E.I.C. Enterprises - Blog

Can you say “moo”?

Ahhh, the quite of the pasture… the chirp of the birds… the cute bunnies scurrying here and there… and the contented sound of the cows as they are milked in the barn… moo.

Moo indeed.  After recently reading in Harry about upcoming price hikes, led by ABI as usual, I had a sudden mental image of the US beer market (consumer and wholesaler) being milked and milked and milked… whether happily or not is another question ;-)

In a prior post, which you can find here I discuss the business concept of a cash cow.  And what does one do with a cash cow?  You milk it.  And my oh my, ABI with MillerCoors (and others) willingly following are yanking on those teats like no one’s business!  Even those craft folks are enjoying a tug here and there. 

Even you wholesalers are getting in on some nice milk… what are your gross profit percent’s?  What are you putting to the bottom-line?  There’s a little moo for everyone ;-)

But what of the poor cow?  Is there any concern for ol’ Bessie?  Or is she simply milked and milked and milked until there is nothing left?  And what happens to ol’ Bessie when she can’t produce any more milk?  Why she is sent to the Slaughterhouse.  Don’t forget, that place has earned that name.

I know the craft beer folks are laughing all the way to the bank – from both a profit and market share perspective.  Think how the entire US beer business would be different if ABI had pursued a balanced market share strategy versus grabbing the ol’ milking stool and sitting down for some hard work.  The entire US beer market would look much different if the Third were still running the show.

Think of paths not taken… this milking strategy has strengthened the craft brewer’s incredible growth… wine and spirits love it too… and with the now un-stoppable power of the prettiest girl at the dance, in affect it has set in motion the complete destruction of the 3 tier system (I believe that is already baked in the cake).  A butterfly beats its wings in the Amazon and… ;-)

To the quickly shrinking pool of beer wholesalers out there (and all of us unfortunate consumers who have little say in this)… can you say moo? ;-)  At least you wholesalers are being well-fed – for now…

We poor consumers are simply getting milked without even a kiss or an extra bale of hay… and many are following the value proposition that craft is a better deal… Moo.  Moo indeed.

More fussing about beer

I think ABI must have hit a chord with that Super Bowl ad “Brewed the Hard Way”.  See the previous post if you haven’t already read my copious wisdom.

Recent headlines…

• “How craft beer is fighting back against Budweiser's belligerent Super Bowl ad”
• “Beer fans lash out after craft brew Super Bowl ad”
• “Reaction to Bud's craft-beer-slamming Super Bowl ad includes this made-in-Oregon spoof”
• “Shots fired, shots returned! Craft beer hits back at Budweiser's attempted takedown”
• “A-B Wins the Super Bowl, Again.  Airs Controversial Anti-Craft Ad”… thanks Harry ;-)
• “Analyzing Budweiser's Hypocritical, Anti-Craft Beer Super Bowl Ad”
• “Craft beer enthusiasts still foaming over Budweiser's Super Bowl ad”
• “The Frothy Backlash to Budweiser Ad Mocking Craft Beer”
• “Budweiser’s Awful Super Bowl Ad Is a Perfect Illustration of Why Young People Don’t Drink It”
• “How Budweiser Upset Every Craft Beer Drinker and Brewer In America”

Belligerent?  Fans lash out?  Craft hits back?  Controversial?  Anti-craft?  Awful?  The vapors certainly seem to be making a comeback.  And no, I’m not talking about the song Turning Japanese ;-)

The brand Budweiser has been mentioned more in the last 5 days than it has in the last 5 years... well that might be an exaggeration but you get my point.  And that is a failure?  Who knows, the backlash against the backlash might just drive more people to give it a swig.

And people who are never going to drink the product anyhow are aflame in the twitter-verse.  This is the intersection of many things; social media, marketing, competition, cowardice and of course a hearty serving of idiots – which is what you will find in abundance in the twitter-verse. 

First, many craft brewers saw this as a chance to piggy-back on ABI’s ad.  This is a common response from small competitors in all types of markets… and it’s not a bad strategy.  The craft brewers who responded in some way to this ad all got A TON of free PR.  Their names were also mentioned more in the last few days than in all the years prior. 

MillerCoors had to respond so they too would be included in MANY of these stories… presenting themselves as kind of like a buddy to craft brewers.  Interesting strategy… I think I’ve heard of that from some business genius.

And of course the media plays it up because they need to feed the beast… the constant need for material to fill the space between the ads.  And “controversy” helps drive those click-rates… as do over-the-top headlines.  “Ronald Reagan dies!  His hair”

A side note about PR… back when I was running my tech-company, we would get great PR.  We were written about on a very regular basis.  And the next day the phone would ring off the hook!  Unfortunately the calls were all from real estate folks (you’ll be needing more space!), copy machine sales reps, telephone sales reps, etc. (I always tipped my hat to the sales folks, good prospecting on their part… although I didn’t appreciate their calls)  I don’t think we once got a clear lead from any PR we got.  Now we weren’t selling a consumer product but PR ain’t all it’s cracked up to be ;-)

Back to twitter-land… This reality also drives the “need” for rapid response, so that one can piggy-back ASAP.  And it drives the imperative that everyone and his dog jump in to get a piece of the action.  This drives a feeding-frenzy that generally WAY over-states the true impact/feelings of these responses.  In twitter-land, an hour or two (forget days) is a LONG time.   And it is just about as deep.

Just the other day The Wall Street Journal ran a piece on talk radio.  The listeners are still there in droves, but advertising rates have fallen as many national advertisers have fled from these stations… why?  Fear of being twitter-bombed by a small group of motivated activists.  It started in 2012 when liberal activists organized social media campaigns to go against advertisers on conservative talk shows.  Rush Limbaugh and his famous “slut” comment was one of the first of these campaigns.

But corporate America is not the land of the courageous.  Few people ever got fired for not doing something or not making a decision.  Now doing something?  That’s where the risk is.  So the easiest path is to roll over and attempt to offend no one… which is of course impossible. 

Thus my amazement (and admiration) that ABI actually did the piece.  I know a hell of a lot of beer distributors, ABI and MillerCoors, were cheering on that ad.  I know ‘cause they told me so.

I think more companies (and people) need to simply stand up to this feigned outrage by a handful of people… and never forget those 500 million tweets per day.  Get over it and go live your life however you desire.  And leave me the-f alone.

Getting the vapors and hiding behind our petticoats ain’t the way to go… especially for a mainstream BEER brand.  If beer gets as pussy-fied as a lot of the rest of the world, we are all lost ;-)  And trust me, the folks who drink Budweiser, Coors, etc. aren’t pussy-fied… nor do I expect them to ever be so. 

If I want to advertise to them, I’d be wise to understand this reality.  And if some blouse-wearing poodle walker - thank you Grounds Keeper Willie ;-) gets a’ fluttered, so be it.  They aren’t going to be purchasing the product anyhow so why exactly do we care what they think?! 

And guess what… the vast majority of craft beer drinkers also aren’t some pussy-fied, blouse-wearing poodle walkers so the craft industry walks on thin ice when they present themselves as such, vapors and all. 

Craft brewer aren’t doing themselves any favors (or proving their intellectual honesty) when they act as crybabies over this Fussing ad, yet they see nothing wrong with things like “Craft for Crap” where you can trade in a bottle of crap (yeah, Bud, etc.) for a craft beer.  Perhaps the big dog brewers should start talking about real crap like WAY over-aged beer… brewers who are afraid to even put code-dates on their beer… bottling line/manufacturing cleanliness, and other little things ;-) 

Or we could say hooray for all beer.  Some you might enjoy… some not.  So?

The vast majority of Americans aren’t pussy-fied, blouse-wearing poodle walkers; we do them a disservice acting as though they are and they can’t take a little good-natured ribbing… going in both directions. 

I’ve done many a re-organization where loud voices and cursing were the norm in the planning process.  Vigorous debate leads to better solutions.  And after the yelling was over, we go out and drink a few beers… and yes, even enjoy each other’s company.

Back to the ad… in summary I think both played to their audiences and each got a healthy, hooray for our side!  Super… now get back to work.

Was the ad for Budweiser over the top?

Inquiring minds want to know… what did I think about the ABI Super Bowl ad “Brewed the Hard Way”?

My Super Bowl party with all my friends was going full steam ahead… composed of my dog and I watching the game with more than a few cold beers.  And then this insulting, tone-deaf, Budweiser ad.  Why I almost got the vapors!  If not for my faithful dog helping to resuscitate me with another cold beer, I might not have made it. 

(In all honesty, my dog is the biggest beer thief on the planet; turn your back for a minute and he goes from sound asleep pooch to evil beer-lapping fiend – if I had dropped from the vapors he would have first consumed my beer and then rifled through my pockets looking for the car keys.  He does leave my gin-and-tonics alone though, but not my dill pickles)

Anyhoo, I thought the ad was freaking great.  I’m surprised they ran it but I tip my hat to them for doing so.  That brand name is one of the most wide known brands in the entire world… you’ve got to leverage what you’ve got, not hide from it.  And here’s a shocker… whether it is your cup-of-tea or not, it’s a damn good, well made beer.

And tweaking – no, not twerking ;-) the craft snobs will most likely go down pretty well with anyone who might be a possible Budweiser consumer.  This country has a long and glorious history of enjoying snobs of all sorts getting taken down a peg or two.

And for the vast majority of beer consumers, they don’t know or care about ABI’s purchase of craft brewers so this “conflict” is meaningless to them.  Good god, it’s a freaking ad! 

To all the craft folks who’ve got their panties in a bundle, grow up.  Has a sense of humor been abandoned by all of you?  Many companies, Proctor and Gamble was the best at it, set one division/product line against the other all the time.    

They’d have 5 people hawking different laundry detergents to the same chain and they were told to fight for THEIR brand… and they were measured by how THEIR brand did.  If you could take space from another P&G brand for yours… you did it.  If they couldn’t fight for their brand, screw them.  This drove everyone to excellence… or the door ;-)

Brand “conflicts” are the norm when a company has similar products in various categories.  And cheering one on can have the perceived effect to some sensitive souls of “dissing” another.  So?

Just because ABI is playing in the craft world, they should be ashamed of brands like Bud and Bud Light?!  “yeah, we came to our senses… that Bud stuff is watered down crap and we’re sorry we even produced it.”  And those millions of drinkers who make them the 1^st and 3^rd most popular brands in the country?  “Only” about 1 out of 4 beers consumed in this country are one of those two.  Guess you folks are dumb asses.  Please.   

Was it a good ad?  I don’t know since the only accurate measure of ad effectiveness is people parting with their money and purchasing your product.  So we’ll have to wait and see. 

In addition one should be careful from confusing a well-liked ad to a good/effective ad.  We get all these spur-of-the-moment measurements of how much someone likes or dislikes an ad.  Just like focus-groups, these have almost no meaning.  Historically one of the most disliked ads in TV history, “ring around the collar” was also one of the most effective.  People supposedly found the ads offensive but they sure purchased Wisk to solve this problem. 

Will this ad sour craft brewers from considering selling to ABI?  Only the idiots. 

And of course in today’s connected, social media world this all takes on a much bigger image than is truly there.  Do not forget this point.  The illusion is much bigger than the reality.  Everyone and his dog has an opinion and they toss them about on every conceivable subject.  Ponder these stats…

Every second, on average, around 6,000 tweets are tweeted on Twitter, which corresponds to over 350,000 tweets sent per minute, 500 million tweets per day and around 200 billion tweets per year.

Anyone who spends too much time chasing this mirage will quickly find nothing really is at the end-of-the-rainbow.  And no matter what one does, there will be someone who isn’t happy with it and will tell the universe their opinion – like anyone is listening.  Why even little ol’ Johnny sometimes upsets a person or two ;-)

The responses I’ve read in the various trade publications seems like the beer equivalent of high school cliques on steroids.  And on second thought, that is perhaps too generous, perhaps middle school is more accurate.  I guess the vapors affect more than just me ;-)

Not to let a chance go by to kick your competitor in the groin, MC jumps into the collective outcry that beer REALLY is worth fussing over!   I can guarantee you that is the case where my dog is involved.  So MillerCoor’s tweet carries some big impact out of the 500 million sent on the same day?  Sure.  

Much ado about nothing.  A good ad from ABI for a good product.  Here’s a shocking idea… perhaps Bud can be a good beer as can Goose Island (or whatever).  They are not mutually exclusive.  It is not a zero sum game.

And in the rough-and-tumble of competition, you might consider my cheering for my team an insult to yours… get over it.

And for those who decry the ad since we should be all about “brand beer”?  That ship has sailed.  The entire regulatory structure of the 3-tier system is under attack, mostly by those inside the fort, and you worry about protecting “brand beer”?!   What planet are you on?

I see a ton of people, almost all of them craft, who clearly have no intention of supporting “brand beer”.  Where was the outcry from “the industry” when they disparage pretty much every product that isn’t theirs? 

This will be for an upcoming post but the unity of “brand beer” is long gone, the 3-tier as has operated for the last 80 years will soon be a thing of the past… and those who aren’t fighting solely for themselves will find that to be a foolish choice. 

 

Craft brewers and food trucks

What can craft brewers and food trucks teach us about economics, government policy and freedom?

When the dot.com explosion hit, fueled by the rapid growth of the Internet, few would have thought it would be a boon for the low-tech world of delivery.  Yet FedEx, UPS, and even the good ol’ post office saw incredible delivery growth as all those on-line purchases had to be delivered by somebody.

Did anyone plan this?  Nope.  It just happened.  No government-driven genius, just the marketplace responding to a new world of on-line purchasing.

Much the same has/is happening with the explosion of craft brewers and more specifically their tap rooms - places we used to call bars ;-)

These tap rooms are incredibly popular.  In fact if I were to start a craft brewer today, this is where I’d spend my efforts, not trying to be the next New Belgium.  $6 per beer that has no transportation costs… few if any packaging costs… no sharing of the margin with those greedy distributors or retailers… just one heck of a lot of profit for the folks brewing the stuff.  That’s where I’d stake my claim.  As long as I can fill the place with people, I’m going to make a lot of money.

But in many places around the country these tap rooms are legally required to be just that, places where the craft brewer can sell their product.  Nothing more.  No kitchens providing food… just tap rooms providing beer.

And this is where the wonders of the marketplace again show their abilities.  How did the marketplace … for those who need a definition, the marketplace or capitalism are better described as…

Free people freely interacting with other free people.

So how did the marketplace respond?  With the genius of food trucks.  Although the tap rooms might not have a kitchen, they probably have a food truck parked outside that can provide some yumminess whenever your heart desires.  This wasn’t anyone’s grand plan… no government expert required… just the marketplace responding to a need/opportunity.  A true win-win-win for all involved – the craft brewer, the food truck operator, and the customer.

The craft brewer doesn’t have the expense of running a kitchen (something which they probably have little, if any expertise in) and better yet, they in effect become 7 restaurants in one (in many cases even more).  The tap room has this type of food on Monday, another on Tuesday, another on Wednesday, etc.  Some are actually multiple restaurants in the same day… afternoon we’re this type of restaurant, in the evening we’re this type. 

Most craft brewer’s web sites “sell” the various food trucks that will be at their place.  They can be a strong marketing draw.  It isn’t just the beer that is driving folks to some of these places.  In many cases the lack of a kitchen has actually been turned into a strong positive!

Sure the craft brewer doesn’t get any of these food sale dollars, but they don’t have the headaches and expenses of providing the eating opportunity.

This in turn has driven the food truck industry to new heights.  The quality and variety of food being offered has increased by orders of magnitude.  These ain’t no roach coaches of old.

The food truck operators and the craft brewers act as symbiotic organisms… one’s success/improvement flows to the other and vice versa.  Better food brings more people… the food truck wins and so does the craft brewer.

Better beer/marketing of the tap room brings more people… the craft brewer wins and so does the food truck.

Craft brewers fight to get the best food trucks… the food trucks win and the craft brewer wins.

Poor beer or marketing and/or lousy food hurts both the brewer and the food truck… thus it is quickly punished by fewer people for both.  That symbiotic relationship functions in both directions ;-)

And throughout this beautiful dance, the customer wins every single time.  Win-win-win.

Just a thought this holiday season and one to keep in mind as you fine-tune your political philosophy and think about who to vote for.

And as a last little X-mas present, the next time you hear someone spouting off about the “evils” of capitalism or the marketplace, remember those are just words.  What they are describing is a process of free people freely interacting with other free people, bound by a general set of laws and regulations.  Who could be against that?  ;-)

Why am I on my soap-box?  As the patriot and brewer Sam Adams noted,

It does not take a majority to prevail... but rather an irate, tireless minority, keen on setting brushfires of freedom in the minds of men

This is needed today, perhaps more than at any time in this country’s history.  Please, grab some matches and go set some brushfires of freedom yourself!

From this black-hearted, mercenary… Happy holidays to all!  Now get back to work.

Visions of sugar plums...

There are numbers that just seem to get our attention.  And one billion is one of those numbers… especially if it is one billion dollars.  That’s the purported amount the Reyes’s will pay to acquire Gold Coast distributing down in Florida.

First a tip of the hat to the brothers.  They have been executing an opportunity-driven strategy for a couple decades now and the results are impressive.  As I have noted time and time again, all success begins with good strategy.  They actually walk the walk… far too many wholesalers over the years liked to talk the talk but when it came down to getting a deal done, they fell short. 

Other than a hefty checking account, the Reyes’s don’t bring any magic to the table… they know what they are trying to do, are staffed with high-quality professionals, and simply go out there and get deals done.  Win – win works.

This magic billion dollar payout now has a lot of folks in the industry AGAIN thinking… is now the time to get out?  Heck if I know… what is your STRATEGY?  What do you want to accomplish?  Is this goal obtainable?  With acceptable risk?  And what is Plan B (and C and D)?  Can you live with all of the various possible futures?

Spur of the moment decisions heavily influenced by what the brothers paid for a rather unique distributor that fits into their unique Florida strategy is not the way to do this.  Thinking and planning is the way to do it… whether you plan to run for the exits or batten the hatches in a plan to be around forever.

For many of you the first step is a market valuation.  How can you decide whether to stay or go if you don’t know what your asset is worth?  This could be combined with a few day strategic planning session where we analyze your business from the top-down, including detailed analysis of all M&A possibilities. 

Included in this must be a discussion of the threats and opportunities you and your organization face.  I personally don’t care what decision you make; I just want you to make it with your eyes wide open and with full understanding of what may or may not come your way.

As I’ve noted in past posts… a “good” decision or a “bad” decision are generally determined by what future happens to come down the pike.  The exact same decision might be great under one future, and terrible under another.  So do what you can do… think, analyze, measure, talk, plan, execute… adjust as data/results come back.  Just keep driving towards that strategic goal.

Steve Cook and I do the best valuations and planning in this industry – just saying ;-)  Actually Cook does most of the real work.  I’m more of a soap-box guy ;-)

So if that $1,000,000,000 has got you thinking… stop dreaming of sugar plums and give us a call.  I’m all for sugar plums, let’s just make certain you’ve completely thought the thing through to better ensure you end up actually eating those sugar plums rather than just dreaming about them.

 

Should beer/alcohol/beverage distributors enter the legal marijuana world?

First the news from the elections… Oregon legalized.  Alaska legalized.  DC legalized.  4 states plus DC now have full legal adult marijuana.  Guam approved medical marijuana.  Various cities around the country voted to decriminalize.  In 2016 we will have 10+ states looking to legalize.  Whether one agrees or not, this is a tidal wave that is a’coming.

Now my post…

It seems many are kind of confused about this opportunity.  After my last email I’ve been contacted by quite a few folks who have some interest in exploring the new wild and wooly world of legal marijuana.  I personally am tired of providing free consulting… it really doesn’t pay well ;-) but I thought I’d toss one final freebie out there regarding my thoughts.

Alcohol distributors can safely and easily enter this industry will little fear if they understand a few things… 

1. I see few synergies between a beer/alcohol/beverage distributor and almost any aspect of the marijuana business.  For those looking to jump into this business for this reason, you’re barking up the wrong tree.  Other than perhaps some technology and backroom stuff, these are very different industries and will operate quite differently.  And for those thinking that perhaps marijuana and alcohol will be available at the same locations… not going to happen in our relevant time frame… and I’m personally not certain it would be a good idea in the first place.
2. Although this is a regulated market (as it should be), I see no need for an independent distribution tier.  So again, for those thinking they will use their present operations to become the marijuana distributor, ain’t going to happen.  Colorado law forced complete vertical integration for at least the first 10 months (you had to grow at least 70% of what you sold).  And even now, completely integrated operations – from grow to retail – are the norm and I would guess they will likely remain so for at least the near- to mid-term.  Washington outlawed vertical integration… you can either grow or retail, but not both.  How other state’s regulatory structure will take place is anyone’s guess.  They will probably follow one of these two general designs.  But the development of a 3-tier system simply isn’t in the cards.  If that is your hope, don’t waste your money in this industry.
3. Therefore beer, wine, and spirits distributors should view this simply as an exciting, high-growth (and high risk) investment/business opportunity.  That’s it.  Nothing more.  Nothing less.  It has nothing to do with your present operations (nor should it).  If you have the money and desire, it could very well be the start of something like the dot.com boon at its infancy.  Go back and look at those election results if you need any convincing.
4. This isn’t a “gray” legal area.  It is black and white.  From a federal perspective, any activity involved in marijuana… and that includes supporting services of ANY type are quite clearly illegal.  As the head of Colorado’s Marijuana Enforcement Division noted at a recent seminar I attended, from the Colorado governor on down… they could all be arrested for violated federal law. Think of it as this analogy… based on federal law, the states of Colorado and Washington have set up a regulatory structure to regulate and tax the mafia’s activity.  They are aiding and abetting the violation of numerous federal laws… and all who knowingly participate are also in violation of these laws.  The accountant to the mob still goes to jail ;-)  As does the advertising agency that knowingly takes their money to help them generate demand for their illegal activity… as does the bank… as does the attorneys… as does all of us.  Now I clearly don’t see this happening (nor do thousands of businesses, some quite large) and I believe the next national election will kind of settle this with a “let the states decide” punt from both major political parties.  But until (if?) federal law changes, this is the reality from the federal perspective.  If this concerns you or if you truly believe a “perp walk” might be in your future, don’t enter this industry.
5. Thus, any tying of your present federal permit with a marijuana business is freaking stupid!  There are no synergies anyhow, don’t connect the two in any way.  This is quite easily accomplished.   But I hear from far too many who mistake the synergies (which don’t exist) and think about tying the two together.  Don’t.  On the plus side, if you do enter, don’t tie them together and still end up getting grief from the feds, the odds are great they would simply force you to divest yourself of one or the other.  No perp walk in your future ;-)
6. This also will temporarily break the hearts of those weed merchants who hope for the big cash-out from beer, wine, and spirits suppliers.  Ain’t happening until at least the feds change their perspective on marijuana.
7. That said, for those willing to jump into a high return/high risk/high growth industry, distributors have the opportunity to leverage their business expertise on distributing controlled consumer goods to build an incredibly profitable stand-alone operation.  The overall level of business expertise in this industry is rather low… you start out way in the lead on this aspect.

I look at you all for potential partners with my edibles business since you have the cash to invest and understand how to build brands via DSD.  And rather than having you attempting to learn all about this nascent industry, we provide turnkey for everything.  That’s some significant value on our side of the equation.

This is a “never-before market” so I’m still not certain from our perspective it might not be better to go with established marijuana operations in various states and to teach them both the manufacturing and DSD aspects.  That I’ve got down.  But since I know you all, you get the first shot.  That’s it for free consulting.  If you want to learn more about the marijuana industry, either join our team or go talk to someone else… I’ve got a start-up to get going ;-)

 

 

Can you be fired for doing a legal act outside of the workplace?

Can an employee be fired for doing a legal activity outside of work hours?  One would hope the beer and alcohol industry would strongly support a person’s right to legal activities outside of the workplace… without workplace retribution. 

If not what happens when employers, with the goal of keeping health care costs down and looking out for the health of their workers, demand workers not drink alcohol… period?  Sure testing might be an issue but the point is a larger one… if I as your employer discovers you are drinking in the evenings or on the weekend, can I fire you?  I would hope most in this industry would respond with a resounding, NO!

Welcome to the wonderful world of legal marijuana.  A world where for now, laws at various levels of government simply aren’t in sync with each other. 

First a summary of the lay of the land…

At the federal level, marijuana is still categorized as a Schedule 1 drug, defined as…

Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. Schedule I drugs are the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence. Some examples of Schedule I drugs are:

heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), 3,4-methylenedioxymethamphetamine (ecstasy), methaqualone, and peyote

We can talk about that stupidity later, but that is the position of the federal government.  Oh but wait, is it?  The Department of Justice (DOJ), the highest law enforcement office of the land, has another take.  They have basically said they’ll step back and let the states handle this.  They laid out their 8 priorities in a memo… basically if these 8 things aren’t violated, the DOJ will take no action and they recommend attorneys general follow this same guidance.

According to the guidance, DOJ will still prosecute individuals or entities to prevent:

1. The distribution of marijuana to minors
2. Revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels
3. The diversion of marijuana from states where it is legal under state law in some form to other states
4. State-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity
5. Violence and the use of firearms in the cultivation and distribution of marijuana
6. Drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use
7. Growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands
8. Preventing marijuana possession or use on federal property

That last one is really a laugh… All of the Colorado ski resorts operate with leases on federal property.  If you’ve ridden many chair lifts or skied upon some “smoke shacks”, you know what I’m talking about.  But back to our larger point…

But Colorado and Washington both have legal adult consumption.  Oregon and Alaska are voting on the same in less than a month.  In Oregon, that travel guru Rick Steves is even traveling the state trying to ensure the passage (he did the same 2 years ago in Washington).  He sits on the board of NORML (National Organization for the Reform of Marijuana Laws) and is consumer of, and strong supporter of legal weed.

23 states and DC already have some form of legal marijuana. Arizona, California, Maine, Massachusetts, Montana, and Nevada are all on track for 2016 efforts for full legalization. 

Florida, Ohio, and Pennsylvania have pending legislation and/or ballot measures.  By the time the next administration takes office, more than half of the states will have some variety of legal marijuana and 5 to 7 states (perhaps more) will have full legal adult consumption.

Which circles us back to the point of this post… can an employer fire an employee for legal activity during non-work hours?

