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August 2018

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The Massachusetts senate race and beer wholesaling

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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


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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

More management wisdom

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Ackoff describes what he is talking about

 

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

 

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

 

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

 

“No one has to change.  Survival is optional”

 

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

 

The second is from that management guru, Albert Einstein

 

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

 

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

 

 

 

What's Up With Values?

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

 

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

 

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

 

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

 

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

 

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

 

 

Some thoughts on Acquistions

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


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


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


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


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


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


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

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


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


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


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


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


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

 

 

 

Now for something completely Positive!

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Are ABI and MillerCoors Planning to Grab Consolidation Synergies?

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

 

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

 

Harry writes: (underlining and bold are mine)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Harry continues:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

With mergers geared toward the mega-distributor…

 

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

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

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

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

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

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

 

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

 

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

 

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

 

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

 

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

Is ABI Planning to Harvest Distributor Profits?

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

 

Harry writes:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Broken Windows Theory of Management – Part 2

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

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

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

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

 

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

 

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

 

A culture of minor theft… a broken window. 

 

Solving the same problem over and over… a broken window

 

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

 

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

 

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

 

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

 

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

 

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

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

·                      Holding employees to different performance demands.

o       a driver who always is late.

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

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

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

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

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

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

 

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

 

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

Broken Windows Theory of Management – Part 1

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

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

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

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

 

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

 

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

 

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

 

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

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

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

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

Next post – more on Broken Windows

Plenty to go around

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

More on Valuations and Mergers

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is going on with beer values?

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

 

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

 

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

 

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

 

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

 

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

 

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


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


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

 

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

 

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

 

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

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

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

 

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

 

 

 

 

 

 

 

 

How to improve your operations

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

 

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

 

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

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

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

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

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

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

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

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

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

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

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

Does a duopoly lead to shared services?

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Even more on mergers

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

 

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

 

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

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

2.                  The Miller distributor purchase the Coors distributor.

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

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

 

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

 

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

 

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

 

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

 

The Prisoner’s Dilemma can be stated as:

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

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

 

 

Al

 

 

confess

don't

Bob

confess

10,10

0,20

don't

20,0

1,1

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

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

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

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

 

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

 

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

 

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

 

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

 

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

The Concept of Value and Other Whimsical Things – Part 3

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

The Concept of Value and Other Whimsical Things – Part 2

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

The Concept of Value and Other Whimsical Things – Part 1

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Bringing a knife to a gun fight

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

Let’s Make a Deal

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

 

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

 

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

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

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

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

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

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

 

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

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

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

A-B Wholesalers

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

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

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

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

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

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

MillerCoors Wholesalers 

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

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

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

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

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

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

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

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

 

 

A-B + InBev + Miller + Coors = Change

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

 

 

 

Consolidation of the MillerCoors Markets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

More on Mergers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

 

 

 

Anheuser Busch – InBev and Family Businesses

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

 ·                    From an A-B wholesaler

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

·                    From a Miller/Coors wholesaler

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

·                    From a large A-B wholesaler

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

·                    From a mixed beer and wine/spirits dist

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

·                    From a large Miller/Coors dist

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

·                    From a medium sized A-B dist

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

·                    Another A-B dist

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

·                    From a large Miller/Coors dist

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

·                    Another A-B dist

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

·                    From a medium sized Miller/Coors

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

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

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

 ·                    Another A-B dist

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

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

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

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

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

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

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

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

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

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

Don’t Shoot the Messenger

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

 

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

 

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

 

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

 

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

 

There is a great quote

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

 

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

 

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

 

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

More on Rising Fuel Prices

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Improving the design of your sales organization

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Creating a Consumer Brand via Distribution

Creating a Consumer Brand via Distribution

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

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

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

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

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

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

Who You Are

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

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

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

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

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

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

Only One Question

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

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

Risk and Probability of Success

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

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

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

                           

Is Power Shifting Back to Distributors?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rising Fuels Costs - What to do?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2.                  Went to 4 day per week service.

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

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

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

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

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

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

·                    Increase your sales impact and merchandising effectiveness

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Change... it's a funny thing

A while back the Wall Street Journal had an interesting piece on waiting and how to deal with its frustration… a chronic issue in both business and personal lives.  I don’t want to talk about waiting here though, but rather change.  Here is an excerpt of the article (bold and underlining are mine):

Research shows that waiting for uncertain outcomes can be more uncomfortable than adjusting to the worst of them, which explains why impending mergers and reorganizations drive people mad. In a paper to be presented later this month, George Loewenstein, a professor of economics and psychology at CarnegieMellonUniversity, studied people who underwent colostomies, or intestinal bypasses. Half of them had the possibility of having it reversed; for the others it was permanent.

Measuring their life satisfaction, the researchers found that those with permanent colostomies very rapidly improved whereas those who could ultimately reverse them stayed relatively unsatisfied. "Hope impedes adaptation," says Prof. Loewenstein.

That last sentence really struck me.  Hope impedes adaptation.  Quite a thought.  I’m certain that no one who is bound for a colostomy is jumping for joy, but those who know they are stuck with it “very rapidly improved”… those with “hope” did not.

I have been an agent of change my entire adult life.  In my consulting practice, driving change is a significant part of what I do.  In fact it is a primary aspect of almost everything I do.  But change is a funny thing.  It is truly amazing how we hold on to ideas we can’t defend, beliefs whose origins are unknown, and surprisingly even ideas we may not even agree with anymore.  Yet we often cling to them like a poor soul hanging on to the only tree left standing in a raging flood. 

I’ve done it myself… often caught by observant management teams who take extreme joy in catching me defending an idea whose factual underpinnings have been eroded away in our discussions.  This tendency to fight change is prevalent in all of us to some degree.  But most of my resistance to change experience comes from my clients and their employees.   

In a consulting project it is always easier for me since I don’t have any what I call “used-to-be’s”.  As in, “that’s not the way it used to be”.  I come in with a blank slate.  And ultimately I don’t really care if something is designed this way or that, as long as it works and is in complete harmony with all other parts of the machine and meets the owner’s desires.

Of course in a consulting project, everyone else has their very real, day-to-day experiences.  They do have “used-to-be’s”.  In addition, they also often prefer this or that choice since it is best for them in their professional or personal arena.   As an agent of change, I help my clients and their employees look at their organizations in completely different ways; thus my ongoing encounters with resistance to change. 

I speculate this reluctance to change is a simple human feature.  It’s straightforward; it is generally better to be cautious with every new idea (and action) rather than to blindly take it to heart.  Do not let go of your present beliefs too easily; you are alive right now and unless you are in a crisis, things probably are not all that bad.  There are a lot more ways for things to go wrong than for them to go right.  So we hang on tight, whether we know it or not. 

And guess what?  If you are in a crisis you will find change much easier to accept.  Significant emotional events are a catalyst for personal change, for breaking out of an old way of thinking and discovering and embracing a new paradigm.  Looking back on those occasions when we finally let go and accept a new idea, it is startling how hard we held on; often for no real reason (in fact often against reason).  It’s not a moral issue; it’s just a trait we all have.  Be aware of it.

Back to the “hope impedes adaptation” thought.  Look at your business.  Have you allowed hope to impede you in moving forward?  Perhaps refusing to accept that now is the time to sell?  Perhaps refusing to accept that there are other, and perhaps better ways to run your business?  Perhaps refusing to accept that your entire strategic vision might be in need of a major tune-up?  Perhaps refusing to accept that members of your management team are not prepared to help move your company into the future?

Did you know that all significant advances in military strategy came in “resource poor” environments?  It makes perfect sense.  You are in battle with limited resources… you either find a way to make it work or you die.  You adapt and change or it’s the end.  I’m certain this situation does tend to focus one’s thinking.

The same is true in most areas of life.  Resource poor environments are where most innovations come from.  This is something you must consciously work to address.  Fat and happy is more than just a snappy saying.  In a resource rich environment, organizations and their people tend to become fat and happy, and very resistant to change.  But organizationally this can lead to very bad outcomes – success breeding failure.  You don’t want your organization to be like an old, magnificent oak tree… which looks strong and healthy but is actually weak and rotting from the inside.  And at the first significant wind, it comes crashing down.  Ideally you want an organizational culture which generates a resource-rich environment but whose mentality is one of being very resource poor… open to any and all ideas, embracing change,  flushing the “used-to-be’s” on a daily basis.

Recently an A-B client was rather surprised that a competitor who he has dominated for years is actually getting better – not just as a result of hotter brands but getting better from a managerial and execution view-point.  As I reminded him, just like the military example above, they either had to get better or die… they chose to get better.  Not without a lot of kicking and screaming mind you, but when pushed towards extinction, they improved.

Very real pain (and quite often fear) is what drives many organizations to embrace change.  My attitude is why wait for the pain?  Keep ahead of the game so you never have to experience the pain. 

Oh, and one last point… please remember that change requires just that, change.  You can’t change yet want to continue to do things exactly as you do today.  Just doesn’t work.

Also, re-read that first paragraph of the WSJ article… “waiting for uncertain outcomes can be more uncomfortable than adjusting to the worst of them,”  For those who embrace organizational change, don’t get too crazy.  People do not handle constant change well.  If you are going to make organizational changes - plan and design it well with a good implementation strategy and then let the machine run.  Focus on improving your organizational performance by improvements in execution, not constantly fiddling with the machine.  Every 3 – 5 years take a hard look at the machine, not every 6 months.  And if you do plan for change, get it done with.  Don’t drag it on and on and on.  It is incredibly destructive to an organization to always be waiting “for the other shoe to drop”.  Accelerating organizational change is one of the many incredible values I bring to the table when helping with a re-org.  Since I am 100% focused on the re-org (and it’s not my first rodeo so I’ve probably learned at least a few things in the past 25 years), we can get the thing designed, built, and implemented in a lot less time… saving your employees the very real (and unproductive) agony of waiting for uncertain outcomes… to say nothing of building a better organization, generally at less cost.

Next post – a one time event, advice for suppliers!

More on Strategy

With the recent announcement of the sale of Thies Distributing inFlorida to the Reyes Beverage Group, many wholesalers are shaking their heads… just how do they do it? 

Let us use this as an exhibit in strategy.  Although I have no inside knowledge of the Reyes’ plans, what can we deduce by simple observation and analysis?  First, strategy is a long-term plan of action designed to achieve a particular goal(s).  Emphasize long-term.

Many wholesalers are looking at the Reyes success and wanting to get in on that action.  Well the Reyes success didn’t just happen yesterday, they have been executing a plan in the beer business for at least the last 32 years. 

That’s when they purchased their first distributorship, a small Schlitz distributor.  Today they are the largest beer distributor in country, selling over 72 million cases per year (including the Thies volume).  Not a bad growth rate, eh?  And they haven’t just been focused on beer; they also have two other divisions focusing on food service.  Combined, Reyes Holding is the 24th largest private company in the entire country with combined annual sales of over $9 billion.  This is the result of strategy.

It might have started as a plan as simple as “a beer distributorship for each son”, but it has clearly evolved.  Strategies do that.  Some confuse long-term strategy with a static, never changing plan… nothing could be further from the truth.  Strategies evolve as circumstances change, as feedback is obtained, as the future becomes the present.

