who’s a keeper and who is leaving the industry in this process… they might be kicking and screaming but they will be leaving.

I have clients who are clearly keepers… and I have clients who clearly have a bulls-eye on their chest (or is that back?).  Here is some advice for all.

·                    Rid your mind of wishful thinking.  Much like the mob might say, “nothing personal, this is just business”.  In 99.9% of the situations, it ultimately won’t matter what your relationships are.  I know it shocks many smaller wholesalers but performance doesn’t matter too much either – in fact it probably doesn’t matter at all.  Yes, you might be much better on the street than the larger, chosen distributor but step back and think about it from MillerCoors’ perspective.  They want consolidation… they want fewer wholesalers.  Each of you is a cost to them.  Reducing the number of their wholesalers by say 20% or 30% saves them a bunch of money.  As an example, look at your business.  If you could reduce the number of retailers you service by 20% to 30% and still sell the same amount of product… would this have just a little impact on your bottom-line?  Oh yeah. 

·                    I have written about the incredibly difficult emotional decision to sell the family business.  I do not take this lightly.  But for some of you, this is a “decision” much like having terminal cancer is a decision.  It is what it is and all you can do is deal with it.  It is not a stretch to compare this to the Five Stages of Grief.  Grief occurs in response to the loss of someone or something.  It is a natural and normal response to loss.  Trust me, for those being forced to sell their businesses, the grief is very real and very sharp.  The 5 stages are:

o       Denial – Not going to happen to me.  I’ve been a loyal distributor for years and years.  My organization outperforms this schmuck everyday on the street.  No way.

o       Anger – Not going to happen here.  I’ll take them to court.  I’ll sue everyone and his dog.  We’ve got strong franchise protection and I’ll fight to my last dollar… as a side note, business lawsuits are extremely expensive.  You can blow through $100K in a very short period of time… and this won’t get you remotely close to going to court.  And the major suppliers have legal teams already on staff; they are paying them regardless… that’s not the case for the wholesaler.

o       Bargaining – OK, here’s a solution.  We’ll merge.  I’ll continue to run my territory and I’ll add the Miller or Coors to my operation and we’ll just become one big, happy family.  Another side note, my last post was about mergers, they can and do work but there are features of mergers which determine this.  In many of these forced consolidations, there is no reason for the “winner” to negotiate a merger with the “loser”.  Not always, but often.

o       Depression – There is no freaking thing I can do.  I’m heading to my favorite watering hole.

o       Acceptance – Well, if I’m going to be forced to leave… I’ll go but I want a premium price.  And unlike terminal illnesses where there generally is full acceptance, in these situations I suspect you will still curse and spit whenever this forced exit is brought to mind… I know I would.  Not that this helps much, but remember you aren’t the only ones to experience this… there are a whole lot of Stroh, Heileman, Schlitz, Hamms, etc. distributors who aren’t around any more either.  It wasn’t that long ago that there were 8,000 wholesalers in the country.  They didn’t all go happily to the exit.

·                    There is still a half year to get a deal done; there is time to get it done in 2008.  Especially if you are a seller (a happy one or not), I would demand it occur this year.  Regardless of your personal political leanings, it is difficult to imagine a near future without much higher taxes… capital gains, personal, probably everything.  If you have to go, NOW is the time to leave.  Retroactive tax increases have already been done during the Clinton years.  Getting something done in the first quarter of 2009 is no guarantee that the rules of the game won’t be changed AFTER you are already done playing.  Bullshit?  Oh yeah.  Impossible?  It’s been done before.

·                    If you are a seller, put your deal together and get it done.  Ask for a premium?  Of course.  In fact demand it.  If the buyer doesn’t like the price, contact the supplier and let them know you are quite willing to exit and the other guy is being the obstacle.  Put supplier pressure on them.

·                    If you are a buyer, now is not the time to try to steal it… pay a good price and get the deal done.  That’s the goal and that’s how deals get done… perhaps even rack up a few supplier brownie points while you are at it.  If the seller refuses valid offers, contact the supplier and let them know you are quite willing to buy but the other guy is being the obstacle.  Put supplier pressure on them.

It is an amazing time in the beer industry.  MillerCoors JV… InBev making a very serious run at A-B.  Absolutely no one is immune from this incredible change… brewers, distributors, retailers… no one.  As the Chinese curse goes, “may you live in interesting times”… well it sure is interesting out there. 



More on Mergers

There’s been a lot more buzz about mergers since the recently announced mega-merger in the Northwest.  It will create a monster entity of 25+ million cases for beer… kicking up to 35 million cases when you include NAs.  A while back I wrote a more extensive piece regarding mergers here.  If you are considering the possibility, I recommend you also review it. 

Suppliers are beginning to push for more and more mergers because it accomplishes a number of their goals:

·                    It provides a means to consolidation.  Suppliers understand that wholesalers must become larger and more efficient if they are to remain viable entities and since very few seem to want to exit the industry; mergers can accomplish both goals while still meeting ownerships’ desires to remain in the game.

·                    In many cases the merged entity does not incur any additional debt.  This helps make the distributor stronger and from an ownership perspective, allows the dollar benefits of the operating efficiencies to flow into their pockets rather than the banks.  Of course from a supplier view-point, they too would prefer not to have their wholesalers burdened with excessive debt.  And the payback periods for many recent purchases is rather far out there.

For many wholesalers, these same goals can be met through a merger.  Of course mergers are far from easy to accomplish.  Among other things…

·                    They require a high degree of trust from all parties.  Often a third party… yes, that’s me ;-)… is useful in bridging the trust issues and representing the interests of all parties in the investigative and design phases.

·                    A common long-term financial goal.  Since in effect you are tying your financial futures together, you can’t have one party wanting to sell in 5 years and the other wanting to be around in 50.  If this is the case, the one wanting to sell in 5 years should just sell today.

·                    Similar operating goals.  Mergers tend to work better when all parties can step back from the day to day operations and hire professional management to run the place.  This is not always the case but it is difficult to merge when both parties want to be the ones running the show.  If the merger partners can direct the company from more of a board level, I believe it greatly increases the chances of success.  There are exceptions to this but ultimately however it is put together, all parties must have similar operating goals.

·                    Compromise.  As an owner you are used to running the show.  You don’t have to ask anyone about anything you do.  Want a new boat?  Go get one.  In a merged operation this is not the case.  This is not to say you still can’t run the boat and your mistress’s expenses through the company, it just has to be agreed upon, and made equal for all parties involved.  OK, that might be a rather extreme example but you understand what I’m saying.

·                    Although it is not required, it is also easier to merge when all parties involved are somewhat equal.  It is easier to merge two (or three or ?) equals than it is to merge a much larger organization with a much smaller one.  Often these are called mergers but in effect they are buy-outs.  Nothing wrong with that, just ensuring we are all using the same terminology.

That’s about it for the requirements for a successful merger.  Of course one of the prime reasons mergers don’t happen is that if either party(s) had their druthers, they’d rather buy the other guy out… not merge with them.  Thus you end up in a situation where both parties play a waiting game… often to the detriment of all.

These waiting games are a shame since in most cases all parties are financially viable so no one will be forced from the table.  But all of the financial advantages of the potential merger are wasted in this waiting game.  And without a huge debt burden to service, almost always the merged parties receive significant financial rewards for only minor compromises.  Well worth investigating.

One can even play the merger game as part of a larger grow-and-sell strategy whereby the merger partners grow specifically with the idea of a future sale in mind… “we are worth more together than separate”.  You go through the effort of putting these mergers together and the sum of this is worth far more than the separate parts.  Many large players would rather have someone else go through the first stages of consolidation and then they step in, rewarding the initial movers quite handsomely.

Is a merger for you and do you have a willing partner(s)?  I can’t say… but it is worth at least a brief analysis… they can be a very positive financial move.







Anheuser Busch – InBev and Family Businesses

Although I don’t have a dog in this fight, the recent InBev – Anheuser Busch situation has been instructive.  Reader’s comments have run the gamut…

 ·                    From an A-B wholesaler

InBev has only grown by purchasing brands; they’ve screwed up everything they’ve touched… I’m damn scared.

·                    From a Miller/Coors wholesaler

InBev has only grown by purchasing brands; they’ve screwed up everything they’ve touched… I can’t wait.  If they think the Miller Coors JV is going to cause disruptions, wait till we get the InBev A-B consolidation… we are in for a treat.

·                    From a large A-B wholesaler

This is depressing.  I haven’t heard one valid business reason from Anheuser Busch to fight this acquisition.  Anheuser Busch is a large public company and should be run as such… not the Busch’s private fiefdom.  My business hinges on a CEO whose primary goal is to have his father respect him?!  God help us all.

·                    From a mixed beer and wine/spirits dist

 I always wonder at these public companies where management’s sole goal seems to be to protect their rice bowl.  What about the true owners of the company, the shareholders?  They take these poison pill options… if purchasing the other half of Modelo was such a good idea, why is it only done to fight off a take-over?  Why wasn’t it done last month or last year?   