The Colorado Supreme Court recently heard an argument on this very subject.  A brief synopsis follows (you can find the original here):

Brandon Coats was partially paralyzed in a car crash as a teenager, using a wheelchair, and has been a medical marijuana patient since 2010 when he discovered that using pot helped calm violent seizures and muscle spasms. Coats was a telephone call-center operator with Dish Network for three years before he failed a cheek-swab random drug test in 2010 and was fired. Dish Network has a zero-tolerance policy against using illegal drugs.

On Tuesday, the Colorado Supreme Court heard oral arguments in Brandon Coats’ case that may have major impact on marijuana and the workplace. Colorado voters first approved a constitutional amendment authorizing the use of medical marijuana in 2000. Marijuana for recreational use was approved by voters in 2012 and started being sold in retail shops in Colorado on April 1, 2014.

Twenty-three states and the District of Columbia now have medical marijuana laws. Washington and Colorado laws specifically state that employers do not have to accommodate employees’ marijuana use. But other states such as Arizona, Nevada, New York, Minnesota, and Delaware grant various levels of protections to medical marijuana card holders from discrimination.

Additionally, the Supreme Courts for the states of California, Washington, and Montana have all ruled that an employer has no duty to accommodate the use of an “illegal drug” such as marijuana. The fact that marijuana remains a schedule one “illegal drug” under federal law has been critical in each ruling for the employer.

Coats brought his lawsuit against Dish under Colorado’s lawful off-duty activities law, which specifically says employers cannot fire people for doing something legal on their own time. Originally the law was enacted to protect cigarette smokers and multiple states have similar laws. Both the trial judge and Colorado Court of Appeals have already ruled against Coats “legal use” argument holding that as long as marijuana is illegal under federal law the state law does not apply.

During the Tuesday Colorado Supreme Court hearing the justices did little to telegraph how they may vote. A ruling may be months away.

I think the betting money is on the “get-out-of-jail-free” card based on the fact that weed is still an “illegal drug”, per the Feds.  Thus you will still be able to fire folks for consuming marijuana even if the activity was legal, at least for a while.

But what happens once this situation changes?  And the betting money is on it changing at the federal level.  As it stands now, the governors of both Colorado and Washington could be arrested and easily convicted for violating various federal laws… as could every government employee who works in marijuana enforcement.  The accountant for the mob still goes to jail too ;-) and from the federal law perspective, these folks are all part of a criminal conspiracy involving illegal drugs and money laundering.

And of course the thousands (10,000 or so in Colorado alone) of folks who work in the marijuana industry… in addition to all of the consumers.  Those 23 states and DC with some version of legal weed?  Anyone associated with it (starting with the governors), whether through regulation, employment, or consumption… all could be arrested and easily convicted.

Is that going to happen or are the Feds going to start changing in an effort to get these laws in sync with one another?  That I believe is a no-brainer but it probably won’t happen until the next administration.  I don’t expect this to occur via a federal-level “let’s legalize it” effort but rather through a “let the states decide” movement… and anything that furthers the efforts of state’s rights can’t be all wrong ;-)

Of course the Colorado Supreme Court could surprise everybody and rule for Mr. Coats.  If that happens, employment law is going to be turned on its head for quite some time.  But this tide is already well past turning.

The FBI has a policy of no-marijuana use for the past 3 years for new applicants (even this is an admission of the prevalence of marijuana consumption in the US), but in just the past couple weeks FBI Director Comey said apply… even if you’re lighting up on the drive to the job interview!  You see the FBI needs talented, tech folks… white collar hackers… and the reality is a lot of these folks consume weed.

“I have to hire a great work force to compete with those cyber criminals and some of those kids want to smoke weed on the way to the interview,” Comey said.  The FBI could possibly amend those strict rules soon. Comey told the conference the bureau is “grappling with the question right now” of how to change the drug policy without scaring off the cream of the hacking crop.

I’ve talked to many folks in many industries and a lot are taking the same path… loosening the strict zero tolerance rules for the simple fact they can’t staff their businesses without it.  Craft brewers would die on the vine if they attempted to enforce a no-use policy!  And their drinkers would abandon them in droves in protest.  That’s just the reality on the street.

So… should an employer be able to fire a worker for legal activity outside of the work place?  I think the beverage alcohol industry should think long and hard about this one… a poor choice might come back and bite real hard.  You don’t have to be “pro-pot” (but I think anti-prohibition is a very righteous position)… just pro-individual rights.  Or at least that’s my take on it.  Let me know yours.

 

Insights into SABMiller, Heineken and ABI

Rather than attempting to simply restate what others have written, I offer below a pretty good summary of the dance of the giants… and even some half-giants… thank you Hagrid ;-) and thank you Tara for a pretty good summary... followed by another one from The Economist.

You can find the full article here or simply continue reading.  This is from the Independent Online from South Africa.  This really is an international deal ;-) 

Also please note that nowhere in the story does it mention the impact of this deal on the US market.  Why?  ‘Cause that ain’t what’s driving this thing… as noted in the last post, the US market is simply something that will have to be managed, it in no significant way will determine whether these deals happen or not.

SABMiller’s choice: lift bid for Heineken or marry AB InBev

September 17 2014 at 08:00am

Tara Lachapelle

IF SABMiller wants to avoid getting bought, its best bet may be to make Heineken an offer it cannot refuse. SABMiller is looking to make a large enough acquisition that will shield it from being acquired by growth-hungry Anheuser-Busch InBev (AB InBev) , the largest brewer.

London-based SABMiller had bet that $45 billion (R495.9bn) for Heineken would be the answer, only to have its takeover offer turned down by the company’s founding family earlier this week.

Even though shares of both Carlsberg and Diageo rose on Monday on speculation they could be alternative targets for SABMiller, Heineken is still the most appealing option, according to Morningstar’s Philip Gorham.

Persuading the Dutch brewer to sell might require a bid within the upper e70 (R999) a share range – about a 30 percent premium – as well as making concessions such as giving the family board seats and adding Heineken to the combined company’s name, Gorham said.

“I suspect that as vocal as Heineken has been about not wanting to sell, everything has its price,” Gorham said. “SABMiller could come back to Heineken. It’s the number one choice. If they don’t get that, anything else is suboptimal.”

Richard Farnsworth, a spokesman for SABMiller, declined to comment on whether it would make another attempt to buy Heineken or other companies.

Vulnerable giant

Heineken confirmed in a statement that it had rejected SABMiller, saying the proposal was “non-actionable” and that the Heineken family intended to keep the company independent. The founding family controls the brewer via another publicly traded vehicle, Heineken Holding, which owns 50 percent of the 150-year-old business.

The Heineken statement “was very clear”, company spokesman John Clarke wrote on Monday.

The rejection leaves SABMiller more vulnerable to being acquired by AB InBev, the maker of Budweiser and Stella Artois. The ball is in the Belgian company’s court to move forward with the long-speculated merger – unless SABMiller can persuade Heineken’s family to sell.

“It’s just very difficult in those sorts of family circumstances where there’s more than money involved, there’s emotions,” Wyn Ellis, an analyst for Numis Securities, said. “From what Heineken said, it looks to me that the definitive answer is no.”

SABMiller had “sensible people, so I guess they would not have made the approach unless they felt there was a chance of certain success”, Ellis said.

While the price that SABMiller offered has not been made public, Heineken shares climbed 1.3 percent to e60.18 on Monday, valuing the company at almost 11 times this year’s estimated earnings before interest, tax, depreciation and amortisation (Ebitda).

SABMiller, valued at $98bn after gaining nearly 10 percent in London on Monday on talk of an AB InBev approach, could justify paying an Ebitda multiple in the “low teens” given the opportunity it would have to expand the Heineken brand in Asia, one of the faster-growing beer markets, Gorham said.

“It leaves some room to go higher” from Monday’s closing level, he said. “I wouldn’t rule out a high 70s takeout price.”

If SABMiller were to pay e78 a share for Heineken entirely in cash, it would result in a 16 percent increase to next year’s earnings, data show.

Lesser alternatives

SABMiller may have other options should Heineken continue to resist, though they also appear flawed. One was to pursue a deal with Carlsberg, the Danish brewer that was valued at $15bn on Monday after rising 2.7 percent, except it was controlled by a foundation that also might not be willing to sell, Ellis said.

Carlsberg’s brands were less appealing than Heineken’s, and its biggest developing market was eastern Europe, which was not growing as quickly as other developing regions, Gorham said.

While Heineken and AB InBev’s brands ranked among last year’s top 10 beers by volume, none of Carlsberg’s beers made the list, according to Bloomberg Intelligence.

Another idea was to buy Groupe Castel’s African beer operations, in which SABMiller already has a 20 percent stake, although that might not provide enough scale, he said.

There is also Diageo, which surged 2.2 percent on Monday, its biggest gain since April. The $76bn company focuses on liquors such as Johnnie Walker whisky and Smirnoff vodka and is unlikely to be interested in merging with SABMiller or selling its Guinness beer brand, according to Ian Shackleton and Edward Mundy from Nomura International.

“That SABMiller’s inorganic options have been so publicly lessened puts AB InBev in an even stronger position, should it choose to make a move on SABMiller,” Eddy Hargreaves, an analyst at Canaccord Genuity Group, wrote in a note on Monday. “SABMiller shareholders may be even more likely now to welcome a bid.”

Perhaps management would be, too, said Bryan Keane, a money manager at Alpine Woods Capital Investors, which owns AB InBev stock.

Being rebuffed by Heineken “may make SABMiller change their position and be more open to discussing a deal with AB InBev”, Keane said from New York. “They’re very complementary businesses.” – Bloomberg

 

The Economist also had a good summary...  which you can find here or you can just keep reading.

Foamy war

SABMiller may be swallowed up by its main rival, AB InBev

Sep 20th 2014 | From the print edition of The Economist

THE world’s biggest brewer, AB InBev (ABI), is also the most frugal. There are no company cars for senior executives. Carlos Brito, the boss, flies economy class. That is one reason why, with 18% of global beer sales, ABI has a third of the profits.

This will matter in the wary manoeuvres now taking place among the giants of global brewing. On September 14th Heineken, the number three by volume (see chart), said it had rejected a takeover proposal from SABMiller, the number two. SAB seems to have been trying to defend itself against a possible takeover by ABI, which was said to be talking to bankers about raising £75 billion ($121 billion) to buy its rival. That was little more than a rumour, but industry-watchers suspect something big is indeed brewing, in brewing. And the chances are that ever-thirsty ABI, maker of Budweiser and Stella Artois, will swallow SAB.

The beer behemoth has few other ways to grow. In rich countries, consumption of beer has stopped rising. In America, ABI’s Anheuser-Busch division is suffering growing competition from small makers of “craft beer”. The number of American breweries has jumped from fewer than 100 in 1983 to more than 3,000 today. ABI has its roots in Brazil, but there drinkers are suffering from a sluggish economy and post-World Cup blues. This leaves ABI with two options, says Andrew Holland, an analyst at Société Générale: give its cash back to shareholders or buy something.

SAB is a tempting target. Though based in London, its origins are in South Africa; it has breweries and bottling plants in 15 African countries, where people still mainly guzzle moonshine. It has stakes in 21 others through an alliance with Castel, a French drinks company. Nearly 70% of SAB’s sales are in emerging markets, many of which are still developing a taste for beer. Last year its sales by volume expanded by 3% (not counting growth from acquisitions). ABI’s, in contrast, dropped 2%.

If ABI gets hold of SAB it will no doubt try to repeat tricks that have worked well since AmBev of Brazil merged with Interbrew of Belgium a decade ago and then pushed out its American boss: squeeze costs and use the new acquisition as a platform to spread its brands. That was the formula after the merged group bought Anheuser-Busch, the maker of Budweiser, in 2008. Grupo Modelo, a Mexican brewer which makes Corona and has been part of ABI since last year, is now undergoing the same rigours.

SAB would be a more difficult undertaking. For one thing, notes Mr Holland, it is more tightly managed than “fat and lazy” Anheuser-Busch was, so there is less scope for cutting costs. SAB is bigger and more complex than anything else ABI has taken on. A knack for cost-cutting may not serve it as well in fast-growing markets. Another problem is that in some countries the two giants’ combined businesses would be too big. In America Anheuser-Busch and SAB’s joint venture with Molson Coors, another rival, would together have three-quarters of the beer market. In China the two would have more than a third. These are not insurmountable problems. In America, for example, the stake in the joint venture could be sold to Molson Coors.

Despite the obstacles, a merger of the leading two beer companies looks the likeliest of the potential huge deals. Heineken, which is controlled by the Heineken family even though it owns just 23% of the company’s equity, has now given notice that it does not want to be bought (though that could change if SAB boosted its offer). Carlsberg, the smallest of the big four, is controlled by a foundation. So the parsimonious Mr Brito may well get his hands on SAB if he wants it enough. Teaching Africans to like Budweiser, however, may prove somewhat harder.

Holy Guacamole! The giants are dancing again.

Interesting news over the weekend… SABMiller made a “hey, let’s get together” offer for Heineken and ABI might be lining up financing to make a run for SABMiller. 

I had planned for this post to be more about the Monster move… but that will have to wait… although Monster offers a painful lesson in the realities of big business and the strength of things like “I thought”… and “I was told”… and “I assumed”… and “they promised”.  Value of those things?  About zero.  Something to keep in mind as this all plays out.

But what about the renewed dance of the giants?  Many have noted how life is often just like a country music song… or is it the other way around? ;-)… but this is better described by a song from a one-hit-wonder band, The Georgia Satellites… Keep Your Hands to Yourself.  To enlighten my younger readers… here are the lyrics

 I got a little change in my pocket going ching-a-ling-a-ling

Wanna call you on the telephone, baby, give you a ring

But each time we talk, I get the same old thing

Always, "No huggee, no kissee until I get a wedding ring"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

 

Ooh, baby, baby, baby, why you gonna treat me this way?

You know I'm still your loverboy, I still feel the same way

That's when she told me a story 'bout free milk and a cow

And said, "No huggee, no kissee until I get a wedding vow"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

 

You see, I wanted her real bad and I was about to give in

That's when she started talking about true love, started talking about sin

I said, "Honey, I'll live with you for the rest of my life"

She said, "No huggee, no kissee until you make me a wife"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

The song can be seen at https://www.youtube.com/watch?v=PdpAop7gp0w if you really want to get the feel.  I have to admit I get this silly image of Brito, Boxmeer, and Clark filling out the various (and changing) roles in this music video. 

But back to my tale… both ABI and SABMiller have a little change in their pocket, and I assume it’s going ching-a-ling-a-ling.  I assume all currency, regardless of its type, makes the standard ching-a-ling-a-ling sound.

SABMiller decides they want to get a little action – if you know what I mean ;-)… or do they just want to run from ABI and their love of Heineken is of a temporary, yet urgent nature?  Regardless, they give Heineken a ring and plead, “my honey, my baby, don’t put my love upon no shelf”… But Heineken gives them the cold shoulder with a strong, “don’t hand me no lines and keep your hands to yourself.”

Now SABMiller, who fear ABI is going to grab them by the hair and drag them into the nearest cave, respond with a “Ooh, baby, baby, baby, why you gonna treat me this way?  You know I'm still your loverboy, I still feel the same way”.

Much like the old serial movies, stay tuned to see if the spurned lover can overcome his sweetheart’s admonition to keep your hands to yourself.  A bigger and bigger diamond ring can melt even the most reluctant business heart… just ask AB shareholders ;-).  And more importantly, the senior management at AB.

And onto ABI… why does SABMiller fear their loving embrace?  Don’t they too have that loving feeling? – OK, too many song references will only burden this so far delightful little post.

From my cynical observation of large public companies, they are run solely with 2 goals in mind… first to enrich the present senior management (the folks who set around the table and make the big decisions) and second, to keep the stock price up.  The second’s sole goal being to ensure the first goal can be obtained.   Sorry, but that’s it. 

Most large organizations; public companies, unions, government, whatever, end up being operated for the benefit of those who run the place… not necessarily the same as those that own the place… or the members of the organization.  These poison pill maneuvers reek of a senior management self-protection racket.  Of course all wrapped in motherhood, apple pie and doing what’s good for the shareholders… yeah, right.

Does SABMiller want to purchase Heineken for the sole purpose of becoming “too large” for ABI to swallow?  To whose benefit is this?  AB tried the same thing when InBev was pleading for them to not “put my love upon a shelf”.

How did InBev overcome this reluctance?  Yeah they raised the offer price a little, but mainly they agreed to allow the senior management (the decision makers) of AB to reward themselves like Saudi princes.  Once they had lined their pockets with more than a little ching-a-ling-a-ling… it was amazing how they welcomed InBev into their boudoir… no more keep your hands to yourself.  What was once a terrible idea for shareholders suddenly became a great idea for shareholders… once enough promised silver had changed hands.

Cynical yes.  True?  Sadly yes again.

Our InBev friends (now ABI) have proven themselves very good at deal making so I certainly wouldn’t bet against them in their run for SABMiller.  The international brands/footprints work pretty well and if ABI can’t make deals happen, they’re stuck with just running the dang things… and that’s a lot harder to do… and doesn’t offer nearly the rewards to THEIR senior management for a little extra ching-a-ling-a-ling in their pockets.  The AB deal put more than a little ching-a-ling-a-ling in their pockets… what was it?  Only about $2,000,000,000 or so for a very small group of individuals.  I’ll do deals every day for that type of ching-a-ling-a-ling.

Just like those country music songs, it all comes down to ching-a-ling-a-ling and spurned (and not spurned) love… basically what’s in it for me?

Now after 900 words (and beating an old song to death), what does this mean for US beer distributors?  Harry reports that even if the ABI/SABMiller deal happened, it would mean little to wholesalers.  I profoundly disagree.

This deal will be driven by international positions and the US is a minor part of these calculations.  Beer distributors keep that in mind.  The US isn’t driving this potential merger; from a decision-making viewpoint it is small potatoes.  It is a headache, but one that can be managed.  And to repeat myself… yes the US market is a great cash cow but it is also a pain in the rear from a supplier perspective. 

We already know how the businesses are performing under current ownership. Dumping/spinning-off all or parts of the US market at the right price is not necessarily a bad idea, especially if the business is likely to sell for more than it’s worth to the present owner.  Even if ABI could add value, it’s not too far-fetched that the businesses could become structurally less attractive in the US. 

If they finally agree to take that love off the shelf, they will make the US market work one way or the other.  And anyone who is telling you how it will all shake out in the US is simply telling stories.  No one… and that includes the present players on all sides of this... can tell you how the US will shake out.  There are far too many moving parts and far too many players… both known and unknown.

With this move, and the continued 3-tier and franchise erosion driven by the craft folks, we could see a profound remaking of the entire US beer distribution system.  Remember things are always like they’ve always been right up to the moment they aren’t anymore.

And don’t let the present Justice Department and its anti-trust positions give you any false hopes… most likely it will be the next administration who would ultimately agree to these actions… and they may take a far different stand than the present one.

For you unconsolidated Miller Coors distributors…could you be holding a structurally unattractive business that would provide a lesser rate of return?  You’re playing roulette, and I’m afraid it might be the Russian kind, especially for the medium to smaller volume distributors.  Take your chances if you like but with these potential changes of ownership, where do you stand?  And if it happens, the odds of what would legally be described as “change of ownership” are very high indeed.  One of you saps, if not both, will be heading to the exit.  You might go “baby tantrum-style” - a style I personally know well ;-) but you will go.

Only a handful of states have franchise laws that protect distributors regardless of almost anything… where you will stand if this happens is determined by the state you’re in.  But you might be facing a situation of bye-bye brands (and effectively your business) with the only argument being what fair market value is.  Who knows, perhaps Coke goes farther than Monster and tries to pick up the entire beer distribution bus?  Does anyone really think they couldn’t run it?  It might just be how much it costs to get it.

We may find that pretty much every wholesaler is playing roulette… and all they can do is cheer for the ball to ultimately fall in the right slot.  MillerCoors, Molson Coors, ABI, Heineken, Coke and Pepsi, Pabst, Boston Beer, Constellation, some of the other larger craft brewers… all might willingly or unwillingly join the party.

Rather than being a non-event for beer wholesalers since we all know how it will go in the US… this could be the start of a re-making of the entire US beer/beverage distribution industry.  It sure feels like the pressure has been building for profound change for some time.  Each of you… look in the mirror and tell me you don’t believe the same thing. Is this the event that sets it in motion?

For the US, even if the structure is attractive, how much more value could the new owners provide? Learning and developing new skills at the corporate level as we know is a very difficult and slow process, especially considering the product portfolios and supplier biases within our industry.

If I’m a fence-sitter this might be a great time to take the offer premium… that extra ching-a-ling-a-ling – and to accept those overtures from that lover that keeps calling on the phone.  Hanging on to your business could mean it will sell for less in the future… perhaps one heck of a lot less. Financial and strategic analysis is a great evaluation tool.  It could give both a potential buyer and seller their affordability index when considering paying a premium or maximizing the purchase price.

Regardless, finding out the value of what you have might be a good place to start in an attempt to formulate a strategy… and yes, Cook and I (actually mostly Cook) do some of the best valuation and M&A work in the country.

Roulette might be a fine game in a casino (although I hear it is a sap’s bet) but it has no place in your business planning.  Russian roulette is a game for far braver souls than I.  I sure wouldn’t be playing it with my business… for most of you, by far the largest asset you own.

What will come of this?  Who knows.  But once these things get in motion, they seldom go back to where they were before.  And hoping and praying the ball falls in the right slot is no way to plan for your business’s future.  That starts with a phone call to me to discuss how we can meet your needs and discuss scheduling a strategic planning session.  Just saying… ;-)

Learning from Monster

In continuing my tradition of upsetting as many people as is humanly possible, let me weigh in on the recent Monster kerfuffle.  And in the process hopefully set out a path for peace with craft brewers.

As a brief background, here’s what Reuters reported on August 15^th  -

Coca-Cola Co's $2.15 billion wager on a stake in Monster Beverage Corp highlights the growth-starved soft drink company's embrace of deals that fall short of a full-blown merger and acquisition but allow it to test-drive potentially risky targets.

The world's largest soda maker said Thursday that it was buying a 16.7 percent stake in Monster. Coke will get two directors on Monster's board as well as Monster's non-energy brands, such as Hansen's Natural Sodas and Peace Tea. Monster will get Coke's energy brands, which include NOS and Full Throttle, as well as access to Coke's extensive distribution system.

Taking a minority stake instead of acquiring Monster outright gives Coke the opportunity to get the perks of being in a $27 billion global energy drinks market without taking on the financial and public relations risks that come with the controversial category, analysts said. If the deal closes as expected, Coke will distribute energy drinks but will not actually own them anymore.

For most of the world this isn’t a big deal one way or the other.  But for beer distributors, specifically ABI distributors who carry the brand, it is a painful lesson in business realities.

You see for them, the key phrase is “as well as access to Coke's extensive distribution system”.  One can be assured that this feature was a prominent factor in setting the purchase price.  Coke wants the brands to make money for THEIR people, not some ABI folks who they have never met.  Thus the ABI distributors will be terminated per their contractual rights.

And thus the ABI folks will be paid one times trailing 12 months gross profit.  The ABI folks believe this is not an equitable purchase price… but here’s the kicker… THEY signed the contract.  Although Harry reports they say they were “compelled” to sign this contract, from a legal perspective they were not.

They freely and openly signed this contract.  They were in no way compelled to do so, they could have easily said “nope!  I’m not signing this contract.”  But of course a “nope” vote would have in all likelihood meant the brands would go somewhere else.  Thus they signed the contract, granted one which contained some terms they didn’t like… but they still signed the contract to keep the brands rather than losing the brands.

It was a clear-cut business decision they made.  Guess what?  Business relationships (in fact relationships of all kinds) are often based on power.  Pure and simple.  “You want the brands?  Then sign the contract.”  If the contract was so onerous that no one would sign it, Monster would have been forced to alter it.  But it wasn’t that onerous and the brands were hot and contributed a great deal of gross profit to those distributors lucky enough to have the brands.  Thus they signed.  And I believe they ALL signed.  How onerous could the terms be if every freaking distributor decided it was better to keep the brands and sign the contract than to risk losing the brands?

And let us never forget (and yes, beer distributors seem to need to be reminded of this on a regular basis) they are Monster’s brands and they can do what they want with them, limited only by contractual bonds.  That’s the way the world works.

Are these terminations going to hurt some of these distribs?  Oh yeah.  In most Monster/ABI distribs the Monster brands are one of at least the top 5 gross profit contributors.  Sometimes 2 or 3.  So the loss of these gross profit dollars will most assuredly impact their bottom-lines.    

To which Monster and Coke respond… so?  You’ve made a ton of money on the brands over the years.  It was a good relationship for both parties but now the situation has changed and Monster and Coke are going to do what they perceive to be in their best interests… bound only by their contractual obligations.  Although I understand the distributor’s unhappiness, I see no evil here.

Which brings us back to craft brewers and distributors.  I’ve made a ton of friends by my stance on beer franchise laws and the three tier system ;-)  Yeah, right.

As I have written about before, I believe tying franchise laws and the 3 tier system together is a tremendous strategic mistake for this industry.  Beer distributors are the last line of defense for the 3 tier system.  Much like Frodo in the Lord of the Rings, if you don’t accomplish the task, no one else will.  And if the 3 tier system goes, so do most of you.

Franchise laws on the other hand are another example of putting power to use, only this time beer distributor power (funny how we like power when it benefits us, but hate it when it goes the other way).  Those prettiest girls at the dance, the craft brewers, are chaffing from these franchise laws and are fighting (effectively) to exempt themselves from them.  And in the process they are setting up the destruction of the entire 3 tier system.

Using the state’s power to enforce these laws is at the root of this problem.  Rather these relationships should be set just like most other business relationships, through negotiations and a contract(s) which legally binds the parties to the agreed upon terms.  No need for the state to become involved.  And yes, power does influence the terms.  If the brand is on fire and is thus the most desirable girl at the dance, the terms will favor them.  If the brands are a dog and the brewer will take almost anything for access to distribution, the terms will likely go the other way.

So rather than crying about the unfairness of life, beer distributors should embrace these realities.  Beer distributors have an incredible warehousing/sales/distribution/merchandising system.  No one comes close to your relationship at retail and your frequency of contact to the licensed retailer.