And when good strategy is executed, you find that there often are few choices remaining, much like the end of a chess match where the final outcome was determined very early on, it is just that one side didn’t know it was happening until the checkmate moment.  These types of plans often have been executed for decades, you will find it very difficult to respond in kind unless you’ve been doing the same.  By the time you are aware of someone executing a strategy, quite often many options have already been taken away.  Southern Wine and Spirits is another example.  They too have been executing their strategy for decades.  And by the time many of the smaller wine and spirits houses around the country woke up, their future was already set.

And strategy is also multi-faceted, not everything is “hard” business.  In Harry’s newsletter he quotes Dennis Thies…

“… we sold to Reyes Holdings because they have a great reputation for getting deals done in a fair and equitable way,"

This might just be because of the type of people the Reyes brothers are, or it could be a cold, hard calculated business decision, or it could just be good PR ;-)  … either way it becomes a part of an effective acquisition strategy.  Do you want to sell – probably the biggest business/family decision you will ever make – to someone who has a “great reputation for getting deals done in a fair and equitable way", or do you want to sell to someone who you don’t trust and has a reputation for being a pain in the rear?  Who would you choose?  Again, whether calculated or not, everything matters, especially in strategy.

And a note about negotiations and buying and selling.  Far too many people focus all their efforts on “winning”.  It seems the Reyes’ focus on getting deals done.  If “winning” is your only goal, you will find that you generally lose.  The goal is to get the deal done, not stroking egos.

For those who want to get in on the big-time action… do you have multiple distributorships (I’m guessing many debt free) which throw off annually a hundred million plus in free cash flow – probably more?  You can afford a longer payback period in this scenario rather than owning one (not debt free) distributor and trying to buy another.  Your financial situation will not remotely be the same.

Is it too late to become a big player in this arena?  Probably not but you had better have a clear, workable strategy that you can actually execute.  And you won’t be playing alone; lots of folks are just as hungry as you.  It certainly seems that the Reyes’ are executing, what I will call for lack of a better name, a Southern Wine and Spirits strategy.  As consolidation continues, they plan to be the last big player standing.  But the game is far from over for the MillerCoors network, there is a lot of opportunity for those willing to step to the plate.  Great opportunities for consolidation, especially in smaller markets… and especially those with good demographic and population trends.

There are also a lot of strategic bonuses to being a mega-distributor.  Because of the large footprint, many new suppliers/products will almost automatically come your way.  Not every wine and spirits supplier wants to go with Southern in every single market, but is the incremental value of going with someone else in a specific market worth the possible wrath of Southern in all those other markets? You can also attract and retain better employees.  A mega-distributor offers many more career paths than a family owned, single market distributor.  In most distributors you don’t have to go very high up the organization chart to find all future progress blocked by either family members or seasoned executives who aren’t going anywhere until retirement.  Much more financial strength equals better financing terms.  Purchasing power, the list is long.

Or how about just the power which comes with size?  I can’t imagine any MillerCoors wholesaler of almost any size, NOT considering the Reyes’ as a possible acquirer.  Who needs brokers?  Think about that… they’ll probably get a look at almost every major sale… if not that, at least a disproportionate number.  That’s potentially a significant strategic advantage. 

Here’s a thought for those smaller players who might be considering an exit… perhaps a better plan is to do the heavy lifting up-front and put together a syndicate of adjacent wholesalers and sell them all as one… Two or three 1 – 2 million case operations (or larger) sold as one are much more attractive to those big acquisition players.   It really is as simple as coming up with an acceptable exit price which all players agree upon.  It someone will pay the number, everyone leaves happy.  If not, what was the harm?

The A-B network is even riper for this strategy… it is just waiting for its “Reyes” to come along.  Ton’s of opportunities… from the big markets to the small ones.  Yes I know about supplier approval… you collectively are going to have to face this dog sooner or later.

Or have you wanted to make an acquisition for the past 30 years if you could find one that works and “is for the right price”?  Deals done to date… zero?  Guess what?  Probably not going to happen.  Perhaps you need to re-think what you are doing.  Remember Einstein’s definition of insanity… doing the same thing over and over again and expecting different results.  Wishful thinking is not strategy.  I’ll buy one when I can steal it is a waste of thinking (or perhaps better stated a lack of thinking).

Now not everyone is going to grow to a Reyes Beverage Group.  But there are still a lot of acquisition options… lots and lots for the smaller market distributor.  What is your strategy to make it happen?  How exactly do you plan to achieve your goals?  Mergers?  Shared services?  Lots of options.

Maybe what you’ve got is what you’ve got.  Don’t cry in your beer that you’ll never be a $9 billion dollar (and growing) operation like Reyes Holdings… instead have a strategy to maximize what you have.  You have an incredible sales and distribution machine… what else can you do with it?  More products?  Different products?  Different customers?  Different territory?

If what you’ve got is what you’ve got, then use the cash flow to fund other things.  Diversify.  Perhaps you can’t grow your beer business but that doesn’t mean you can’t grow other business and financial assets.  There are lots of businesses out there; there is more to the world than beer wholesaling.  Plan and execute.  If you don’t plan, when an opportunity presents itself you will not be ready to move since none of the groundwork will have been done.

But also don’t forget, you may not like where strategic analysis points.  So what?! … I’m not overjoyed my hair is falling out.  What does either point have to do with reality?  It is what it is.

For those employees reading this, remember that consolidating industries throw off “excess” employees.  This is where a lot of the cost savings come from… fewer people.  If you combine 2 distribs, you don’t need 2 General Managers or 2 Sales Managers, etc. etc.  Have your own personal strategy.  Again you must plan ahead.  If you find yourself in a position where an MBA or advanced training would help, you have to already have those skills.  When the demand is there, you must already be prepared to meet this demand.  Planning. Strategy.

Make use of all the training provided by your suppliers.  It’s free!  Take it to heart.  Practice it. Consciously work to be better at your job.  Consciously work to expand your scope of knowledge.  I know no one has the time, but the dedication to get a BS in business (or operations or finance) or an MBA or whatever is well worth it over a lifetime.  Start a program and take a class or two at night, every semester and you will be amazed at how quickly that degree arrives in your hand.  Then when the opportunity arrives you will be ready for it.

Remember whether in business or your personal lives… ultimately you may or may not achieve your goals – this is often ultimately beyond our power to control… but without strategy it is highly unlikely you will end up where you desire.

Time to batten down the hatches or turn up the heat? Part 3

Well at this point you and your management team have hopefully analyzed every aspect of your business… squeezing those expenses you can control… and even more importantly, analyzing the design and operation of your business to maximize both the short and long-term ROI on the assets employed. All other things being equal, he who gets the best returns from the assets employed (be it trucks, working capital or people) will win… and of course hot brands help make everyone look smart but that’s another story.

Pricing is also an area of possible improvement.  Can you squeeze a few more percent of gross profit while not negatively affecting sales?  Remember that beer, wine and spirits are very much image products… in many ways they are a statement of who and what you are.  Not every buyer is a price shopper.  We all want value but perceived value might be paying top-dollar for a product.  The price-driven consumer does exist and somewhere in your brand mix you should provide value to this person… but you don’t have to price your entire portfolio as though everyone thinks this way, they don’t.  For those wholesalers who have an extensive brand portfolio, segment your brands even farther… with a “premium”, “average”, and “value” pricing option in each category.  Work with those suppliers who will work with you.

Take another look at working with more supplier money.  In a multi-brand house, suppliers are always fighting for share of mind from the sales and merchandising force.  Well, nothing’s free.  Have them compete to be included in your monthly sales rep’s incentive package.  Not with some additional money for the rep, but rather the incentive that’s part of the rep’s structured compensation system.  Get it?  Their money, not your’s.

Perhaps revisit some past decisions.  If you aren’t making any money in single serves, perhaps you should pull back in this area as part of a larger strategy.  30 packs?  Draught?  Remember that there will always be some friction between brewers and wholesalers.  For a brewer, volume is profit.  For a distributor, volume is cost.  Work to ensure this remains balanced and not heavily skewed to one side or the other.  But whatever you do, ensure it is done as part of a coherent, comprehensive strategy, not just a collection of single, non-connected decisions.   Many suppliers could take note of this last statement.

Want to find “easy” money?  Take a hard look at how much old beer you write off each year.  It comes straight from the bottom-line.  Ditto for shrinkage and damaged product.  Take a hard look at your policies and procedures.  I know many wholesalers attempt to solve the problem of over-age product by charging employees for it… “Someone will pay and it won’t be me!”  This can work but often it creates more problems than it solves.  Often a better attitude is we don’t charge employees for over-age product, we replace them. 

Make a point to let your employees understand the economics of your business… the public school system does an abysmal job of teaching even basic economics (and reading and math and history and English and thinking but that is a rant for another day).  Often employees think you pocket that $15 for a case.  Remind them that you have to purchase that case first.  Often a simple visual display in an employee area can effectively make this point.  If your gross profit is $3 for each one of those $15 cases, then you must sell AN ADDITIONAL 5 cases to make up for every damaged case… every case of old beer… every case of “lost” beer.  That’s an additional 5 cases just to be where you would have been if these other things hadn’t happened!  The employees (and managers) need to understand this ratio works strongly against you.  25 cases of old beer?  125 cases of additional sales just to be where you would have been.  100 cases of end of month shrinkage (heck if I know what happened to it), 500 cases OF ADDITIONAL sales just remain in the same place.

And it goes beyond just product.  A “minor” fender bender or a trailer door damaged in the warehouse… $3,000 cost equals 1,000 additional cases just to be at the same place as if the accident never happened.

And of course the employees need to understand this $3 per case gross profit doesn’t just magically flow to your bottom-line.  This $3 has to cover every single expense of the organization, and hopefully some profit too.  Help your people understand and you may be amazed at the change in philosophy when handling product.  And think about product security.  When I see beer stacked on a pallet, I don’t just see beer; I see $20 bills stacked there too.  Look at your inventory control procedures.  If it were $20 bills rather than beer, would your policies and procedures be the same?  Why not?  Perhaps it is just a statistical blip, but I am hearing of a lot more significant employee beer thefts… often with collusion between multiple departments.  Make certain it doesn’t happen to you.

But at some point you will discover there is only so much you can cut… only so much you can squeeze.  What if looking down the road this still isn’t enough?  Obviously the easiest way to increase profitability is to run more products through your existing “machine”.  As long as the cost of dealing with this new product doesn’t exceed the additional revenue, it is at least on paper a winner.  But don’t forget the intangible costs.  There is only so much management (and sales force) share of mind, it is not an endless supply and these additional products often do have some significant intangible costs.  Brand success generally solves this problem but picking the winners from the losers is far from an easy task, and unfortunately the costs come first… the profit may or may not ever arrive.