·                    From a large Miller/Coors dist

Even though I fight A-B every day on the street, I’ve always hedged my bets by owning a lot of A-B stock.  Analyzing this from solely a shareholder’s position, I don’t give a damn about what the 3rd or the 4th want.  I can run my business however I care, it is 100% mine.  A-B is a public company and the Busch family has very little stock… this deal should be examined for maximizing shareholder value, nothing else.  Adolphus is right.  InBev might have a difficult time making the thing work but for A-B shareholders it reads like a good deal to me.

·                    From a medium sized A-B dist

Fight, fight, fight!  A-B should NEVER sell.  It is a proud US company and should remain one.  Had many responses in a similar vein.

·                    Another A-B dist

I still remember the day the 3rd told us how he had made us all rich, and demanded exclusivity.  I’m a loyal Anheuser Busch guy who bleeds Bud… selling to InBev will F*** the A-B wholesaler.  Fight for us too.  Many similar responses.

·                    From a large Miller/Coors dist

The beer market is now a global market.  A-B is going to have to partner with someone just to remain in the game.  No tears from me but August IV is getting beat up for strategic mistakes that were made long before he took the helm.  But I am enjoying the show. 

·                    Another A-B dist

The A-B distribution network is the strongest in the land.  InBev isn’t stupid enough to try to mess with this… to say nothing of MANY laws which restrict their options.  I think this merger would be good for A-B and A-B wholesalers.  A few similar responses.

·                    From a medium sized Miller/Coors

hee hee hee, if InBev buys A-B, A-B is screwed.  If they don’t buy A-B and instead purchase SABMiller, A-B is screwed.  Those chickens are coming home to roost.  I’m from the SE and they more than had their day but the future is MINE.

 So the range of opinions and beliefs span the board.  I’m glad I don’t have a dog in this fight.  Whether an idea or action turns out to be “good” or “bad” is only determined in the future, so we will just have to wait and see how this one shakes out.

 But regardless of how the A-B  -  InBev thing is finally settled, the episode brings into sharp focus a significant issue most beer wholesalers around the country confront and one which this final note captures…

 ·                    Another A-B dist

 My great grandfather started this business, from prohibition to today.  I KNOW what it means to run a family business with a long and proud tradition.  It is in my blood.  August isn’t the only one who confronts these issues.  I have a great offer in front of me and it makes financial sense to take the money… but can I live with being the one who sold the family business?  What is your advice John?

 If I had the magic answer to this question and one more… what would I do if I sold?... I’d be on my yacht in Tahiti.  But I profoundly understand the issue.  Considering the sale of a family business is one of the most difficult choices any person will ever make.  I have started a number of companies in my day and the bond one feels to one’s own company is extremely strong.  I always think of a company as an infant who will never grow up.  You have to speak for it.  You have to direct it.  You have to protect it.  In many cases a family business is more important than your wife or even your children.  This might sound shocking but if you examine reality you will find it is true in many, many cases.  So the first step is to just accept that these businesses are FAR MORE than just a financial asset.

Your family distributorship is much different than owning some shares in some large public company.  Throw in the fact that it might have been started by previous generations and it gets even more complicated.  Add the fact that most business owners with children would like to see their children continue the business in some manner.  Toss in another fact that in many cases the compensation and benefits the owner/family receives is FAR greater than they could expect to generate out in the “real world” and it gets even more complicated.  As the A-B distributor above notes, the Busch family isn’t the only one that confronts this conundrum.

And just like the Busch family, wholesalers often have some shareholders who participate in the business and others who don’t.  It is almost universal that the outside owners think the insiders take too much money and benefits, and have it too easy.  The insiders think they are busting their hump for those ungrateful outside shareholders.  Outsiders often want to sell and cash out… insiders want to stay.  No easy answers.

So what to do?  For wholesalers who are confronting the issue of what to do with their family business, I generally visit them and talk to all the players in confidential one-on-one meetings.  I have very good empathy (if I do say so myself) and am an unbiased 3rd party who knows the realities of this industry very well.  In addition, I represent the interests of the company… not any individual or group.  And don’t worry about me using this process to sell you some brokerage services… that is simply morally and ethically wrong.  If in this process the decision is made to sell, I can’t in good faith then turn around and try to pop you for some big brokerage commission... thus guaranteeing my complete and honest assessment of the situation and my complete loyalty to you, my client.  Maybe the answer is to sell.  Maybe it is to buy.  Maybe it is operational.  There are many possible options and the solution is probably a number of steps taken in sequence.  Give me a call if you want a hand in addressing this very complicated issue.

But a quick check list of actions is probably something like this… First pause and pull back from your organization.  Just for a moment put your wants and desires aside and analyze your business situation.  Based on the most likely future(s) you confront and your present situation is the long-term continuation of your business a reality?  I know it is difficult but try to put some odds to it.  Your answer is probably going to be either yes it is long-term viable, no it is not, or it depends.  In many, many cases the answer will be it depends

Next, put your wants and desires back into the mix.  What is your ownership and family situation?  The first part was a “from the head” analysis.  This one should be “from the heart”.   And remember, just because your business is long-term viable doesn’t mean that selling isn’t an option.  It is a mix of head and heart.  The Dawson’s from Texas are a perfect example.  There is little doubt that BudCo was long-term viable… but they had an offer – a great one from what I heard -  looked to their heads and hearts, and decided the best course of action was to sell.  It is a multi-faceted process.  Financial comparison between selling and staying.  Impact on family members.  Potential operating options… mergers, shared services, acquiring.  Value expectations… up or down in the next X years?  Operating capital needs in the next 5 – 10 years.  Taxes.  Your aversion to risk… cash in hand is always the lowest risk option but is it the right one?  A lot of things go into the mix.  And if you decide to stay and fight, you need to assure you have a focused and integrated strategic and operational plan to ensure your long-term success.

 And of course what about multiple children?  Or children from various partners?  How do you keep things fair?  Does everyone participate?  No one?  Often not a lot of easy choices.

The toughest situation is when the head analysis says one thing and the heart analysis strongly disagrees.  My personal feelings in these situations are as follows… I give my honest advice… I might be right or I might be wrong but I will tell you what I think and the reasons behind my thinking.  You can choose to follow my advice or ignore it.  Ultimately it is your ball and you can do with it what you will.  My goal as your advisor is not to have you just follow my advice, but to help you succeed in whatever choice you make… and to ensure you fully understand the implications of the choices you make.  To ensure whatever direction you decide to take, you do so with your eyes wide open and have a plan in place to help ensure your decision ultimately succeeds.

No one wants to be the one to sell the family business, ask the 4th.  But then again, no one wants to be the one who didn’t sell the family business and steered the ship while millions and millions of dollars in value… that’s family value, not yours alone… simple evaporated into the air.  So to my A-B distributor friend who sought my advice, the answer is as usual… it depends.  And no, I didn’t leave this distributor in the lurch… I have helped him analyze his situation and he is presently trying to mesh the head and heart. 

Don’t Shoot the Messenger

OK, this is the last post on fuel issues for a while.  You can read a few past ones here and here and here.  First, let us acknowledge that rising fuel costs don’t hit all wholesalers the same.  For some of you it is a VERY big deal… for others it is a relatively slight reduction in profitability.  And from the start let us also accept – now don’t shoot the messenger – that this industry may just become less profitable than it has been in the past.  This is not the first industry to see shrinking profits… nor will it be the last.  And often industry-wide profitability is cyclical over the longer-term… perhaps we are now just entering a trough.  As a wholesaler I’m certainly not just going to roll over and passively accept this reduction in profits, but in the end it might just be the nature of the beast.  Please put down the gun.


And in our fight to maintain profitability you certainly don’t want to take any actions which cause long-term harm to your business.  Thinking and acting outside the box is good – in fact it is a key value I bring to my clients – but you don’t want to be penny wise and pound foolish.  Analyze all potential moves from a system-wide perspective… make certain they work in all areas of your business.  This is no time for wishful thinking.  Cutting merchandisers might sound good but what about the reality on the street?  Cutting mid-level and senior management might make a lot more sense.


For those looking for help from your suppliers… they might throw you a bone but I don’t believe you will get any significant assistance.  Kind words?  Sure.  Sympathy and understanding?  Of course.  Cold hard cash?  I have a bridge to sell you.  I don’t want to over-generalize but most suppliers, throughout their organizations, think distributors make far too much money for the value they bring to the table.  Whether this is true or not is irrelevant… they believe it.  And of course they have their own problems with their energy cost and in fact higher costs for almost all of their inputs.  They are your channel partners, not your older brother… do not expect them to save you… not going to happen.  And again, please put down that gun and quit aiming at the messenger.


One of the first things one does in analyzing any situation is to attempt to determine the most likely future(s) you are going to confront.  Then you build your system to address your goals, the market reality as it stands today, and the future environment you expect to operate in.  So what does the energy future look like?


Unless you are in the oil and gas industry, it looks pretty bleak.  $5 per gallon gas before the end of the summer.  Diesel much higher than that.  And no, it’s not driven by some conspiracy but is rather the result of simple supply and demand, made worse by the very weak dollar.  From an energy security view-point, this country should end its stupidity and allow oil and gas drilling… this would lessen the demand on foreign oil but would probably have only a small affect on the price of a barrel of oil… the oil market is a world market and prices are set on a world-wide basis.  Although the psychological affect on the markets of the US getting serious about exploiting our own oil and gas might be significant.  You can hate the ExxonMobil all you want but our oil and gas companies only control about 3% of the world’s oil market… and trust me, 3% isn’t setting any prices.  We could allow oil and gas companies to build new refineries – a new one hasn’t been built in over 30 years.  Do you think the number of vehicles on the road and total fuel usage has gone up just a bit in the past 30 years?  This would help lower prices but I certainly don’t see too many politicians or their “environmentalist” backers willing to accept this simple fact.  You and I are aware of this but far too many simply won’t accept the fact that almost every single product moved across this country is at some time moved by a diesel engine.  Every freaking product there is!