So rather than fighting for the state to grant you perpetual franchise rights (something I believe you are going to lose… power comes and goes), why not offer tiered services for the suppliers you represent?

For Class A suppliers, you offer full brand support.  Everything up to and including brand authorizations.  For these folks you bring everything you’ve got to the table to help them build the brands.  In exchange, they agree to contractual terms which in effect give you strong franchise rights.  Perhaps more favorable GP terms too.

For Class B suppliers, you offer a little less and they agree to contractual terms which don’t give you as strong as a position in ownership/control of the brands.

For Class C suppliers… etc. 

Do you see where I’m going with this?  You change the paradigm and rather than giving every supplier everything you’ve got (which in reality few do any how)… you allocate your tremendous power based on the degree the supplier is willing to be contractually bound to you. 

You can then allocate your resources accordingly.  Hot brands will still happen and a smart distributor will ride that wave as long as is possible, even if those brands happen to be from a Class D supplier. 

Political power comes and goes… as you and the craft brewers are learning… although both are going in opposite directions… but your lasting power doesn’t reside in the state legislature but in the incredible sales and distribution machines each of you controls.  Use that to your advantage.  Just because you agree to distribute a product does not necessarily mean you have to “give it all away” to each and every one.  That’s not what the prettiest girl at the dance would do.  ;-)

And smart craft brewers will draft their contracts to also take advantage of this shift to meet their individual desires and market realities.

If you want more on this, give me a call or email.  No more freebies from Conlin ;-)

The Insanity of the 21 drinking age

One of my many complaints about the world is the federally-mandated 21 year-old drinking age.  That we have brave men and women risking their lives for our collective freedom and safety… people who are entrusted with incredible power, who make life and death decisions on a regular basis… yet that they can’t legally drink a cold beer is BS in my book.

Almost all states allow young women to have an abortion at 18 without any parental consent… yet she doesn’t have the maturity to drink a cold beer for another 3 years?!  Regardless of one’s beliefs on abortion, this reality makes no sense.

CNN just ran a piece which you can find here on what science is telling us about this crazy policy.  Of you can read it in its entirety below…

 

21: Science's limit when it comes to the drinking age

By Jen Christensen, CNN

updated 7:11 PM EDT, Tue July 15, 2014

Source: CNN

(CNN) -- On July 17, 1984, President Ronald Reagan signed into law the National Minimum Drinking Age Act, which withheld a percentage of highway funds from any state that didn't raise the minimum drinking age to 21.

The week before, Reagan had declared ice cream a "nutritious" food.

Perhaps that's a hint that politicians don't always know what's best for your health.

Thirty years later, there is a group of people with Ph.Ds and MDs who take issue with the drinking age. They say, from a scientific standpoint, that the law may target the wrong teen behavior.

The law came into being to solve a serious public health problem.

Before the minimum drinking age law, 16- to 20-year-olds were the most common drunken drivers.

When the drinking age was raised, the number of fatal crashes involving a young driver dropped significantly, from 61% in 1982 to 31% in 1995. It went down more for that age group than any older age group.

But while the law did have a significant impact on drinking and driving, it did not stop kids from drinking. In fact, it may have made drinking even more appealing to teens, whose brains naturally seek out risk more than adult brains do -- without considering what the consequences might be.

A survey of students at 56 colleges across the country just a couple years after the legislation passed found that "significantly more under-age students drank compared to those of legal age." This study concluded that "the increase in purchase age appears to have been not only ineffective but actually counter-productive, at least in the short run."

The definition of adulthood is not clear-cut when it comes to science.

"There's no magic that happens physically to someone when they are 21 as compared to age 18," said Dr. William Graf, a professor of pediatric neurology at Yale.

The American Psychological Association (PDF) says that drawing a single line between adolescence and adulthood under the law is at odds with developmental science. They say adolescence usually begins at about age 10 and ends around 19, but really it depends; maturity is based on an individual's experiences.

Developing brains

Current data from the National Survey on Drug Use and Health and Monitoring the Future, the two official surveys that monitor such topics, suggest that roughly 65% of college students (generally aged 18 to 22) drink alcohol in any given month.

Most of the college students who choose to drink are binge drinking, according to a study out of Harvard. Seven out of 10 are consuming five or more drinks in a row.

Binge drinking can have a damaging impact on a developing brain. Evidence suggests that heavy exposure to alcohol can cause irreversible brain damage and cognitive deficits, including memory problems.

Scientists say the teenage years are one of the most important times for brain development, next to infancy. Neurons in the brain are growing and strengthening, connections are developing to allow the brain to transmit information faster and allow the brain to process more complex thoughts, and the brain goes through a kind of pruning process to eliminates synapses that are infrequently used.

All this brain development has a huge impact on a person's development and mental well-being. It also means that young people have lapses in judgment during this time period as they try to figure out how to be adults.

The limbic system, the part of your brain that is involved in processing social and emotional information, develops early in adolescents. But the prefrontal cortex, the part of the brain that involves judgment, impulse control and abstract thought and the ability to anticipate the consequences of your actions, isn't fully shaped until your late 20s.

Mimicking behavior

Abigail A. Baird, associate professor of psychology at Vassar College, has spent her career trying to understand what happens with the typical adolescent brain.

Baird argues that if anything, in terms of biology, the age limits on driving and drinking should be flipped.

"If I were queen for the day, I would move the drinking age to 18 and maybe not let them drive until they were 21, at least not with other people besides your parents in the car," Baird said.

She likes the idea of graduated driver's license laws that slowly let young drivers have more responsibility as they get more practice in the car. This is based on the theory that they will learn how to avoid accidents as they gain experience.

The statistics back her up. Before states introduced graduated licensing systems during the first six months of solo driving, newly licensed drivers were about eight times more likely to be involved in fatal crashes than more experienced drivers.

"We all know adolescents are obsessed with learning from their peers. ... Adolescents learn based on experience. They are not good at learning abstractly; that's what changes a lot between 18 and 21. When you get older, you can learn from reading stories about people and by really feeling for other people."

Baird believes that society could use the way young people learn, to help them learn how to drink responsibly at an earlier age. If drinking were less of a clandestine affair, perhaps a teen's peers could model more appropriate behavior for younger participants. She says it's important to learn how to behave around alcohol.

"Find me a business dinner that you will go to where you are not offered alcohol," Baird challenged. "In our society, you do need to know what do around it and how much you can handle."

 -------------------------------------------------------------------------------

Wisdom from CNN?!  Go figure ;-)  If you want to watch an interesting video of drinking ages around the globe go here

Is the concept of “we mutually pledge to each other our lives, our fortunes and our sacred honor" only for saps?

First a clarification… in a recent post, which you can find here, I referenced a Steve and some have mistakenly believed I was speaking about my buddy and associate Steve Cook.  I was not.  I was referencing the Brewers Association inspired NYT op-ed by Steve Hindy.  And I didn’t even get a dang t-shirt!  ;-)  I’ll let you all figure that out. 

All I can say is that for 25+ years I have worked with beer wholesalers and I can tell you that you can take their word to the bank.  I’ll do a handshake deal with almost any beer distributor in the country, regardless of how many zeroes are in the deal.  The same cannot be said of others. 

To all the beer wholesalers out there… the craft brewers are not your opponent and it is destructive to think of them in that manner (and the same to you craft beer folks regarding distributors) but the BA is most definitely an opponent if not an outright enemy.  Accept reality as it is and deal with it.

But onward and upward… one thing a good manager (or consultant) must do is to always try to manage the “what if’s”.  What if this happens?  What if that happens?  How does that affect the company?  In this process one has to mentally project the business (or system) 5 or 10 years out.  What incentives does it drive?  How does it work once the dust has settled?

That’s why the present battles over franchise protection and carve-outs are so lacking.  Many of the arguments are focused solely on the here-and-now.  I don’t hear too many folks projecting out what these things might mean 5 or 10 years down the road.  And if history is any guide, tomorrow will actually show up.  ;-) 

That was one of the many insights of the founders of this country… they attempted to set up a system which would work today, next year, and 200 years down the road.  Does anyone see any such thinking in these carve-out/franchise arguments today?  Nope.  Government is simply a means to achieve one’s short-term financial goals.  Beyond that?  Who cares!  ;-) 

Let’s all see who can control the power (and the feedin’ trough… ‘cause that’s what it all comes down to) and they are today’s winners.  These battles are a microcosm of our larger society.  The founders of this country stated “we mutually pledge to each other our lives, our fortunes and our sacred honor.”  They meant those words and they captured the reality they faced.  From that to “how can I set up the trough for me”.  Sad.

I personally still see things lining up where the 3-tier system disappears in the relatively near future.  As I noted before, beer and beverage distributors are the last line of defense.  And I believe some of the larger distribs think they can survive quite nicely without it (I think they are wrong).

Craft brewers are going to regret the world they bring about.  A handful will prosper via alliances with MC or ABI but the rest are going to be local brewpubs.  And the Heinekens of the world will also have to choose a partner and hope it all works out for them.

Intellectually one can make a strong case that carve-outs are actually ass-backwards.  Beer distributors actually do (can) build small craft brands much more than they do established nationally advertised and supported brands.  One can argue that franchise protection should be applied to the small brewer with the carve-out being reserved for large, national brands.  I won’t hold my breath but if one analyzes the reality on the street that is much more consistent with the way things actually operate.

My argument remains that these things don’t need to be enforced by government.  Let the marketplace sort it out like happens in other industries.

It’s kind of funny but I’m working on an unrelated business start-up right now and I plan to offer strong franchise protection to my business partners.  Not government enforced… I WANT to do it.  I not only want them to make a good margin on the product, I want them to own and build equity in the manufacturing and distribution rights.  This is a proven method to ensure commitment from a business partner and to allow them to share in the financial rewards of success.

 Long ago I wrote a blog entitled, Plenty to Go Around, which you can find here.  Perhaps everyone in this industry should give it a read.  Do you have a mindset of scarcity or abundance?  I won’t hold my breath for the BA and others to get on board but as I noted above, the individual craft brewers remain supply-chain partners, not the opponent.

But since I remain a cynic, I’m still betting the 3-tier system is going to be taken apart… piece by piece with little thought given to the future… and few will be happy with where this takes us.  But what the heck do I know? ;-) 

 

 

 

 

 

 

Long-Timer or Free Rider?

Had planned to write no more about this but I received a surprising number of very personal responses to the last couple posts.  I know I’ll get beat up for relaying their feelings but they pleaded for their beliefs to get aired.  I think the recent posts got them fired up to vent their feelings… so get out the sticks for good ol’ Conlin and here we go…

This one captures the general feeling…

Your last two post are the truth and the truth hurts.  Beer people like me could care less about distribution values because I love the business with no plans to ever sell.  This business provides a great living each year for doing a great job executing.   On the other hand this type of information scares the hell out of people who dream of cashing out with a big check without ever putting in any effort to better the company.  They are The Free Ride Guys.  The Truth Hurts.

And another…

John, please add one more post just to screw with lazy, dumb ass owners who think they understand what this business is all about from warehouse employees to sales and everything in between.  Too many of the 2^nd and 3^rd generation owners do little more than cash their checks.  They do nothing and reap great rewards while their employees work really hard for their pay.   Most of these owners claim to be right wing Republicans but they are really Liberal Democrats who keep getting funding from the distributorships… “government/distributor” handouts for doing no real work.  They hide when there’s real work to be done but are always first in line come payday. 

 And lastly, a longer venting…

Conlin, it is sad that many owners never get to the warehouse when the day starts so they never get a pulse for what is really going on on a daily basis.  All they do is run around with their calculator crunching distributor “For Sale Value” every time they read an article from Harry or Benji when someone sells for an inflated price to see how much their deal is worth.  They run a few reports and think they busted ass for the day.  They leave in the early afternoon so as not to miss their favorite hobby. The only reason politicians like them is they give them campaign checks but they love telling friends how much influence they have with the politicians.  These owners have no clue how to relate to the working people of the distributorship, only the very few office people they see. Most managers know how to play them because they always tell these owners good stories, not the reality of what is really going on. (sadly, even if they knew the real stories they would leave for home and hope the problem will disappear). These owners receive not one ounce of RESPECT from any employee. From my personal experience and observation, in partnerships there is usually one person who actually loves the Beer business.

The others hang around Yacht Clubs, Tennis Clubs, Hunting Lodges and Country Clubs where they envy the members who have cashed out of their business. It kills them that they may never get to join that club. None of these guys I am describing love this business. Many were forced in by a parent, but they DO love the $$$$. I bet only a few of them could make over $100K on their own. The only thing that keeps some of them in is a son or daughter. The other cousins or siblings in the beer business that love this business keep these people from the big cash out. I would really love to know if these owners think they bust their ass every day for the yearly salary they receive????  They better be very thankful that other blood keeps the ship sailing in the right direction.  They had better hope that the real worker does not get the attitude that they are tired of making them rich while they keep working long hours and weekends while the lazy owners are at home or the Country Club.  It does make me angry to have to split profits with these types of partners. Most of them try other business deals but fail miserably because they have no work ethic or no real life experience.  If these type of owners were left to run things the operations would crash and burn within two years while they were getting stolen blind.  These owners have no clue how to run a beer operation.

Weee doggie!  Venting the ol’ spleen indeed!  There… to my friends who sent these (and others in the same vein) I’ve made your feelings public… now get out the pitch forks and torches and get after the messenger.

Strong feelings from folks who bring it every day versus those who they see as having as their sole interest protecting their lucky sperm club handout and free ride.  Although these feelings might seem only tangential to the arguments about franchise law, carve outs and the rest… might it not be the actual essence of the thing?  Just a thought. 

In addition, for some of these “unequal” relationships I recommend a frank and honest discussion about possible methods to meet everyone’s goals… it is possible with flexibility on all sides.  And a great consultant like me to help the process along ;-)

Other than that, I’ll leave it to the reader to decide the merits of the arguments… I’ll just add that I find folks who bring it every day are less concerned about exit prices than those “free riders” who operate with one eye on the exit door.

Thanks to the distribs and employees who shared.  This industry is filled with great folks… owners and employees.  We do a disservice to all when we focus solely on what we perceive as our short-term self-interest.

 

Franchise law, carve-outs, and the 3-tier system

Well it seems the pot is really starting to boil.  The Brewers Association and NBWA are getting out the short knives.  Craft brewers and distributors are manning the ramparts.  Bars and restaurants are beginning to rise against the special treatment afforded to craft brewers, just because they brew the stuff.  Some distributors are telling NBWA to stay out of their state’s business.  It seems as if everybody is upset with someone… ah, ain’t spring swell?  ;-)

As some of you know, I was going to get into this fight, earning me my new nickname of Bad News Conlin ;-)  And it seems some may have plagiarized my work (and even my title), eh Steve?  I won’t even begin to discuss the self-serving (and unprofessional) actions of various organizations and individuals… but enough of that ;-) 

I’m heading in other directions and plan to leave this fight for others.  But I thought I’d throw out my 2 cents worth in an attempt to save the most dynamic and entrepreneurial beverage alcohol industry the world has ever seen.

It’s kind of funny how dang near everybody in this industry is making more money than ever before, yet the fighting only escalates as the dollar signs go higher and higher.  I think there is a word for this… but why go down that street?  ;-)

Let’s start at the beginning… December 5^th, 1933.  Without that, none of you exist in your present form.  And the wisdom of the 21^st Amendment.  I’d have to guess it never would have passed if it had attempted to determine the nation’s alcohol laws.  This side wouldn’t have like that.  That side wouldn’t have like this… and it would have died.

Instead the framers of the amendment made the right (and easiest) choice.  Let the stinken’ states decide.  It was clear the country wanted legal alcohol.  The well intentioned (well, at least somewhat well intentioned) 18^th Amendment was a classic example of federal government over-reach.  Rather than following the basic structure of that failed experiment, the 21^st Amendment went the other direction.  States-rights.  Alcohol consumption is by definition a local issue… my getting drunk every Saturday in Littleton doesn’t affect anyone in California.  So the 21^st Amendment was written to both legalize alcohol AND to let the states decide alcohol regulation.

And part of this wisdom was the creation of the 3-tier system; a mandatory system whereby distinct “tiers” would only be allowed to operate in the production, transportation and sale of beverage alcohol.  THIS system is the reason we have the most dynamic beer, wine, and spirits industries in the entire world.  On this point there really can’t be any debate.  In these fights this point must never be forgotten.  It is the design that holds the entire system in place.

Yes, it in effect does use government to create a protected monopoly, the beverage alcohol distributor.  But the pluses to society FAR outweigh the negatives.

So everybody that’s fussing and feuding right now should pause and consider if their actions and desires help or hurt the 3-tier system.  For without the 3-tier, most of the players in this industry, brewers, distributors and even retail, would find their existence quite tenuous.  Alas, that has as much chance as the proverbial snowball in hell.

The beer industry (and general beverage alcohol) is undergoing a cultural revolution.  Not that long ago, all the players (brewers, distributors, retail) were basically family businesses.  And family businesses see the world and operated quite differently than public companies with their “professional” management.

Family businesses generally think much longer term… they have no need to focus on quarterly results and daily stock price.  Family businesses generally have a much stronger bond to their employees, to their customers and to their local communities.  This isn’t a moral statement, just a factual observation.

With the dominance of retail chain grocery, the family retail business isn’t quite as dead as the dodo but it is close.  Thus the way retail thinks has undergone a transformation.  And during this same time frame the power of these chains has increased exponentially.

It wasn’t that long ago that the major brewers were all family businesses.  Well A-B really wasn’t but Gussie and then the Third ran it as such.  Now all the major brewers are huge, international businesses… and they think as such.  Again this isn’t a moral issue; it’s simply the way it is.

Of course the upstart prettiest girl at the dance craft brewers are family businesses but I’m not certain they have the time frame thinking of the typical family business, perhaps in 20 or so years they might.  They are more creations of a “gold rush” mentality (and reality)… gettin’ some while the gettin’s good.  Is every craft brewer this way?  Of course not, but I’m speaking of in general.  And do they in general have an appreciation of the system design that has allowed them to flourish?  Nope.  And do they care?  Nope.  That’s just the way it is during a gold rush.

Thus the beer distributor is the only remaining player who still truly thinks and acts as a family business.  Again, no moral aspect to this… just the way it is.

But even our lovable beer distributor has undergone a transformation over the past 30 years.  Back in the day when every community had 4 – 6 distributors, each one was a nice family business that provided a nice living for the owners.  Now the typical distributor (of which there are now 2 in every community) is a VERY profitable enterprise – and about as recession-proof as any industry in the country (and as close as is possible to printing money)… most distributors rank in at least the top 0.5% (you’re there if your income is $1M per year).  That means 99.5% of all Americans make less than you do.  And many rank in the top 0.1%.  Thus 99.9% of all Americans make less than you do.

Not what most think of when they think of the “typical” family business, eh?  And for the most part, not a group that is going to get sympathetic treatment by the media.  And you are created by the government and state law.  If a brewer wants to go to market, they MUST use you.  There is no way around it.  It’s that or throw out the 3-tier system. 

Pull back and look at it from a non-distributor view-point… you’re a creation of the government AND you’re in the top 0.5% of all incomes.  I can hear the tiny violins playing right now ;-)

There was another transformation which also occurred during the past 30 years.  Beer distributors used their political power to pass franchise laws.  So now not only does a brewer have to use a distributor to reach retail and the end consumer, they in effect are forced to give up ownership of their brands, forever.  That one is kind of hard to swallow.

Beer distributor talk about how they build brands and thus deserve an equity piece of every brand they distribute.  That may or may not be the situation, but does the state really have to be involved?  Why can’t each party simply come to terms with the other and have this agreement captured in a contract.  That’s how every other business works.  Just because this is a regulated product does not mean that government must have their thumbs on the scales.

I firmly believe the entire beer industry is doing themselves and more importantly, society a disservice in the direction this fight is going.  And that direction is carve-outs for the small brewer.  If anyone thinks the definition of “small” will remain the same, I have a bridge to sell you.  Carve-outs are an affront to the 3-tier system.  Ultimately you can have one or the other but not both.

Carve-outs are the small brewer’s response to a clearly unfair situation… namely franchise laws.  And please don’t talk about the ability to terminate “without cause”.  We all know that is a self-serving illusion.

It seems to me that either franchise laws go or the 3-tier system does.  I know and love beer distributors but I vote to get rid of franchise laws.  The attempts to evade these self-serving laws are setting up the destruction of the entire 3-tier system.  The issue of pre-prohibition tied houses will pale in comparison when international brewers team up with incredibly powerful chain retail.

Sure without franchise laws one will see a lot more “churn” with the smaller brewers.  So?  One will also see an explosion of new distributors.  Beer distributors will have to fight to keep every brand they have, every day… again, so?  That’s the way it works in the competitive world the rest of us live in.

Without franchise laws the “need” for small brewer self-distribution goes away.  Here’s my recommendation for the craft brewer who wants to enter distribution.  Go to your local retailers and sell in your product.  That’s something YOU should be doing anyhow.  While at the retailer, ask them who they think is the best performing beer/alcohol distributor that services them.  Go to that distributor and tell them you have already sold in these products/quantities at these retailers and they are awaiting delivery.  Close the sale with the distributor.  The craft brewer can spend their time building the brand and not attempting to become a warehousing and delivery entity.  Sure they have to share the margin with the distributor (So what?  Distributors add real, tangible value) but the craft brewer is not force by law to forever giving up equity in their brands just to get distribution.  If they chose to, fine – that’s part of your negotiations.

Let me repeat, take away franchise laws and the intellectual arguments for self-distribution disappears.  And self-distribution is quite clearly the end of any type of 3-tier system.

Some distributors will say, without franchise laws (or getting equity in the brands) they won’t distribute their products.  No problemo.  The issue isn’t whether you will or won’t, the issue is will anyone.  Again, welcome to a competitive world beer distributors.  You won’t determine any of this, the marketplace will.  And you will do what the marketplace demands or you will pay the consequences.

The real problem beer distributors have with ridding themselves of franchise protection is with the big 2.  They are afraid what ABI and MC would do to them without franchise protection.  First, don’t forget the brands are theirs.  Perhaps the world doesn’t require as many beer distributors as are presently out there.  So?  Do you all have some god-given right to a monopoly which puts you as some of the richest individuals in the country?

I know distributors and their employees quite well.  I believe most (but not all) would fare quite well in a world without franchise protection.  Will some have to go through gut-wrenching changes?  Of course.  Will some cease to exist?  Again, of course.  Welcome to the world the rest of us operate in each and every day.

But most will survive and prosper in this new world.  I have yet to see a huge, multi-location distributor outperform the smaller, local distrib.  Never.  Add value and prosper.   Or if you truly are this century’s buggy whip manufacturer, then you are toast no matter what.  Please don’t destroy the dynamism of this industry as you fight to keep your government-protected rice bowl.

Have the courage to see that franchise laws are sowing the seeds of your ultimate destruction.  Get rid of them and draw a line in the sand… there is now no reason for carve outs from a system that has served society well for over 80 years.  Carve outs are the ultimate enemy and they will destroy the very structure that made the small brewer possible.  They will also destroy the most dynamic beverage alcohol industry the world has ever seen.  Getting rid of franchise laws will cause you some pain.  Allowing carve-outs to take root will cause your demise.  It seems the choice is pretty straightforward.

I know many out there will disagree with me but that intellectual position is based on one assumption… that the volume limits for carve-out exemptions will remain low (and controllable).  I simple do not believe that will happen… and once you give in on the intellectual arguments against carve-outs, the only barrier left in place is the volume cap. 

It is beyond naive to think that the BA, state craft brewers associations, and individual craft brewers are not going to continually push to increase these limits… forever.  Distributors, you are the only players left in the market who think long term.  If you give in, the 3-tier system disappears.  Based on my contrarian analysis, it’s as simple as that.

 

 

Disruptive change - How will you respond?

I have a friend who owns a small taxi company (he also knows the beer distribution business pretty well).  He’s witnessed firsthand how disruptive technology can quickly transform an entire industry… can you say Uber?  Now the beer distribution industry isn’t facing a disruptive technology but rather a beer renaissance like the world has never seen before.  This is a very good thing but it is also going to be disruptive.  Change by its very nature is disruptive.

This friend sent a great email warning to beer distributors along this line…

… All the legislatures in the country are giving Uber and other ride sharing apps the green light breaking up protectionist laws in place for taxi companies that date back as much as 100 years.  The beer industry should be on notice!

The world is a changin.

He’s got that spot on.  The only question is how each of you responds.  He’s watched with amazement as the large taxi companies spend all their time and effort on using their regulations and protectionist laws (and “purchased” politicians) to try to stop the likes of Uber.  As he notes, perhaps they would be wiser to spend more of that time and energy in actually improving the services they offer… to actually compete rather than fight to keep the other guy out of the game.

Each of you faces the same issue.  Will you fight solely to protect your rice bowl or will you adapt to long overdue change and compete?  If you chose to fight like the taxi companies, you need to ask yourself what type of permanent political damage you are doing to yours and the industry’s reputation.   

Reputations are a lot like virginity, once you lose them they are dang tough to get back.  ;-)

You can (and sadly most likely will) wrap yourself in “good for the children and society BS” but if your sole concern is protecting a very self-serving, protectionist agenda you will be laying the groundwork for your eventual demise.

Fight or adapt and compete.  I know many of you and your organizations.  I hope you take the adapt and compete road … you’ll be doing a dis-service to your legacy and every employee if you attempt to man the protectionist barriers and demand the tide stop rolling in. 

And it’s generally never good news when an industry is in the news… following is an article from the 3/12 edition of National Review Online.  You can find the original here or just continue reading.  I counsel you all to choose your battles carefully.  Win or lose, fighting for the indefensible will do serious damage that will come back to haunt you.

jc

March 12, 2014

Alcohol Battles Brewing in the States

A slew of proposed laws would loosen restrictions on the sale of booze.

 By Katherine Connell

At least six states are taking aim at the country’s byzantine patchwork of state laws governing the sale of alcohol.

As any out-of-towner knows who has attempted to buy wine in a New York City convenience store only to unwittingly purchase the awful “wine product” Chateau Diana, laws governing the sale of alcohol can seem bafflingly arbitrary. In New York, where wine and beer cannot be sold on the same premises, it doesn’t look like Trader Joe’s will be tearing down the wall between its wine shop and grocery store any time soon.