And if you do stray into the non-alcoholic world, the greater your success often just hastens the day the brands are pulled from you.  This doesn’t mean you shouldn’t enter the NA world, it is just one of many facts you will need to include in your analysis.  Perhaps selling other products to new account-types?  It can be done but it is generally difficult to have the profits exceed the costs.  Expand into other territory with other products?  This can work if you can high-spot with a product with some consumer demand.  If you greatly expand your account base it is again generally difficult to have the profits exceed the costs

Since the vast majority of our business is with licensed accounts, look to products which also go to licensed accounts… wine and spirits.  But in most cases, you will somehow have to provide state-wide coverage to be a real player in this world.  I’ve beaten this horse, here and here and here and here and here and have tried (so far unsuccessfully) in 3 states to build a state-wide association.  In each case different strategic views and/or owner pigheadedness (I really have a subtle way, eh?) have stopped these from occurring.  It makes herding cats seem like a walk in the park! ;-)  But some day I will get one built with the right strategy and they will then take off around the country - or so I predict ;-)

If you haven’t already done so, you need to develop a formal product addition and deletion policy.  Spend some time and determine what product and supplier criteria your organization and strategy require before you accept additional brands.  From a cost cutting perspective, on an annual basis review brands and packages for deletion.  A simple 12 month ranking of sales by brand or package is the best place to start here.  Obviously you just can’t whack all the slow movers since there are political issues you must confront… you get the 2 good brands but the supplier also wants you to carry the 5 dogs.  Also there are simple market issues… is it better to keep the dogs rather than give them to your competitors and have them use the products against you?  Again, it depends.  There is more to this decision than just volumes but there are a lot of costs tied to these slow moving products.  Take a hard look and come up with a formal policy which meets your strategic and market goals.

Selling is always an option and I’d be running towards the door in 2008 if I could get a premium price for my business.  I don’t wish this to be true but facts are facts.  But decide right now, am I staying for the fight (and can I?) or should I get out now.  The absolutely WORST decision you could make is the crap, “oh, I think I’ll sell in a few years”.  This would be the most freaking stupid choice you could make (is that a strong enough statement of my feelings?)… tremendous down-side risk with little (any?) upside.  Please don’t take this path.  Other than the old “I don’t want to right now”, there is generally no business justification for this decision… and since when did what any of us want have any impact of the various realities we face?  If you are going to stay, then stay and plan accordingly.  If you are going to go, then go now, not at some undisclosed time in the future.

Don’t want to sell, and can’t find anyone to buy?  Take a hard look at a merger or shared services.  Operationally they almost always make sense.  There has to be a lot of trust, and compromise will be required from everyone, but 80% of something is generally better than 100% of nothing.  Been there, done that.  There are a lot of benefits to being larger… pulling better suppliers, more power with suppliers, economies of scale throughout the organization, many more career paths for your employees, the ability to attract and retain more skilled employees… ultimately the ability for everyone to make more money.  But much like a handshake, someone has to be willing to stick their hand out first.

And of course doing nothing is also always an option.  I’ve heard more than one wholesaler state, “even if it went away today, I’d be set”.  That may be a true statement but it most certainly is not the way to run a business.

Next post – some warm and fuzzy thoughts on change

Time to batten down the hatches or turn up the heat? Part 2

OK, by now you and your management team have completely analyzed your present situation.  Is it a position of strength?  Weakness? Somewhere in between?  Hopefully you have developed pro-forma financial statements where you can perform sensitivity analysis on a number of key inputs – like GP%, brand volumes, average selling price, some measure of discounting, and some key cost inputs.  You need to really examine the sensitivity of your financial model to changes in these inputs.  You must be extremely wary of a situation where a small change in an input drives significant change in the overall financial situation.  Those are risky environments where you would be well advised to be pro-active, rather than re-active in making operational adjustments.

And what of the whole issue of pro-active versus re-active change.  Do you wait until tough times come and then make changes?  Or do you plan to ride out the tough times with no changes?  Or do you see tougher times coming and make changes now so they have little to no financial impact (assuming this can be done).  Or do you knowingly take a financial hit during these hard times and aggressively expand your sales and merchandising efforts?

One thing is certain; there may be no better time to review service frequencies, service types, special event participation, etc.  Often in the heat of competition, we collectively bid up the costs of things like special events to the point where the cost far exceeds any value received.  If you are looking to tighten down on anything provided at retail, now is the time to do it.  The economy and fuel prices will give you perfect cover.  Have you allowed bad habits to take hold in some retail accounts?  Get rid of these problems now… if not now, you will probably never do it.

Don’t be foolish in the process, but an account-by-account (and event-by-event) review is most definitely in order.  But remember, chain power isn’t going anywhere and fighting them is probably fighting a losing battle.  Use your head when you do the account reviews.

But where possible, now may be a good time to dial these things back at retail…  Or do you go for all the special events, etc. and try to gain share and exposure during tough times? Perhaps tie them into a long-term contract so they are yours far into the future?  It depends… on your goals, your market situation, and your competitor’s actions.

On the cost side, ultimately there really are few costs which are truly within the distributor’s power to control… other than organizational design.  And sooner or later that is where this analysis will point.  And ultimately when we talk about organizational design changes, we are talking about reductions in overall payroll.  Getting the same work (or even more) done with fewer employees.  Increasing the efficiency and yes, even elegance of your organization.  That is ultimately the challenge.

The only way this can be successfully done long-term, is through better design and increased performance from employees throughout the organization.  Note that I emphasize long-term… any pinhead can cut costs.  You simply walk around and point at people, “you don’t work here anymore, nor you, nor you…”  And for 6 – 9 months or so, this may even work.  But the remaining people will soon tire of carrying a bigger and bigger load and sooner or later the wheels fall off.  Read the business publications, this is a normal feature of bad cost cutting.  And it is far, far too common.  But for a short period of time you can do it and look like a hero.

If you do need to reduce head-count, do it from a system-wide perspective, not by being “fair” to departments.  It is a mistake to say, “We need to cut 4 people so each department must cut one position”.  One department might be significantly over-staffed and another at the bare necessity.  Put more thought into the analysis and look at what is best for the entire system, not any single department.  I’d sure rather squeeze my office staff than my merchandising (or sales or delivery) folks.  If this steps on departmental toes, so what?!  Get over it.

But remember, cutting costs can only go so far.  And there are two sides to your income statement, income and expenses.  At some point you will find attempted expense reductions become an illusion because:

1.                  They have a significant negative impact on sales (income), or

2.                  They create significant operating issues of which the net effect is to increase costs, not reduce them.  The infamous penny wise but pound foolish situation.

Also, finding near-term financial solutions in cost cutting is much easier for larger companies than smaller ones.  From just a mathematical perspective, one employee is 1% of our work force if we have 100 total employees.  But one employee is .001% of our work force if we have 10,000 employees.  For this cut to be equivalent, the 10,000-employee company would have to cut 100 employees.  Plus there is always much more fat at a larger organization, it’s just the way it is. 

Another area to investigate for improvements in efficiency and cost reduction is in matching the person, i.e. pay, for the job… You don’t want to pay managerial wages for merchandiser work yet far too many wholesalers (especially A-B) have high paid managers whose almost full-time job it is to do low-level work.  It is a great luxury being able to have trained, experienced managerial people to throw at any problem which pops up, but it is very expensive.  Ensure the work matches the pay.  And of course the surest method to solve this problem is to ensure everyone does 100% of their job, so high-paid managers don’t have to waste their time doing things that other’s should have.

Look at your delivery team. Far too many wholesalers have their delivery management (or sales/delivery management if it is structured as such) running routes and helping make deliveries rather than doing their real job.  This is a waste of man-power, a waste of payroll, and is very demoralizing to the “manager” who in effect is just an all-purpose delivery driver.

But the challenge here is that a leaner organization MUST function better… it must be better designed and operated.  Fat organizations don’t have to operate as efficiently since they can always throw people at problems.  Thus if people don’t do their jobs, it isn’t as big a deal.  In a lean organization, everyone must do their job 100%.  This cannot be over-emphasized… lean organizations must be very efficient, with no wasted effort… they must operate seamlessly… and they must be high-performance organizations where 100% task completion is always the norm. 

Perhaps this is just a self-serving belief since this is what I do, but I believe ultimately when an organization is looking to become more efficient, you need to re-build the organization from the ground up, not just can a few people.  In a November 2005 post here I described it as follows:

How not to re-organize your business – an analogy

If you wanted to improve the efficiency of a V8 engine you would not simply pull off a couple spark plug wires; thereby “turning it into” a V6.  The results would leave you more than a little depressed.

Yet many wholesalers do effectively that when they look to improve the efficiency of their business – cut a route or two and that’s that.  Wrong.

It is possible to build a V6 which is more efficient, quieter, faster, and more powerful than the old V8.  But to do so you must start from scratch – start anew.

If you truly want to improve the efficiency of your business you need to re-design it from the ground up.  You need to design it for the world of today and tomorrow – not yesterday.

How?  In business-speak you need to begin with strategic planning.  Start with a completely blank slate.  Your territory is where it is, the roads are where the roads are, the bridges are where the bridges are, and the retailers are where the retailers are.  Your warehouse is where it is but this can be changed in the mid- to long-term.  Do you see my point?

As a mental process assume your organization has no employees since there is no organization yet.  Therefore things like present routing or compensation or employee concerns or a thousand other issues don’t restrict our thinking since none of them exist – we are building a new company. This is the first step in building a new organization, not pulling off a couple spark plug wires and watching your “new” V6 sputter and lurch down the street.

From there you develop a plan and then implement the plan.  Simple.

Often my re-organizations don’t focus on cutting costs but rather reallocation of resources… rebuilding the organization to address today and tomorrow, not yesterday.  In cost cutting situations, don’t plan to put 100% of the savings in your pocket… it generally can’t be done.  Share some of it with your remaining employees.   If you want only A-players, you have to pay them as such (and demand A-player performance). Whether in war or business, I’d rather have “fewer but better”.  I’ll win a lot more battles with that structure.

Next post - Open your eyes to other possibilities… cutting costs can only go so far.

Time to batten down the hatches or turn up the heat? Part 1

As the media breathlessly announces the possibility of an upcoming recession, driven by sky-high energy prices and the various problems in the housing markets, what is a wholesaler to do?

Many of you have been seeing this slowdown for sometime… generally in the on-premise arena where owners have been talking about soft business for some time now.  Cutting back their employee’s hours, etc.  Now it is moving into the general consciousness.  This is not really surprising.  These high energy costs have got to impact the economy sooner or later - and energy costs are ultimately embedded in every product.  Add in the housing problems and tough times might be racing our way.  And of course in many ways, the macro-economic future is a collective self-fulfilling prophecy… if we collectively believe tough times are a’ coming, then they very likely will.  And many in the political world and their media counterparts are doing everything possible to ensure these tough times come since they perceive it to be to their political advantage... got to love politicians and political partisans, eh?

Some in the media are forecasting that this recession, if it comes, may be the worst in over 20 years.  This is really a bit of scare mongering on their part since there really hasn’t been any serious economic downturn for well over this period of time.  But of course this reality, and our collective economic ignorance tied to a rather unrealistic fat-and-happy attitude opens the door for misguided political mischief as our determined political “leaders” try to solve this problem.  Can you say targeted tax increases to make up for revenue short-falls?  Sin tax movements are popping up all over the country... for revenue reasons, misguided public safety, and my favorite, fairness.  And many are realizing they can’t get these taxes through their state legislatures, so they are going direct to the voters with ballot initiatives.   