There is a great quote


“Life is tough, and it’s tougher when you’re stupid”


which very nicely sums up this country’s energy policies over the past 40 years, and which we all will pay the price… to say nothing of many other policies which our politicians and judges foist upon the innocent citizens of this great land.  Don’t get me started… in a nut-shell, the near-future is mostly likely one of very high energy costs, probably also driving slower economic growth. 


Worst yet, as I pontificated about a while back here, the Middle East is going to have a very significant impact on your business whether you like it or not.  Western Europe has already accepted that Iran is going to get a nuclear weapon… they just plan to live with it.  Idiots in my opinion… but they have been idiots for some time.  It is highly unlikely Iran will be stopped… and if it is stopped it will involve some serious military action.  I don’t see this helping fuel prices.  If they acquire nuclear arms, this will of course drive a nuclear arms race in one of the most volatile areas on the planet, and until a replacement for oil is discovered, one of the most important.  Again, don’t see this helping fuel prices.  World-wide demand most certainly isn’t going down.  Throw in crazy Hugo and Russia flexing their muscles and it is difficult to see the price of oil lowering anytime soon.  Plan for this.  In fact, since the odds are things will get worse before they get better, have a Plan B for a crisis in the oil markets.  If not you could lose a lot of money in a very short period of time.


I get beat up every time I state this but… if you are not a long-term player in the beer distribution business – and this is determined by the market, not solely your desires – then you should sell your business for a premium today... this instant.  Please take your finger off the trigger.  And for the purchasers, this isn’t the time to try to get things on the cheap… it is the time to make strategic moves which ensure your long-term viability.  Being cheap but not getting any deals done is not the definition of success.  Look at the successful acquirers in this industry… they act quickly, fairly, and pay very fair prices.  They don’t miss deals because they’re stepping over dollars to pick up a few pennies.  They are not a pain to deal with.  If you have to pay more to make a significant strategic move, then do it.  Often passing on these strategic moves means the only other long-term choice will be to someday sell your business.


Looking at the industry from a strictly economic viewpoint, you can cry all you want about your profitability but there are still many more people who want in this industry than want out… this is a sign that whatever profitability exists, it is still high enough to attract willing market participants.  You might not be happy with where this profitability is headed or with where it finally bottoms out, but that too is irrelevant.  The cold, hard, impartial hand of the marketplace will determine this… as it has everyday in the past… it is just that in the past you (and at least the remaining wholesalers) were happy where this market-level profitability was… now not so much.  This is simply macro-economics 101.  Please release the trigger and back away from the weapon.  And remember all those small wholesalers who left the industry… do you really think they all went voluntarily?


So the “solution” is in one of three places (probably some from each)…

1.                  Cut costs where you can.  Mostly this equates to a lower head-count.  That’s just the way it is.  But there are market realities which you cannot ignore.  Re-structure, re-route, and build a more efficient organization. Yes, you can do it by yourself... but together we can do it better.  That is an absolute guarantee.   Make it as flat as is possible… if you must reduce head-count, many times it is best to look to middle and senior management.  How bad do you want (need?) savings?  In these posts I paint with a broad brush, if this doesn’t apply to you, don’t get angry with me, just ignore it.  Remember when you hire a mercenary (that’s me), you get a mercenary.  You pay me to tell you the truth as I see it, and that’s what I will do… whether you want to hear it or not.  Almost no one else in your entire world will do that for you… it is very valuable.  Don’t cry about your bottom-line when you are not willing to actively do something about it… and canning the janitor isn’t generally the solution.  Please take the laser sight off my chest.

2.                  Build and run a more efficient organization.  This is a necessary by-product of the first point.  This requires better design, better planning, and better execution throughout the organization.  Look at each employee’s actually activity… not what their job description says but what they actually do on a day-to-day basis.  Do you have high paid employees doing low level work?  Look at every management position you have… it that person didn’t show up for 3 months, what would be the day-to-day impact on your organization.  If the answer is “little to none”, why do you have that position in the first place?  Throughout your organization… top-to-bottom… this philosophy equates to “fewer but better”.  A fundamental requirement is better planning and flawless execution. 

3.                  The above two points can only be taken so far.  Sooner or later you will have cut as much as you can… and sooner or later you will have the most efficient organization you can build.  The long-term solution to increased costs is to increase your average gross profit dollars per stop.  Read that again.  More products, different products, gaining market share… this is why I am such an advocate for using the power of connectivity to leverage your distribution systems.  State-wide associations!!!  If not that, then 3 or 4 wholesalers acting as one on certain aspects of their businesses.  In the same state or across state lines.  I’m not talking shared services (although they make sense), I’m talking about using what you already have as a magnet to attract brands and products… building a superior funnel to better supply you with additional products.  You need to do something since these cost increases are hitting the wine and spirits folks and other beverage distributors just as hard as they are hitting you.  You would be wise to expand your concept of who your competitors are for new and existing brands.  The same economics that apply to you, also apply to them. 


Don’t just react to the market, set your course and determine the future.  Make the future you want… don’t just wait and hope it happens.  A great quote from hockey legend Wayne Gretzky says it nicely…


When asked by a reporter what made him such a great player, Gretzky responded that he didn’t skate to where the puck was, instead he focused on skating to where the puck was going to be.


Something to keep in mind.  Now aren’t you glad you didn’t shoot the messenger?

More on Rising Fuel Prices

Let us talk a little more about rising fuel costs.  First, it is difficult to see how high energy prices won’t be around for at least the near-term.  They could of course be a reality for the long-term but only time will tell.  But for us, the here and now is our primary concern.

As I mention in a past post on this subject here, one of the first places to look is your sales, merchandising, and delivery routing.  They are each parts of a larger whole and are intimately integrated.  And routing is ultimately driven by frequency of service.  Most wholesalers have squeezed this as much as is possible but you probably should take at least another look. 

I can’t emphasize enough that you don’t want to practice wishful thinking here.  You are in the service game and it is penny wise and pound foolish to try to cut this below some market-determined threshold.  I don’t think you’re going to force chain grocery stores or c-stores to build bigger back rooms simply because you don’t want to visit them as frequently.  If you can do that, you’re in the wrong business… head to the MiddleEast and solve the Israeli and Palestinian problems instead.  The world will thank you.

And of course you have to examine your’s and your competitor’s strategic goals.  Some might see tough times as the perfect time to put the peddle to the metal and push to expand their market share… especially if their competitor is busy focusing on saving a penny here or a nickel there while opening the door for someone to eat their lunch… or is burdened with significant debt.  Just because fuel costs are high doesn’t mean everyone will be cutting back… as always, it depends.  Cut operating costs with your eyes wide open.

Another simple place to find savings is just in the smooth operation of your business.  Poorly performing account managers (sales reps) can add tremendous costs to your system… wrong orders, out-of-stocks, code problems at retail, calling on retailers out of sequence, missing retailers… all can add a lot of inefficiencies and associated costs to your system.  A poorly performing warehouse can do the same by building bad orders… poor ordering can lead to warehouse out-of-stocks or code problems in the warehouse. Office failures lead to problems on invoices and pricing.  Driver problems lead to code issues at retail, missed stops, incorrect products being delivered. 

You need to track these types of things on a daily basis and rather than simply deal with them… identify the cause and solve them.  Your organization shouldn’t be dealing with the same issues day after day after day.  As I have mention many times before, you purchase a certain number of minutes each and every day.  You can use these minutes to drive your company forward or to deal with things which never should have happened in the first place.  Whether you know it or not, it ultimately is your decision.

And some are playing with that most sensitive of issues, fuel surcharges.  As I mentioned before, if you are thinking about implementing fuel surcharges, think about the amount.  I don’t think you will get beat up any more for a $4 - $5 charge than for a $1 - $2 charge so why not make 3 to 5 times the money for the same pain?  And there will be pain.  And once you get this in place, plan to NEVER take it away.  Once you’ve “trained” them to pay it – and taken the pain of doing so – don’t just give it back for nothing.  Looking forward then, perhaps don’t call it a fuel surcharge, call it some other more innocuous name that won’t raise hackles when fuel prices drop… but our extra charge doesn’t.  ;-)  This strategy alone could put hundreds of thousands of dollars in your pocket every year – do the math and you might be surprised ($1 X 20 routes X 20 invoices per day X 250 days = $100,000… $5 = $500,000 – if you’re going to do it, do it!). 

Let me emphasize this point again… I might be wrong about this but from my understanding of human nature I don’t think the amount of a fuel surcharge will be the source of anger as much as the concept of a fuel surcharge.  If this is the case, you will have some flexibility on the amount…within reason… as long as you are willing to take the heat on the concept.  And there will be heat.