Elsewhere in the nation though, from Maine to Florida, restrictions on alcohol are being challenged in state legislatures this year, driven in part by the burgeoning popularity of the craft-beer movement.

In Florida, Republican state senators have proposed measures this legislative session that aim to ease up on some of the rules currently hampering the state’s small-batch brewers. One bill would legalize the sale of 64-ounce growlers — containers filled straight from the tap, sealed and sold to customers — as is allowed in 47 other states. Florida at the moment permits the sale of 32-ounce bottles, but that’s not the industry standard. Another bill would allow licensed beer retailers to offer free tastings, as is legal for stores selling liquor and wine. The large beer distributors in the state are unhappy to see their market dominance challenged and will put up a fight.

A proposed law that was voted down last week in New Hampshire would have done away with the current requirement that all stores that sell beer also stock at least $3,000 worth of food. “If the bill were to pass, it could open the door for boutique-type beer stores that could cater to our smaller, yet growing, beer industry across the state,” Republican state representative Pamela Tucker said, before the bill was killed on a 163 to 142 vote.

Democratic representative Ed Butler insisted that the law was worth keeping because “the sale of food at stores with beer and wine hopefully encourages consumers to enjoy one with the other.” As the New Hampshire Union Leader editorialized, the assumption seems to be “that people who buy beer in bottles and cans have no food at home with which to enjoy their alcoholic beverages.”

Pennsylvania, which maintains a state monopoly on the sale of all types of alcohol, is infamous for the hoops it makes retailers and consumers jump through. It’s not possible to purchase wine and beer in the same location, and the only way to pick up a six-pack as opposed to an entire case of beer (the only thing typically on offer at the state-run beer distributors), is to swing by a restaurant or deli, which take advantage of “eating place malt licenses” to sell beer to go. Grocery stores in Pennsylvania have taken to attaching sit-down restaurants to their buildings so that they can do the same.

Legislative attempts to move toward privatization, as recently as last summer, have been unsuccessful in large part because the state-run stores are staffed by unionized employees who benefit from the status quo. Nevertheless, Republican governor Tom Corbett called last month in his state-of-the-state address for another go, and some legislators are prepared to take up the challenge.

“Let’s make 2014 ‘last call’ for state-controlled liquor in Pennsylvania,” Corbett said. “We have to reform our antiquated system of state-owned liquor stores. Visitors often wonder about it — unless they’re from Utah.”

In Utah, liquor restrictions are a live issue for different reasons. A majority of residents belong to the Church of Jesus Christ of Latter-Day Saints, which teaches its members not to consume alcohol. Beehive State lawmakers are in the midst of a heated debate about whether to tear down the “Zion curtain.” That’s the barrier, often a frosted-glass panel, behind which bartenders in restaurants are required to go to mix drinks or uncork beer for customers, so as not to expose children to the act of alcohol being dispensed. The 2009 law requiring the barriers exempted restaurants that opened prior to January 2010, so proponents of the bill to undo the law argue that the current rules unfairly disadvantage new businesses, in addition to alienating tourists.

Maine liquor regulators this year started cracking down on bars for displaying the alcoholic content of different beers, a practice that is prohibited in a post-Prohibition 1937 law that’s still on the books. The idea behind the law was to keep advertisers from making high alcohol content a selling point, but with the rising popularity of craft beers, which include a variety of more potent brews, it’s a common and seemingly commonsense practice to post alcohol content. Democratic state representative Louis Luchini is working on legislation to address the issue, but in the meantime, bar owners and brewers are unsure what the law requires of them.

Alcohol-content levels are at the center of a battle over beer in Tennessee, where there’s a movement being led by the Craft Brewers Guild to “Fix the Beer Cap.” Any beer exceeding 5 percent alcohol content in the state is classified as “high-gravity” beer and is subject to the same sales restrictions as liquor, which can only be sold in state-licensed stores. Even if a measure on the ballot in Tennessee this fall to allow wine to be sold in grocery stores is approved (an idea favored by 66 percent of respondents in a recent Vanderbilt University poll), the cap means that some beers with half the potency of wine would still be verboten in supermarkets.

“I know there are a lot of consumers who want to purchase Chimay, Delirium Tremens, and they want to be able to able to get it with the convenience of a grocery store,” said Republican state senator Brian Kelsey, who favors raising the cap. He and other state legislators have hit on one issue, at least, that can unite Republicans and hipsters.

What is the future for brands?

There was a great article on the decline of brand strength in the most recent The New Yorker magazine.  You can find the original here or just continue reading for the full article.

Beer and beverage brands are different than a car or TV… their strengths are less physical but rather more mental and psychological.  The emotional ties are what drive their successes.  Thus beer and beverage brands face more risk when these psychological bonds begin to fray.  Bud Light, Coors Light, Miller Lite, etc. are what they are.  Unlike the auto or TV, new “gee whiz” technology won’t be able to impact the consumer’s desires.  Thus the challenge.   Or opportunity, depending on how one looks at it.

That said, here is the article…

Twilight of the Brands

 by James Surowiecki February 17, 2014

 Twelve months ago, Lululemon Athletica was one of the hottest brands in the world. Sales of its high-priced yoga gear were exploding; the company was expanding into new markets; experts were in awe of its “cultlike following.” As one observer put it, “They’re more than apparel. They’re a life style.” But then customers started complaining about pilling fabrics, bleeding dyes, and, most memorably, yoga pants so thin that they effectively became transparent when you bent over. Lululemon’s founder made things worse by suggesting that some women were too fat to wear the company’s clothes. And that was the end of Lululemon’s charmed existence: the founder stepped down from his management role, and, a few weeks ago, the company said that it had seen sales “decelerate meaningfully.”

It’s a truism of business-book thinking that a company’s brand is its “most important asset,” more valuable than technology or patents or manufacturing prowess. But brands have never been more fragile. The reason is simple: consumers are supremely well informed and far more likely to investigate the real value of products than to rely on logos. “Absolute Value,” a new book by Itamar Simonson, a marketing professor at Stanford, and Emanuel Rosen, a former software executive, shows that, historically, the rise of brands was a response to an information-poor environment. When consumers had to rely on advertisements and their past experience with a company, brands served as proxies for quality; if a car was made by G.M., or a ketchup by Heinz, you assumed that it was pretty good. It was hard to figure out if a new product from an unfamiliar company was reliable or not, so brand loyalty was a way of reducing risk. As recently as the nineteen-eighties, nearly four-fifths of American car buyers stayed loyal to a brand.

Today, consumers can read reams of research about whatever they want to buy. This started back with Consumer Reports, which did objective studies of products, and with J. D. Power’s quality rankings, which revealed what ordinary customers thought of the cars they’d bought. But what’s really weakened the power of brands is the Internet, which has given ordinary consumers easy access to expert reviews, user reviews, and detailed product data, in an array of categories. A recent PricewaterhouseCoopers study found that eighty per cent of consumers look at online reviews before making major purchases, and a host of studies have logged the strong influence those reviews have on the decisions people make. The rise of social media has accelerated the trend to an astonishing degree: a dud product can become a laughingstock in a matter of hours. In the old days, you might buy a Sony television set because you’d owned one before, or because you trusted the brand. Today, such considerations matter much less than reviews on Amazon and Engadget and CNET. As Simonson told me, “each product now has to prove itself on its own.”

It’s been argued that the welter of information will actually make brands more valuable. As the influential consultancy Interbrand puts it, “In a world where consumers are oftentimes overwhelmed with information, the role a brand plays in people’s lives has become all the more important.” But information overload is largely a myth. “Most consumers learn very quickly how to get a great deal of information efficiently and effectively,” Simonson says. “Most of us figure out how to find what we’re looking for without spending huge amounts of time online.” And this has made customer loyalty pretty much a thing of the past. Only twenty-five per cent of American respondents in a recent Ernst & Young study said that brand loyalty affected how they shopped.

For established brands, this is a nightmare. You can never coast on past performance—the percentage of brand-loyal car buyers has plummeted in the past twenty years—and the price premium that a recognized brand can charge has shrunk. If you’re making a better product, you can still charge more, but, if your product is much like that of your competitors, your price needs to be similar, too. That’s the clearest indication that the economic value of brands—traditionally assessed by the premium a company could charge—is waning. This isn’t true across the board: brands retain value where the brand association is integral to the experience of a product (Coca-Cola, say), or where they confer status, as with luxury goods. But even here the information deluge is transformative; luxury travel, for instance, has been profoundly affected by sites like TripAdvisor.

For consumers this is ideal: they’re making better choices, and heightened competition has raised quality and held down prices. And they’re not the only beneficiaries; upstarts now find it easier to compete with the big boys. If you build a better mousetrap, people will soon know about it. A decade ago, personal-computer companies like Asus and Acer had almost no brand identity outside Taiwan. Now they are major players. Roku, a maker of streaming entertainment devices, has thrived even though its products have to compete with similar ones made by Apple (which is usually cited as the world’s most valuable brand). And Hyundai has gone from being a joke to selling four million cars a year. For much of the twentieth century, consumer markets were stable. Today, they are tumultuous, and you’re only as good as your last product. For brands like Lululemon, there’s only one consolation: make something really great and your past sins will be forgotten. ♦

 

The 3-tier system needs more beer distributors

Although I don’t necessarily try to be a contrarian, I do try to follow where the facts lead… regardless of whether I like the path or not.  And for the 3-tier system I believe the pendulum has swung too far regarding the number of beer distributors in the country.  Yeah that’s right; I think the conventional wisdom on the “need” for continued wholesaler consolidation is wrong headed and actually counter-productive for Brand Beer… and all the players along the way.

Anyone in this industry has heard it time and time again.  It is a mantra repeated over and over again until no one even thinks to question the foundation of the belief.  Exactly WHY is continued wholesaler consolidation “required”?

 The tried and true response is for cost savings… to remain competitive.  Really?  Margins, both % and $$, are generally at all-time highs.  What has happened to all those folks preaching about how wholesalers MUST learn to operate on razor-thin margins?

Although folks only whisper it, many (most?) wholesalers are making record profits… all while unit sales are down!... all this in some of the toughest economic times the country has faced in decades.  My gosh, how would things look if the industry volumes were up?!  I look all around and I don’t see any economic pain in the beer distribution business. 

I hear how ABI and then MC are going to rape beer distributors… heck I’ve even written things in this vein… but I sure don’t see it happening. 

If ABI and MC (and others) are trying to do this they must be incredibly incompetent.  I mean record wholesale percent margins… record wholesale dollar margins… and record wholesale profits.  If that is being raped by your primary suppliers then I know of a lot of industries that would gladly take some of that.

But still the mantra… consolidation WILL happen.  Consolidation MUST happen.  It is pre-ordained that consolidation is the way of the future.  Why?  Based on what facts?

From my observations, as beer distributors become larger and larger they become more wholesale logistics entities and less wholesale sales entities.  They can be very efficient on the distribution logistics… the nuts-and-bolts of receiving, warehousing, and delivery but they seem to be less and less sales entities.

 In fact some of the best known management and M&A consultants in the industry have preached for years that this is the preferred path for beer distributors.  Forget that “sales stuff”, let the suppliers take care of that and you can simply be a warehousing and distribution business.  Sadly, the industry followed their advice and now the vast majority of the beer a wholesaler distributes is already sold for them; they are simply replenishing the stock at retail.  I question whether putting up shelf strips, static stickers and building pre-sold displays are really the marks of a “brand building” industry.

Is some of the softness in Brand Beer (especially the national stuff) simply the logical consequence of losing the local market feel that a smaller distributor had?  Is Brand Beer getting its butt kicked by the spirits folks in part because beer distributors are becoming more and more like the large wine and spirits distributors?  Especially in their relationship with retail?  The special sauce that helped make beer such a powerhouse at both retail and consumer was (is?) perhaps based on their close relationship to retail.  A relationship which is weakened each time a distributor gets larger and larger.

I’ve heard this many times from beer folks.  I was just talking to one of the best beer guys I know and he noted he was far more intimately aware of his market when he was one million cases versus the six million he now is… and he’s still the beer guy he always was… he didn’t put in the clutch, it’s just that it is next to impossible to match local market knowledge and execution with a smaller distributor versus a mega-distributor.  That’s just the way it is. 

I don’t think it is good for Brand Beer in general or brewers and beer distributors in specific to continue to chase this supposed necessity to consolidate.  Craft brewers, craft distillers, consumer product manufacturers of all stripes are seeing a mad rush to local.  Brand Beer and big brewers and distributors ignore and/or fight this trend at their own peril.

If brewers want/need a larger footprint, then form larger associations of local beer distributors.  Long ago I gave away this wisdom and I’ve yet to see a state really run with it.  Lots of opportunity if distributors can just check their egos and the need to be the boss at the door… and of course get over the need to try to eat all the other distributors in the state ;-)

I understand operational synergies as well as anyone but one would think that at some point, the cost at retail to an ABI or MC of reducing their distributor base will far exceed the benefits of having one less warehouse out there to ship to… of course there’s always the issue of having one less beer wholesaler’s family (and senior management team) to support ;-).  Is consolidation being driven primarily by this fact alone?

Remember that beer isn’t wine or spirits.  The requirements at retail for beer are MUCH different than spirits.  A case of 1.75’s is one heck of a lot more drinks than a case of beer… and it doesn’t have a product-life of only around 3 months.  I won’t even bother bringing up the retail realities of draught product.

Soft drinks are much different too.  Beer distributors aren’t doing the manufacturing on-site.  This leads to different economics when considering warehouses (or plants) required.  This drives one to far fewer plants in any specific area vis-à-vis a beer distributor.  Beer warehouses are operationally cheap by comparison.

And one can only take the operational savings of closing warehouses so far.  You still have a very high retail service frequency and thus miles and additional drivers and trucks very quickly equal lots more dollars.  At some point in time it is cheaper to keep a warehouse open than it is to run the delivery operations from a distant location.  I know, I’ve done that analysis many times.  And with higher fuel prices, this distance shrinks for every fuel $ increase. 

And what about everyone’s favorite darling, social media?  Social media for beer folks is the essence of local.

Throw these all in the mix and it becomes evident that beer operations simply won’t consolidate down to the level of the pop or wine and spirits folks.  Not going to happen.  Include the overall general trend of the strength of local and it becomes evident that this inexorable march to consolidation is based on false pretenses.  Just because it is repeated often does not make it so. 

Obviously in major urban markets more consolidation is possible because of limited distances and high population density… but those same features are what allow for less consolidation in these exact areas! 

Is some of the softness in Brand Beer due to wholesaler consolidation and the corresponding loss of the local relationship?  I’d have to guess yes.  I don’t think one or two mega-distributors per state are good for Brand Beer or the brewers… big, small, or in-between.  And it most certainly isn't good for the foundation of the 3-tier system.  And I don’t think it’s going to happen regardless of what someone keeps repeating.

On a completely different subject… do you know of anyone who sold out in the last 25 years who did so out of financial necessity?  Or who really wanted to leave?  I know of none.  They only left because someone drove a dump truck full of cash to their front porch.  They left because someone was willing to pay them 20 years of after-tax income in one lump sum.  This is the ONLY thing driving consolidation in this industry.  It’s not need… it is someone else’s money.  I think this is rotting this industry from its core.

In addition, think of that… in at least 25 years not a single entity (or very freaking few) faced financial pain that demanded they close up shop.  No one has gone out of business in this industry in decades.  Other than government, I can’t think of a single industry in the entire country that can say the same.  Amazing.  Is this a forever thing or simply a sweet-spot that is going to end sooner or later?  More on this point in future posts and articles.  2014 is going to be an interesting year for the beer distribution business… I guarantee it!  ;-)

 

Advice from Niccolo Machiavelli?

In the spirit of the coming holiday season I offer this Machiavellian little ditty.  I’m hearing this one spreading more and more, like a quiet wildfire, and in my role of providing news, opinion and insights you can’t find anywhere else… here goes.  And please remember I take no stand on either side… as Joe Friday would say, “just the facts ma’am” ;-)  And if you don’t know who Joe Friday is, you should.

But first let’s take a mental field trip with our old friend Niccolo Machiavelli.  Perhaps you have heard the phrase of being Machiavellian?  Machiavelli is famous as the author of a small book, The Prince, published in 1532.  In it he applies the analytic tools of science to politics to determine the best way to rule effectively… remember this is the 1500’s… kings and princes ruled the land.  To be ineffective might mean your head ending up on a spike.

One of the general themes of The Prince is that accepting the aims of princes—such as glory and survival - can justify the use of immoral means to achieve those ends.  Basically Niccolo gives his advice from both thought and observation on how to best achieve one’s princely goals.  People to this day still argue about his thoughts on “right and wrong” versus success. 

He is the source of great quotes.  Some are…

“Everyone sees what you appear to be, few experience what you really are.”

“If an injury has to be done to a man it should be so severe that his vengeance need not be feared.”

“There is no other way to guard yourself against flattery than by making men understand that telling you the truth will not offend you.”   This one every owner and manager needs to understand.

“it is much safer to be feared than loved because ...love is preserved by the link of obligation which, owing to the baseness of men, is broken at every opportunity for their advantage; but fear preserves you by a dread of punishment which never fails.”  This is probably pretty good advice for a prince in 1532 and it kind of captures the essence of what is meant by being Machiavellian.  Perhaps a Who’s Your Daddy culture IS better than a Who’s Your Buddy?  I think Niccolo might think so.

“The first method for estimating the intelligence of a ruler is to look at the men he has around him.”  Look at your management team… how do you stack up? 

“A man who is used to acting in one way never changes; he must come to ruin when the times, in changing, no longer are in harmony with his ways.”  Good advice for today’s beer industry.

“Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.”  Talk to your management team and attempt to permanently instill this thought in their minds.

“The promise given was a necessity of the past: the word broken is a necessity of the present.”  We have all probably experienced this from suppliers and retailers of yesterday and today… and perhaps in the backseat of a car in our rambunctious youth ;-)

Anyhow I think you get the gist of Machiavellian.   So what does this have to do with beer wholesalers? 

First a couple more side trips…

Many ABI distributors find themselves in the unenviable position of fearing their primary supplier.  Not only is ABI using the US beer market as a Cash Cow, they are also using “their” distribution system as a significant source of milk.  And one would expect that ain’t going to be changing… I’d bet it will get worse long before it gets better.  Although part of me asks what is the basis for all of this (I know, shocking eh?).  I see ABI distributors making record profits… in lousy economic times… so what’s their beef?  But what do I know?  ;-)

But many ABI distributors are looking for protection nonetheless… from their favorite source of protection, state legislatures.

As I have written about in Who’s Your Daddy, which you can find here and a follow-up piece Who’s Your Buddy, which you can find here… ABI and MillerCoors seem to be taking different paths in this game.  ABI is most definitely an “I’m your daddy”- type corporate culture.  MillerCoors seems to be taking a much more “I’m your buddy”-type culture.

Now this could be simply the result of who is running the companies… and as I have noted, Brito and crowd come from a much different culture than the typical American.  But I think it becomes reality based on a simple fact… power… eh, Niccolo? 

Starting with the Third, A-B has been slowing turning “independent” distributors into franchisees.  Most A-B distributors welcomed this trip and even hastened it along… it was easier (and still is?) to let corporate do all of the thinking.  Ultimately, most hurried down this path because they were making boatloads of money (and most (all?) remain doing so today).  In addition, when a supplier makes up close to 100% of a distributor’s volume, they do have more than a little say in how things are done.

Which brings us to a second point, the concept of robustness.  A measure of how robust a system is is “its ability to effectively perform while its variables or assumptions are altered”.  A robust system can operate without failure under a variety of conditions.  The more robust a system, the better it is equipped to deal with change, both foreseen and unforeseen.

Looking at the ABI versus MillerCoor distribution systems, the typical MillerCoors distributor is far more robust than their ABI competitor.  This is not due to someone’s careful planning, it’s the result of market shares and what distributors have had to do in order to survive and prosper.

A distribution system with only one supplier is pretty much by definition not as robust as a distribution system with 10 different suppliers, none being a big majority of share.

Thus the typical ABI distributor is at far more risk from change than is their MillerCoors competitor… because their distribution system is less robust and thus is less able to “to effectively perform while its variables or assumptions are altered.”

Combine this system reality with an aggressive supplier who looks at you as a Cash Cow and the typical ABI distributor is under tremendous strain… or so they perceive themselves.

Which brings us back to Machiavelli.   What advice would Niccolo give to ABI and MillerCoors distributors?  For the ABI folks… work aggressively to make your distribution system more robust.  As long as they have close to total power over you, they have close to total control over you.  Great goal but that too ain’t going to happen overnight.

Perhaps try to enlist your distribution competitors to help provide some protection for you from the potential ravages of your supplier.

But this is where the Machiavellian part raises its head… from what I hear in the shadows around the country, old Niccolo is finding some willing converts to his way of thinking in the MillerCoors network. 

I think Niccolo would warn the MillerCoors folks from going too fast in the direction of fighting to help your competition.  If your primary competitor… a competitor who has kicked sand in your face for years… a competitor who due to market share has ruled you and the retail scene for years… if this competitor is now being bled and thus weakened by their new master, why would you want to stop it?

If this competitor is being weakened by the actions of their supplier, why wouldn’t you sit back and let them be?  Wouldn’t it make more competitive sense to allow any and all things which weaken your competitor to take place?

Niccolo might ask why should a MillerCoors distributor join the fight for uniform FOBs… this is a weapon which cuts their competitor much more than it does them. 

Niccolo might ask why should a MillerCoors distributor join the legislative fight on any of these fronts which at their core are primarily directed to stop moves by ABI.

Niccolo might ask why should a MillerCoors distributor fight any of these fights FOR their competitor, especially when their competitor has failed to answer their requests for help in the past… sorry, I’ve heard that complaint for many years from many states.  “Just the facts, ma’am”

Of course the answer to these questions is “it might happen to you someday too”.  But the MillerCoors distributor is more robust so the odds of it damaging them are much smaller.

And Niccolo might scoff at the idea of “someday”.  What matters is the here and now, not some hypothetical future which may or may not ever occur.

Niccolo might ask what does the MillerCoors distributor get (because EVERYHING has a price) for supporting legislation that primarily benefits their main competitor.  He might advise to support, but to ensure you are paid handsomely for this support.  Extracting a pound of flesh when the opportunity presents itself… or letting the bleeding continue.

I have preached the importance of unity for beer distributors for some time.  You can read any of my past posts to see this is true.  And I don’t take a position on any of what I’ve discussed… just asking the questions.  But these are interesting questions and I believe a strong case can be made for both sides…

The “we’re in this together” side AND the “let them be bled dry” side.  I know a surprising number of MillerCoor distributors who are beginning to lean to the “let them be bled dry” side.  After almost 500 years,  good ol’ Niccolo’s advice is still perhaps right on the money.

Which side are you on?  It is interesting times in the beer business, eh Niccolo?  And to all you state association execs that herd cats on a daily basis… sorry.  Have a great holiday season ;-)

 

Technology is changing industries AND consumers

The major trade publications continue story after story regarding the softness in the big beer brands.  In fact they note that big brands of all types of beverage alcohol are struggling.  Unfortunately they all also continue to look to the past to explain the present and predict the future.  Wrong!

The following post was first printed in October 17^th edition of Modern Brewery Age.  You can find the original at http://www.breweryage.com/tabloid/archive/2013/JohnConlin.pdf

Or you can simply continue reading.  As a side note, if you don’t subscribe to Modern Brewery Age, you should.  It is well worth the price and provides unique news and data you won’t find anywhere else.

 

Technology Has Changed America’s Taste in Beers

By John Conlin

President, Conlin Beverage Consulting, Inc.

First a disclaimer by the author.  I offer analysis, not my desires and wishes.  Only by looking at the facts can we hope to devise a successful strategy for dealing with the realities we face.

That said, is technology killing America’s beer industry?

No. But it’s changed America’s taste in beers, probably forever. The big losers? The mega-brands that have dominated the industry for more than a generation.  It’s not that the consumer no longer desires the likes of Bud Light, Coors Light, Budweiser, and Miller Lite, the top four brands in the country, but rather that the consumer for which these products were developed is rapidly transforming.

It wasn’t that long ago that one of every four beers consumed in this country was a Budweiser.  Even today, one of every five beers is a Bud Light. These mega-brands and their mass produced and mass marketed appeal ruled the beer world.  Similar mega-brands ruled most consumer products, killing off their smaller regional and local competitors over the past few decades.  But many of these mega-brands are seeing falling sales as consumers race to other brands and products. 

Are we seeing the end of the mega-brand?  Yes and the culprit is technology.  Technology is remaking of the very essence of the American consumer.  The impact of this technology skews toward youth but it is impacting all of us, regardless of age.

Technology has brought choice and personal customization to almost every area of our lives.

It is remaking of the very essence of the American consumer.  That in turn has changed what we buy and how we buy it.

Look at TV entertainment. First came the change from three networks to hundreds of channels. And now the Internet has transformed the entire concept of visual entertainment. Today, we can pick the time and source of what we’ll watch -- and the device we’ll use to watch it.

There are very few “mega-brand” TV entertainment shows any longer. As a result, viewers are watching very different things.

And how about the ubiquitous smart phone?  Here is a product which has already become the most important item in many people’s lives.  It is the primary means that they use to interact with the world around them.  And it allows almost complete personalization.  Almost every aspect of it can be changed to fit the user’s desires.  And it can easily be changed tomorrow and the next day and the next.  You can listen to the music you want when you want.  You can watch video entertainment of your choice and time.  Smart phones offer immediacy. The explosion of apps offers people ways to use these powerful computers in their personal and professional lives that was unimaginable only a few years ago.  The iPhone was introduced only 6 years ago! 

Which brings me to my observation; to believe that this consumer, and all who follow, will be drawn to some mass-produced, mass-marketed mega-brand is beyond wishful thinking.  The foundation of a mega-brand is built on a consumer who is becoming rarer each and every day.  From a manufacturer’s perspective, the problem isn’t with the product.  The problem is that the consumer for who the product is designed is becoming more and more scarce.

Not only is this technology changing the expectations and desires of the average consumer, it is also allowing these desires to be met.  Advances in technology and manufacturing now allow small players to produce world-class product, for relatively small investments.  This is true for manufacturing, packaging, labeling… the whole nine yards.  And although there still might be some economy of scale advantages for the mega-manufacturer, and these have historically been quite large, these advantages are shrinking all the time.  And all evidence is that this will only continue.  In addition, in a world where customer choice and personalization is king, being smaller, nimbler, and local is an advantage, not a weakness.  The huge plant built on the concept of very large production runs might be turning into an albatross, not a competitive advantage.