Oh wait, I’m not supposed to talk about those things so publicly.  Shh!  No one, especially our enemies will ever be aware of these things unless I write about them ;-)  For those unaware, that’s just a jab back at those who think the various neo-prohibitionists out there are unaware of the many things this industry does unless they read my blog.  They seem to think the enemies of this industry are just too dim-witted and uniformed to ever use our own words and actions against us unless I tell them to do so.  Please.  Underestimating one’s enemies generally doesn’t end well.  I’ll unload on that one with a rant on another day.

Of course many (actually most) of you have had some very good recent years.  Net gross margin mix has been up and a lot of cash has been flowing to the bottom-line, even with the high fuel prices.  In a somewhat unique situation, in many cases the recent times have actually been better for the Miller/Coors guy than the A-B wholesaler.  And this causes additional problems for the A-B folks since they generally have the highest cost structure.  Regardless, hopefully you haven’t allowed your organization to also expand and consume this additional money.  That’s one of the problems with good times, often expenses expand at the same or even quicker pace.  This can cause big time problems because if the good times end, you will very quickly experience financial pain.

An excellent thing to keep in mind is a great saying “Success breeds failure”.  Don’t let it happen to you.

So what, if anything, should a distributor do?  Being a consultant, the first answer is always, “it depends”.  The reason for this isn’t solely that consultants are low-life’s trying to get their hand in your pocket ;-), although in some cases this may be true.  Rather, it is because to give decent advice, you have to have more information to base this advice upon.  That’s the reason anytime someone asks me a consulting question, I first have to ask questions for 5 – 10 minutes before I can give a decent response.  So obviously I can’t give one-size-fits-all advice on a topic of this magnitude.

First there are a number of factors which will determine what, if anything, you should do.

The first one is the reality that the ONLY thing that matters is what is going on in your little corner of the world… the direction you will take depends on what future you think is most likely for your territory.  Forget about the national averages.  The future for your territory may match the larger country exactly, or be at complete odds with it.  I know Benj and Harry spend a lot of time filling their publications with national, and even international information, which might be valuable for national suppliers and entertaining for the rest, but it is really ultimately of little value for wholesalers in the actual operation of their businesses.  In the end, the local world is ALL that matters for distributors of any product.

Second is an issue which is more philosophical in nature… and even the great and wise Conlin doesn’t have the final answer on this one ;-)  And this great philosophical question is… how much do you think a distributor can actually influence sales?  This is a profound question which far too many wholesalers have never really examined.  It is of utmost importance since it should strongly impact the design and direction of your organization.  Can wholesalers significantly impact consumer choice?  I know many wholesalers who think they alone are responsible for the success of this or that brand…but I’ve never heard one claiming responsibility for the demise of a brand!  ;-) 

But if you examine market shares, you generally find brand shares are pretty close across adjacent distribs.  Not always by any means but quite often.  And often the difference in a state from highest brand share to lowest share is often very narrow (if you want to be number one in your state next year, be in last place this year!)… and since obviously different wholesalers are operating in these different territories, brand success can’t solely be based on any single wholesaler’s performance.  And even in those situations where there is a significant difference in brand shares, quite often (although not always!), it can be rationally explained by differences in the LOCAL territory. 

Many supplier personal – not just their street people but throughout their organizations, will tell you – often after mass quantities of beer - that their opinion is wholesalers don’t influence sales (and generally make far too much money for the value they bring).  For insights into this, please go back and read my last post “Now for Something Completely Stupid” here on the directional nature of stupid.

My beliefs on this subject don’t matter, it matters what your beliefs are. It’s your business. But since you’re all wondering, I believe the ability to ultimately truly impact consumer choice is probably a lot less than many wholesalers believe. But then again, I’m probably not as good looking as I think either ;-)  It is far from zero and there are plenty of success stories but…

A lot comes down to just the basics - gaining distribution, excellent merchandising, clear pricing, displays, displays, displays, strong retailer relations, a good basic order replenishment and delivery system… in a nutshell, excellent execution on what we can control… and ultimately giving the consumer every opportunity to purchase our products.  That’s all we can do.  We can’t force them to drink it… please remember that Philip ;-)

I once worked with a distributor who when I first went to work there told me he had to take me across the state line to show me “the most amazing thing”, this amazing Stroh wholesaler.  As my client and the competing wholesalers would freely admit, this Stroh guy truly kicked everyone’s butt at retail.  We visited a few off-premise accounts and it was amazing.  This guy and his organization out merchandised everybody else… by a lot … with Stroh products!  They owned those stores.  And guess what, even though he was clearly the best at retail execution, he still had to leave the industry.  I’m certain there are similar stories around the country.  Remember, we can only do what we can do.

For those wholesalers who I have just upset with the above analysis, please remember this is not personal nor is it a moral issue, this is simply unemotional analysis.  You must be able to do this to make good business decisions.  I might be wrong.  If so, go out there and make it happen. 

After you have completed the analysis on these two points, looking down the road at a possible economic downturn, what to do?  Obviously doing nothing is always an option.  Sometimes it is even a good choice!  You certainly don’t want to over-respond but neither do you want to take too long to make changes… you can bleed a lot of money in a short period of time.  And even if you choose to do nothing, having a plan B already developed and ready to implement is always a good choice.

And as mentioned above, it depends on your specific situation.  If you are burdened by debt, you probably want to be a little quicker in making adjustments… i.e. you might want to make changes before pain rather than after.  But if you have your foot on your competitor’s throat, why let up? Perhaps bad economic times might be the perfect time to turn up the heat on your competitor… especially if they don’t have the ability to effectively respond.  But don’t try to put your competitor completely out of business, it generally can’t be done… but you can take and keep share if and when they are weak, and in the process keep them weak for years to come.   For many Miller/Coors folks, for the perhaps the first time they are feeling their oats and giving just as good as they are getting… perhaps even giving a little more than they are getting.  Do you want to pull back and give them a chance to breath or keep hitting them while the hittings’ good?  In gambling parlance, do you double down, be happy with what you’ve got, or start cutting the fat right now?  The choices, the choices.

Next post – the analysis continues

The Evolution of Beer Wholesaling... continued

More on delivery

Anytime you want to analyze or re-design any system, the first things you should do is to define who you are, what you want to accomplish, and the most likely operating environment(s) you will confront.  Obviously a 70 share exclusive A-B wholesaler versus a 30 share Miller/Coors/multi-brand wholesaler will have very different operating realities which they must address.  But there are some common goals – not to be followed blindly but general goals which should help guide your thinking:

1.                  In delivery you will ultimately face a daily route limitation of either cases or stops.  In high market share houses, the truck could possibly make more stops in a day but there simply isn’t room to put on additional cases.  This is the ideal situation and almost always generates high profitability.  On the other hand, the truck may have additional capacity available but it simply can’t make any more stops in the delivery day.  In these situations you want to take a hard look at frequency of service – reducing the total number of weekly delivery stops will by definition increase the number of cases on each route (and that all important number… average cases – or gross profit – per stop).  With high fuel costs, now is the ideal time to be reviewing service frequencies.  Don’t be foolish here though, there are realities which you face on the street and severely cutting service frequencies will only hurt you – find the balance that is right for your marketplace.  Also beware of wishful thinking… just because you’d like your delivery drivers (or sales reps) to make 30 stops per day doesn’t mean it can be done.

2.                  You want to handle the product as few times as is possible.  This is where bulk and cart routes add route efficiencies.  Yes, I know carts are expensive (and can’t somebody make a lift gate that doesn’t break?), they may or may not be worth the expense.  But handling the product multiple times out in the parking lot doesn’t do anything for anyone.  And yes, bulk and carts impact your warehousing operations but generally warehouse help is much cheaper and easier to find than Class A CDL drivers.  Warehouse help also doesn’t tie up a significant capital investment – a tractor trailer. Warehouse help generally doesn’t have time stops – other than having the trucks loaded before the drivers arrive in the morning.  Don’t let your warehouse drive your delivery operations.  Warehousing is a support function (as is IT, the shop, the office) - they should respond to the needs of the sales and delivery teams, not direct them.

3.                  Side loaders have their place, but loading by the stop rather than by the route can save at least one hour per day on the route – and makes the driver’s job that much easier.  Drivers have tough jobs and are in great demand.  Anything we can to help make their jobs a little easier should be considered. 

4.                  Don’t let the sales department dictate delivery routing.  Delivery has many more restrictions and it should drive sales routing, not the other way around.  Don’t let driver pay or sales rep pay drive your routing.  Build the most efficient routes possible, for both sales and delivery, and make compensation adjustments after the routing is done.  Ignore compensation and employees when building any new system.  Address them after the new system in built, not before.

5.                  Beware of expanding days of service.  IF, and this is a big if, a wholesaler could control service frequency, the ideal scenario would be to run 7 days per week.  It would maximize your fixed asset utilization rate and we could get by with the fewest number of Class A CDL drivers, vehicles, etc.  But I don’t think it is possible to control service frequency, retail power is simply too great – and our illustrious suppliers far too often side with the retailers, not us.  Be careful of providing Saturday delivery service.  Often the number of stops simply goes up and absolutely nothing is gained other than increasing your costs.  And once given, it is generally impossible (without great pain) to take these things back.  Be careful when offering additional services of any kind.  You’re certainly not going to win all the time (i.e. week-end pull-ups in chains), but be careful when trying to compete with your beer competitor with frequency of service.  That is often a sucker’s bet where everybody loses except the retailer.  This is not to say that a 75 share A-B house shouldn’t use their market position to continue to pummel their competitor (you have your foot on their throat, why let it off?)… just be smart about how you do it.

6.                  Dynamic routing works well for UPS and Federal Express… not so good for beer wholesalers.  By dynamic routing I mean situations where there aren’t fixed routes, i.e. some days you might run 25 trucks, some days 16; some days the retailer sees this driver, some days another, the next another.  On paper it sounds great, and a few wholesalers around the country make it work but generally it causes problems.  For it to work you MUST have a well-trained and disciplined delivery force… otherwise retail execution goes to hell.  Proper rotation?  Forget about it.  Also retailers like to have the same driver service them.  It makes senses.  First there is the issue of trust, the driver is wandering around the back of their store and handling product.  Second, the retailer tires of “training” each driver who shows up at their back door… where to put the product, how to check in, etc.  It sounds good (as many of you know), but the reality is generally much different.  If you can make it work, great… but this is an area I would approach with caution.

7.                  Specialization makes sense in the sales area, but not so much in delivery.  Remember that all specialization leads to routing inefficiencies.  Why?  Because generally the ‘special” accounts are spread throughout your territory so each level of specialization demands another complete layer of routing.  In sales, I find separating on and off-premise accounts can have tremendous impact, especially in the on-premise accounts.  In most cases this includes draught – there is no reason a pre-sales rep can’t sell draught.  Give it a shot and watch your draught sales increase.  Sometimes a chain grocery sales force might make sense.  Or even somewhat lower paid c-store “order taker” sales routes.  They all will generally increase your costs (although in the right markets, the order-takers can save some $$) – you have to analyze to determine if the potential increase in sales impact is worth the additional expense.  Specialization in sales should ALWAYS lead to a better sales effort – but it may or may not be worth it.  Go with on- and off-premise first, check out the others slowly.  Throw caution to the wind and investigate every possible option – build it on paper and see which one is best for your territory, your market realities, and your desires.