Let’s think about the heat… and where it will come from.  Your suppliers will almost certainly be against it, even though you get popped by one on every incoming load.  If you’re going to try, you’ll just have to take this and deal with it.  On the retail front I think you can make the case to your retailers in a fairly pervasive manner… but then there is that pesky problem of chains.  They get deliveries from a lot of folks, to a lot of stores and fuel surcharges from all of them could add up to a lot of additional cost for them.  And they have power… lots of it.  If I were a chain I’d tell you where you could put your fuel surcharge… that’s your problem not mine… and I wouldn’t pay it and I’d play “chicken” however you want.  And in the end I think I’d win.  In fact just last week Harry reported that the SuperValu grocery chain – one of the largest beer retailers in the country -  in very clear language stated they would not accept any surcharges and would refuse all deliveries which included any type of surcharge. Yeooh!  Their attitude towards distributors seems to be either raise your prices or eat the fuel costs, ‘cause we certainly aren’t going to do it for you.

This leads to my one serious concern regarding fuel surcharges, fairness.  I have written about the incredibly powerful concept of fairness here.  If you haven’t read it or don’t remember it, please go back and check it out.  If you implement a surcharge you should take care to ensure it is perceived as fair.  People can be very irrational in their anger.  ATM fees are a perfect example.  People “gladly” pay hundreds if not thousands of dollars each month to the government with nary a peep.  Yet a $1.50 ATM fee has them out with their torches and pitchforks.  So don’t naively think that just because the amount is small, it shouldn’t be a big of deal with your retailers.  The amount is not the issue, it is the concept… and is everyone playing by the same rules.

A sense of fairness is very basic in the human condition. The unfairness doesn’t even need to directly impact the person – we have all witnessed people being deeply anguished by unfair acts committed on a friend or even a complete stranger. The concept of equity – and the fury when it is violated - lies deep in the human psyche.  Read that again.  The fairness bug can bite you from retailers who were not even involved in the unfair act.

Therefore, you tread on very thin ice if you simply “allow” chains not to pay the surcharge while popping everyone else with it.  People don’t like to be a sap and won’t be overjoyed to discover they wouldn’t have had to pay the surcharge if they had simply refused.  Put yourself in their shoes… paying it for 6 months or a year and then discovering you’re a sap.  This most definitely won’t generate those warm and fuzzy feelings.  Nor will these negative feelings disappear in any short-period of time.   Remember the old saying… trust is much like virginity, once you lose it, it is dang tough to get it back ;-)   And never ever assume this won’t get out on the street… it will. 

Be careful as you implement this charge.  Perhaps only apply it to accounts who don’t meet some volume hurdle – thereby giving you an out regarding the chains.  The other retailers won’t like it but at least they might understand it – much like volume discounts.  But much like volume discounts, it is still a burr under the saddle for those who are on the receiving end of the policy.  However you decide to address the realities of your specific market, be careful and make certain it is fair… and your employees are completely trained and prepared to address the issue on the street.  Just this preparation can help ensure the proper message is delivered to retail.  It is a painful experience to have your own people put their feet in your mouth.

And please, please, please… if your direct competitor is willing to be the spear catcher on implementing fuel surcharges, use your head and get right behind him.  Whatever minimal gains you might get by beating him up on the street is FAR exceeded by the very real financial gains of standing right behind him.  And as noted above, these gains can become a permanent and substantial source of income.  That said – and I almost can’t believe I’m saying this – if your competitor spear catcher is implementing an unfair surcharge, I most definitely would not get behind him… I most definitely would beat the hell out of him on the street… I most definitely would pour gas on the flames on unfairness.  I would never want to be on the wrong side of a major fairness issue if I could help it.  Never.  And if your competitor is stupid enough to do so, you have an incredible long-term club to beat him with for years to come.  If your competitor’s actions are truly seen as unfair, it will never be forgotten at retail.  Perhaps I am just a coward but that is how much the fairness issue concerns me.  Ignore it at your own peril.

Of course you can always just raise your prices to address rising fuel costs… we don’t need to discuss this since you all are aware of the issues this dredges up.  Perhaps they are worth confronting, perhaps not… but it should be discussed as an option.  It seems the chains are going to tell you either raise your prices or eat the energy costs… and other than operational adjustments, this might at the end of the day be the only viable option you have.

Also, as you look for products and technology to cut fuel consumption, ensure you examine total system cost and savings.  As an example, purchasing some device that “saves” fuel but has a 435 year payback period isn’t a wise choice… even though it is a factual statement that it will save fuel.  If you look to technology to help, focus on ROI not just savings while ignoring costs.

Rising fuels costs are a harsh reality for today’s distributor.  Heck, they are a harsh reality for almost every business and consumer out there.  They aren’t going to go away any time soon.  For the short-term you may find your profitability is simply going to be less than it was in the past.  I wouldn’t gladly accept this as a fact, and I’d do everything in my power to have it not be the case.  But ultimately, it just might be.  Don’t blame me… it might in the end just be the nature of the beast.

Improving the design of your sales organization

Many wholesalers are taking a new look at the structure of their sales and merchandising organizations.  It is no small feat selling and supporting a full line of domestic beers, imports, crafts, perhaps an energy drink or two, a water, miscellaneous NAs, perhaps a spirit brand or two, wines, and whatever else flows through your warehouse on a daily basis.

The A-B network was recently told that if they hadn’t re-structured their sales forces in a couple of years, they were behind the times.  This concept could probably be extended to the entire industry.  Even more so in these times of high fuel costs when distributors are trying to balance a strong, full product-line selling, merchandising and delivery effort with the realities of high operating costs.  So, what to do?

I believe it is a very rare sales rep who can truly sell everything I just listed above… I know I most certainly couldn’t.  Many distributors attempt to address this by adding a brand specialist here or a category specialist there.  This might be how the organization ends up, but it is completely the wrong process if you want to build the best, most efficient, highest performance organization possible.

Every time you think about making modifications to your organization, regardless of where or why, you should start with a blank slate, and analyze and build from there.  You might end up at exactly the same place… but you might not.  When you build from an existing structure you are making a HUGE assumption, which may or may not be true… when you build from an existing structure you are implicitly stating that the present structure (or way of doing something) is the BEST possible.  There is no chance for improvement so you build from the perfection you already have.

This is generally not the case… things evolve… things change… even if it was the best 3 years ago doesn’t mean it is the best today.  And this “blank slate” process doesn’t imply any huge additional effort… it might be as simple as a 30 minute discussion and more importantly, the mindset to always look at things anew… but it should be done.  You will always arrive at a better solution. 

Also remember that your organization is an integrated system.  You shouldn’t just add a category specialist.  Rather you should design them completely into your system.  These are much different processes and you will get far better results by designing the changes in, rather than simply tacking them onto your present organization design.

That said, here is my generic advice.  First and foremost, in most situations I would have an on- and off-premise sales force.  The demands of those worlds are so different I don’t think in most cases you can have a single individual selling both and maximizing results.  In many ways even the skill sets required to succeed in on-premise selling versus off-premise selling are different.  In addition, the volume realities in both are very different… and if you pay some sort of volume-based commission (and you should), you will find your people will often ignore on-premise.  It makes complete sense and the commission structure pushes them in that direction.  Why take 45 minutes trying to sell 5 cases on-premise when I can go right around the corner to a chain grocery and perhaps sell 500 cases?  Even if I can’t sell anything, perhaps just filling the cold box and re-stocking the displays will generate far more immediate sales than that on-premise account.  If you don’t specialize, you need to adjust your sales commissions so on-premise volume pays a lot more than off-premise volume.  Otherwise your sales reps will never give the on-premise world the attention it deserves.

But also note with every type of specialization… whether in sales, merchandising, or delivery… each type of specialization adds a complete layer of routing and is thus at least a little more inefficient than not specializing.  Visualize the routing of your territory.  With only one type of sales staff, the routing (perhaps not the sales effort but the routing) will be the most efficient.  Add specialization and you now have two complete sales routings for your territory… because on- and off-premise accounts are spread throughout your entire territory.  This is true with all specialization. 

When considering specialization, your analysis should be is the additional cost (and there will be at least some) justified by the increased performance?  This increased cost versus hoped for increased performance is something every wholesaler should examine… especially in delivery.  With high fuel costs, getting rid of too much delivery specialization can help generate some substantial savings.  Also with specialization you must ensure the hoped for increases in performance actually occur.  The increased costs are a guarantee, the benefits are not.

But back to sales structure.  As the beer wholesaler (and even suppliers) continues their evolution from a beer distributor to more of a beverage distributor, the demands on the sales, merchandising and delivery organizations continue to mount.  In the sales arena, I believe ultimately the solution to this is to separate the high-level selling functions from the order replenishment, merchandising, and opportunistic selling functions.  One individual’s job will be to support everything you sell in the account… everything.  Their primary role will be complete account management… order replenishment, some merchandising, and being an opportunistic sales rep.  You never want to take the sales aspect completely away from this type of position since in our industry you can sell a lot of product on quality service alone.  A lot of those “extras” are given out on the basis of service, and this individual… a true account manager… is who will be driving total service at the account level.  But make no mistake; this is not “just” an order taker position.  If you try to build it and treat them as such (and more importantly compensate them as “just” order takers), you most likely will fail.  This is an extremely important and demanding position; the entire smooth functioning of almost your entire company rests on these individuals doing their job well.  Re-read that last sentence.  It is very important.  You must hire and compensate accordingly… whether you want to pay this amount or not is meaningless.