The Internet ties directly into both changes allowing a free flow of information and opinion from both consumers and manufactures.  Put all these together and you have a contradiction.  The present consumer mega-brands and their manufacturing infrastructure simply aren’t built for the world in which they find themselves.  And nothing they can do will change this reality.

In the beer industry, we see it with the explosion of craft brewers and the share declines of the mega-brands.  Of the top 4 brands; Bud Light, Coors Light, Budweiser, and Miller Lite, only Coors Light is eking out a volume increase.

On the other hand, the Brewers Association reports that as of June 2013 there were 2,538 breweries in the United States, more than at any time in our history. Over 400 came on-line in 2012 alone. More are coming.

This craft industry was up 15 percent by volume and 17 percent by retail sales dollars in 2012; this in an industry which was up around 1% in volume in 2012.  And the move to these smaller, more personalized brands is accelerating.

Some mistakenly believe this softness in the mega-brands and the incredible craft beer renaissance is due to changing consumer tastes and that light lagers are dying.  Or that they are finally paying the price for years of sexist advertising.  Or their creative material is lacking.  Or pricing is too aggressive.  Or the foreign ownership of the big two brewers, Anheuser Busch InBev and MillerCoors.  These and many other reasons are being tossed about in an attempt to explain the present situation in the world of beer.

Although there might be some truth to each, the underlying reason is far deeper.  The power of technology has profoundly changed our expectations of the brands we consume.  The one-size-fits-all mega-brand is simply not in sync with this transformed consumer.  This is true in almost every consumer products arena.

Craft distilling is exploding. Artisanal products are taking off. Natural and organic products, almost always from smaller manufacturers are taking share from their larger, national competitors; and these new kids on the block are doing this all with almost no advertising or marketing.

The country is headed back to a time when small local and regional manufacturers command the consumer’s affections. These consumers desire choice and are drawn to authentic, unique, and local products and brands, not mass produced products with ubiquitous national advertising.

This will hit large national/international manufacturers hard with share losses coming primarily from the big national brands that have dominated the market for the past few decades. Ironically, it’s their size and dominance that make them vulnerable.

In the beer world, expect to see continued declines in the mega-brands as they fight what is most likely a long-term losing war. Gimmicks with packaging and less (or more) sexist ads won’t change this reality. The consumers these mega-brands were developed for are quickly changing to become adverse to their value proposition.

Technology that has enabled small manufacturers to succeed in the marketplace has transformed many industries in a very short period of time. And that includes the beer industry.

Will the Big 4 beer mega-brands die overnight? Not likely. But their future is one of tough times. Consumers have changed and are never going back. More and more they expect and demand the ability to personalize all the important brands and products in their lives -- including beer.

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John Conlin, President of Conlin Beverage Consulting, Inc. has been providing operational, financial, and merger and acquisition consulting services to the beer and beverage distribution industries since 1986.  Conlin is an expert in the operational and financial aspects of mergers and acquisitions, organizational improvement, and driving corporate change.       

Are you a panda or a cockroach?

Robustness.  A measure of a system’s ability to deal with changing inputs while still functioning at a high level.  A robust system continues to function even though inputs change.  A less robust system’s performance is negatively impacted by input changes.

These systems could be anything… software code… a mission to Mars… a company or organization… your family car… even a living organism.

The old Windows operating system was a great example of a piece of software with a low robustness factor.  If a person hit the “wrong” key, you’d confuse the software, get a blue screen and have to re-start the computer.  A robust piece of software would continue to function even though the user made many wrong entries.

If one were designing a flight to Mars, one would want it to be very robust.  Stuff happens and you’d need the systems to continue to function within a wide range of inputs.  No pulling off to the side of the road if you have any problems on this trip.

You family car has become more and more robust through the use of technology.  Ideally it continues to function even in extreme situations (changing the inputs) like full braking or ice-covered roads or evasive, accident-avoidance.

And this type of analysis also works for living systems, i.e. animals.  For this example I take two extremes… our friends the panda and the cockroach.

We’ve all probably heard stories about that tough SOB, the cockroach.  Survive a nuclear war.  Survive dang near anything, anywhere.  THAT is one robust system.  Inputs might change.  Individuals might be wiped out.  But there will be enough survivors to keep the cockroach roaming the planet.  A single female American cockroach will produce around 150 young in her 1,000 day life time… Do the math.  That can add up to A LOT of cockroaches in a very short period of time.  They are omnivorous scavengers who will eat almost anything.  They can go for as long as 6 weeks without food… they are fast, sprinting as fast as 80 centimeters per second (that’s over 31 inches per second) and can turn on a dime at full speed… and yes, the can live without their heads for weeks.  Talk about robust!

On the other end of the spectrum there is our warm and cuddly friend, the panda.  The panda is a very specialized animal.  It basically eats only one thing… 99% of its diet is bamboo.  Which is unfortunate from a robustness-viewpoint.  An omnivorous scavenger who will eat almost anything is WAY more robust than an animal which eats only one thing.

Even worse, bamboo has almost no nutritional value.  Therefore the panda must spend 10 – 16 hours PER DAY foraging for food and eating 20 – 40 pounds PER DAY to keep alive.  And even then the panda has a very low energy level.  It becomes exhausted after only minor exertion.  The female ovulates once per year and can become pregnant for only a period of 2 – 3 days.  Many don’t even have the energy or desire to breed.  From an evolutionary viewpoint this is a useful adaptation since you couldn’t have a lot of pandas wandering around… they’d eat all the bamboo and they all would die.  But from a long-term survivability viewpoint, this all adds up to a very low robustness and thus, an endangered species.  Human activity hasn’t helped them but they are in reality a very specialized animal which is most likely, long-term a temporary visitor on this planet.

Which brings us back to you and your organizations and the title question… are you a panda or a cockroach?  How robust is your organization?  I don’t know about you, but I’d sure rather build a cockroach organization than a panda organization.

From a supplier/risk viewpoint, the MillerCoors distributor is more robust than their ABI counterpart.  Since the typical MillerCoors distributor has their volume spread over more suppliers, they are less vulnerable to “changes in inputs”, i.e. specific brand declines, than their ABI brothers and sisters.

Many ABI distributors are attempting to become more robust through the addition of new suppliers.  Most likely a wise path to walk but in the short- to medium-term, ABI distributors will be VERY reliant on one very significant input.  That’s just the way it is.

But what about other changes in inputs.  How does your company stack up on the robustness scale?  Look at your personnel.  If ol’ Joe gets clipped on the highway some morning does your company continue operating at 100%?  If your ordering person wins the PowerBall and walks out with no notice, do you not skip a beat?

If anything happens to ANY of your folks does the system keep operating at a high level or does it have problems?  Are you a panda or a cockroach?

In your next management meeting spend a little time looking at every aspect of your business… people, technology, energy, equipment, brand/supplier strategy, disaster planning, vision and mission, etc. and ask how we can become more cockroach and less panda.

If tough times come the cockroach will still be around ready to take advantage of all the opportunities change presents.  The panda can barely get by in good times, in tough times it is probably toast.

So ask yourself, are you a panda or a cockroach?

 

 

 

 

The Coming Artisanal/Craft Era

Paradigm shift - a radical change in underlying beliefs or theory.  Some times in history it is evident that one is living in an on-going paradigm shift.  The French and American revolutions might be examples.

But I believe most of the time we are unaware of the incremental small changes that are occurring around us.  If you could step out of the here-and-now and look down on what is happening it might be quite evident… but since we live in the here-and-now we often don’t see the paradigm shifts until they have already happened.  It is always easier to view the past than the present.  Then one can look back and see how “obvious” these changes were.

With that intro, I believe we are in the midst of a profound paradigm shift that will rock most consumer product companies to their core.  Over the recent few decades this country has seen the growth of large consumer product companies with their associated strong national/mega-brands.  The smaller local and regional players were hit pretty hard during this time… in fact most have been squashed as this national/mega-brand reality simply rolled over them.

But that tide has already turned.  I believe we are in the midst of an explosion of artisan or craft consumer products that will only accelerate over the coming decades.  One sees it in this industry with the explosion of craft brewers.  The Brewers Association reports that as of June 2013 there were 2,538 breweries in the US… more than at any time in the country’s history.  And hundreds more are coming on-line.

Although it hasn’t receive as much attention, the craft/artisanal distilling industry is following the same path as craft brewers… although at an even faster pace. 

The local paper in Denver had a recent story on an artisanal cheese manufacturer.  This paradigm shift is not localized to any one industry or region.  It is the tip-of-the-spear and it is moving like lightning.  And I believe it will sooner or later impact nearly every consumer products company and every mega-brand in the entire country.

At its core, this is what is driving the present downward trends for all the beer mega-brands… that compounded by being used as a Cash Cow… which is being milked like a milkmaid mainlining Red Bull ;-)

The high-water marks for the beer mega-brands might have already been reached and they might face a long-term prospect of continued decline.  It might not be so much that the consumer doesn’t desire a light lager… just that they don’t want THOSE light lagers.  For any craft folks reading this, I believe this just might be an opportunity for you… there are only so many IPAs the world needs ;-)

There are many things driving this profound paradigm shift…

Technology and manufacturing – Since we live in the here-and-now we often don’t really understand how far and how fast things have changed on this front.  Small players can product world-class product… for relatively small investments.  This is true for manufacturing, packaging, labeling… the whole nine yards.  And although there still might be some economy of scale advantages for the mega-manufacturer (and these have historically been quite large), these advantages are shrinking all the time.  And all evidence is that this will only continue.  In addition, in a world where customer choice is king, being smaller and nimbler is an advantage, not a weakness.  The huge plant employing hundreds and hundreds might be turning into an albatross, not a competitive advantage.

People power – In addition, as the large consumer products companies have flattened their organizational charts and technology has replace thousands of positions, there is much less upward mobility for their employees.  Life-time employment is a thing of the past.  So there are people with tremendous knowledge and skill sets who are available.

Hard economic times – Perhaps counter-intuitively, tough times cause an explosion in entrepreneurial activities.  The risk/reward decisions become easier when you don’t have many other options… trust me, I’ve got some been there, done that on this topic ;-)

Intangibles – People are social animals… we long to belong to a team.  Few of us strive to be some anonymous schlep at some large, face-less, soul-less corporation.  These smaller companies offer a great deal of personal fulfillment… sure everyone would like to hit the long ball and get rich but getting up every day and loving what you do is worth a lot more than $$.  Talk to almost any employee at a craft brewer.  In addition, in a smaller organization you can actually see the results of your efforts.  If you work for a huge multinational company your efforts simply disappear into the ether whether you bust your butt or surf the web all day.  This is not true in a smaller company.

The changing consumer – let’s use the ubiquitous smart phone as an example.  Here is a product which has already become the most important item in many people’s lives.  It is the primary means that they use to interact with the world around them.  And it allows almost complete personalization… almost every aspect of it can be changed to fit the user’s desires.  And it can easily be changed tomorrow and the next day and the next.  Ring tones can be personalized to whatever you want… ring tones can tell you exactly who is calling.  You can listen to the music you want when you want.  You can watch video entertainment of your choice and time… the concept of TV is being transformed as we speak.  It offers immediacy… these folks don’t email (that’s soooo 2000).  They don’t leave voice messages… why take the time?  They text which is about as immediate as one can get… hit send and it’s at the other’s phone in a matter of seconds.  To believe that this consumer, and all who follow, will be drawn to some mass-produced, mass-marketed mega-brand is beyond wishful thinking.    

Combine all these factors and one can get a fleeting glimpse of the profound consumer products paradigm shift that is occurring under our feet.

Will the beer mega-brands go the way of the dodo?  Not anytime soon. There still are A LOT of bottles and pints of these brands being consumed.  Brand Budweiser has been declining for years and it is still the number three beer brand in the country.

Will they see continued volume and share growth?  I’d bet against it.  I think the future is in the other direction.  And it might come faster than any of us can imagine. 

Historically one often speaks of eras… no question the last few decades have been the era of the mega-brand.  Perhaps that era is coming to a close?

Beer, spirits, cheese, you name it… the small artisanal explosion is already happening.  Where it goes is anyone’s guess, but it will leave its scars on more than a few large consumer products companies and their associated mega-brands.  And perhaps on their distributors too.

 

Is the US beer market being milked?

The US beer industry continues to have a tough time.  The Beer Institute reports total shipments down 2.3% in the five months thru May.  Longer term, spirits continues their march, taking share.

The high-end continues to rock but the rest is pretty poor.  The usual suspects are blamed… weather and weather… taxes and the economy… and those dastardly spirits folks. 

Could the US beer industries woes be the logical result of the market realities of its larger players?  Could the woes be as simple as the result of over-aggressive pricing and to a lesser degree a change in the nature of the product consumed?  For the bang-for-the-buck crowd, a case of beer will never match a 1.5 liter of booze.  In my favorite local liquor store I can get a 1.5 liter of Sapphire gin or Kettle One vodka on deal for $32.  Note these are super-premium products; there is A LOT of much cheaper, quality stuff out there too.  As of 7/29, a significant liquor store in Littleton has a front line price on 24 12oz cans of Coors/Bud/Miller at $27 and change.  With taxes that will be over $30 for a case of cans.  Oh... and we are covered by two branches ;-)

For the bang-for-the-buck crowd, a mainstream light beer will never match the punch of a craft beer… to say nothing of a taste profile which younger (most?) drinkers are flocking to.  A few craft beers are already priced at parity with Coors/Miller/Bud bottles. 

And the very nature of craft beers will lower overall volumes.  If every drinker in the country switched to craft beers, overall volumes would plummet to a new much lower baseline.

And tough economic times drive many to think in more bang-for-the-buck ways than they might in better times.  If you want to feel better as you whistle past the graveyard you can read how the price of beer is actually quite low based on this or that metric but you know what?  Whether these are valid or not is completely irrelevant.  It is the consumer who determines these things, not some inflation-adjusted formula or some explanation based on the increased cost of inputs.  And the consumer is not tied to these analytics; they can change their mind and “re-set” what they consider a good price.  Is over a buck a beer for off-premise consumption a “good” price?  I think many folks are saying no.  And I think their wallets are in complete agreement.

But there is a reason for this aggressive price… back in the days when all of the major brewers were US companies (and US-focused) there was much more importance to things like a share point here or there and the never-ending battles with wine and spirits.  For the most part the US was the only stage on which they played.

But now 80% of all US beer volume is controlled by 2 large, international companies.  I don’t believe they look at US beer pricing (and its impact) in the same way these companies did in the past when they were solely US companies.  And why should they?

This is neither right nor wrong it simply is an observation.  I have written about the economic concept of Cash Cows which you can find here.  Basically Cash

Cows have high market shares in a marketplace with low growth rates – that pretty much defines the US beer market.  InBev saw A-B (rightly) as a very fat Cash Cow just waiting to be milked.

Cash Cows are typically high share leaders in a mature market or high share mature companies in major markets… they generate more cash than they consume AND typically have a lot of dough available… this pretty much defined pre-acquisition A-B.

Under classic strategy these business units should be “milked”… taking profits and investing as little cash as is possible. 

Cash cows provide the cash to drive a lot of the other actions of the company…

·         Providing cash for major business development initiatives, i.e., turning Question Marks into market leaders and helping fund Stars

·         Reorganizing regional and global financials by consolidating post-acquisition revenues, company-wide admin, R & D costs, debt service, dividends, etc.

I think the “woes” of the US beer industry are as simple as this… it is being milked, especially via pricing, to help fund these companies other activities in other countries… places where there is tremendous upside.  Again, this has no moral aspect, it is simply a business decision I believe has been made.

Unfortunately, this cash harvesting strategy and reapplying of financial resources for other programs could create a significant paradigm shift. Broad-based business expansion projects become top priority.  These can deplete resources for ongoing business development.

And by doing so it has opened the door to many of these “threats” and has been a boon for craft brewers by giving them tremendous pricing leeway.

Many beer wholesalers cry about their volumes these days but most are pretty happy with their gross profit.  I don’t see too many running for the exits.

Now of course if one takes the long view (ignoring the kumbaya sing-along on unity from the Beer Institute) will this be good for the beer industry for the long haul?  As I have noted in my attempts to share my wisdom on the craft brewing industry (which can be found here)… in reality there isn’t any such thing as the “beer industry”.

Folks who run large public companies and who think of the long-term are as rare as purple, 2-headed unicorns who speak French.  This is no negative reflection on them; it is simply the sad reality they live in.  And as a friend and fellow cynic noted when he worked at a large bank… this public company was run to enrich the top 200 employees (and I think he was very generous in this number) and to keep the stock price up.  That’s it. As a side note, I believe the Third was an exception to this but he was very old-school and he thought more as the owner of a private company since that’s basically how he ran A-B. 

So I would assume the big dogs will continue to do what they perceive is in their best self-serving interests… not necessarily in the US “beer industry’s” best interests but in the multi-national’s best interests… all while looking down the road about a quarter or two.  And unless ABI has a change of heart, or MillerCoors wants to get into a bruising fight that they cannot win, one would expect that the US domestic beer industry will continue to be treated as what it is to these companies, a Cash Cow that exists for the milking.

Of course they will fight things like equalization because that will hurt their Cow.  And of course they will come out with new products, etc… this isn’t an either/or type situation just the reflection of a larger strategic reality.  They have access to… or do they own? ;-)… incredible distribution systems.  You want that Cow to gush milk for as long as forever… or at least as long your stock options last ;-).

It remains to be seen what this paradigm shift means and how it will impact US beer distributors who do live in the long-term.  You’ll have to wait for my wisdom on that topic ;-)  Perhaps I’ll even make you pay to hear it and to devise strategies for dealing with it!  How’s that for a crazy thought?  ;-)

As a parting side note, just as I was about to post this came an article in the St. Louis Business Journal… you can find it here.  I’ll quote the first paragraph…

Anheuser-Busch InBev invests $1.4 billion in China

“In a push to create the world's first global beer brand, Anheuser-Busch InBev is making a big investment in China — a market that is expected to deliver more than 40 percent of the industry's growth over the next 10 years.”

 That Cow is goin’ be a rocking ;-)

And as another parting side note, the day after I posted the above, Harry led his 7/30 newsletter with this news...

A-B Taking Pricing

Dear Client:

A-B is taking a price increase again at the end of September in some markets.  BBD has seen price sheets going up between $0.45 - $1.20 on package beer.  Looks like it's going to be another year of 2 to 3% price increases even in soft times

Thanks to Harry... and I hear the milkman coming... again and again and again ;-)

Craft Brewers and the Prettiest Girl at the Dance-Syndrome

After reading a recent piece in Harry’s newsletter I was taken back to a significant time in my life.  Harry and I emailed back and forth about it and I thought it could perhaps be a good post.

Harry was reporting on the money and attention that is being thrown at craft brewers and their responses.  Let me tell every craft brewer out there (and every wanna-be) my tale of woe…

THE SITUATION

The time is the late 90’s.  The dot-com boom is rocking.  There was a river of money flowing by and I wanted to jump in and grab some.  The final straw was when I read about DrKoop.com in the Wall Street Journal... here was a company with revenue (not profits, but revenue) of around $40,000 and its market valuation topped out at over a billion.  And where is it today?  Exactly.

I called a tech friend and said let’s get together… as I told him, he was a tech-wizard and I know how to start businesses so let’s get rich.  We got together with a few of his tech buddies and discussed how we could all make each other rich.  And off we went with a company we named eSniff.com (notice how we tried to capitalize on every buzz-word of the time, the e and the .com).  Our technology used in tech-terms a packet sniffer and thus the name.

The company’s goal was to help organizations keep people from screwing around on the Internet at work.  It was a real product with real profit… both things few of the dot-com companies had.  We even went international right away with sales in Mexico and a beta-product for Japan.  Trying to impress the money-guys even more.

Looking back, our arrogance and my ego were astounding… are you listening yet craft brewers?  Little did we know we were looking in the rear-view mirror when we pounded our chests about the value of our business and what we would or wouldn’t take for even a piece of it.  We thought since this or that company was valued in the billions we could match them.  But since we were doing our planning by looking in the rear-view mirror, we failed to see what was coming… instead we focused on what had been… and the past was very much to our liking. 

Our business strategy was to get big fast… that’s what got the private equity guys attention… so we burned through money and did in fact get relatively big.  We actually had the beginnings of a pretty nice little company… eh, craft brewers?

Now the private equity folks aren’t stupid and they knew many of these business plans and the valuations they were generating were in many cases built out of smoke and mirrors.  There really wasn’t much there, there.  But operating on the greater fool principle… you know the greater fool principle?… the specific investment might not make any sense and have any real value but as long as you can find a greater fool to sell it to at a profit, what difference does it make?

During the housing boom in Florida I heard of many situations where people bought a house and sold it in 90 days for a $30K profit.  It’s all well and good as long as there is a never-ending supply of greater fools.  But just like the kid’s game Musical Chairs, it’s not much fun when the music stops and there is no chair for you.  Being the last fool really sucks.

So these private equity folks were all VERY aware that a great deal of the dot-com stampede was driven by greater fools… but they played because they could make HUGE profits… and did.  And they had the inside information so they thought they could ensure there would be an exit for them once the music stopped.

So we lived it… a river of money and crazy valuations simple stopped.  It did not slow down… it did not coast to an easy stop… it ENDED.  The private equity folks behaved like a herd and when one smelled danger they all took their money and ran to the exits.   Dreams of going public?  Yeah right.  Dreams of a big dollar payday?  Yeah right.

And for those of us whose business plans depended on this river of money to fund our growth?  Well we went from the prettiest girl at that dance to a person begging to do things just for a few bucks to keep us alive for another day.   Not only were we willing to sell our soul, we did.  When you are staring into the maw of bankruptcy and the damage to every employee it will impact, it is amazing the things you will willingly do.

THE CASE FOR EXPERIENCIAL LEARNING

Every craft brewer out there needs to read that last paragraph again.  Getting your nuts cut off has a very negative impact on your aforementioned arrogance.  I went from laughing about the “low” valuations that we would never accept to sleepless nights wondering how we could all just get out with our hides in one piece.  Our original investors lost everything… and they were friends who had trusted me.  I still can’t get over my failures to these folks.

So craft brewers… enjoy the ride.  But the path from prettiest girl at the dance to the depths of depression and despair is a lot shorter than you might think.  And if you think you remotely control this (we’d NEVER let that happen to us), you are whistling past the graveyard.  I’ve had the misfortune of walking this path… you are riding a wave but don’t let your arrogance and ego convince you that you are the maker, let alone the controller of that wave. 

Being in the sweet spot of an incredible consumer awaking is a great place to be.  Just make certain your strategy is flexible enough to deal with all potentialities.  I don’t know the future, but things are just like they have always been right up until the moment they aren’t anymore.

And remember, if and when the money folks get a sniff of fear, the game will be over and it will be over quickly.  No more come-hither looks from across the room.  No more business cards with special messages.  No more of a lot of things.  Only the bottom-feeders will be happy when this comes to be… and you very well might be their meal… that is if they even consider you worth eating.  Right now the value of your brand equity is high (oh, I remember those days) but after the crash you may find it is non-existent… been there, done that.

And yes, Steve Cook and I are providing M&A and profit-improvement services to craft brewers and would be happy to discuss potential opportunities but please don’t write off my tale of woe as just some self-serving marketing ploy.   This story and my scars are very real.

Whether you use our services or not, keep the above in mind as you enjoy being the prettiest girl at the dance.  Just don’t think that it will last forever.  I lived it and hope you can learn from my very real pain.  From the peak to the valley is a lot shorter (and a lot quicker) than you can imagine.  And it’s kind of like sky-diving… it’s not the fall that is the problem… it’s that sudden stop at the end  ;-)

Random Thoughts on Craft Brewing

Craft beer… the prettiest girl at the dance.  Harry, Benj, Modern Brewery Age, Beverage World, Beverage Industry and everyone else and his dog have written extensively about where it is and where it is going.  As usual, let me help clarify why. ;-)

First we need to understand that words are abstractions, they don’t necessarily exist in the real world.  Thus the craft beer industry doesn’t really exist.  Craft brewers yes… an “industry” not so much.  So all this concern about where the industry is going is somewhat off the mark.

Each and every one of these craft brewers will do what they perceive is in their self-interest.  That’s exactly what they should do.  So for example when folks are wringing their hands over the explosion of craft brewing capacity they are talking about something over which no one has any control.

As a mental exercise, let’s take a stroll and see what the Tragedy of the Commons can teach us.  Haven’t heard of that phrase before?  It comes from an article titled "The Tragedy of the Commons" by ecologist Garrett Hardin. 

Hardin used an example involving medieval land use in Europe.  The Commons was a “public” area where herder’s could graze their livestock.  Since it was “owned” by all, no individual or group existed to look out for the best interests of the Commons.  Thus it was in each herder's individual interest to let as many of their livestock as possible graze there.

Of course this will ensure the Commons is sooner or later overgrazed and damaged for all.  But for the individual herders, for at least a while they receive all of the benefits from the additional livestock grazing, while the damage to the Commons is shared by the entire group.  If all herders make this individually rational economic decision, the Commons will be depleted or even destroyed, to the detriment of all.

Now the craft beer business is not a limited resource like the Commons but the realities they face are similar in many ways.  One can look at the landscape of craft brewers and see a very likely train-wreck regarding over-capacity.  But who is going to pull back their expansion plans for the good of the “industry”?  I can answer that… no one.

Much has been written about the issue of old craft beer and the damage it might do to the “industry”.  Guess what, folks have discovered the wonders of pipe-line fill.  It can make a business look incredibly successful (for at least a while), whether this is reality or not.  All those warehouses and all that retail space adds up to quite a bit of beer… this is something the big boys discovered long ago.  And if the beer gets old?... perhaps that’s not a worry of an individual craft brewer.  And the damage it does to the “industry”… what “industry” is that? ;-)

KNOW WHO YOU ARE

Long ago in my MBA finance class we had a case study on a quickly expanding grocery/mass merchandise chain, a hypermarket.   The case study was to analyze the financial-driven growth of this company… and the solution/discovery was that their growth was the only thing funding their operations… and once the growth slowed or ended, the company was not financially sustainable and would fail.   Obviously rapid growth sooner or later hits a wall and down the company fell.