8.                  Specialization in delivery generally should only be refrigerated (of course it could just be an insulated bay), non-refrigerated and bulk (pallet dock deliveries).  Bulk is of course the most efficient - supplement them with a team of merchandisers and you are ready to roll.  If you run cart routes, ideally you want them to service every account in their route area.  If 10 or 20% of the accounts require the product to come into the store by hand truck, so be it.  There is no reason this product can’t come off the cart truck (assuming it can get into the parking lot).   There’s no reason a couple of over-the-shoulder accounts can’t even come off the bulk route.  Spread throughout your territory are accounts which might be ideal for this or that type of delivery – you don’t want to try to run the “ideal” delivery system to each one.  If you do, you’ll have delivery trucks criss-crossing each other all day long just because of some preconditioned mind-set… or four different delivery trucks servicing different accounts in the same parking lot.  Remember you want to build the best delivery system for your entire company.  This by definition means that each individual delivery route will be less than ideal, but in total it should be ideal for the entire organization.  There is no reason your draught trucks can’t also delivery the package product to those on-premise accounts who carry draught.  Delivery specialization doesn’t help us sell a single additional case of product, use your head and don’t be limited in your thinking. 

In delivery your focus should be on being efficient, not specialized.  Use as few vehicles as is possible to deliver your product.  Use the savings from this to increase driver pay, add merchandisers, increase incentives for the sales department, pay for the increased man-power needs in the warehouse, pay for a specialized sales force, or even drive it to the bottom line!

Part 6 - The Evolution of Beer Wholesaling

Creating a Consumer Brand via Distribution

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

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

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

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

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

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

Who You Are

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

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

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

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

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

Only One Question

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

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

Risk and Probability of Success

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

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

Next Steps

If this is something you wish to investigate, the first step is to talk to your sales team.  Will retailers allow us to use our branded POS materials?  We don’t need 100% participation but we need a majority.  If they will, my vote would be to proceed with the attempt to create the brand (logo design, generic marketing materials, web site, etc.).  If not, I don’t see how you will be able to reach out and touch consumers – something you must be able to do if you are to build this brand.

Outside the box?  On yeah.  Out in left field?  Heck, we are out of the ball park.  Odds of success?  Couldn’t say.  Worth trying?  If you have the right product line or are expanding into more categories (especially wine and spirits), it might be worth at least a little time with the management team over a beer or three.

                           

Part 5 - The Evolution of Beer Wholesaling

The Evolution of the Selling Function

The retail selling environment has changed dramatically over the past years.  This has been driven primarily by the incredible growth in national and regional chains.  Long gone are the days where a significant decision-maker was available in almost every retail account on the street.  Today in many accounts the person “in charge” has very limited decision-making powers… if any at all.  And those in charge are extremely busy and are unlikely to give any single sales reps much time on a regular basis.

The suppliers have taken over a great deal of the higher-level selling activities – in many cases to the detriment of the local markets.  This isn’t a rap on the supplier’s chain folks, just an observation that in almost all cases, the wholesaler in the local market can, and will do a better job.  But unfortunately this also isn’t what the chain market structure demands.  Those chain decision-makers simply don’t want to, and won’t see market-specific wholesalers when the chain covers a lot of additional territory.  From the chain’s perspective this is completely understandable; it isn’t their job to ensure all the wholesalers in a state are on the same page.  The chains have tremendous market power and if you want to reach the eyes and ears of their customers, you will play by their rules.  Simple as that. 

Yeah, I know a lot of people give lip service to the idea of taking marketing to the account level but very few actually practice it – it is easier to talk about than actually do (I just shake my head when chain groceries talk about local marketing, yet do state-wide sets!), and it requires people to relinquish power, not a high point on the list of human nature’s desires.

So how does the beer wholesaler address these market realities?  First let us examine the reality of the average beer sales rep (or as I prefer to call them, account managers).  If you analyze a typical beer sales call, you will find that very, very little time is actually consumed in true selling activities.  As a percent of the sales call, or sales day what is it?  5%?  10%?  Not much more.  This isn’t a poor reflection of the account manager; it is simply the reality of the street.  In many retail accounts, the account manager doesn’t even see a decision-maker on a regular basis.  They do their job, create the order, and move on down the street.  Again, this isn’t a reflection of poor performance, just reality. 

Look at it from the retailer’s perspective.  They couldn’t care less about having a great sales rep call on them, they want someone who can write good orders (no out-of-stocks or excess inventory), who understand the retailer’s customers so they know what product to sell through them, who are great at merchandising (helping the retailer with pull-thru), who do a great job with pull-up, fill-up, and face-up, and who properly communicate with the driver and perhaps merchandiser so everything in the account works like clockwork.  They want a great account manager to call on them. In our industry, a person with a tremendous customer service attitude (but perhaps weak “selling skills”) will sell a lot more beer than a person who is a great sales person but weak in customer service.   It is the nature of the world in which we live.

Ultimately the retailer wants their account manager to focus on one thing – maximizing the net gross profit dollars generated by the space they are given in the retail account.  This maximizes the gross profit dollars for the store AND the wholesaler.  It is ultimately a win-win, as it must be.

And in all likelihood, this industry will seldom attract individuals who are at the very top in selling.  These types of individuals can sell real estate or high tech or any of a number of other items and make far more money than they will ever make at any level in the beer industry.  Again, this is neither good nor bad; it simply is the way it is.

In addition, the situation at retail for the account manager is becoming more and more complicated as the “beer” wholesaler expands into more categories.  Just the beer category alone is getting pretty complicated.  Add in malternatives, energy drinks, carbonated beverages, waters, juices, perhaps even wine and spirits – beer wholesalers are playing in all – and you have a much different landscape than existed even just a few years back.  In any single retail account can one person service all of them? – I think yes. Can one person sell all of them? – I think no.  You can send in different account managers for each category type but this is rather expensive, and if you want to retain delivery efficiencies (and you do), they all have to call on the retailer on the same day (or call with different delivery cycles – 24 versus 48 hour).  Retailers also have a demanding day and are highly unlikely to give time to each of your category account managers, especially when they know the product is going to be coming from the same warehouse on the same truck the following day.

So how should a beer distributor design their sales organizations to maximize their sales results while addressing the realities of the street?  I believe in many markets the correct evolution is to one of full-line account managers (perhaps specialized by type of retailer), supplemented by category-specific higher level sales reps.  The account managers lead the opportunistic selling effort, backed up by opportunistic merchandising and delivery.  Ideally I want an opportunistic selling attitude throughout my company, in every person who works for me, regardless of position.  The category-specific higher level sales rep supplements the store-level account manager and provides a scheduled, focused true selling effort at retail – although at a much lower contact frequency than the account manager.

For the full-line account manager – the emphasis is on properly supporting their entire product line at the account level.  They are ultimately responsible for every aspect of the retail account. 

·                    Order replenishment – MUST be a master of their route book (the most important tool an account manager possesses).  Retailers don’t give a damn about how well their sales reps can sell them, they want good orders taken and delivered.

·                    Pull-up, fill-up, face-up (taking care of all product needs in all areas of the retail section of the store)

·                    Merchandising – all aspects

·                    Opportunistic selling – jumping on whatever opportunities present themselves – additional displays, new placements, etc.

·                    Obviously in some accounts, some of these tasks might be shared with a merchandiser

·                    Skill set

o       An understanding of retail

o       General knowledge of all relevant product categories

o       Intelligence and training in the use of a route book

o       Strong customer service focus – this factor alone will probably determine the success or failure of the individual in this position

o       Excellent people skills

o       Desire and ability to perform demanding physical labor

o       Strong communication skills – in addition to retail contact, must be able to communicate clearly to delivery and merchandisers

o       Good time management skills (organized, efficient) – this is a fast paced position which is demanding each and every day

These account managers can be even further specialize by retailer type.  If it can be afforded, I always prefer to see on- and off-premise account mangers.  I think the nature of the on- and off-premise market is such that it makes sense to differentiate the two.  Perhaps chain groceries require their own sales effort – just remember this will probably increase merchandising needs since a small group of grocery chain account managers will not be able to be at all grocery chains first thing in the morning… thus pull-up needs in some accounts will have to be handled by someone else.  If we don’t specialize, the much larger account manager sales force starts their days at the chains and can cover these pull-up demands without additional manpower.  In some c-store heavy markets (where the selling opportunities are often nonexistent), specialization of c-store “order takers” might make sense.  These account managers can be paid slightly less, freeing up payroll for other positions.  In addition, this might be the first step in the progression of your sales reps.

Of course all specialization creates inefficiencies in routing and higher costs.  But the other side of the coin is that all specialization should also generate better sales results.  You have to analyze whether the additional costs are off-set by the better performance.  To do this, you must build both organizations on paper and put some costs to each.

Regardless of the specialization we provide at the account manager level, we supplement the account manager with a “super sales rep” who can even be further specialized as a “Senior Category (beer, craft and import, wine and spirits, NA, etc.) Sales Rep.  This individual calls on retail at a much lower frequency of contact than the account manager and has only one goal – selling.  No pull-up, no facing, no order replenishment… only making scheduled, high-level sales calls on a regular basis.  Although this position will not be able to make nearly as many daily calls as the account manager, an organization can get by with relatively few because of the lower frequency of account contact.  Therefore, they can be responsible for a relatively large number of retailers.  Please note that this lower frequency of contact is simply a reflection of the realities at retail – I’d gladly have them sell the retailer at a much higher frequency but few, if any retailers will give us that time commitment.  Therefore we take what we can get and maximize the selling time the retailer allows us.

The skill set of the category manager is pretty straightforward:

·                    Superior selling skills

·                    Detailed understanding of retail

·                    Extensive category knowledge

We specialize these high-level reps by category for two reasons.  The first being the complexity of the typical “beer” wholesaler’s product line.  It is the rare sales person who can truly sell and service everything you might have at retail.  Domestics, imports, crafts, malternatives, energy drinks, waters, juices, carbonated beverages, wine, spirits, etc.  Instead we allow the account manager to service the full product line (while still being an opportunistic sales animal), while offering supplemented sales effort with a category specialization.  Even if the category specialists aren’t required to do anything but sell, it is still a tall sales order to ask a sales rep to become an expert in every category and to be able to sell everything you might carry.

Second, the reality of retail - and human nature - is that you are not going to get everything you ask for.  Just not going to happen.  If you ask for 5 things, you might get one or two or even three… but you generally won’t get everything.  Your category specialists will also face this reality but instead of only sending in one rep – and getting 2 to 3 things, you might send in multiple reps each focusing on their category… with each one getting their 2-3 things… leaving the total company with a net gain of perhaps 10 sales accomplishments rather than 2 in any retail account.  This is of course more expensive, so each wholesaler has to examine their specific marketplace, their share, goals, etc. prior to implementing this type of selling effort.