In addition to this person, a more specialized sales force(s) will call on retail at a much lower frequency, but making more detailed brand or category specific sales calls.  In this fashion you can truly support all those various brands and categories you distribute… and this list is only going to grow whether you’re an A-B or MillerCoors distrib.

This structure provides inherently superior sales impact and account management focus and also allows for you to relatively easily add new products/categories with little additional cost.  Looking to enter wine and spirits?  No problem.  A major push for energy drinks or NAs?  Again, no problem.  The account manager’s scope grows a little at retail and you supplement that with a new, small, focused sales team.  It works in whatever direction you go.  Of course at some point the work load of the account manager might grow to excess, but then you simply add a couple new account mangers to bring everyone’s workload down to an acceptable level.  Simple.  In addition, you can still have additional specialization under this same structure, such as a chain grocery team.

You can of course send different sales reps into the same account, each representing a different brand or category, but to maximize delivery efficiency they will generally have to call on the account on the same day.  Seems like a waste of resources to me for very little, if any gain.  And often retailers won’t spend time with both anyhow since they know both are from the same company.  They too have extremely busy days so you can’t really blame them for this attitude.

Regardless of how you structure your sales organization… or for that matter your entire organization… you need to accept that your organization is becoming more complex by the day.  You need to accept that in a world of very high energy costs (in addition to cost increases across the board) your organization must be lean and efficient.  You need to accept that a high-performance sales organization is not just desirable, it is a requirement.

And for this to all occur, you must understand and treat your organization as a complete, integrated system.  And for this system to work well it must function seamlessly… with every single part doing its job, 100% of the time.  It requires high performance from every single person and it requires a complete integration of every action.  Better planning from top-to-bottom.  Better communication throughout the organization.  Better coordination of every act.  In fact, better everything.  Easy?  No.  Doable and desirable? … oh yeah.


Management and Leadership

Let us talk a little about management and leadership.  But first a couple questions… does anyone like the traffic cop who takes perverse pleasure from writing speeding tickets?  You know the type, they claim they do it for “safety” yet they’ll drive past a stranded motorist on the side of the road.  They like the power, the ability to slap someone down, being boss over someone.  Would you consider this type of individual a leader?  Someone who others will voluntarily follow?

Or how about a spouse or parent who always has a “but” to add, regardless of the good work?  You know… oh that’s great you worked your butt off and painted the house, but you got paint on the roses.  Or that’s great you got 95% on the test but you did miss this easy one.  Or it’s great you behaved so admirably, but you shouldn’t have been there in the first place.  Always the “but” no matter how good the act.  The “but” not only generally erases the positive comment - and its associated positive emotions… it actually turns positive things into negative things. 

Or how effective would a basketball coach be if all they did was scream at you every time you missed a shot.  Would you learn?  Improve?  Become a positive team member?  Would it perhaps have just a little impact on your overall attitude?  ;-)  My father, who was a pretty good youth baseball coach had a general rule of thumb… he’d never yell if you dropped the ball (he’d work to help you improve your skills), but if you threw the ball to the wrong base… then you’re going to hear about it.  Do your best physically and that’s all you can do.  Do less than your best mentally and you’re in the dog house.  Perhaps you can’t run very fast to get to the ball – little you can do about that.  But once you get to the ball, you had better throw it to the right place – that is 100% within your control.

Now let’s think about management and leadership.  Do you see any of these traits in yourself?  Is your only goal when you go out at retail is to find something wrong?  Suppliers (a certain one in particular) seem to be infected with this one.  Do you race to the cooler and start checking dates?  Hoping and hoping to find a problem… ahhh, and with that you have done your job and can sleep peacefully tonight?  We all know where the most likely problems are (just like the most likely place for catching speeders).  It’s sad.  They don’t really get any pleasure out of NOT finding problems (just like the traffic cop doesn’t truly get any pleasure out of everyone following the speed limit).  No, they only seem to think they add value when they can find something wrong.  Don’t fall into this perverse trap, measuring your worth… your effectiveness based solely on finding fault… and wrongly thinking this is your primary objective. 

Or every time you go out to retail do you ALWAYS have to find at least one problem.  Hey sales rep, this store looks incredible and you’re beating the pants off the competition, BUT you’re missing X.  All the warm and fuzzies of the first part of the sentence are destroyed by the second.  Perhaps it’s just that I am getting older and more relaxed in my old age but I’m always surprised when even I (a world-renown pain-in-the-rear) walk into an account with a manager or owner and I think it’s pretty dang good… but the owner is immediately on the phone (a terrible management practice in the first place) calling about some minor imperfection in the account.

We are all emotional creatures – whether you like it or not – and we respond emotionally.  If an account, or back room, or driver’s performance is 90% kick-ass, shut the heck up about the 10% that isn’t - those who know me know that in person I’d use a little bit more colorful language to make this last point ;-)  Save your discussions for improvements for a later time… and even then, frame these in a constructive fashion.  Don’t destroy a great performance – and more importantly, positive emotions - by always pointing out the small part which isn’t perfect.  Do you like it when your wife does it?!!  Then it is highly unlikely your employees like it much either.  Spend more time being a cheerleader and focusing on those things your employees are doing well… and working to constantly expand those things that they are doing well. 

Or do you only comment on the negative aspects, never once commenting on the positive and worse yet… never offering any concrete suggestions to help your employees get better.  Again, do you like it when your parents or spouse do this?!  That coach who only screams at his player’s failures while offering no assistance with improvement will never be too successful.  As a manager, by definition your success depends on the success of your people… and you will catch a lot more flies with honey than with vinegar. 

Some mistakenly believe this implies you have to be a push-over for your employees.  Nothing could be further from the truth.  Most successful leaders are extremely demanding.  But they are much more than solely demanding… they help their people succeed.

Remember that effective management is ultimately effective leadership.  And leadership is a voluntary act… i.e. others have to voluntarily choose to follow you.  Try as you might, you’ll find it very difficult to force them to follow.  They might “let” you be the boss, and do their job, but that is a far cry from leadership.  And it will show in your organization and the results this organization produces.  Regardless of your position in your company, work to be a leader.  You might be surprised at the results.

Creating a Consumer Brand via Distribution

Creating a Consumer Brand via Distribution

When most people think of a brand, they think of a product.  Bud, or Coors Light, or Miller Lite are not just products, they are also brands.  But a brand does not remotely need to even be a physical product.  Here are two definitions of a brand which where plagiarized from the web…

In marketing, a brand is the symbolic embodiment of all the information connected with a product or service. A brand typically includes a name, logo, and other visual elements such as images or symbols. It also encompasses the set of expectations associated with a product or service which typically arise in the minds of people.

A unique and identifiable symbol, association, name or trademark which serves to differentiate competing products or services. Both a physical and emotional trigger to create a relationship between consumers and the product/service.

I believe a unique opportunity presents itself in the beverage business today.   With the explosion of products in all beverage categories, the need for a “guide” for the end consumer is greater than ever, especially in the premium/super-premium categories.  How do the trend setters who start these brand successes find them in the first place?  What are their sources of information and support?  Of course there are publications, web sites, and that most valuable of all, word-of-mouth.  But can a wholesaler also play in this arena and more directly impact a product’s success?

Historically wholesalers didn’t attempt to “brand” and sell themselves to the end consumer.  They might push their company name (distributed by XYZ Distributing) but for the most part they took their product to retail and almost all of their focus was on solely selling the products they carried to the retailer and the consumer.  If they attempted to “brand” themselves to anyone, it was to the retailer, not the end consumer.  A few exceptions exist; some high-end specialty food wholesalers have made the leap.  For the consumer trend setters in the know, just the knowledge that this wholesaler carries this product is a badge of approval (some boutique wine/spirits houses have also achieved this).  These consumers then impart this approval to their circle of friends, etc. etc. and if lucky, the product takes hold and spreads.

There is great value for the distributor of any product who can effectively brand themselves to the end consumer.  This is the opportunity and challenge that confronts you.  The marketplace is ripe for this attempt at branding especially among trend setting beverages of all types… areas where the end consumer is looking for an honest, trustworthy guide…  areas where past successful guidance draws the end consumer to those other brands which are also under the ‘approved by” seal of branded distribution.

Who You Are

Wholesalers around the country are struggling with defining who they are.  In many markets, my own choice for most is that they define themselves as distributors of premium beverages.  Limiting your corporate mission to any one beverage category is too restrictive, and expanding beyond beverages carries substantial risk.  Therefore, for at least the near-term I think the typical “beer” distributor needs to transform themselves into a distributor of premium beverages (supplementing their “normal” full-line beer business).  As I have mention in earlier articles in this series, if you are to enter new categories, from a distribution view-point it makes the most sense to always initially target the high-end.