So my prediction on the craft capacity front is that a number of things will most likely happen to individual craft brewers…

·         Some will hit the wall at high speed and meet an unfortunate end....fail to plan then plan to fail.

·         Some will hit the wall at slow speed and will survive the experience if they get some well needed strategic and tactical help.

·         Some will power through the whole episode and come out stronger and more profitable – these will be considered the smartest guys in the room – but remember as I’ve noted before, nothing wrong with a little luck to go along with their skill.  However, if you can only have one, give me luck any day!

·         Some might be able to cash out before the wall and possibly laugh all the way to the bank if they have value and brand equity.

And of course too many trade publication view things from a static perspective, but the tsunami is inevitable.  Keeping up with change and paradigms shifts are critical… so the entire issue of what is a craft brewer is an ever changing one.  Consumers don’t care if this or that company fits into this or that category.  That’s not the way they think – and why should they?

Most importantly, one has to contend with a wide range of strategic and tactical options. Perhaps Company A wants to some day become the biggest brewer in the land. Perhaps Company B wants to ramp up as quickly as is possible (can you say fill that pipe-line) and get out while the getting’s good.  Either choice is acceptable (as are hundreds in between) but your success is more likely when you know the exact path you hope to travel.  Not that there won’t be surprises and adjustments as you walk that path, you just have to have the knowledge and flexibility to deal these too.

All you craft brewers out there… need some business development support?  We can link where you want to go with how you will get there!  Steve and I are now working with craft brewers to explore their options based on their unique situations.  Give us a call and let’s talk about diving a little deeper.

ABOUT RETAILING

Perhaps one perceives themselves as a brewer, not a retailer.  The next sees the craft beer-thing simply as the draw to fill their on-premise establishment (kind of like the strippers at a “gentleman’s club”).  Note this doesn’t imply the retail-vision will produce lower quality craft beers, just that their strategic vision is different than those with a desire to be a brewer first and foremost. 

And it can be quite a retail draw.  A retail-focused craft brewer just opened up in my neck-of-the-woods and their business is incredible.  They are only open limited days and times… but every time they are open, they seem to be packed.  Anyone in this business knows that you can make a heck of a lot of money in a short period of time with a hot on-premise establishment. 

In fact in many places in the country a push-back is starting from regular on-premise accounts from what they consider the unfair advantage the craft brewers enjoy via their tap rooms.  The craft brewers (being the prettiest girl at the dance) often get special treatment for their tap rooms… most to their advantage.  And of course since they make everything they sell, their retail profitability is dang high!

How long will it last?  How high will it go?  Heck if I know.  But there is no indication it is slowing nor do I think things will ever go back to “normal”.  This is a permanent change in the landscape.  Lots of moving pieces and I’d guess there will be surprising winners and losers.

Some pricing changes are already occurring… in several places in the country major craft brewers are priced at parity with Bud/MC 6 pack bottles.  Perhaps those $12 four-packs are going to find some pricing pressure?  And of course volumes remain soft for the big boys (and quite a few others)… everyone is asking themselves if this will be the summer when serious price competition fires up. 

What’s going to happen to those high prices and sweet margins the craft brewers (and their distributors) presently enjoy?  From a distributor perspective, in MANY situations, those craft beer gross profit dollars are what is keeping you healthy.  You might want to take an objective look at your business exposure.  Our valuation services do just that and much more.

Just some things to think about as we go about our Commons and our everyday business.

Coca-Cola rethinking their US distribution plan

There was an interesting article in the 4/17/13 edition of the Wall Street Journal.  If you subscribe, you can find the article here.  The headline was “New Coke: Bottlers Are Back”

 Basically the article was about Coca-Cola’s recent change in direction where it is now gradually getting out of the distribution business, again.  Some quotes from the article explain this: (underlining and highlights are mine)

 “Coca-Cola Co. likes to have its cake and eat it too.

 That is why it sold its bottlers and then bought them back again. That is why it is now going back to the franchise model for distribution.

 In a deal that would allow it to keep vast amounts of control over its business, Coke said it reached an agreement in principle to expand territorial distribution rights to five independent bottling partners. That would reduce Coke's direct control over its U.S. distribution only to about 75% from 80% currently. The company said more such deals are on the way as it backs out of the delivery business.   

 "You need to walk before you run,'' said Muhtar Kent, Coke's chief executive, in an interview, of the step-by-step approach.

 In 2010, Coca-Cola Co. paid $12.3 billion to buy its biggest U.S. bottler in order to secure control of most production and distribution in its home market. Now, this latest approach will allow it to keep production of popular brands including Sprite, Powerade, Minute Maid and Coke in-house but gradually parcel out distribution once again.

 The move is a delicate balancing act by Coke, which is trying to keep a tight grip on how its drinks are made and sold while shedding the capital-intensive business of maintaining delivery trucks, routes and warehouses. Coke also is seeking to boost sagging profit margins in the U.S., where soda consumption has fallen eight straight years.

 Coke's share price surged 5.7% Tuesday to close at $42.37 on the New York Stock Exchange as Wall Street applauded the model even as the company reported a decline in first-quarter profit and revenue.

 The Atlanta-based company's move could prompt PepsiCo Inc., PEP +4.13% its main beverage rival, to speed up its own review of its operations. PepsiCo paid $7.8 billion in 2010 to acquire two large independent bottlers, also giving it direct control of most of its U.S. beverage manufacturing and distribution.

 Coke currently has about 70 small bottling partners manufacturing and delivering about 20% of its drinks in the U.S. Tuesday's announced deal would increase the scale of five of them…

 But unlike past distribution deals, some of which stretch back generations, Coke isn't giving the bottlers perpetual rights to the new territories. Instead, bottlers would be given 10-year licenses for any new real estate, which then need to be renewed. The initial deals with the five bottlers aren't expected to close until 2014.

 Mr. Kent said a lot has changed since Coke began striking U.S. distribution deals for its famous cola roughly a century ago. At the time, territories were determined by how far horse-driven carriages could travel in a single day. The new distribution deals are "moving us into the 21st century,'' he added.

 Selling off distribution rights could earn Coke a lot of cash. Consumer Edge Research estimates that the 80% share of U.S. distribution rights currently owned outright by Coke to be worth around $9.5 billion.

 Coke isn't ready to surrender control over manufacturing, though, planning instead to further integrate bottling operations around the country. Manufacturing of Coke products currently is spread over hundreds of facilities.

 Mr. Swartzberg said he wouldn't be surprised if Coke eventually also sells majority stakes in the manufacturing part of the business a few years down the road.”

 My first reaction is to notice that same old big business trend… new management has to do “new” things.  Team X comes in and decides outsourcing is the key… after they leave Team Y comes in and decides insourcing is obviously the right call.  Can’t just stand there, you’ve got to do something!

But this change is pretty big news.  Coke has found (and it seems Pepsi might be following) that the distribution end of their business is better done by others.  I completely understand their desire to control the production (it is after all THEIR product) but they have found the “capital-intensive business of maintaining delivery trucks, routes, and distribution” is perhaps not their strongest suit.

Soft drinks are like beer, they require a lot of feet on the street and a smaller, more local private company driving this effort seems to be a superior choice.  I hope some of those craft brewers think about this… are they craft brewers or are they distribution companies who happen to brew beer?  Strategically these are WAY different beasts.  Et tu Brito?

In fact in other parts of the world, Coke has already divested itself of both distribution AND manufacturing… they let other specialists take care of that.  They want to retain control and make money.  Pretty simple.

Also interesting that these franchises aren’t perpetual but rather with a fixed time frame.  Coke wants to ensure IT ultimately controls them, regardless of who actually owns the thing.  Again, I understand their desires.  Might we see something like this taking hold in the beer business?  I’d be surprised if we didn’t.

Of course there are many differences between soft drinks and beer but as many organizations have found, specialization often leads to better performance.  Let the local guys deal with the warehousing, delivery, and merchandising needs (by definition these are local activities, they must be) while the big dogs focus on getting a great product produced and marketed.  Then pass the ball to the local guy and let them take it to the street.

Sure makes sense to me… and obviously to Coke and Pepsi too.

UPDATING YOUR VALUATION PROPOSITION

By Stephen Cook, CMC

Great Lakes Consulting Associates, LLC

www.BeverageGuru.com

The nature of consumer goods and the dynamics of the supply-chain continue to tax our abilities to effectively manage and concisely communicate. For the beverage industry consultant, using numerics to identify opportunities by developing illustrations is a must have for our “chief” kit. How better way to get your point across then by “painting with numbers.” Don’t believe it? Consider this.

A long time ago while at home in NYC, I was watching John Gnagy, America’s pioneering television art instructor.  I remember thinking how creative and impactful Gnagy’s visualization process and comments were. His audio-visual process was incredibly effective in translating his vision into a reality that was easily understood by viewers. Just how good was it? He was chosen as the first performer, on the first show on the day the TV broadcast antenna was completed atop the Empire State Building in NYC.  This self-taught “blacksmith” of art went on to become one of the country’s greatest audio-visual educators by teaching drawing art, yes drawing and art, to millions of viewers. Gnagy’s success focused on breaking down the drawing process into fundamental elements and developing a quick, easy and proven method to learn through visualization and communication.

Our valuation methods and process are very similar to Gnagy’s approach. The process addresses the fundamentals, namely, the business components that drive cash flow and the overall value of the enterprise. We keep it simple yet effective and compare our clients operating financials to a pro-forma template that is organized, easily understood and presents a clear of picture of the business. Just like Gnagy our “painting with numbers” methods are proven and provide high value by visually translating and clearly communicating the current and longer-term financial realities of your business based on size, region, product mix and financial performance.

As the pressures of consolidation continue to diminish (estimate over 80% domestic volume consolidated), we are finding more clients interested in a less formal valuation process and an updated financial review. Our high value-added strategic planning approach to company valuation aligns well with the ever-changing market needs for many of our wholesaler clients by identifying areas of financial strength and weakness; providing a clear picture of what the business looks like; and ensures our clients are focusing on the right priorities and business drivers which convert into increased value of the enterprise.

A valuation process of this nature is about more than just providing “a number”. It is about enhancing your planning process by providing expert insights into sales and operational areas of improvement throughout the company. Deliverables include financial-based analyses of your entire company AND an industry performance comparison AND projections of sales revenues and operating expenses based on current activities and trends.  This is a battle-tested executive management tool which could be a vital part of your strategic planning session.  

The Proposition, from both a strategic and tactical standpoint to wholesalers:

Can you afford NOT having an updated valuation profiling of the enterprise and NOT use the results in your planning process? KNOWING MORE, ABOUT YOUR COMPANY, THAN POTENTIAL BUYERS, SUPPLIERS, COMPETITORS OR CUSTOMERS IS JUST GOOD BUSINESS PRACTICE!

Give us a call if you would like to discuss further. Looking forward to everyone having a great and prosperous year.

 

 

Operational Realities of the Explosion of Brands and Packages

Had quite a few responses to the last post on brand and line-extensions.   So I thought I’d talk a little more about this explosion of brands and the operational realities this creates. The constant evolution of the beverage scene will continue to put stress on strategic planning and proper resource allocation.  There is no room for complacency.  The game is from here on out.

AN ENVIRONMENT OF CONSTANT CHANGE

I admit I’m getting old but I well remember driver-sell days.  Can you imagine trying to sell today’s product line via driver-sell?!  I would pity the poor driver who had to try to come up with that day’s load.  Yikes indeed.

We live in a world with an explosion of suppliers and brands and packages.   

• Suppliers come and go (expect this to pick up pace as a normal process of shake-out sooner or later occurs in the craft world).
• Brands come and go.  And not just from smaller folks. 
• Being the “Bud guy” no longer insulates you from these market-driven realities.
• Seasonals – everybody’s favorite ;-) make things even more interesting. 
• Packages come and go and come back again. 
• Lastly, the battle for space is never ending, and I have yet to find a box-stretcher that can magically accommodate everyone’s desires.
• Bottom-line… performance from every area of an organization is becoming increasingly important and increasingly more difficult.

As some of my responses noted, this is simply the new normal so you might as well get over it and get out there and sell.  Never forget the advice from that old guy (104 years old) “Was ain’t is”. 

THE NEED FOR ORGANIZATIONAL FLEXIBILITY & PLANNING

Many companies have responded to these changes by adding a few of these over here… and modifying some of those over there.  Over time, these individual responses to a rapidly changing market often become inefficient and less effective than desired.

Why?  Well, remember your company is an integrated complex system.  It is a living, breathing organism whose performance is directly affected by the relationship and ability of the parts to communicate and work to a common goal.  It is not the sum of a bunch of different parts.  The better all aspects of the system work together, the better the system will perform.  Having parts which are not in harmony is not only inefficient; it can be very frustrating too.  Think of an engine whose timing if off, the system will not perform well no matter how hard one tries.  And it will most likely take even more effort (and $$) to obtain this sub-par performance.  A Lose-Lose situation.

These market-based organizational modifications are well and good if part of a larger strategic and tactical planning process.  Otherwise it can cause a lot of organizational stress.  Occasionally, one needs to step back from this and with the management team look at the company completely anew… the roads are where the roads are.  The bridges are where the bridges are.  The retailers are where the retailers are.  Other than that, everything can be changed.

The answers to these questions should drive the planning process: Who are you?   Who do you want to be?  What market realities do you confront?  What are your organizational strengths and weaknesses?  What threats and opportunities present themselves?  What are your options?  Where is the company going?  Is that where you want to go?  How will you get there? 

A HIGH RETURN ON YOUR INVESTMENT

Now I’m biased in this but I firmly believe my or Steve’s presence in this process greatly helps ensure a better, more effective and efficient solution.  You and your management team know each other very well.   Sometimes that’s good but sometimes it is a hindrance to creativity.  You all are well aware of the other’s thoughts, biases, and BS.  Often important issues aren’t even discussed since everyone already knows everyone else’s opinion.  Necessary and vital discussions don’t occur since they lead to the same dead-end… why go there for an unproductive exercise in frustration? 

Perhaps you need someone with new BS ;-)  That’s me.

Although you and your management team are the experts in your specific marketplace (and if you aren’t there is little I can do to help you), Steve or I perform a critical leadership role in the strategic planning process while providing the organizational design expertise (based on hundreds of wholesaler and supplier engagements) to meet your ever-changing needs.  Together we create a better, stronger team.  I’m the agitator who changes the dynamics of this mental process.  And when we’re done, I leave as does my cost.

I firmly believe there is tremendous value (and team building) in the planning process.  Most management teams learn to love me right away.  I’m about identifying problems and SOLVING them.  In addition, I generally can give the boss more grief than they can comfortably do ;-)  

My attitude is you are paying me for my advice and insights; therefore I am obligated to provide them.  This type of true unbounded communication rarely occurs without the presence of an outside agent of change.

As an additional benefit, I help owners better understand their team and I help managers become better at the art of management.  This last point is not a minor one.  Your managers and supervisors are the tactical players who guide the battle… the better they are at managing, the better your performance on the street and on the income statement.

Not to brag ;-) but your entire organization will be better because of this process.

The best time to do things is the present. Take good and make it better.  Take great and drive it to a higher level.  But don’t wait for pain to force this mindset.  Instead embrace it as a positive and rewarding constant. Let us work with you, your management and staff to design and implement a continuous improvement process.

Take a week or two and re-imagine your company with our assistance.  You won’t regret it… but then again, I’m biased. ;-)

Give me a call or email if you would like to discuss this opportunity. 

Line extensions and Krusty the Clown

When I speak to state associations I often stray off into the weeds and find the Simpson’s cartoon character, Krusty the Clown.  Krusty is a shameless shill who will put his name on any product… and I mean ANY product.  All of them being of rather dubious quality. 

A tale of two strategies

I use this amusing – hopefully ;-) illustration to make the point on the difference in strategy between MillerCoors and ABI as they roll out new products.  MillerCoors has historically been hesitant to do line extensions, especially on major brands.  ABI has no such qualms.  First a disclaimer… I use Krusty as a humorous example, not a reflection of quality.  ABI and MillerCoors produce GREAT products of the highest quality.  They all may not be your cup of tea, but the quality is always world-class.

But whose strategy is “better”?  That is easy… the one that works the best.  Although Brito never did seek my advice prior to the acquisition – his loss ;-) I’ve always thought they saw more value in the brand names than did others (both for the US and world-wide markets).  Yes of course they saw a shockingly corpulent cash cow but I think they also felt the value of the brand names was not completely reflected in the stock price.  My gosh, it wasn’t that long ago that one in four beers consumed in this country was a single brand, Budweiser.  THAT is a mega-brand.  And this fact was reflected throughout the marketplace.  How many distributors are named “Budweiser Distributing" or "Bud of …” rather than “Anheuser Busch Distributing”? 

Therefore that they have proceeded with a line-extension strategy (ala Krusty) is not really too surprising.  In the past many producers have been wary of line-extensions (especially for major, important brands) and feared the potential risk of losing total market share based on several factors including:

1. The line extension would dilute and weaken the overall brand.
2. Failure of the line extension would damage the overall image of the brand in the customer’s eye.
3. The cannibalization of other brands in the portfolio.

In the past these may have been true (and of course anything taken to excess will have negative repercussions) but I think they are less true today. 

Today’s beverage consumer is used to (expects?) a lot of brands.  And these brands often come and go.  The negative impact of a “failed” brand extension is more often than not, simply not noticed by the vast majority of consumers.  And let us not forget the long and twisted path that got us to Bud Light (and others).

So I think the downside of well-executed brand-extensions is much less than many think.  It seems to me as if ABI is building the Bud Light brand into a mega-brand name under which various other products are grouped.  Obviously you have the various beer line-extensions but you also have Bud Light Lime-a-Rita, Bud Light Lime Straw-Ber-Rita.  Some might ask what does a ready to drink margarita-in-a-can have to do with Bud Light… but this is an extension of Bud Light Lime.

They are doing the same with the brand Budweiser but for now are keeping the extensions down the beer lane.  I’d have to guess this might also change.  These names give instant recognition to these brands.  At some point do these extensions begin to take a toll on the strength of the brand name?  Perhaps.  But if enough are hits, I think they will over-shadow the losers… and as noted above, today’s consumer doesn’t seem to really care about (or keep track of) of disappearing brands.

In addition, I believe another factor in the ABI brand strategy is control of “their” distribution network.  There is only so much time in the sales day (and only so much room in the warehouse) so these brands have the added benefit of forcing these wholesalers to spend limited time focusing on ABI brands rather than chasing the next hot craft beer.  Brito and the guys are pretty good at strategy and this must be one aspect of it.  I sure haven’t seen any ABI distributors dumping brands to grab that golden ring of Anchor Wholesaler.  So this achieves the same distributor network goal…control; whether the distributors want to play along or not.

Now MillerCoors has been much more careful with their brand names.  Sure they do things with Genuine Draft… but let’s get real.  That’s not much of a risk for them.  For them the big dogs would be Coors Light and Miller Lite.  They (or Miller) have put the Miller name on various products (and might be planning to do it again soon) but the Miller brand name is not remotely the Budweiser brand name.  Or at least that’s my read of the marketplace.

MillerCoors is rather attempting to build completely new brand identities based on differentiation within the portfolio.  In some ways this makes sense especially when we are seeing an explosion of new craft - and crafty ;-) brands.  People are trying new things… looking for new tastes, new emotional bonds… so customer trials should be pretty high.  And perhaps those hapless consumers will be fans of the product before they discover it is really brewed by MillerCoors.  And of course once a few of these brands are successful, they provide new avenues for THEIR own line extensions.  Over the course of a decade or so, this “multiplier affect” could prove to be substantial.  So one could go with a new brand building strategy and then roll into a line/brand extension strategy to capitalize on these successes – assuming there are any successes ;-)

And of course there is that old saying, “don’t put all your eggs in one basket”, so there is perhaps some strategic protection from these multiple new brand platforms. 

But ultimately I think the different strategies reflect the different realties ABI and MillerCoors face.  The strength, breadth and reach of their brand names are as diverse as their brand strategies.  Their power (and space) at retail is simply not the same.  Just think of the strategic impact of space at retail.  In many high market share markets, one could argue ABI has too much space for various brands.  These line extensions allow them to keep this space/handles (and from their perspective, hopefully grab more) rather than allowing the competition to make the argument to cut their space.  MillerCoors on the other hand generally losses the space battle (this is the definition of a zero-sum game).  So if they do a line extension, is the retailer more likely to demand that they squeeze it into their present space?  Or if they come with a new brand, are they more likely to take some of that “extra” space from ABI?  There are a lot of moving parts in these analyses.

MillerCoors long ago accepted the wisdom (or is it the reality, whether they liked it or not?) that they are best served in a multi-brand distributor.  AB and then ABI have never accepted this (nor do I expect them to do so in the near future).

The importance of supplier/distributor alignment

The best strategy always is based on the realities one faces.  These two face different facts on the ground (and different goals via distribution) and thus their individual strategies for brands (and many other things) will by necessity be different.  Only time will tell which is the “best” strategy.  My guess is that both will be successful.  This isn’t an “either/or” situation.

Work hard my friends, stay the course....THE BEST STRATEGY WILL ULTIMATELY BE THE ONE THAT GAINS THE BEST ALIGNMENT OF THE THREE TIERS TO MEET CONSUMER NEEDS. Don’t forget who is driving the bus!

As a side note, I’ve heard from many ABI distributors that they do like some aspects of ABI’s brand creation.  In the past AB would study the hell out of some new product idea before they even considered taking it to market.  This created a lumbering process where new brand introductions were very slow (and costly).  Under Brito and company they do a quick study and if the results look good, they roll.  Saves money, gets the product out there for the consumers to decide, and keeps “their” distributors hopping on THEIR products.  Pretty good strategy indeed.

Would Krusty approve?  I think he would give it a hearty, “HEY HEY!”.

Another watered down rant?!

News flash… it have been scientifically proven that Conlin is NOT watering down his rants!  Whoever starts rumors such as this should be horse whipped, and I know just the horse to do it. 

 So let’s start with that class action lawsuit against ABI. 

 A classic: the cart before the horse

First, who was the judge who approved the class action status?  An attorney doesn’t make that decision… they can ask for it but a judge has to grant it… why on earth would a judge grant class action status to such a flimsy action?  Why not let the plaintiffs first provide the hard evidence that this nefarious “watering down” was actually occurring?  Why let the damage to ABI happen (and which they all know will happen) before, SHOCKINGLY finding that the claim doesn’t hold up to testing?

That is of course a rhetorical question… that a judge makes a stupid decision is like a “dog bites man” story.  Sadly very common.

But in the Sunday March 3^rd Denver Post, ABI felt they had to respond to this dubious charge with a full page ad touting all the water they have canned/bottled for disaster relief… with the tag line “they must have tested the wrong product”… above a picture of their canned water.  The ads ran in the Houston Chronicle and the New York Times among others too.  You can see the graphics and a short story here, http://blog.chron.com/beertx/2013/03/anheuser-busch-punches-back-with-ad-campaign

A couple things on this story… The Popular Science website ran a story titled, BeerSci: Is That Water In Your Pint Glass? Anheuser-Busch is being sued for watering down their beer, but there's a way to test for that.

Which you can find here, http://www.popsci.com/science/article/2013-03/beersci-water-your-pint-glass.   As they note, for $100 this claim could have been tested before a class-action lawsuit was started.

Searching for truth and objectivity

For those with an inquisitive mind I have a project… use any search engine and search for articles on this ABI watering down its beer story… use whatever words you think will work.  You can skip the articles (and there are MANY) but make certain you read the comments.  Read at least a few article’s comments… in a short period of time you can get a pretty good idea where the beer industry is today… and it ain’t pretty for any of the mega-brands.

If anyone thinks the craft beer craze is slowing or is only a short-term aberration, these pages and pages of comments will dissuade you of this foolishness.  If ABI and Molson Coors and SABMiller only got their revenues from the US market, one would be wise to short their stock.  You will be hard pressed to find ANY commenter supporting these companies or their brands.

Luckily, you all are distributors so continue what you are doing… offering incredible value to every craft brewer out there… and in realty, offering incredible value to every supplier you carry.  The future for the light mega-brands is going to be one of tough sledding.  And my gut says the odds of some young craft beer drinker switching to Bud Light or Miller Lite or Coors Light AT ANY TIME in their lives is incredibly small.  Just ain’t going to happen.  Not that these drinkers won’t necessarily drink products from the big suppliers (but many never will)… but that most will likely NEVER drink those products.  At least that’s my crystal ball.

Want to save some dollars and get better results in keeping track of this industry?

Did you know that by using the power of the modern search engine you can get free, broader, more objective perspectives than many (all?) subscription industry publications.  You can typically get better, more timely, unfiltered information delivered to your inbox as often as you desire.  In today’s world why let someone else determine what is news and what isn’t.

For reference, Google has what they call Google Alerts (and many of the search engines have a similar feature).  You enter in a key word or two and anytime that word/phrase is in a story you receive an alert with links to the stories.  I use a lot of alerts… ABI beer, MillerCoors beer, beer distributor, beer wholesaler, Anheuser Busch, Conlin Beverage Consulting, John Conlin, etc.

They all do a great job too… you only get the best results… you’re not inundated by a ton of stuff, just fairly targeted, very timely news on what interests you.  With some well-defined alerts, in 15 minutes of reading you can be on top of everything happening in this or any other industry.  And if you find you get a bunch of stuff that is not what you are looking for, simply fine-tune your searches.

In effect these search engines allow you to create your own personal, industry-specific newsletter.  You can go as deep or as wide as you desire.  All with very little effort.

In fact I found that link to the newspaper graphics via an alert… it was the first link in an alert for “Anheuser Busch beer”!  

If I were a distributor, in addition to the broader industry-related alerts, I’d probably have alerts for every brand and supplier I carry… in addition to my company name.  That way I will always know what is being written about them (and yourself).  You can perhaps spot trends before they become well-known.    In today’s connected world, why let anyone be a gatekeeper on information?  As you are well aware, the Internet is changing business models across the globe… it’s doing the same here.  If you desire, you can easily control the flow of information and manage it to your desires.  No one else needed. And you don’t have to be an Internet wizard to accomplish it.