In addition, retailers often become “immune” to the account manager – they see him/her probably at least once per week, perhaps more.  The selling effectiveness of the account manager is severely hampered by this familiarity.  It can be a tough “sales call” when it starts off with the retailer yelling, “what the hell do you want!?”  Often with much more colorful language ;-)

Many wholesalers in the past have had their sales management team fill the senior selling role but the above is the next step in the formalization of this process.  It ensures it is done on a regular basis and sales management can still continue to make their trade/sales calls.  It also can change the dynamic when management calls on retail.  Instead of being seen as “sales” visits (and tell me, who likes to be “sold”?), management’s visits can be reframed as customer service calls… primarily focused on thanking the retailer for their business and asking how we can do a better job in helping the retailer become even more successful.  Leave it to the category specialists for product education and “arm twisting”, management is now seen in a different light and this reframing of their role can have a profound impact with the retailer.  Retailers will be much more open to these management calls, and they will let you know if you are having sales/delivery/merchandising problems long before they become major problems.  And of course when management is not “selling”, they can become incredibly effective in selling!  It is amazing how changing the role of management on the street can fundamentally change this relationship.

Evolving your sales effort in this manner also allows you to better match your employee’s skill set, both for today and for career advancement.  Not everyone is a super sales rep… not everyone has a detailed customer service focus… not everyone has the desire and ability to do the physical labor required at retail by the account manager… not everyone has the artistic eye for incredible merchandising… play to your’s and your people’s strengths.

You can still of course have your sales blitzes, hand selling, etc. but they are generally less structured than what I describe above.  Above is the way your business is operated each and every day.  Account managers handling all aspects of the retail account and fully supporting everything we sell into that account… category specialists coordinating with the account manager and funneling new products and placements to the account manager who then takes the ball and runs with it… and sales management reframing their role at retail and in the process becoming even more powerful sales agents… all operating as a seamless, integrated system.  Tie this in with a great delivery and merchandising effort and you have built a sales organization for today’s and tomorrow’s beer wholesaler reality.

Next and final piece – thinking completely outside the box – Creating a Consumer Brand via Distribution

Part 4 - The Evolution of Beer Wholesaling

Part 4 – A brief look at other beverages – and why ignoring wine and spirits might be a mistake

The lines between beverages continue to erode in all areas of the supply chain.  Whether beverage alcohol products like beer, wine or spirits… or the entire spectrum or non-alcoholic products; the lines at the supplier, distributor, and retailer levels are clearly eroding and merging.  Of course the regulatory aspect of the alcohol versus non-alcohol products will continue to be a bright line, but that doesn’t mean folks can’t, and don’t play on both sides of the line.  Consumers are being offered an ever widening array of beverage products and everyone in all areas of the supply chain are racing to both keep up and find the next winner.

Beer wholesalers are no different.  They are actively investigating and aggressively playing in many of these beverage categories.  The day of the stand-alone, beer-only wholesaler is long gone in all but a very few, select markets.  As the beer wholesaler investigates these other categories, here are some ideas to keep in mind.  Let us look at NAs and waters as one group, and wine and spirits as another.

NAs and waters – This is a huge category which spans literally thousands of products and brands.  From a beer wholesaler’s perspective, one whose organization is primarily designed around servicing licensed accounts, the key factor for these types of products rests with the licensed versus non-licensed retailer and supplier service demands.

Let’s start with the ideal situation for the wholesaler and progress from there.  The ideal initial situation is a brand which brings in the maximum gross profit dollars with the least additional cost.   This is a premium/super premium product with high-margins and high-volume – and one which the supplier “allows” the wholesaler to sell to only licensed/presently serviced accounts.  You may expand into non-licensed/new accounts but only after success in your present account base.  This allows you to create a situation where expenses follow revenue, rather than the other way around.  This greatly decreases both financial and operational risks.  This is a good strategy to pursue in all new areas – first prove the revenue/brand potential then accept the increased cost.  Of course this is often easier said than done, but it is an ideal goal.  Suppliers on the other hand would probably prefer you spend the money upfront, thus giving the brand the maximum boost from the start – and putting the dollar risk on you.

These products generally become much more questionable when you have to leave your presently serviced account base.  High spotting of new accounts can help minimize your costs - and be quite profitable under the right circumstances.  But greatly expanding your account base can have a very significant impact on the net profitability of these brands.  When (if) you enter vending, all bets are off.  I know of a very few wholesalers who have done all right in vending but most have experienced costly failures.

When developing your corporate plan for these types of brands, remember that all success (and failure) begins at the strategic level.  Your organization is designed in a certain way.  It has its’ strengths and weaknesses.  Always play to your strengths.  You don’t have the volume or velocity of a Coke or Pepsi – or the organization already in place to execute this volume.  Trying to match them play-for-play on the street generally ends poorly.  Your suppliers might want you to, but they might want lots of things.  Coke’s goal is to never have a customer be more than a few hundred yards from a Coke product.  Good luck on trying to match that, especially from your organization which is most likely built heavily towards servicing licensed accounts – with an emphasis on chains.  Regardless of the path you choose, you must ensure operating costs remain in control.

Also, if you are truly going to significantly expand beyond your licensed account base; few single suppliers/brands will give you adequate gross profit dollars to be a real player in these new accounts.  Therefore if you make the jump, plan on doing it with multiple suppliers.  It is the rare brand that can cover all of your additional costs by itself – and even then, why not supplement it with other high margin products?  What happens when that “super brand” trips or falters or leaves?  And there is ALWAYS competitive response.  For your protection, expand your brand base.

In addition, here again I believe the power of connectivity (see Part 2 of this series, The Power of Connectivity) can greatly expand your power and success in the NA and water categories.  You will often find these suppliers are designed around serving states, not just markets and not surprisingly want distribution far beyond just licensed accounts – both of these are significant handicaps for the beer wholesaler.  Most often the beer wholesaler is not the distribution partner of choice for these suppliers, thus the stronger and more desirable brands often go to other types of distributors.  Or if they do come the beer wholesaler’s way, they realize they are very desirable and act accordingly, ala Red Bull (remember that it’s not how much gross profit they bring in, it’s about how much of that gross profit makes it to the bottom-line).  The upshot in many cases is that the beer wholesaler can only get the less desirable brands. 

If you’re going to get into the game, then get in and play to your strengths.  Use the power of connectivity to increase your collective strengths so that you and your fellow members are much more desirable.  For those of you “enjoying” the dictates of Red Bull… do you think the balance of power might be different if they had to deal with a state-wide association rather than taking you on, one at a time?  Yanking an entire state is more than just a little different than canning some wholesaler in a specific market.  Protect yourself and your investment by the power of connectivity.

Also, although I know it goes against the grain of most beer wholesalers who live with some type of franchise protection, don’t be afraid to poach established brands from other wholesalers.  With an established brand you know what you are getting – spending additional dollars when you already know how many gross profit dollars are coming your way is much easier, and less risky.

Wine and Spirits – This too is a huge and complicated category.  In most states, the products are separated but I will treat them as one.  Of all the operating choices confronting the average beer wholesaler, expanding into the wine and spirits world has the greatest potential for success and significant impact on your bottom-line.  Wine had retail sales of $24.3 billion in 2005, spirits $53.9 billion - together they represent just under 48% of all retail sales dollars spent on beverage alcohol.  48%!  On average, in every licensed account you service, your sales staff is cut out of almost half the beverage alcohol business – think of it as a pie chart, half the pie you simple ignore!  Why ignore products which are a natural fit to your basic organizational design of selling to licensed retailers?  It makes no sense.

I’ve watched wholesalers crawl through broken glass to get Red Bull, yet they act as though wine and spirits are another, alien world.  You already service the VAST majority of these accounts.  In some states you may have to slightly expand your account base – but in almost every case the new retailer shares a parking lot with an account you presently service. 

This expansion even makes sense in control states.  You already have a sales and merchandising force on the street and in all likelihood are already calling on these accounts.  Retail delivery becomes a non-issue.  A chain-link fence in your warehouse to separate the product from your other products and you are ready to go.  Whether control state or not, a great deal of this additional gross profit can be driven to your bottom-line.  Executed properly, probably more than any other category choice confronting the beer wholesaler.

Yes, I know the likes of Southern Wine and Spirits are not just going to roll over and play dead, but beer wholesalers have tremendous advantages over the wine and spirits folks.  Wine and spirits organizations and beer wholesalers both reflect the fundamental differences in the nature of the product they distribute – and this basically comes down to one thing, velocity.  A case of beer is very different than a case of wine or liquor.  Both organizations are designed around this reality.  Beer wholesalers have a profit and cost structure adapted to this reality – i.e. we’re at retail A LOT more than the wine and spirits folks and we move A LOT more boxes at retail.  Our sales, delivery, and merchandising operations reflect this reality.  From a retail (and supplier) perspective, this makes us more desirable.  No wine or spirits competitor can match the average beer wholesaler on the street. It makes more operational sense for beer wholesalers to distribute wine and spirits than for wine and spirits folks to distribute beer.

Use this higher frequency of service to your advantage.  Price and discount accordingly.  Retailers can see their working capital tied up in wine and spirits decrease greatly with beer wholesalers.  When I walk around a large wine/liquor store I am always amused at how much money they have tied up in VERY expensive “shelving”.  All of those full boxes of product acting as shelving is not the best use of the retailer’s working capital.  Wine and spirits folks face a tremendous operating challenge if they attempt to match the beer wholesaler’s service – a very costly challenge that I don’t believe they can match.

But, and this is a huge but, as long as beer wholesalers remain independent, non-connected entities, the strategic advantage rests with the wine and spirits distributors.  This is true even though collectively the beer wholesalers have far superior operating organizations.  The strategic advantage still resides with the wine and spirits folks since they meet their supplier’s basic needs – state-wide distribution.  The beer wholesaler will generally only have an opportunity to pick up brands that can’t find a better home.  And you’re going to create a winning team with this?  It can be done but it is far from easy and there will be a lot more failures than successes.

For the vast majority of you, if you are to truly be a player in the wine and spirits categories, you must create a state-wide operating association. You can be a small player and pick up this or that non-“must have” product but if you really want to enter these categories, you MUST form the state wide association.  This isn’t because Conlin says so… it is because that’s the way it truly is.  I don’t decide market structure and neither do you; I simply analyze the realities we confront.  Southern Wine and Spirits changed this game a long time ago, read their web site and they brag about it, providing state-wide distribution is a must – the price of admission.  In many control states, you can’t even distribute wine or spirits unless you provide state-wide coverage (beer wholesalers aren’t the only ones with lobbyists up at the state capital).  You can attempt to provide state-wide distribution all by yourself but of course what operating efficiencies do you bring to the table once you leave your present territory?  None.  Companies like Southern will eat your lunch.

But this can all change with the creation of the state-wide association.  Once completed, the strategic advantage now firmly rests with the beer wholesaler – allowing you to now capitalize on your superior street-level organizations.  Once completed, this strategic advantage remains with the beer wholesaler, regardless of what the wine and spirits distributors do.  We can take a great deal of their gross profit dollars with only minor operating adjustments. 