Goal – Create a consumer identifiable brand so that when someone walks into an off-premise account (and on-premise where we can execute) and sees an XYZ Premium Beverages product(s), the product automatically goes up in stature.  The consumer is more likely to give our product a trial.  If they’re looking for something new (and we’ve met their needs in the past), they are more likely to go to our products – i.e. we create a brand, and those products that we wrap under this brand are given an automatic boast in stature.  This can help us sell both within a category and across categories.  The same person who drinks expensive whiskey drinks (or purchases) expensive gin, wine, beer, waters, NAs etc.  From a marketing perspective this is very likely the same person.  This branding gives us an opportunity to target this person.  They are looking for guidance and branded distribution becomes one source of this guidance, right in the purchasing environment.  We become a piece of that decision making process.  The impact could be minor or it could be huge – but it most assuredly won’t happen if we don’t try – and trying is relatively simple and low-cost. 

Not every product a wholesaler carries needs to be included as part of this branded distribution – in fact you wouldn’t want to.  Not every product will fit the strategic vision of this branded distribution – but many will.  You will want to carefully manage the branded distribution in the consumer’s mind.  Consistency.  Quality.  Stature.  A seal of approval.  You can probably roll many of your present craft/import beers - other products - into branded distribution, but not A-B or Coors or Miller or the mainstream stuff – this destroys the entire brand image, and instead takes you back to the “distributed by” which IS NOT a brand, and in most consumers minds get a response of “big freaking deal”.  You and your team must understand this – you are creating a brand – an image, stature, a seal of approval - not just telling the consumer who distributes the product.  If you don’t understand this, don’t waste your time trying to create branded distribution.

If you are successful, your suppliers will want to be carried as a branded distribution product – this gives you leverage with them that can be turned into extra marketing dollars, lower FOBs, more media support, etc.  In addition, if you get traction you can even take it to TV and radio.  In most situations I don’t think you’d have any legal issues since you aren’t selling any specific wine or liquor or beer or whatever, but rather the name of your branded distribution enterprise (the brand) – look for it – it’s a seal of approval.  This branding can be state-wide via the state-wide associations of which I’ve written, or just for a local market.  Since the vast majority of your consumers live and shop in the local market, state-wide branding is not a requirement.

On launch you might be able to get a fair amount of PR in the local newspapers (perhaps TV).  Ideally, you wrap it around something – some type of expert, some “big deal”.

Let me emphasize again, this is not just “distributed by” or some specialty craft/import sales and delivery operation.  This is directed to the consumer, not the retailer.  And the consumer doesn’t give a damn about how the product was sold or delivered to retail… this is an attempt to create a consumer brand… so that when they see a product which is included in this brand image, they are more inclined to try it.  If you attempt to put every single import or craft beer under this brand umbrella, you in effect destroy the entire brand concept.  Confusing?  Then give me a call.  I can almost guarantee you it is thinking like you and your management team have never done before.  But the opportunity is real and the cost of trying quite low.

Only One Question

Only question is whether in your off-premise accounts, they will allow you to present a standard look and feel on all (most) of the marketing material – since you need to let the consumer know this is an XYZ product.  This can be in addition to the retailer’s look and feel, but you must have the means to convey the brand image to the end consumer.  And remember, a whisper often gets much more attention than a scream – a subdued, subtle approach may prove to be much more effective, especially with high-end, status products. 

If you can physically do this, then it is worth the minor cost of production of these XYZ materials.  You can advertise and create the brand through shelf talkers, display material, price cards, etc.  Of course you can also execute in on-premise with various POS materials – that’s a given, the off-premise world is the only question mark.

Risk and Probability of Success

The only risk I envision is the loss of investment in the production of marketing materials and the personnel time used in attempting to create the brand – both planning and execution.  Neither of these is substantial.  The probability of success is difficult to ascertain.  There are simply too many unknowns at this time, the primary one being the end consumer.  Can we create a cohesive brand image which will resonate with the consumer and help influence their product choices?  I know it can be done, what I don’t know is whether you will be able to accomplish it – there are a lot of variables outside your control.  Other than attempting it, I see no method to further quantify this risk.  Considering the small amount of money required, this might be a justifiable expenditure.

I also don’t envision any product risk if this is attempted and fails.  If the XYZ materials simply stop being seen at retail, I don’t think there will be any product repercussions. If the consumers were paying that much attention, then we would not have failed in the first place!

Outside the box?  On yeah.  Out in left field?  Heck, we are out of the ball park.  Odds of success?  Couldn’t say.  Worth trying?  It might be worth at least a little time with the management team (and jc) over a beer or three.


Is Power Shifting Back to Distributors?

I was recently talking to a wholesaler and in off-hand comment he noted that he thought there is a balance of power shift happening with power shifting back to distributors, away from suppliers.  I have to admit that when he made the comment I somewhat discounted it… just a wholesaler whistling past the graveyard.  Over the past 50 or 60 years it seems the suppliers and retailers have been gaining power, often at the wholesaler’s expense… much has been written about this process and it has in many ways become accepted wisdom.  So (and I hate to admit this) I listened but didn’t really hear, and most certainly didn’t analyze the statement.  Go back to a recent post on change, here for how we sometimes hold onto beliefs… I do it too.  Work at embracing the possibility of change (and no, I’m not an Obama supporter)… it becomes a valuable skill, the ability to consciously cast off old beliefs and analyze new ideas from a completely blank slate.

But the more I thought about it, the more I became convinced he was right on the money.  Now I’m not implying wholesalers are in a dominate position but the flow, the momentum is on the distributor’s side.  And this is a trend which should continue into the foreseeable future.  Now the question is how will wholesalers take advantage of this and can they further accelerate the trend?  My beliefs are they will if they are wise and have the courage to do so.

Some of the power shift is a reflection of the consolidation in the wholesaling world… beer, wine and spirits, soft drinks have all, or are experienced the same thing.  In most markets there are only two distributors left and they are much larger and more sophisticated than ever before.  The capital investment represented by these firms is substantial… warehousing, technology, employment, rolling stock, working capital commitment.  Even a relatively small wholesaler is still going to be a fairly substantial operation in their specific market.  And of course there is physical reality… unless you sell directly to the consumer, without the ability to reach retailers there is no way to reach the ultimate consumer.  You’ve got to have some method to do so.

This reminds me somewhat of the boom of the Internet and Internet-based shopping.  During the height of the Internet boom, when the Internet was going to transform the very foundation of life ;-) much ink was spilled over whether this was going to put the brick and mortar retailers out of business.  In fact many wrote how it was only going to be a matter of time.  Well the brick and mortar folks are still around (unlike almost all of the early pure-play Internet companies) but one of the more significant impacts has been the tremendous increase in volume for shippers… UPS, FedEx, all have seen their businesses increase tremendously.  Well of course this was going to happen, right?  But the reality is that not that many saw it coming.  They were focused on all these Internet companies (trading at multiples ranging to infinity, since none seemed to make any money) who were going to destroy the brick and mortar folks, not so much on the impact of such a dull and mundane thing as distribution and delivery.  I think the same type of situation is occurring in beer distribution.  Suppliers – big and small – won’t just freely give this up but power (and it is a good thing) is flowing back to wholesalers… take advantage of it now.

First though, note that this is a relative power shift from suppliers to distributors… those pesky retailers still continue to build their power – and how do they do this?  By the power of connectivity!!!!  Isn’t that all a chain really is?  They leverage their power with suppliers and distributors by acting as a single entity… and they leverage their power with consumers by presenting a uniform brand image in multiple locations.  They do everything they can to entice the consumer to walk into their accounts and then take ownership of all those eyes and ears (on- or off-premise) and use that power against suppliers and distributors.  You want to reach MY customers?  Then you’ll have to deal with me first.

In many ways the same opportunities present themselves to the wholesaler.  Those retailers you service (and even those you could service) are in effect YOURS.  Of course you aren’t the only one servicing these retailers but you’re one of very few.  And you have unique strengths and abilities you can leverage to your benefit.

Some wholesalers, like the Reyes’ are attempting to leverage their power by growing mega-distributors – in locations throughout the country.  Others through acquisitions or mergers are focused on attempting to control a specific, defensible geographic territory, more like Ben E. Keith.  But every distributor of any size can participate.

How?  If wholesalers want to take their business to another level, they need to leverage their distribution system - rather than letting your primary supplier(s) do it for, or is that to you?  ;-)

Connectivity.  Join hands with other wholesalers… they can be contiguous, they can be sprinkled throughout the state, heck they can even be in other states… but think more like a chain retailer.  The more customers, the more power.  Those customers (the retailers) are YOURS, and if suppliers want them – and they do – then to some degree they have to dance to your tune.

The best way to leverage these connected distribution systems is to, as much as is possible, operated as a single entity (at least from the supplier’s perspective) – the bigger, the larger the scale the better.  The supplier ultimately doesn’t give a damn if these distribution partners are one business, separate business, whatever, as long as they meet their needs.  Does the “machine” do what I need it to do?  Is it the best choice?  And the beauty of this is that none of this requires anyone to relinquish any control, everyone remains completely independent.

Think of it this way… imagine a separate and intangible (but very real) level between suppliers and distributors; let’s call this the distribution power level.  Whoever controls this power level wields great power and influence.  When there were 8,000 independent beer wholesalers there was no question who controlled this power level, the suppliers.  With less than 2,000 wholesalers – each larger, more sophisticated, etc. – a power shift occurred, driven by market realities.  But you don’t have to remain a passive player in this power level – the 4th, Tom, and Leo will gladly “own” it if you let them.  With a little effort and the wisdom and insight to use the power of connectivity, you can grab a significant share of this power level.  When dealing with your main suppliers, do you think you’d have more impact and negotiating power if you “are” a 4 million case operation or a 24 million case operation?  Attractiveness to new suppliers?  Terms from all your suppliers?  The list of power is long.