And of course if you want opinion and rabid rants, you’ve got little ol’ me ;-)  Yesterday is yesterday… or to quote an old geezer from a story I did long ago, which you can find here, was ain’t is.  Don’t ever forget that.  Whether it’s subscribing to industry  publications or projecting brand trends or designing your company for the future… things change… change with them.

More on craft beer and the value of distributors

A few months ago I did a radio interview with a guy who does an Internet radio show and blog called Bite and Booze, http://www.biteandbooze.com (it’s about food and alcohol down in Louisiana).  His name is Jay Ducote.  So after 15 minutes of my incredible wisdom, this is what he created and put on YouTube… http://youtu.be/txcDK3XGb6c

 I think most of you will agree with this.  In fact it might be a useful link to send to legislatures who are thinking about writing craft beer carve outs to franchise laws.  15 minutes of genius cut down to one sound bite… such is life ;-)  But it IS a good sound bite.  Way to go Jay!

 Next post I’ll give my 2 cents worth on line extensions versus new brands… or as I note in speeches to state associations, a Krusty the Clown strategy versus a non-Krusty the Clown strategy… and it won’t be watered down either ;-)

 

 

 

 

Is Conlin Watering Down His Rants?

Where to begin?  I guess let’s start with the news of the day… some disgruntled ex-ABI employees have helped start a class-action lawsuit alleging that ABI waters down some of its beer.  You know about class-action lawsuits?  The Legal Dictionary subsection of the Free Dictionary notes (underlining and bold mine):

 Class action lawsuit - A lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group.

 Class action lawsuits have become a controversial topic in the 1990s. Once seen as a way of empowering individuals with small claims to have their day in court, class actions are viewed by many lawyers, legislators, and government officials as a vehicle for plaintiffs' lawyers to make millions of dollars on issues of dubious merit.

Critics of class actions remain unconvinced about the social and legal value of group lawsuits. In small claims class actions, critics question the value of supporting litigation in which individual class members have very small stakes. For example, does it make sense to permit a lawyer to initiate a class action where a utility company overcharged two million customers two cents per month? Such filings demonstrate to the critics the lawyer-driven nature of most small claims class actions. The individual claimants, because they have so little at stake, do not exercise any control over the litigation or elect to opt out of the class and pursue individual claims. With the plaintiffs' lawyer in total control, the dynamics of the lawsuit change. The lawyer has the largest economic stake in the outcome, leading to settlements that guarantee high attorney fees and minimal payouts to the class members.

Critics also dispute the value of the private attorney general role. Most class action attorneys, they contend, are seeking lucrative financial awards rather than social justice. Moreover, class actions may interfere with the regulatory and oversight functions of the appropriate government agency. The agency may conclude that the injuries attributed to the defendant are insignificant and do not warrant prosecution. A class action substitutes the judgment of the private attorney for that of the public's elected officials.

Bottom-line, in many class-action lawsuits the end result is the lead attorneys pocket tens of millions and the “injured” parties get a coupon for $1.50 off the next time they purchase the product.  As with far too much of our legal system, corporations weigh the costs of fighting the lawsuit (and that includes damage to image, negative PR, etc.) versus the cost of just writing a check to the instigating attorneys to make them go away. 

I have no idea of the merits of this lawsuit… although I think it highly unlikely ABI would bother with such a stupid move.  And this is from a major ABI-basher.  There are still folks around who remember a market-leader call Schlitz… and what happens when accountants start making product decisions.

But let us use other people’s pain for our own learning.  What is the source of this lawsuit?  Disgruntled employees.  Do you have any idea how many companies have been hung out to dry by disgruntled employees? 

This industry has changed a lot in the past few decades… what might have been ignored years back might be a major problem today.  If you are playing fast and loose with things… I’ll leave it to you to fill out the list… you are giving tremendous power to your employees. 

And like a lot of things in life, in the good times everybody gets along… but a laid off or terminated employee might get the crazy idea of revenge in their minds… and they might very well act on this goal of revenge.  And in today’s world of lawsuits and a media looking for “gotcha” stories, it is not all that difficult for a disgruntled employee to cause you some serious pain.  Especially if they truly know where the dirt is.

If you have ever been so foolish to fool around on a spouse, you know the power you give to your “cheat-mate.”  With YOUR actions, you hand tremendous power over to them.  Which in the good times might not matter… but when you decide to end the affair the other side might not be so magnanimous. One phone call and your life will change forever.  Trust me, many a person (generally guys) have cried in their beers over this one.  If someone thinks they have been screwed – so to speak ;-)  they will very likely seek revenge.

I know of an ex-beer distributor who terminated an employee.  This employee was none too happy about this course of events.  This same employee knew where many bodies were buried… in this case knowingly selling out-of-code product.  This employee took this information to a major supplier of this distributor.  This major supplier was just looking for a reason to get rid of this distributor and lo-and-behold, their wish called them up on the phone.  This person is no longer a beer distributor.

How many of your employees have knowledge that would cause you great pain if it became public.  Here’s a solution… stop the crap.  Those days are long gone.  If you aren’t absolutely pure as the driven snow, change.  EVERY employee who knows of this stuff is a time-bomb waiting to explode.  Perhaps they might get the idea that they could use a little extra assistance in their retirement fund.  Stranger things have happened.

Changing subjects… much has been recently written on the explosion of SKUs and what retailers, distributors, etc. should do about it.  First I think they are phrasing the question wrong.

At its core, this goes back to that age-old question on whether businesses follow demand or create demand.  If one believes business can create demand, then they have the power to control SKU expansion.  If one believes business follows demand, then retailers and distributors can do little to impact this… it exists and they are simply trying deal with this reality in the most efficient and profitable manner possible.  Until you answer this question, any discussion on SKU growth is somewhat meaningless.

In addition, are we talking about an explosion of SKUs (4 packs, 6 packs, 12 packs, 15 packs, 18 packs, 20 packs, 24 packs, 30 packs, 36 packs, and don’t forget the single serves – often in different bottle/can sizes and of the same brand)… or are we talking about an explosion of BRANDS and the associated increase in SKUs driven by this brand growth?

I’d guess reality is a little from A… and a little from B.  Sure suppliers try to push for SKU growth IF they can use this to gain incremental space at retail.  Walk down the toothpaste or laundry detergent aisles to discover this isn’t a new concept. 

As a side note, here is a great idea every distributor in the country should take.  Far too often beer-folks walk into retail and blindly go to the beer aisle.  There are millions of dollars of marketing being done in every chain grocery out there.  Literally take a field trip to your local chains and together with management and employees, walk down every aisle.  Observe and LEARN.  Make this a regular part of your market calls.  You’ll see opportunities for secondary displays but more importantly watch what others are doing.  Can you steal their good ideas and make them your own?  Remember, this isn’t 3^rd grade math class, copying good ideas is very much allowed.

But right now, the market for craft/new beers and products is incredible.  Trying to control and throttle this at the distribution level is probably not a great idea.  I don’t think it is in your power to control… so why try?

Instead look to manage (not change) the reality you confront.  Yes this might mean changes to your sales and merchandising forces, delivery fleet, most definitely your warehouse, and every other aspect of your business.  That’s where Steve Cook and I come into play.  We can provide a new set of eyes with years of experience to help you and your organization adapt to this new world.

 

TEACHING DOGS NEW TRICKS

In a lot of our recent organizational design AND operations work, we have found our client’s desires are spread across the entire spectrum of their operations.  So Steve and I have created an updated yet flexible consulting project approach for these demands… it’s pretty simple, we’ve added a “Chinese ala-carte menu” option.  We come in for anywhere from a couple days to a week or two and focus on whatever is causing you the most problems or the opportunities that have significant upside.  It’s all your call and it can evolve as we go.

As part of the process, we will provide objective, fact-based recommendations and high value-added solutions by applying two uniquely different approaches. We can either directly provide the needed leadership and expertise or function in a complimentary project support role and leverage our expertise to assist you in exploring your unique business situation, identifying problems, quantifying the risks and developing practical solutions and plans that work.

You get an industry expert to work on whatever you desire.  Not just pointing out the problems, but working with your management team to SOLVE the problems and GAIN competitive advantages.  Give Steve or me a call if you want to investigate this high-value service.

 

GLOBAL BRANDING

Lastly, NPR’s Planet Money had a recent story on SABMiller and ABI and how many brands around the world they own (210)… along with a map showing their respective brand-strongholds.

You can find the story and map here.. http://www.npr.org/blogs/money/2013/02/19/172323211/beer-map-two-giant-brewers-210-brands

It’s kind of interesting.  See… no watered down rants here ;-)

 

The ABI – Grupo Modelo Antitrust Charade

I’ve been asked repeatedly my take on the Department of Justice’s decision to fight the ABI – Grupo Modelo deal.  None of the reporters who asked wanted to quote my response… it doesn’t fit into the narrative… although they all agreed.  They’ve seen enough so that they are cynics too ;-)

Thus let me weigh in and tell you my cynical take on the DOJ’s decision to sue to stop this merger.  I believe the decision comes down to a simply thing… ABI must not have greased the right palms and/or didn’t grease them enough.

 Brito and crew were there at every Presidential debate......... but they must have been a little slow in reaching for the ol’ checkbook.  Welcome to the new world of crony capitalism… well actually when it comes to antitrust enforcement, it seems that has always been a world heavily influenced by politics.  Facts?  Not so much.  Political beliefs and who’s scratching whose back?  Oh yeah.

Think I’m a cynic?  Well duh.  But think this analysis is wrong?  Consider this:

• A two year DOJ investigation into Google’s practices recently ended with basically no action.  Many articles have been written, and I mean many, on how during this time Google spent $25,000,000 on lobbying efforts.  Most of the writers noted that this was a pretty good investment.  And if you consider market power, etc. Google is far more “dangerous” to the public than ABI will ever be. 
• Facebook now employees close to 15 lobbyists.  Do you think they do this just because they like to piss money away?!  This is the essence of crony capitalism.  Equal treatment under the law?  That’s for saps who don’t know how to play the game.  And of course it gives tremendous power to our political overlords, who bestow their favors on the chosen few.

As for ABI, I’d guess they thought they would be dealing with a different administration and this deal would have sailed through… which it very likely would have.  Same facts but different results.

So as you read the various handwringing’s over what ABI might have to do to get this blessing, don’t necessarily believe for a moment it is about hard facts and cold statistics.  Those are only used as window dressing to support decisions that have already been made… and to bolster the power of these political overlords.

Think this rant is just Conlin going off the deep end again?  This quote from an article in The National Review Online states how the game is played… “As law professor D. Daniel Sokol told the Wall Street Journal, in antitrust cases “Defining the market is 90% of the game. . . . If you win that battle, the rest is easy.”  Every professor in my MBA program felt the same way.

You can read the entire article here, http://www.nationalreview.com/articles/339916/brew-busters-daniel-foster

And this process isn’t restricted to ABI.  How many folks out there are either for this or against it based solely on what they think it means to them?  Let’s at least drop the charade that this is about “market power” or protecting that helpless little consumer… it’s about winners and losers being decided by some political power.  We cheer it when it lines our pockets… we curse it when it empties them.

Nothing less, nothing more.  I have no ability to change this but I refuse to act as though this is really about the DOJ “protecting” the poor citizens of this country.  It’s about protecting things, just not what they say it is.

Think about the supposed “solutions” that are being offered… selling a brewery is going to change the US beer market?  Divesting a brand?  That’s just the economic pain the government wants to inflict as payment to get this thing approved.

Since I don’t have the necessary facts to offer ABI a hard suggestion, I’ll instead answer with my gut… I wouldn’t give an inch on anything of importance.  This isn’t ultimately about facts so why act as though it is?  If I don’t want to piss away a ton of money over the next few years (and waste a lot of management time) I might tell them to screw off.  About that penalty?  You were foolish to give in and include it in the deal.

Wait 3 more years and restart the deal.  You already own 50% of the dang thing… you’re not going nowhere.  There will be a new administration and next time either they will be more politically aligned with letting these deals happen or ABI can get better at writing the right checks to the right folks.

Isn’t this crony capitalism fun?  ;-)

Can the 21st Amendment be the model?

The 21^st amendment to the Constitution repealed the 18^th Amendment, the failed experiment called Prohibition.  But it did something else of equal importance.  Rather than attempting to decide and dictate all of the issues related to alcohol laws and regulations, the amendment simply stated that alcohol regulation was to be decided at the state level.

There was genius in this decision.  It greatly increased the odds of the amendment actually being ratified. Attempting to dictate every aspect of alcohol regulation for the entire country would simply have insured the amendment would never become law.

The 21st Amendment allowed states and their citizens to craft laws and regulations that fit their unique desires and situations.  It built on the reality that an individual’s consumption of alcohol is a local issue.  It allowed effective control of beverage alcohol while creating a framework where competition and the marketplace would still flourish.  It has been a tremendous success.

I believe a similar model should be used to transform the K-12 public education system.  End The Education Plantation, www.EndtheEducationPlantation.org is a single issue, non-partisan organization which has only one goal:  Passage of federal legislation requiring any state or school district that accepts any federal education dollars to offer Education Freedom Accounts to every child attending school in that state or district. These Freedom Accounts would have to equal at least 95 percent of the total per pupil spending of that district or state.  Other than that, we defer all other decisions to the states on how/where these funds can be used. This only demands that parents control the money spent on the education of their children.

In effect, this legislation would force states to create a state-regulated market for K-12 education (and pre-K and higher education if they desire). Just like the 21^st Amendment, we use federal power to force Federalism in the education of this country’s youth.

This will unleash the wisdom of millions and is guaranteed to improve the educational outcomes of rich, poor and middle-class children alike.

Obviously different states will decide different things. Regardless of your political beliefs, some states will make decisions you agree with and others you disagree with. Guess what. That’s happening right now.

The public education system of this country is failing far too many children.  Seventy percent of all eighth graders are not proficient in reading.  It’s worse for minorities.  And, sadly, the future of most kids is somewhat set by the eighth grade.

The vast majority of these non-proficient children will NEVER become good at reading.  Think of what this means for their job prospects, their cultural activities, and how they will raise the next generation.  Most fourth and eighth graders are also not proficient in math. This does not bode well for any of us.

ACT reports 75 percent of all incoming freshman are not prepared for college. Only four percent of African-American high school graduates are ready for college.

And few students wake up the day before high school graduation and decide to attend college. Most of these students have been preparing for college for years. Yet only 25% are ready?

And what of those who didn’t take the more difficult classes and don’t plan to go to college? Do you think their educations are any better? A recent article talked about a small manufacturer who was looking to fill some entry level positions. Out of 100 applicants with high school diplomas, only three could pass a simple math test!  And of those three, none knew how to read a ruler.  This is simply wrong.

Yet the country spends more money per pupil than every other country on the planet, save one -- over $12,000 per student per year.  In most parts of the country you can attend a pretty good private school for that amount.

Our country is filled with dedicated and loving teachers, administrators, para-pros and volunteers.  It is not the people who are failing.  It is not that we spend too little money.  It is that the top-down, expert-driven system is simply failing.  And the only way to fix a failing system is to CHANGE it.

We don’t claim to know the answer to every question.  We don’t have to.  Rather we know the system that will find the best answers for the lowest cost -- freedom and competition.  Our proposed legislation would, in effect, force states to create a marketplace for K-12 public education.  Let us unleash the wisdom of millions and let them discover and create better schools for all of our kids.

The future of today’s children and in a very real sense the future of the country depends on it.  The genius of the 21^st Amendment, which has served the country quite well for 80 years, can be the model for transforming this country’s K-12 public education system.  Raise your voice. 

Regardless of your wealth or education, no one is immune from these failings.  We will either collectively solve this problem or we will collectively watch this problem destroy our country.  If not us, who?  If not now, when?  Please step to the plate.  50 million children and the very soul of this country are pleading for us to do something.  Join us.

Here’s what Milton Friedman wrote in 2004…

Government is committed to assuring that all children receive a minimum education. It currently does so by setting up and running schools, assigning students within a designated catchment area to each school. Students are thereby deprived of choice. They go to the designated school or else they do not benefit from the government commitment and their parents must pay twice for their education—once in the form of taxes, again in tuition.

Equally important, government is deprived of the benefits of competition. It is as if the government decided that the automobiles it uses must be built in government factories. What do you think the quality and cost of government cars would be? Or, to take another example, it is as if recipients of food stamps were required to spend them in a specified government-run grocery store.

It is only the tyranny of the status quo that leads us to take it for granted that in schooling, government monopoly is the best way for the government to achieve its objective.

A far more effective and equitable way for government to finance education is to finance students, not schools. Assign a specified sum of money to each child and let him or her and his or her parents choose the school that they believe best, perhaps a government school, perhaps a private school, perhaps homeschooling. Let the schools in turn, whether government or private, set their own tuition rates, and control their own operating procedures. That would provide real competition for all schools, competition powered by the ultimate beneficiaries of the program, the nation’s children.

That’s all we are trying to do.  I hope we can count on you.  If you agree, please spread the word.

 

 

Black Swans and the Future

Well a new year has begun and who knows what the future holds… other than higher taxes, but that’s a rant for another day.  I worked with a distributor some years back where we analyzed what the future held for them.  A generational hand-off was planned and they wanted some outside opinions on various courses of action.

This was a relatively small distributor in a rather remote part of the country.  The population had been declining for years and we all agreed, there was nothing on the horizon which was likely to change this.  And population has a huge impact on this and many other businesses.  With a growing population you’ll look like a hero if you can just maintain market share… growing share AND having a population increase will make you look like the best distributor on the planet.  But a shrinking population makes it incredibly difficult… you have to grow share just to remain in the same place.  And as we all know, growing share is easier said than done, especially if you’ve already got a pretty high share to begin with.

For these folks although they were profitable, financial projections (under almost any likely scenario) showed that in about a decade or so, things would be looking bleak.

The big question was how would this impact this upcoming generation?  Would we simply be setting them up to fail at some point in the not-so-distant future?  From a strictly financial perspective the answer was rather obvious… if there was a suitor who would pay a good multiple (and there was)… it made the most sense to sell and to set the next generation up doing something else.

But as I have noted many times, a privately held business (or even a public one, eh Brito?) is much more than simply a financial asset.  The owners took the analysis to heart but decided they were going to remain in the business.

The Black Swan Scenario

IF our predictions regarding the future had been even remotely accurate, this distributor would today be facing a tough profit/loss situation.  But then something magical happened… and it goes by the name of the Bakken Shale formation.  This state is now the second largest oil producer in the country, behind only Texas.  And it is only beginning.  Talk about boom times and all the growth and good times they bring!

I suppose you could call this a Black Swan event.  What’s that you say?  A Black Swan is “an event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader.  Black swan events are typically random and unexpected”, i.e. they can’t be predicted.

So what does this little feel-good story have to do with all you other beer wholesalers?  Don’t ever forget that you do not know (nor does anyone else) what the future holds.  I’m assuming if you are a beer distributor on January 1, 2013… then you plan to stay a beer distributor.

Yeah, yeah, I know… consolidation MUST happen.  It’s a forgone conclusion and nothing you can do will stop the march of these forces.  Don’t ever forget that in the 1960’s – the age of the business conglomerate - business classes taught (and forecast) that sooner or later (generally sooner) there would only be a handful of businesses in the entire country!  The efficiencies of conglomerates where simply so great that there was no way to stop their march of consuming all businesses in their path.  Think of all those synergies!

Yet where are conglomerates today?  Few still exist.  What looks like a sure thing on a spreadsheet quite often looks quite another in the real world.  Will some of you make the wrong choices in the coming years?  Of course.  But that is easy to determine when looking in the rearview mirror.  I have found that predicting the past is not too difficult.  Now the future…. that’s another thing all together.

Fail to Plan; Plan to Fail!

So as the new year begins, sit down with your management team AND consider engaging me or Cook to provide some high value-added objective decision support ;-)  Think of what the future holds and what makes sense.  Spend some time on the current state of the enterprise (a company profile comparison), possible future(s) scenarios (strategic planning)… and even on some impossible futures (sensitivity analysis).  Prepare your company. 

For the unexpected aspect, you shouldn’t attempt to predict black swan events… by definition they aren’t predictable.  Who knew what horizontal drilling and hydraulic fracking would do to large parts of the country?  Rather you need to build your organization with the robustness to deal with the negative ones that occur and the strength and ability to be able to exploit positive ones.

Which reminds me of an old story of a king, a condemned man, and a horse…

A man is sentenced to die by the king. As the verdict is announced, the man says, "Wait! If you spare my life, I promise that in one year, I will teach your horse to talk. If I fail, you can kill me then." The king is intrigued, and figures he has nothing to lose, so he agrees. Afterwards, the man's friend says, "Are you crazy? You'll never teach the king's horse to talk." The man laughs and says, "Think of it this way. I have an extra year to live, and a lot can happen in a year. I might die. The king might die. And who knows, maybe the horse will learn to talk."

So don’t spend too much time listening to others who tell you what you do or don’t have to do; knowing how your options support your vision is key… as I have noted before, grab the future by the throat and make certain the future you want is the one that actually occurs.  Who knows… maybe the horse will talk ;-)

 

 

 

Strategic planning is the key to “Big Ticket” acquisitions and divestitures

The days of the financial buyer seem so long ago. Just asking for the going multiple or just overpaying appears to be from a “by-gone” era in the beverage industry. There is too much at risk.

What is a realistic acquisition cost or a fair selling price? It depends....on who you are; how you organize your operation; and your portfolio mix.

How can that be? Because things are more complicated...period. The levels of financial analyses and strategic business planning needed to succeed in either transferring a brand(s) or acquiring a company AND running a profitable operation continues to escalate as the industry evolves.

For the great deals, both parties are mentally in sync and on top of their financial and operating game planning.

For the prospective buyer, it starts with a vision!

Properly evaluating a company’s current financial performance and understanding how to achieve operating synergy are fundamental to identifying the opportunity and accurately projecting future performance. Many times company’s potential to leverage economies of scale and/or capitalize on the vertical integration opportunities factors heavily for the strategic buyer when acquiring either brands or operations. Paying an “affordable” premium is individual to the unique situation of seller.

It has been our experience that these premiums are easily justified based on thorough financial and company analyses. These preliminary analyses normally include evaluating current organization structure, staffing requirements, gross profit contribution by brand, business systems and operations work flows.

For the potential seller, identifying the strategic benefits and the financial capabilities of the prospective buyers along with developing some financial sensitivity of the prospects “go-to” operations goes a long way. The affordability index for each buying prospect is as diverse as the acquisition candidates.

Give John and I a call if you would like to discuss in strictest confidence your needs and answer any questions regarding your company’s plans for the New Year.

We wish you the best during this Holiday Season.

The power of your people, other thoughts, and legal weed

Well I hope the Thanksgiving turkey was good.  Steve and I are most thankful for the opportunity and feel privileged to consult with a great group of folks; owners, management, staff, and affiliates… all of whom continue to make the beer business one of the greatest industries in the entire country.  It continues to be a most rewarding experience to say the least! 

Here are a few random thoughts from Littleton…

Your people are what matters.

From one of our associates, The Herman Group – Trend Alert (alert@herman.net), comes notice of something that intuitively has always made too much sense and confirms what we as consultants continue to see as a “game changing paradigm.”

“Finally there is a study that confirms what we have known for a long time: the best way to boost the bottom line is to lead people better. “

The report, by the Boston Consulting Group (BCG) and World Federation of People Management Associations, titled, "From Capability to Profitability: Realizing the Value of People Management," has confirmed that companies with stronger people-management capabilities consistently have significantly stronger financial performance.  Moreover the report found companies had 3.5 times higher revenue growth and 2.1 times higher profit margins than those of companies with poor people management skills. Also emphasizing leadership development, talent management, recruiting, onboarding and retention, employer branding, and performance management and rewards were particularly important.

"[Higher performing companies] take their people investment much more seriously", says Roselinde Torres, senior partner and managing director at BCG. The report examined more than 100 countries worldwide and surveyed over 4,000 managers from human resources and other fields. The study used the corporate managers' ratings of their organizations' people-management capabilities, while BCG conducted independent reviews of companies' financials.

As part of that review, BCG included a review of "Fortune" Magazine's list of the "100 Best Companies to Work For." Those that consistently made the list outperformed the Standard & Poor's 500 eight of 10 years. The software company SAS Institute Inc., based in Cary, North Carolina is one company that has consistently landed on the "Fortune" list every year.  SAS has repeatedly received recognition for its people practices.

SAS demonstrates its sensitivity to the interests and talents of its employees by offering lots of different tracks for employee growth, including "subject-matter expert" and "critical-skills expert".

Though the company has more than 13,000 employees, its turnover rate is only 3.3 percent. HR VP, Jennifer Mann believes that turnover is so low because the company provides opportunities for advancement. It also provides countless extra services, including an in-house health clinic, daycare and fitness centers, and focuses on employees' work-life balance.

Roger Herman’s closing comments are concerning – “Studies like this one will raise the consciousness of executives in corporations worldwide. Their challenge will be to embrace the culture of improvement and develop. Too many corporate leaders are not ready.”

Something to think about when you look in the mirror and at your management team as this New Year begins.  In a nutshell it really comes down to culture… and far too many companies just let their cultures happen rather than actively trying to direct and develop the culture you desire.  Not to brag- I’d never do that ;-) but one of the reasons for my success in helping companies improve is my ability to collectively help forge a common vision and then together building a unified, coherent system to achieve this vision… along the way helping individual employees (and owners) change their ways of thinking.  Give me a call and let’s talk about how Steve and I can help transform your business. 

If you haven’t run for the door yet, I’m guessing you are here to stay.  Might as well get after it and get your company ready for the long-haul too.

More on Chesbay

First let’s think a little about what the Chesbay MillerCoors dustup means.  My last few posts on this got a few folk’s blood pressure up to unhealthy levels ;-)  But my point remains the same… you must be able to make logical, coherent arguments to those who may not think like you do… or know the industry like you do.  We have good, fact-based arguments but each one of you needs to be able to make the case.  This is true whether you like to hear it or not.  I simply gave you some of the objections you are likely to hear.  Like any good sales rep, you need to know every possible objection and have a response(s) for each and every one.  And turning red in the face is not likely a winning response.

In this arena you aren’t the boss who can simply slap the table and say that’s the way it is.  In this public/legal arena you are simply one voice of many… you need to ensure you are prepared for this world.  And lastly, a tip of the hat to Denny and the Virginia Beer Wholesalers.  He told me they had the best franchise protection in the country and he certainly showed it.  And now I owe him big time ;-)  Denny, I’ll be over to mow the lawn once spring gets here.  Glad I didn’t give in on shoveling the dang snow.