And again, the poaching of brands becomes very desirable.  Do you think every brand in any wine and spirits house is happy with the share of mind they are receiving?  Not by a long shot.  Instead of building your wine and spirits business from only new brands (a long road with many failures), poach existing brands and jump start your entire effort.  If you form a state-wide association, this is the first course of action.  Rank the potential candidates by net gross profit dollars and go after them.  When you run out of poaching opportunities, then turn your attention to new brands/suppliers.  In most situations, all it takes is for the supplier to give 30 days written notice and those brands are yours.  Cost to you?  Nothing.

Some of you will say we tried wine and/or spirits before and it didn’t work (please see Part 3 of this series for a brief discussion of this thought), so what’s changed?  Well here’s why now…

1.                  In the past you didn’t offer what the supplier needs – state-wide coverage.  Again, I would probably advise not spending a great deal of time and money on these categories without this.  In most cases it is not an option; it’s the price of admission.  Read Southern Wine and Spirits’ web site if you doubt me.

2.                  The sophistication of the beer wholesaler has increased tremendously.  Most wholesalers, especially those in major markets, are strong, professional operations.  Most operations have the people, technology, and expertise to execute these changes without negatively impacting their present operations.

3.                  Consolidation in wine and spirits distribution has left many suppliers with few choices.

4.                  Consolidation in beer wholesaling has reduced the number of wholesalers required to provide state-wide coverage.  It is easier to get 10 wholesalers to agree than to get 20 to agree.  Now we have larger, stronger, and fewer.  And most wholesalers’ eyes have been opened wide regarding the tremendous changes and challenges their organizations confront.  Their continue existence is far from guaranteed.

5.                  The retail selling environment has changed dramatically.  Many, many retailers offer no true selling opportunity at the account level – the people servicing the individual retail account are doing much more order replenishment and merchandising rather than selling.  This allows the beer wholesaler to leverage their far superior street-level organization.  No one can touch the average beer wholesaler for execution, retailer contact and relationships, etc.  We supplement this with a small team of experienced wine and spirits sales reps and you have suddenly built a superior organization (an expansion of this concept will be the topic of Part 5 of this series).

6.                  The lines have already been blurred between beer, wine, and spirits at the supplier/producer level.  I can see no reason to believe it will not flow with even greater speed into the distribution level.  But either the wine and spirits guys will continue to invade your turf – taking ever more and more high-end gross profit - or you will join hands to form a state-wide alliance (something the suppliers require) and invade their’s.  I don’t see many other options.

7.                  Finally, it takes a dedicated professional to guide the analysis and construction of these alliances – someone who aggressively pushes the concept – that’s me.  Without an advocate, this simply doesn’t happen.  In the past there was no outside advocate and having a peer direct the formation of these organizations generally leads to failure.  Not always, just often.

This entire concept makes sense even for those beer wholesalers who already carry wine and/or spirits.  In fact it makes even more sense for them.  They receive all of the benefits of being attractive to many more suppliers, generally without increasing their operating costs at all.

And the good news for all is that the challenge is not operational – that is relatively easy – the challenge is for each beer wholesaler in the state to put whatever issues they may have aside, and to join hands and create this monster.  And once this monster is created, it becomes a powerful tool to funnel wine and spirits products, craft beers and imports, and even NAs to the member wholesalers.  With a good operational strategy (see Conlin Beverage Consulting), each wholesaler will be able to drive a substantial portion of this additional gross profit to the bottom-line… in most cases providing bottom-line increases which are a significant percent increase.  Almost assuredly the largest bottom-line impact of any strategic or operational choice you confront or will confront in the near future. 

Nothing else even comes close.  Instead of ignoring almost half the market for beverage alcohol products, the beer wholesaler can becomes a significant player in this space in a relatively short period of time – you just need to join hands and form the association.  The investment required to form this association and fund it for a year or so is minuscule, especially when compared to the potential (and very likely) returns.

Whether wine and spirits, or NAs and waters… the world is quickly changing for the beer wholesaler.  Determine who you are and then don’t wait for just any future to come along, grab the future by the throat and make certain the future that comes is the one you desire.

Next piece – the evolution of retail selling, order replenishment and merchandising… and how to use this to your advantage

Part 3 - The Evolution of Beer Wholesaling

Part 3 – Are you a beer distributor or a beverage distributor or ???

I strongly believe that all business success (or failure) begins at the strategic level.  Without clear, focused, and well thought strategy, failure is almost guaranteed… although I am a firm believer that luck is much better than skill.  If I can only have one, give me luck anytime ;-)

And one of the first steps in developing a strategic vision is the determination of ‘who you are”.  This is not as easy as it sounds.  Even minor differences in determining “who you are” can lead to very different visions, and very different courses of action.  And of course there are two ways to look at this – “who you are” and “who do you want to be?”  Sometimes they are the same.  Sometimes they are not.

Beer wholesalers have been confronting this question of “who they are” for some time now (whether they know it or not).  Are you a beer wholesaler?  Beer and wine wholesaler?  Beer and NA wholesaler? Full-line beverage distributor?  What?  Is this where you want to be?  Is this where your future lies?  Far too many wholesalers have let this definition evolve by chance. This or that opportunity came along and they went with it – profoundly changing their “who they are”, often without them even knowing it.  This is poor corporate planning and can lead to costly failures.  And not just in the new opportunity, but in your core business as well.  There are only so many manager minutes or sales rep minutes available in any day.  Spending them on X means they can’t be spent on Y.  Lost time, lost focus, much higher costs than expected… all can and do occur. 

So, who are you?  The vast majority of beer wholesalers have already abandoned being strictly a beer wholesaler.  Whether energy drinks or waters or some other NA product, most are evolving into something different, something more complex (the same can be said of many suppliers)… and hopefully something more profitable and long-term sustainable. 

For many A-B wholesalers, tied into this entire analysis is the fundamental issue of do you stay exclusive?  If you do, the issue of “who you are” is pretty easy… it is who A-B says you are.  A-B has expanded the actions wholesalers can take and still remain officially exclusive, but in long run if you stay exclusive the vast majority of your brand/category decisions will be made for you.  I’m not saying this is necessarily wrong; it is just the way it is.  I talk to many A-B wholesalers about the issue of exclusivity and there really isn’t an easy answer, one way or the other.  For the vast, vast majority of A-B wholesalers, you have to admit they have done pretty well for themselves sticking with the big dog.  But predicting the past is easy, predicting the future is much more difficult… and only the future will determine whether decisions made today will turn out to be right or wrong.

Also, long ago in my consulting days I learned about giving “easy” advice.  Advice where you can stand on your soap box and loudly and strongly pontificate about this or that being the best decision but where all of the possible resulting pain of the action rests with someone else… kind of like sitting at a bar and telling your friend to dump his complaining wife and those bratty kids.  It’s easy for you; you don’t experience any of the pain regardless of the decision. I try to be very careful not to give easy advice.

Should you remain exclusive?  It depends.  Carefully analyze the operating implications of both courses of action, look in the mirror, take a deep breath and make a decision.  Just remember that ultimately this is all about business.  All public companies will (and should) do what is in the best long-term interests of their shareholders.  Period.  As an example, I don’t think any of the big three would like to abandon the 3-tier system, but if the day comes where it would be the best business decision for them to do so, they will (and again should) do it.  Like the mob says; “Nothing personal, just business”.  You need to attack the decision in the same manner.  Definitely not an easy decision.

 

I believe the future for most beer wholesalers is an evolution into a broader line beverage wholesaler – hopefully knowingly planned and executed.  As I mentioned in part one of this series, there are only a few ways a beer wholesaler can hope to grow and/or maintain their profitability – and the best one is to grow your brands and brand base in their presently served territory (and presently serviced retailers).  In some markets, just maintaining market share in territory with a growing population will provide for this growth.  But since this is beyond our ability to influence, this impact is simply what it is – remember, luck is better than skill.

For those things which you can actively influence, brand growth and brand acquisitions have the most impact on your profitability.  I won’t bother discussing beer brand acquisitions; you are all quite well versed in that game (although A-B’s recent moves have definitely changed the fight – see a recent post titled Strategy under General Consulting Wisdom. You will have to scroll down to find it). 

Before we look at the various other beverage categories, a couple of observations:

·                    When you enter a new market you don’t get to dictate the market structure or how things are done.  Many beer wholesalers have failed in the past when entering new categories because they want to do things the “beer way” and want others to change for them – this is not going to happen.  Often this is the result of moving on an opportunity but not really committing to it – remember you are either in or out, there generally isn’t some half-way position. No one is only a little pregnant.

·                    You are in the distribution business.  Remember that volume = cost.  All other things being equal, 10,000 cases at $40/case gross profit ($400,000 net gross profit) is MUCH better than 100,000 cases at $4/case gross profit ($400,000 net gross profit).  Of course seldom are all other things equal, so you also must analyze the upside… if those 10,000 cases might grow to 12,000 but the 100,000 might realistically grow to 3,000,000 cases – this might alter your strategy.  Otherwise, all other things being equal – fewer boxes but more gross profit $ is always better. 

·                    Because of the above, when entering new markets/categories it is almost always best to focus solely on premium and super-premium products.  If you are organizationally only going to provide a limited amount of effort to these new categories (which of course you are), it makes sense to spend these organizational resources to obtain the most net gross profit dollars at the lowest additional cost.  In the past, far too many wholesalers entered a new category with a low cost product line and found they lost many, many dollars fighting the present full-line distributors.  Most low-end business is based primarily on price (you want the liquors on the on-premise gun?  Have the cheapest brands).  Why would you want to compete here?  Remember what I said about strategy driving success?  Entering new categories at the bottom is generally a strategic mistake and your past failures might have nothing to do with the category or your organization’s ability to execute but rather with the simple fact you chose your entry wrong.

·                    Not to be crude, but as you all know it is very easy to pick up crap brands.  Stay away from them – high risk brands generally only make sense if you are already well entrenched in the category.  They most certainly are not the correct products to initially enter a category.  You might miss a hot one… but many, many more times you’ll end up with a dog and a lot of wasted organizational time.  And very importantly, it hurts your reputation at retail, thus hindering future product success.

·                    As you enter new markets, the present players in that market aren’t simply going to slink off and give up their business.  Expect competitive response – again a reason to go after the high-end products.  You may evolve into a full-line distributor in this category but start at the top and work your way down until sound business strategy says stop.  Just like in the beer business, at some point it makes sense to play in the price-driven products, but would you start distributing in the beer business with only price products?  Then why do it in others?

·                    Don’t try to re-invent the wheel.  Go out and hire people with experience in the new categories.  Take the time to learn from them, and give them time to learn your world too.  If you are serious about the category, start with a fairly senior person and let them build the team – often it can be surprisingly small yet still very effective.  Steal top people from your new competitors.  Everyone has a “street reputation” and generally it is on the mark.  Talk to those retailers who you know and trust (and of course your employees), and ask them their opinions of people – who is kicking butt and who is a slug are all known on the street.