Obviously state-wide (and multi-state) is best, but if this isn’t in the cards today, talk to other wholesalers in your state with whom you have a good relationship – maybe to start with you only have 3 wholesalers, but 3 are better than one.  Contiguous or not.  For some purposes they don’t even need to be with those who have the same major suppliers.  I know that’s a scandalous thought but why not?  If they aren’t selling to MY retailers, at some level they aren’t my competitors.  Why let a single wholesaler who lacks vision derail your taking control of this power level?

And as a side note, if you are serious about grabbing your share of this power level, or taking it further and even considering a merger or state-wide association… let me help you put it together.  I have recently witnessed a number of heartbreaking attempts at coordinations and mergers go down in flames because the various parties attempted to do it themselves.  They call me when the thing is 99 percent dead and want me to revise it.  Dang tough to do.  This isn’t just me trolling for work.  Without me, each party of course looks out primarily for THEIR interests.  That’s not surprising.  But there is no one looking out for the interests of the coordination or merger or state-wide association… and thus the thing generally doesn’t get put together… even though it probably makes sense for everyone involved and most of the “problems” could have been solved IF there was someone whose goal it was to represent both the proposed coordination (or merger) and protect each party’s interests.  Having me involved greatly increases the chances of success.  This isn’t selling, it is just the truth.

Regardless, do it and you grab a share of this power level.  It becomes a funnel to bring additional brands AND project significant power to your present and future suppliers.  Do nothing and this power level (and remember it DOES exist) remains in someone else’s hands.  Don’t ever forget, they need you as much (or perhaps more?) than you need them.  Do something about it.

Rising Fuels Costs - What to do?

Let’s talk a little about rising fuel costs and what, if anything can be done about it.  This post was going to be about a power shift to distributors but after reading Harry’s newsletter regarding the impact of rising fuel costs and his overwhelming wholesaler response… and reading some perhaps foolish moves people are making… today we will take a side trip and talk about fuel costs.

Yes, energy costs are high and very likely will go higher.  Oil is trading at over $100 per barrel and some forecasts call for $200 per barrel in the relatively near future.  A stronger dollar would help this situation considerably but that’s a rant for another day.  Since energy costs are imbedded in absolutely every product made, this has an impact on everyone and everything… but when you are in the distribution business the impact is obviously going to be much greater.

But before we get too crazy, let’s look at the landscape.  In another of Harry’s newsletters (03/03/08) he talks to Joe Thompson about deals and consolidation.  To quote Joe, “many distributors are in the “no pressure, no profits, no problem” mode.”  Yes these increased fuel costs are coming out of your hide but most of you are still driving a substantial amount to the bottom-line.  I’m not one to just willingly accept that my company is going to make less money so I too would be looking for ways to re-coup and/or reduce these increased costs… but in the same article Joe notes “distributors major in minors. They’ll step over dollars to get to nickels”.  Please send all angry replies to Joe and Harry ;-)

Don’t be penny wise and pound foolish in your attempts to minimize your fuel costs.  As regular readers of my blog know, I hate to offend ;-) but let’s get real… in many cases the increases in fuel costs don’t come close to some of the other ways a distributor might spend money.  I have no problems with this… it is one of the perks of having a private business, but you need to examine expenses from a total organization perspective, not just a single line item in isolation.  If you take steps to save fuel costs but in the process add even just one or two additional delivery routes, you are going to net out A LOT less money than if you had done nothing at all.

You need to look at your company as an integrated system, and analyze all possible changes from that system-wide perspective.

Some of you are considering going to 4 day per week delivery to cut down on fuel costs.  I wrote about this way back in September 2006 and you can find it here but let’s go over some of it again. 

Here is a mathematical certainty… all things being equal; going to 4 days per week delivery will force you to increase your delivery fleet and drivers by 20%.  That is a mathematical reality. 

All other things being equal, either you have to add additional drivers and vehicles – since you are taking 20% of your delivery capacity (one day out of five) and giving it away.  Or if you don’t add drivers and trucks, then each day, each driver has to make 25% more stops and put off 25% more cases.  I don’t think in most situations this additional stop or case capacity is available. 

If you have that much flexibility in your delivery operations that you can simply add 25% - every single day on every single route - just by hitting a switch, then I think you have bigger problems (or opportunities) than whether you deliver 4 or 5 days per week.

The last couple of places I consulted the drivers worked on average 55 to 60 hour weeks, delivering five days per week.  Those are 11 to 12 hour days.  So to go to four day per week delivery (to save fuel), all things being equal, these same drivers will now have to work 14 to 15 hour days!  But wait, is this even possible?  Will retailers even allow us to work their stores at the hours this would imply?  Yeah, those on-premise and c-store folks love getting their deliveries during their busiest times!  ;-)  Heck, EVERYONE loves getting deliveries when it is their busiest times. ;-)  And drivers LOVE being out later at night. 

Oh, but wait again (using these same two distributors as an example), on pretty much every day… on pretty much every route, the trucks are going out FULLY LOADED.  They couldn’t make any more stops or put on any more cases if they tried.  So you will have to add routes.  Just one Class A delivery driver and vehicle with full expenses for both can run up to $150K per year.  Tell me again, how much are your fuel costs going up?  How does this make sense?

And of course there is that sad reality that cutting a day of delivery doesn’t save 100% of that day’s fuel costs.  You still have to physically get to each one of those retailers.  You will save a little on fuel by not running a day, but the range is much more like 20% - 50% - for that day only... remember you still have got to roll to each one of those accounts.

For those wholesalers who did go to 4 day per week delivery and didn’t add any routes, I’d guess you did two things.

1.                  Adjusted service levels (therefore all things aren’t equal)

2.                  Went to 4 day per week service.

Doing the first was wise, the second not so much.  For those who have already gone to 4 day per week delivery… if you really want to find some substantial savings – well into the hundred’s of thousands per year, go back to 5 day per week delivery.  You’ll probably have to share some of these savings with your drivers, but so what?  I want to have the highest paid drivers.  You will still drive a lot of additional money to the bottom line, far more than the price increase in fuel is costing you. 

Chris, Jude, Duke, Jimmy, Tom… you can send my check for this wisdom… I think a 25% cut is reasonable – which will save you collectively over $3M a year (probably more), to my office address ;-)….     Well, mark them off the list of potential clients! ;-0 See what trouble you’ve started Molly!  I’m blaming this on you.

Will this cause all of you who go back some pain?  Oh yeah.  Don’t blame me for past decisions.  I can’t change the past, but clear rational analysis can always provide a clear pathway for the future. 

One good thing about these high fuel prices is that it forces one to examine your entire company in a quest to re-coup these increased costs.  If fuel costs go up 100% versus a few years ago, it is highly unlikely you will be able to “find” offsets to these increased costs solely in your fleet - route management.  Not to beat a dead horse… but you must look at your entire company as an integrated system, not a collection of separate departments.

Type of delivery is an option.  Bulk, bulk, bulk everywhere you can.  Carts are expensive upfront, take a fair amount of space, and drive some increased costs in the warehouse but in most markets they make a lot of sense.  But not all.  They don’t roll real well in a foot of snow or through 4 inches of mud.  Load your side-loaders by the order rather than the day, this can save at least 1 hour per truck per day for the driver... but will again drive some increased costs in the warehouse.

For those folks still running driver-sell… switching to pre-sell and tel-sell will:

·                    Increase your sales impact and merchandising effectiveness

·                    In almost all cases, REDUCE your overall costs - no, I’m not talking to you Gary ;-)

·                    Let’s see, better sales execution and lower costs… why not?

·                    Don’t believe me?   In a week I can show you how.

If we look at your entire company as a machine, the most efficient use of that machine is to run it as near capacity as is physically possible – every single day.  High peaks and valleys cause inefficiencies.  You have to over-build your machine to handle the high capacity times.  Obviously the marketplace determines many of these peaks and valleys – but to whatever degree we can, we should attempt to level operations so that each and every day is about the same.  For those wholesalers who just can’t seem to level their delivery operations (or get decent volume on Mondays), the very real costs are enormous. 

You may want to fight a little harder to achieve more balanced delivery.  Use the fuel costs as cover to “force” retailers to take delivery on the days which work best for you and strive to balance your machine, every day of the week.  Every other freaking supplier to these stores generally tells the retailer when they will be getting their deliveries (alright, not all chain grocery), why can’t the beer distributor do the same?  You can.  You just have to do it.

For areas with high seasonality, perhaps run two sets of routing – a high season and low season.  You’ll save a little on fuel this way, and some vehicle wear and tear.  Unless you have a pretty readily available labor pool, probably not a lot of other savings… but there could be, it depends.

In the past few years some have gone in the direction of too much specialization in delivery.  If you have a great deal of delivery specialization, there are some significant savings just waiting to be had here.  If you’re sending four different delivery vehicles into the same parking lot, you’ve got a lot of savings staring you in the face.