And remember, these fights are just like the street.  Just because you won today doesn’t mean the battle is over.  The other side learns from their defeat and comes back tomorrow… and the day after that… and the day after that.  It doesn’t ever end.  So yes, congratulate Virginia but always keep on the offensive.  Don’t let your guard down ‘cause this battle is a constant one.  Make certain you and your company are playing offense at both the state and federal levels… it is not hype that your futures depend on the performance of your state associations and the NBWA.

Some ask why would I do this?  Why not keep my head down and not enter any of these controversial areas?...  Do like most of the other providers to this industry, simply make what I can and stay out of anything which might upset anyone at all.  I refuse to do that because I am a passionate supporter of this industry… and from years of directing business reorganizations and driving corporate change I know that better solutions are always arrived at by vigorous debate. 

Just ask yourself the next time you need a quality valuation or help brokering a deal or help in improving the profitability of your business or consulting support that provides objective, fact-based recommendations… who would you like to have at your side?  A passionate, committed partner who will work with you to help you accomplish your goals… and one who will challenge every assumption you and your management team have… or someone who is quite willing to take your money yet refuses to join the battle?  Perhaps I’m wrong but I know who I’d want on my team.  At least that’s the way I see it.

Portfolio Growth

As for deals… in my last post I noted that my guess is deal flow will dry up for the next few years.  But that is for distributorships… brand deals (both transfers and potential additions) will perhaps become even more abundant.  The dance of the elephants is not remotely close to ending and it is difficult to imagine that ABI, SABMiller, MillerCoors, MolsonCoors and others don’t get some sort of deals done over the next few years… whether with each other or someone else… it’s a very good bet that deals will be happening at the suppler level, both large and small.   And of course these have the tendency to realign brand/supplier/distributor footprints. 

So for all you deal happy folks out there, don’t fret… brand deals driven by supplier acquisitions/divestitures are certain to occur.  Who knows, if quite a few happen it might actually help the footprint/supplier alignment issues… it’s always easier to get a deal done when one is trading brands rather than simply purchasing them.  Few want to sell brands (and I agree with them) but trading is another thing all together.  For those in states with weak brand transfer laws, I guess you need to hope that the brands go your way versus the other guy… or work to get stronger laws enacted for everyone’s benefit… ‘cause the issue is coming one way or the other.

In the Haze

And on a completely separate topic, we here in Colorado are starting a grand experiment in the next few weeks… the legalization of marijuana.  I’ll leave it to others to debate the merits and wisdom of this act but the voters have spoken and they want legal marijuana.  Even though all the big dog politicians from both parties were against it, it passed via referendum quite easily.  Colorado has already had “medical” marijuana for a couple years and the sky hasn’t fallen but this is it full bore… as the supporters note, the goal is to regulate the manufacture, sale, and distribution of weed just like the alcohol industry.

There won’t be folks lighting up on the streets, public consumption remains illegal… but of course how much enforcement effort will this get?  Private establishments, like bars and restaurants and cafes can decide whether they will allow lighting up or not.  I’m thinking about starting a chain of pubs called Weed and Feed ;-)  Or perhaps a Starbucks-type place, Buzzed and Confused.  As you can see, the possibilities are endless.

Possession of under an ounce will be legal and everyone can have 6 plants of their very own… perhaps the big opportunity is for the garden centers?  Perhaps I need to become a “grow” consultant?  In addition, individuals can form co-ops and combine their six plants with others into large growing operations… as long as they don’t sell anything they grow.

How it will affect beer consumption and this industry?  I have no freaking idea.  None.  Will it be successful?  Again, no freaking idea.  Is this the start of a national legalization?  Again, no idea but the trend is in that direction.  Is there a ground floor opportunity to become a weed distributor?  Seriously.  Who the heck knows.

I’d guess if it is successful here (and in Washington which also voted to end the weed prohibition) it will probably spread around the country.  The feds still say weed is illegal under any circumstances… yet one can drive around Denver and find medical marijuana stores in abundance so it can’t be all that illegal... and the “medical” threshold was pretty low… “can you fog a mirror?  Then you are eligible to purchase this medicine.” 

Down along the industrial section of the South Platte River, I hear there are already large warehouse growing operations plugging away (as they have for a few years) and the feds haven’t closed them down either… they have threatened their bankers though.  This is an interesting point of attack… think about how you’d do business if no financial institution would accept you as a client?  If you support the feds position, not a bad strategy.  But your guess is as good as mine as to what course the feds will ultimately take.  My gut is federal officials, from the Pres on down simply don’t want to touch this issue.  Either way they go they know they are in a lousy political position.  Thus kicking the can down the road (and doing nothing) is a politician’s usual action when confronted with this type of issue… see spending, debt, entitlements, taxes, etc.

I heard from a lawyer friend that he had a buddy making $80K per month (profit) from his medical store… so there is definitely legal money to be made in the ganja industry.

There is only one area which I feel pretty confident about making a prediction. This is a somewhat unique situation where unlike the end of alcohol prohibition where it was a national act, only 2 states in the nation will soon have legal smoke.

I’d guess visits to our fair state will increase substantially… the ski areas will love it… (some craft brewers might find an opportunity here too… rather than just tap rooms, tap and toke rooms?... high quality craft beer and high quality ganga?) and almost all of these new visitors will drive.  And when they head home they’ll all have a trunk-full of high-quality weed tucked safely away.  It remains a felony to mail the stuff and I’d have to guess that taking a bag or two on an airplane is probably not a wise idea. 

This industry is quite familiar with the market response of having a large dry area next to a wet area.  In effect Colorado and Washington are the only 2 completely “wet” areas in the entire country … does the entire state become like that wet retailer who sits right across the dry boundary?  Of course this will be illegal but are the feds or surrounding states really going to try to stop every car and truck heading out of the state?  I don’t think so.

And just in the local paper today is another issue this raises… off-duty use of weed.  A case is pending before the Colorado Court of Appeals on whether employers will be able to fire workers who smoke marijuana off duty.  This one started under medical marijuana laws… a medical marijuana patient was fired from his job after testing positive for marijuana, even though there was no evidence he was impaired on the job.  With full legalization one can expect a torrent of these cases.  Can someone be fired from their job for doing something off duty which is legal? 

For this industry a similar argument would be that an employee could be fired for drinking on the weekends.  The legal argument allowing the termination for off-duty marijuana use is that since marijuana is illegal under federal law, it is illegal period.  As with far too many things in our lives, some judge will ultimately determine this.  But before that I’d guess a lot of Colorado and Washington beer distributors will be caught up in many lawsuits regarding off-duty smoking.  Are Class A CDLs a cover?  I guess we will find out… but what about all the other positions in your organizations? 

So there are three experiments here…

• First the legalization
• Second the impact of having only two wet areas in the entire country.  But 18 other states already have medical marijuana so maybe it isn’t as dry as one might think.
• Third how does an incremental bottom-up change in drug laws affect a whole range of other laws… laws which will most certainly be in conflict with each other.  

Stay tuned and we’ll see how it all turns out.  What do you think?  Click the comment button at the end of this post and let us know your thoughts.  Good idea?  Crazy as hell?  Somewhere in between?  What’s your prediction on how it all works out?

Now I’ve got to get out to my garden ‘cause planting season is just around the corner ;-)  Dang wife won’t let me turn the garage into a hydroponic wonderland!

 

 

Prepare for Opportunity

Well the election is over and it seems new tax rates (and new taxes) are coming one way or another.  I assume all distributors who wanted to leave have already done so.  Therefore if you’re still here, you’re probably in the game for at least the next 4 years.  I could be wrong (wouldn’t be the first time) but I can’t see anyone racing for the door until capital gains tax rates come down, and in all likelihood that won’t be happening under this administration.  Perhaps sanity will rule the day since every time capital gains rates decrease, revenues increase... but I wouldn’t hold my breath or bet the farm that sanity will rule the day.

So all you hoping for an acquisition, you need to change to a longer-term strategy to be well positioned once deals start happening again.  Pause and think about that… the odds are there will be few if any acquisition opportunities over the near-term, then prepare so that when the time is again ripe, you and your organization are ready.  PREPARE FOR OPPORTUNITY.

Unless something fundamentally happens to this industry, I’d have to guess values are going nowhere but up… I’ve been wrong too many times thinking values are coming down.  I’m a convert now, values are up and staying up ;-)… unless something very fundamental would happen.  What that might be, I don’t know… but want to give myself a backdoor just in case I need it ;-)

Something every distributor out there should be doing is… focusing on improving the internal operations capacity and bottom line profitability of your company. 

So start with a plan so that you and your organization are financially and organizationally prepared if and when an opportunity presents itself a few years down the line. 

• Obviously this means dealing with whatever debt you have.  If a distributor has little to no debt (and that is an important factor), they can remain in this business almost as long as they choose.  That’s just the way it is.
• Evaluate and restructure your management team…

 Do you have the team in place to deal with a major acquisition?  If not, start the process of changing this.

• Retool and update your business systems and processes…

The Reyes Beverage Group are perhaps the best in this industry on this front.  They have a proven, dynamic template which they bring to every acquisition they make.  Can you do the same?  Would you even want to export what you are doing to the acquired company?  Take a very hard look and improve what you are doing now… it’s a double win.  Your present organization’s operations will improve and if/when an acquisition presents itself you will have an internal template which you can quickly and easily export to the acquired organization.

• Improving warehouse performance (Steve Cook excels at this), you should get after it and drive more dollars to the bottom line....

Most beer distributor’s warehouses simply weren’t designed for the present world of lots of relatively low volume SKUs.  A great deal of cost (or cost savings) can be found here, in addition to greatly improving the overall flow of the business.  It has been said that “when Mom’s not happy, nobody’s happy”… well the same is true about your warehouse, “if the warehouse ain’t working well, then nothing is probably working well.”

This issue is not going anywhere anytime soon.  And even if your warehouse isn’t filled with craft beers, your major suppliers will give you plenty of SKUs, seasonal packages, new brands, etc. to make the operations of your warehouse a key factor in the operations (and profitability) of your entire company.  The warehouse is becoming THE factor in the entire performance of your company.  Make certain you have the design, processes, AND personnel to keep this important, but far too often overlooked, aspect of your business running at peak performance.

And no, this doesn’t mean you have to automate your warehouse.  In many (most?) situations Steve and I find there are much better, more effective solutions than spending millions and millions on automation.

Fifty-five percent of warehouse labor is travel time in the facility! Reconfiguring the layout typically provides a quick payback.  Think of that… a lot of bang for a little buck.  Trust me, it’s worth giving Steve Cook a call.

And speaking of peak performance… a simple but useful mantra is to do it right the first time.  Whether it’s taking a correct order or loading the right product or a million other things… transform your organization to one where it is ALWAYS done right the first time.  It is incredible the manpower, frustration, and very real cost associated with not doing it right the first time.

The age old cliché still applies: “Why is it there is never the time (and money) to do it right the first time, yet there is always the time to do it over?” (and sometime over and over and over again)

And not to toot my own horn… I’d NEVER do that ;-)  But long ago I wrote a 4 piece blog on time management from a corporate perspective.  The wisdom in these pieces amazes even me.  They were written in 2006. You can find them here and here and here and here.  The second one deals directly with the issue of why it is so important doing things right the first time… but I’d recommend you give all 4 a read.  Implement the thoughts covered in these posts and you will be a long ways further down the road towards preparing your business for whatever opportunity that may come your way.

And lastly I must call BS on the subject that you must get bigger to survive.  I was once in this camp of thinking but have since tossed it in the dustbin where it belongs.  I have witnessed the national, regional and local diversity among distributors and how they can stay in business (and live very nice) even on surprising low volumes.  One can pontificate how they must get bigger to survive but that simply is not historically correct, and I see nothing on the horizon to change this.

I appreciate the economics of consolidation as well as anyone but just because it makes financial sense on paper it does not mean that paper will someday actually reflect reality.  People like this industry and almost all of the remaining folks plan to stick around. 

Sure ABI and MillerCoors are going to harvest your profits and shift costs but for the pain to reach the level that debt-free smaller distributors are simply not financially viable?  For that level of pain to occur, the entire industry will be experiencing Armageddon… and I don’t see Armageddon coming anytime soon.

So yes I’d love to get the brokerage work by selling these smaller distributors who aren’t “financially viable” but that simply is not the case nor do I think it will be the case anytime soon.  That’s not to say that from a strictly financial perspective many of these folks shouldn’t have sold already… guess what, these are not strictly financial businesses (few if any are) and other factors outweigh the financial concerns. 

My best advice is to prepare your business so you can take advantage of an opportunity whenever it may present itself.  And in the process maximize profitability and strengthen your team for both today and tomorrow. 

And lastly, unless you are paying for my consulting advice, don’t listen to anyone telling what you must or must not do.  Now if I’m saying it… that’s another matter altogether ;-)

 

 

Chesbay, MillerCoors, City Beverage and Freedom

First a quick note about the Chesbay dustup and the Illinois Liquor Commission’s decision on allowing ABI to continue their ownership in City Beverage.  That decision which some have called surprising and confusing is EXACTLY the reason I counsel against legal actions like the Chesbay dustup.

As a regulated industry, as much as is possible we need to stay out of courtrooms.  For once in the courtroom, one person’s judgment (whether right or wrong) can forever change the industry.  And surprising and confusing decisions happen all the time.  Putting 79 years of post-prohibition regulation in a single person’s hands is simply a risk not worth taking. 

So Chesbay gets to exit this year with their money (less legal expenses)… Reyes Beverage Group gets to complete a transaction which makes perfect strategic sense… and MillerCoors gets to extract some type of performance commitment from the Reyes’s and get out of a legal battle where most sides were against them.  And the industry wins because this thing goes away.

As for the City Beverage decision… who knows.  AB has had that stake for many years and the world hasn’t ended… and it is Chicago and Illinois… unfortunately a world of political pay-to-play if there ever were one.  I’m not saying this decision was that… just that it is rather sad that the fine people of the state of Illinois allow this level of political corruption to continue.  It sullies every decision, whether corrupt or not since one can never be certain.  One would hope that sooner or later the folks in Illinois will tire of seeing their governors and other elected officials cooling their heels in jail… and as has been noted before by some cynical types… only the stupid and greedy politicians get caught in the first place (we have one of those, ex-governor Blago sitting in a prison here in Colorado at this very moment).  The “good” ones simply never get caught.  Perhaps free people should demand more from our elected officials.

And on that note a couple points.  First, many folks out there think I’m crazy for putting my beliefs out there in front of all (my associate Steve Cook being one).  They think it is bad for business and one should never do it.  I take a longer view… how do we expect the incredible bounty and freedom each of us enjoys to continue if we are afraid to speak up?  I realize it can be dangerous to enter the culture wars (where both sides are generally wrong) but speaking in favor of freedom is never wrong.

Which brings me to my second point… it seems that good ol’ Guinness is not only a great beer, the lineage of the Guinness line has produced a pretty good thinker too…

Following is a brief interview from National Review Online (http://www.nationalreview.com/articles/332478/have-drink-guinness-interview) with the great grandson of the founding Guinness.

It is worth the read (I haven’t read the book yet) to hear what a foreigner has to say about the freedoms of this great country and the risks to them.

Have a Drink of Guinness

November 5, 2012 3:00 A.M.

"Like a precious family heirloom, freedom is not just ours to enjoy, but to treasure, protect, and pass on to future generations,” says Os Guinness in an interview with NRO’s Kathryn Jean Lopez. Guinness, great grandson of that famous Dublin brewer, has recently written a book, A Free People’s Suicide: Sustainable Freedom and the American Future. Here, the social critic helps remind us of what’s special about the United States.

KATHRYN JEAN LOPEZ: What concerns you about freedom in the United States as you watch us right before a presidential election?

OS GUINNESS: I am a longtime admirer of the U.S. and its enormous significance for the world. But as your presidential elections have become more and more of grand popularity contest, dominated by money to an obscene degree, they have less and less to say about the real “state of the Union.” One of the recent conventions, for example, was well described as “more Pat Boone than Winston Churchill.” The present condition of American freedom is only one of many themes that are conspicuous by their absence in this election.

LOPEZ: “Suicide,” in the title of your new book, is a bit strong, isn’t it?

GUINNESS: The title comes from Abraham Lincoln: “As a nation of freemen, we must live through all time, or die by suicide.” On the one hand, he was referring to the open-ended challenge of what George Washington earlier called “the great experiment” — and experiments are always open-ended. On the other hand, he was echoing a point made by many historians: Strong free peoples bring themselves down. It won’t be the Nazis, the Soviets, or Islamic extremists who bring America down, but Americans and American ideas.

LOPEZ: From an outsider’s perspective, are you saying, “Who do you Americans think you are”? Do you think we overestimate our importance in the world?

GUINNESS: I would caution against the tone of hubris that is so common in American rhetoric, especially after the collapse of the Soviet Union in 1989 — hubris being not only overweening pride but also the illusion of invulnerability. References to “American exceptionalism,” the “second American century,” and the like roll off the tongue easily and send patriotic shivers down the spines of American audiences. But when they are used as a litmus test of patriotism, they inoculate Americans against thinking seriously about the real health of the Republic and America’s true standing in the world in the global era.

LOPEZ: “Freedom must be guarded vigilantly against internal as well as external dangers,” you say. How can we do this?

GUINNESS: Awareness of domestic dangers was a characteristic emphasis of the Founders, and they learned it from their reading of classical writers, such as the Greek historian Polybius and the great Roman orator Cicero. Curiously, the Founders actually downplayed the danger of external enemies and emphasized the menace of internal enemies, such as Polybius’s notion of “the corruption of customs.” The present generation of Americans, on the other hand, has done the opposite, and so concentrated on external menaces (Homeland Security, and so on) that it has almost completely ignored internal dangers. In the long run, the internal dangers will prove the more important.

LOPEZ: How is freedom the greatest enemy of freedom?

GUINNESS: The rewards of freedom are always sweet, but its demands are stern, for at its heart is the paradox that the greatest enemy of freedom is freedom. There are several reasons for this, but the deepest concerns a simple moral fact: True freedom requires ordering, and the only ordering appropriate to freedom is self-restraint, yet self-restraint is precisely what freedom invariably undermines when it flourishes. So the most common way to lose freedom is to allow it to slide down into permissiveness and then license.

LOPEZ: What do mean when you say that freedom could prove to be “America’s idol”?

GUINNESS: By “idol,” I mean the Jewish and Christian understanding of the term as something of great human importance and value that is elevated into being a supreme ground of trust and then an object of devotion, when it should not be asked to bear that weight and it will always disappoint its devotees. Freedom is often idolized like that in the U.S., as if it were supreme, self-evident, and self-sustaining. I refuse to take part, for example, when Americans sing the hymn about freedom’s “holy light.” I have lived under totalitarian Communism, so I prize freedom as much as anyone and have long fought for freedom of conscience and speech. But freedom must be understood and guarded with great realism, and we must never forget its limits and its duties.

LOPEZ: What is “sustainable freedom”? It sounds as if it might have something to do with green jobs.

GUINNESS: “Sustainability” is a vogue term today. People talk about sustainable pretty well everything — sustainable development, sustainable capitalism, sustainable environments — but curiously no one talks about sustainable freedom. The American Founders, in contrast, knew that they faced three tasks in establishing this great Republic: winning freedom (the Revolution), ordering freedom (the Constitution), and sustaining freedom (or “perpetuating our institutions,” as they put it). Needless to say, the third task is ours today, but I have only ever heard one American (John Gardner), and not a single national American leader, address the need to renew freedom in every generation. That is amazing because the Founders’ view of how to sustain freedom is probably the most brilliant and audacious proposal the world has known, but at the very moment they most need it, modern Americans ignore it.

LOPEZ: What do you mean by the “golden triangle of freedom?”

GUINNESS: “The golden triangle of freedom” is my term for the means by which the Founders believed they could create a free society that could stay free forever — which, if you think about it, was and is an extraordinarily daring idea. Alexis de Tocqueville called it “the habits of the heart,” but the Founders themselves never gave it a name. It runs like this: Freedom requires virtue, virtue requires faith of some sort, and faith of any sort requires freedom — which in turn requires virtue, and so on ad infinitum. From orthodox and conservative Christians such as George Mason right across to deists and freethinkers such as Thomas Jefferson and Ben Franklin, there was virtual unanimity over this emphasis. But it nearly goes without saying that all three legs of the triangle are either contested or openly dismissed today. But if the Founders’ system is abandoned, what will go in its place? I have never heard anyone give a moment’s thought to that question.

LOPEZ: How is the problem of freedom the “problem of the heart”?

GUINNESS: From St. Augustine to Machiavelli to John Kenneth Galbraith, many commentators, despite their very different worldviews, have blamed the instability of free societies on the restlessness of the human heart. This is made worse today because of the way our consumer societies are deliberately fuelled through stoking restlessness. We have replaced the notion of the good life with our consumer ideal of the life with goods, and in the process we have plunged ourselves deeper and deeper into debt, and we cannot stop. Have you ever pondered the irony of the prevalence of addictions and recovery groups in the land of the free?

LOPEZ: How have Americans become their own worst enemies?

GUINNESS: There are many varieties of freedom in America today, but they share a common characteristic: In Isaiah Berlin’s terms, they are essentially positive and not negative. This means that Americans have both abandoned the Founders’ view of sustainable, negative freedom (the freedom not to be interfered with) and espoused notions of positive freedom (the “freedom” to have various guaranteed benefits) that are unsustainable in their essence. Thus it is only a matter of time before American freedom will undermine itself. If things go on as they are now, the time will come when, as the designer of the Titanic said, it will be a mathematical certainty that the ship will sink.

LOPEZ: How can we be better stewards of freedom? Why should we be?

 GUINNESS: In today’s climate of atomistic individualism, we rarely think of our ancestors and even less of our children’s children. (“What has posterity ever done for us?”) But like a precious family heirloom, freedom is not just ours to enjoy, but to treasure, protect, and pass on to future generations. The missing key to sustainable freedom is civic education and transmission. It used to be understood that in a free society, everyone is born free, but not everyone is capable of it. Citizens have to be educated for liberty, which was once called liberal or civic education. Yet this practice has disappeared all over the Western world, and certainly in American public education since the 1960s. Without civic education, freedom can never become a “habit of the heart.”

LOPEZ: You write: “Unless America succeeds in revaluing citizenship, in restoring civic education, and in revitalizing education that proves as powerful as the potency of mass entertainment and consumer advertising, the American unum will no longer be able to balance the American pluribus, and America’s freedom itself will continue to wither.” We can’t exactly do that before November 6, can we?

GUINNESS: No, restoring civic education and forming the habits of the heart will take at least a generation, and it will have to start with serious leadership that America so obviously now lacks. But unless such a restoration happens, the consequences will be severe, for E pluribus unum is not only America’s motto but also its greatest achievement and its greatest need. The American unum has been lost since the Sixties. If this continues, there will soon be no unifying American identity and vision to balance the pluribus, and the days of the Republic will be numbered.

LOPEZ: Does all this matter to Europe in a particular way?

GUINNESS: Your Founders called America the novus ordo seclorum, and historians termed the U.S. “the first new nation,” but the rest of the world went on its ancient way unimpressed. Today in the global era, however, almost all the world is experiencing the gale-force winds of modernity that the U.S. faced and answered — mostly with striking success — more than two centuries ago. Seen this way, never has America been more relevant to the world than now. Thus the European Union now talks of “unity out of diversity” instead of E pluribus unum. But at the very moment when the American model is more relevant than ever, America has lost its sense of identity and lost confidence in its own way. The brilliant settlement between religion and public life, for example, which James Madison called “the true remedy,” is being squandered through the now-50 years of fruitless culture wars. Yet who dares say “a plague on both your houses” and then find a way forward in the interest of all Americans? No one, to my knowledge.

LOPEZ: Could today’s time of testing be as decisive as the Civil War?

GUINNESS: The crisis of freedom touches the very heart of America, and as it is deepened and intensified by the many movements coming out of the 1960s, it will prove more decisive for America than the depression years of the 1930s, and it may even rival the Civil War era for the decisive stamp it puts on America.

LOPEZ: “No self-respecting American will ever be opposed to freedom any more than to love” — you have hit on the problem there, haven’t you? Who is going to believe that the Obama administration is truly eroding religious freedom? Who will believe that the president doesn’t value it as we have in the past? He must obviously value it on some level, by definition.

GUINNESS: The Obama administration has been talking, but not walking its own talk. If you listen to the president’s remarks on religious freedom, and even more to the powerful speech by Secretary of State Hillary Clinton, you would hear statements worthy of Roger Williams and James Madison. But their health-care mandates tell a different story. Kowtowing to the LGBT agenda, this administration stands in shame as perhaps the greatest official violator of freedom of thought, conscience, religion, and belief in American history.

LOPEZ: If Americans would immediately appreciate only one thing about our freedom, what would you hope it would be?

GUINNESS: I would hope that Americans would thank God for their freedom and celebrate the achievements of their great pioneers of freedom — with an equally frank admission of the egregious blind spots and shortcomings. But at the same time, they need to reexamine the subtle challenges of freedom, and in particular face up to the tough requirements of what it takes to sustain freedom. The American Founders got slavery and the place of women badly wrong from the start. But the world has never seen a more brilliant and daring answer to the instability and transience of freedom than theirs. The question today is whether, as their heirs, you are worthy of that gift and are able to keep it going. I hope and pray you are and will.

— Kathryn Jean Lopez is editor-at-large of National Review Online.

 

Something to think about from the descendent of a great beer-man.  You might know my thinking on this… this can only be solved by fixing this country’s K-12 public education system.  Until that is done, all is for naught.  www.EndtheEducationPlantation.org

 Still accepting checks and money orders ;-)  And we do NEED the money.  How’s that for blatant pan-handling?

 

 

 

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 locked…no 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 4^th 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 3^rd 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 3^rd grader?... with apologies to all those dull 3^rd 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 3^rd graders; they have to stop acting like 3^rd 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 3^rd 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 3^rd 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 3^rd grade teacher.  Now there is nothing wrong with 3^rd 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 3^rd or 4^th (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

Congratulations to  CAROLINA PREMIUM BEVERAGE LLC

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.