And of course you should look at both frequency and method of service.  Most of you have probably already squeezed this as much as is possible but it is still an area to investigate.  But before we discuss frequency of service and method of service delivery let us first define what service is and isn’t.  Service is not defined by how many times your truck is parked in front of the account.  Quality service is not defined by being the best firefighter in town – if you run out (or need anything) just give us a call and we’ll be there today!  Providing quality retail service means that the retailer never has to call because there never was a problem in the first place.  Quality service is pro-active, not re-active.  Quality service is doing it right the first time and empowering employees to deal with problems on the spot.

Now may also be an excellent time to expand your use of tel-sell.  Tel-sell is a very effective and efficient method to service many types of accounts.  But remember, tel-sell is a SALES function, not a glorified administrative position. 

But don’t get carried away in these processes.  There are certain market realities that you cannot change.  And if you try to cut too deep, you may find your competitor happily eating your lunch each and every day.  You are in the service game… never forget it.  There ultimately is a cost of doing business and you can’t change these realities.  If you’ve cut as deep as you can and it still doesn’t work… you should seriously consider exiting the industry.  In fact… regardless of why, if you are remotely considering selling “in the next few years”, now is the time to go.  Don’t shoot the dang messenger… this is sound advice.

You can put all of your sales reps and merchandisers in the smallest car made but is this really wise?  All to save a few bucks on fuel?!  Ensure the vehicle matches the requirements of the job.  Penny wise and pound foolish is not a good business strategy.

For most of you, the reality is simply the only way to find substantial operating savings is by building a more efficient merchandising, sales, and delivery structure. 

Look at your use of technology, far too many wholesalers have invested a lot of money in technology but only use a small fraction of its capabilities, which is true throughout most industries.  Be careful where you spend your technology dollars; they can eat up a lot of cash while often providing little value.  I often hear about the incredible detail some of this technology provides, incredible granularity - how’s that for high-tech speak! ;-). 

Because I’m kind of a nuts-and-bolts guy, I often note, that’s great that you have this level of information… now what exactly do you do with it?  To which far too often the response is a confused stare.  Just because you know something doesn’t immediately equate that this knowledge helps you do anything concrete in the very real, day-to-day world.  It may, it may not.  Don’t chase (and spend money on) knowledge just for its sake alone.

Examine your expenses.  The reality is very few of your large expense items are controllable, that makes those that are controllable even more important.  Run a “cheap,” or thrifty organization, as in we will gladly spend the money but only in those areas where we get the most bang for our buck – always have a return on investment mentality. 

In addition look at breakage, shrinkage, and out-of-date product costs.  To make the math easy, assume on average your organization has an average margin of $3.00 case.  And assume that on average each case costs your organization $15.00.  In this example, for every case lost in breakage, shrinkage or for being out-of-date, your organization must sell an ADDITIONAL 5 cases just to be back to where you would have been had the original case not been lost.  Your employees need to be aware of the tremendous impact this can have.  Every warehouse, sales, and delivery office should have a simple display visible which emphasizes this point. 

If you are thinking about implementing fuel surcharges, think about the amount.  I don’t think you will get beat up any more for a $3 - $5 charge than for a $1 charge so why not make 3 to 5 times the money for the same pain?  And there will be pain.  And once you get this in place, plan to NEVER take it away.  Once you’ve “trained” them to pay it – and taken the pain of doing so – don’t just give it back for nothing.  Looking forward then, perhaps don’t call it a fuel surcharge, call it some other more innocuous name that won’t raise hackles when fuel prices drop… but our extra charge doesn’t.  ;-)  My gosh this is good stuff!!  If I do say so myself.  This strategy alone could put a hundred thousand plus dollars in your pocket every year – do the math and you might be surprised ($3 X 20 routes X 20 invoices per day X 250 days = $300,000… $5 = $500,000 – if you’re going to do it, do it!).  As noted above, please send checks to my office address.  I don’t just want the Reyes’ money, I want everyone’s!  ;-)  I hope you’re happier now Molly.

And please, please, please… if your direct competitor is willing to be the spear catcher on implementing fuel surcharges, use your head and get right behind him.  Whatever minimal gains you might get by beating him up on the street is FAR exceeded by the very real financial gains of standing right behind him.  And as noted above, these gains can become a permanent and substantial source of income.

Look at instituting minimum orders.  Perhaps fuel surcharges below some minimum order quantity?  Look at pricing.  You can often set price breaks so that they are in effect a minimum order or at least they push the retailer in that direction.  Always attempt to increase average cases/stop and even better, average gross profit dollars/stop.  Don’t drop your prices to do this.  RAISE your prices from case one and then put your first price break (5 cases? 10?) so that it equals your present case one price.  In this manner you don’t give up any margin and you push your smaller retailers to larger drops.  Those that can’t or choose not to pay a little more.

Take a look at the managerial and supervisory positions in your organization.  What is the ROI being generated by these positions?  Is there a better way to allocate these resources?  Are you paying managerial wages for worker-bee activities?

Look at every aspect of your business.  Squeezing doesn’t mean accepting poorer performance in any area, it just means you’ll have to plan, execute, and coordinate better… a leaner organization demands this, but this either/or thinking is a false choice.  Let me emphasize this again, a lean, high-performance organization REQUIRES better planning, coordination and execution from every player on the team.  Plan for it.   

And if you really want to re-coup these additional fuel costs, give me a call and let me work with you and your management team to design and implement the most efficient operation that is possible – the payback period for my services is generally measured in a couple of months.  In any improvement process I can help build a more efficient AND stronger system.  Any pinhead can cut costs over the short-term, but can they do it with the end result being an even stronger organization?  How many businesses have you and your management team ever re-organized?  Hopefully I’ve learned something in the last 25 years.

Some mistaken believe my job is to come in and tell them how to run their distributorship… this is very wrong.  Think of me as a focused, experienced project manager who, working with you and your management team, quickly and expertly helps design and implement change.  I don’t do your GM’s job… we have very different jobs but working together we can build superior organizations.   

Next post I promise… a discussion of a power shift back to wholesalers

A one-time event, advice for suppliers

OK, this is a one-time event, advice for suppliers. 

First sage piece of advice… supplier’s organization structures are built incorrectly, specifically for dealing with their distributors in today’s world.  This one has always bothered me since I first started consulting to beer distributors in the early 80’s.  Other than the consumer, who is the most important entity for any brewer?  Their distributors!  Nothing gets done without the distributor.  Nothing.  No matter how good the chain program is… no matter how spectacular the national advertising… no matter how incredible the product might be… nothing happens on the street without the distributor executing.

Yet who do the suppliers put as their main contact person with wholesalers?  They use it as an entry level position… one of learning and training.  I’m certain many (most) wholesalers would agree that THEY are the ones who train the local brewery rep… and once they finally get one trained, off they go and another newbie takes their place.

I ask you… why would you put your most green people in direct contact with… having primary, front-line responsibility for managing your most important client/partner?  Doesn’t this seem like a disconnect?  That something just doesn’t make strategic sense of this arrangement?  Sure does to me.  Green people managing the most important client/partner?  In effect being trained by them? 

I can’t tell any of them exactly how they should build their organizations since I don’t have adequate information on their organizations, desires, etc. but a change certainly seems in order.  These wouldn’t just be higher-level employees doing the same things as your present entry-level brewery reps do… the entire position would have to change. 

There are probably even some cost savings in this since many middle-level managers who presently manage the street-level brewery rep would no longer be necessary (at least in that role).  You might need more of these more senior folks to manage and partner with your wholesalers, but the net-net would probably be:

*          A reduction in overall personal

*          A flatter organization structure (always a good thing)

*          Decision-making authority at the point-of-contact

*          Better execution and coordination with distributors

I realize that the requirements of these new positions somewhat contradict the old way of getting “up the corporate ladder”.   But so what?!  There are fewer and fewer wholesalers and each is becoming more and more important… you need to address this reality.  And I believe there is strategic advantage for those who do.

In addition, if a more senior person was primary contact for the distributor, perhaps the never ending travel to various meetings could be cut down substantially.  These senior people can present the supplier’s information in an effective manner, making the constant meeting schedule a thing of the past – saving wholesalers and suppliers some serious cash and A LOT of time. 

I had also planned to give the suppliers some insights on strategy… my gut belief is far too many of them still think of themselves as brewers.  Any company that spends almost $1 billion on sales and marketing (or about half that for Miller and half again for Coors) in my book is a sales and marketing company which also happens to produce beer… I don’t care if they outsource the marketing or not.  50 years ago they probably “were” a brewer… not today.

I told this to a group of middle-level managers at one of the major suppliers and they looked at me like I was speaking Martian… they do so at their own peril.  It was kind of sad, watching these managers, in marketing no less!, not be able to get their heads around the concept that their company was anything but a brewer… and the company’s focus and mission was to brew beer. 

But the big suppliers pay HUGE amounts to management consultants to help them with their strategy… and then a few years later when the management consultants have “created” a new, better than ever method to create strategy, they pay them again… and later again… and then again.  Wish I could get on that train ;-)

Therefore I will keep my strategic insights to myself but will be spending some time on strategy for wholesalers in an upcoming post. 

Next post – Is there a power swing back to distributors?