·                    Don’t let past failures automatically rule out new opportunities.  The statement ‘we tried that before and it didn’t work” is meaningless.  What exactly did you try?  And more importantly, WHY didn’t it work?  Analyze the failure with brutal honesty.  Learn.  As an analogy, every marketing program has at least 2 goals… one of which can always be accomplished. 

o       First, to ultimately increase sales.  This may or may not be achieved.

o       Second, to learn.  This goal can always be accomplished.  The only question is if we will take the time and effort to analyze the results (regardless of what they were) and increase our knowledge.  And then of course with this new understanding, future programs should only get more and more successful.  This same thinking should permeate your organization – whether compensation systems, or information reporting, or simple management techniques.  Learn from every action you take.

·                    Although I rail against the unthinking evolution of strategy and corporate mission, don’t pass up an unexpected opportunity that lands in your lap.  Just make certain prior to grabbing it and running, you know exactly what you are grabbing and where it will lead you, both today and tomorrow.  Many wholesalers are extremely successful in this or that market niche simply because of some happenstance event.  Nothing wrong with that.  Just remember that old adage, “Look before you leap”.

Since this article is getting rather long (and some of my wholesaler friends have graciously noted that in their opinion I am rather long winded ;-), I’ll leave the analysis of wine and spirits, and NAs and waters for the next article.

Next piece – a further look at other beverages

Part 2 - The Evolution of Beer Wholesaling

Part 2 – The Power of Connectivity…. Distributed distribution

As mentioned in part one of this series – the one action that is guaranteed to have the maximum impact on any wholesaler’s profitability is to grow and expand their brand base in their present territory.  In your present territory you have tremendous operating efficiencies – you’re already there and you’re already providing superior service.  But how do you make yourself even more attractive to suppliers?  How do you enter markets (like wine and spirits) where state-wide distribution is a requirement if you truly desire to be a significant player?  How do you make yourself more attractive to other beers?

If you read the business press these days, you will find article after article on the power of connectivity.  From the explosion of the Internet to YouTube, businesses in all areas are racing to obtain the incredible impact of this connectivity.  Beer wholesalers can also take their businesses to another level by capitalizing on the concept of connectivity and permanently change the strategic advantage to their side.

Using the concept of distributed computing as a model, wholesalers can leverage their present operational advantages in a way that makes competitive response very difficult.  Let us for a moment enter the high tech world and describe distributed computing:

Distributed computing is a programming paradigm focusing on the process of aggregating the power of several computing entities to collaboratively run a single computational task in a transparent and coherent way, so that they appear as a single, centralized system”.  Say what?!  The main goal of a distributed computing system is to connect users and resources in a transparent, open, and scalable way. Ideally this arrangement is drastically more fault tolerant and more powerful than many combinations of stand-alone computer systems”.  It is “a system where tasks are divided among several computers rather than having all processes originating from one central computer” and “distributed computing breaks centralized computing into many, semi-autonomous computers that may not be (and usually aren't) functionally equal”. 

The incredible success and power of the Internet is an example of distributing computing.  Think of what your computer can do when connected to literally hundreds of millions of other computers on the Internet.  Think of the information available… the communication… the reach… the entertainment… the raw power.  Now think about how much it would cost you to obtain even a fraction of that capability for a single, stand-alone computer.  Even a cursory analysis of this shows the incredible power that can be unleashed using the power of connectivity. 

How can beer wholesalers use this same concept for their advantage?  By the simple act of joining hands and forming a state-wide operating association comprised of like-minded, non-competing wholesalers.  What I call distributed distribution.  In effect, each one of the association’s members is like a free-standing computer – it is self-contained and needs no other to accomplish its tasks.  But by taking the time and effort to connect each member (via the state-wide association), the network becomes much more powerful than any single member.  And this process opens beer wholesalers to very quickly become significant players in the wine and spirits, NAs, and water markets while further strengthening their appeal to craft brewers.  All it takes is for the prospective members to reach out and grasp hands with the other members – that’s all there is to it – when this is done, magic!  An incredibly powerful network leaps into existence where before there was none – and each member remains completely in control of their entire business operation.

This association has only one goal: to act as a funnel to identify and bring brands (which meet some agreed upon criteria) to its members.  Period.  By forming the alliance, each member’s attractiveness to suppliers increases by orders of magnitude – thus gaining each member better brands and more brands than any one would likely be able to obtain as an individual operating entity. 

We’ve all heard of business synergies, where 1 + 1 doesn’t equal 2 but instead equals 3 or 4 or 5.  For a little up front effort, this network can be built and take the synergies through the roof.  Take the strengths of each of your individual markets (and each of you generally out performs your wine and spirits competitors), combine these in a low-cost network of wholesaler partners, thereby leveraging your present sales and delivery system.  You don’t integrate your businesses, each wholesaler remains completely independent – this is simply a means to expand your product line and offer suppliers instant state wide distribution.  1+1=6  But you have to take the first step.   

Use the power of connectivity to create a commanding synergy and change the strategic balance in the marketplace.  What ever state in the nation you are in, spend a minute and think about the size of this state-wide entity…

·                    How many delivery trucks does it put on the street every day?

·                    How many refrigerated delivery trucks does it put on the street every day?

·                    How many sales reps?

·                    How many merchandisers?

·                    How many square feet of temperature controlled warehouse space?

·                    How many square feet of refrigerated warehouse space?

·                    What is the size of the financial assets this monster brings to the table?

·                    100% of all licensed accounts in the entire state are serviced – the vast majority at least once per week.  Multiple times per week for those accounts which constitute the bulk of the volume.  Who compares?

Do you think you will get suppliers to take notice?  You bet they will.  Do you think it gives each member more power with suppliers?  Of course.  For those wholesalers “enjoying” the dictates of Red Bull, what if you had obtained the brand via the state-wide association.  What if instead of taking on one wholesaler at a time, Red Bull had to deal with a state-wide entity.  Do you think they could do what they’re doing today?  I don’t think so… this creates a significant change in who has the power – all by using the simple power of connectivity.

Even retailers gain by the formation of this association.  Because of the far superior frequency of account service by beer wholesaler, retailers can significantly reduce their product inventories; thus freeing a substantial amount of their working capital - for retailers it is truly the equivalent of finding money on the street – and it can be substantial.  Retailers will clamor for this association to service them – and will demand your wine and spirits competitors attempt to match your service levels – something they will not be able to do, and something that will prove to be extremely expensive for them to try.  A permanent shift in the strategic balance.

But first the wholesalers must create the connectivity by forming the association… and the good news is that the challenge is not operational – that is relatively easy – the challenge is for each potential member wholesaler in the state to put whatever issues they may have aside, and to join hands and create this monster.  Far too many wholesalers act as though their adjacent wholesaler is their competitor, even though they don’t compete at all at retail.  You must put this thinking to rest.  All those computers in distributed computing aren’t competitors, they are partners – whether they like the others or not!

And once this monster is created, it becomes a powerful tool to funnel wine and spirits products, craft beers and imports, and even NAs and waters to the member wholesalers.  With a good operational strategy (see Conlin Beverage Consulting), each wholesaler will be able to drive a substantial portion of this additional gross profit to the bottom-line… in most cases providing bottom-line increases which are a significant increase.  Almost assuredly the largest bottom-line impact of any strategic or operational choice you confront or will confront in the near future. 

Nothing else even comes close.  Instead of ignoring almost half the market for beverage alcohol products, the beer wholesaler can become a significant player in the wine and spirits space in a relatively short period of time (to say nothing of greatly increasing your desirability to suppliers of NAs, waters, and even craft beers) – you just need to join hands and set this monster loose. 

Next piece – Are you a beer distributor or a beverage distributor or ??? 

Part 1 - The Evolution of Beer Wholesaling

Part 1 - Options to build and/or maintain your business

Beer wholesaling has undergone a remarkable transformation over the past 50 years.  For many of you that path has been one of becoming the Coors – Miller – Stroh – Heileman – Schlitz – Pabst – Hamms – craft beer – import – etc. wholesaler.  For others it has been one of picking up a lot of the fall-off volume as the regional brewers fell, a period of exclusivity with little new product, and now an explosion of new brands, products, and alliances.

In most situations around the country, the wholesalers who remain standing have strong, profitable, and defensible territories.  Each is like a self-sustaining fiefdom.  Unless serious problems were to impact the industry, each can probably remain in business well into the foreseeable future - unless they are overly burdened by debt.  The concept of a single state-wide A-B or Coors/Miller/multi-brand distributor probably will not see the light of day in most states.  I know many would like to be this entity, but it isn’t going to happen any time soon.  And the pain required to force these fiefdoms to sell would be incredibly destructive to the remaining ‘winners”.

As for the model of a combined A-B - Coors/Miller/multi-brand distributor, i.e. only one distributor per market… I don’t think this has any hope of success.  If you analyze almost any category of business, you will be hard pressed to find an industry where there is only one distributor.  I know of none in any consumer goods products.  You might have a very large one and a much smaller one, but the dynamics of competition almost always dictate at least 2, generally more.  I think if you look around you’ll find this to be the case.  I see no reason to think the beer distribution industry is any different.  And I think most of the major suppliers would rather go direct than get in the same “distribution bed” with their significant competitors.

So what is the next step in the evolution of beer wholesaling?  Let’s first look at your options if you want to build and/or maintain your business.

1.                  Grow your present brands – something I’m certain each of your organizations actively pursue.  But of course this is ultimately limited by the marketplace and your suppliers. 

2.                  Control costs – again something each of you pursue.  Controlling service levels and operating costs is very important but ultimately you can only cut service levels so much without hurting sales.  And most major operating costs are not within your power to significantly impact.

3.                  Expand via acquisition into contiguous territory.  Something most of you would probably do in a heartbeat but the problem is there are many buyers but few sellers.  The fiefdoms are set and most can remain in business if they choose.

4.                  Expand via acquisition into non-contiguous territory.  Something you may look at but there are few, if any, operating efficiencies in these types of expansions.  And generally the contiguous wholesaler(s) can out bid you since they do have operating efficiencies.  They may choose not too, but they can if they desire.  The Reyes family is clearly pursing this type of expansion strategy.

5.                  Expand into other territories – start servicing accounts outside of your present beer territory.  Generally this is only successful if you can high-spot accounts.  And it can become somewhat self-defeating in that if you find success, demands for increased distribution will grow.  Thus costs go up significantly but usually the brand(s) still remain below the required share to be profitable (it’s all about average gross profit per stop).  Once servicing chains becomes involved, costs go through the roof.  Some larger players often attempt this.  Of course if one attempts this and goes head-to-head against a stronger, well entrenched competitor, it is very difficult to match their service – thus the weaker organization is left to pick up brands that no one else generally wants.  This is most definitely a long-term proposition that requires multiple years of investment spending with a fair probability of failure.

6.                  Expand your brand base in your present territory.  This one has the greatest impact on your profitability – especially if you can generally limit the expansion to your present account base. 

a.       Expand with beer brands.  This is an on-going battle.  Other than those A-B houses that are sticking with exclusivity, everyone is chasing the hot craft beers, imports, you name it.  This is even occurring at the supplier level, at an aggressive pace.  Don’t expect this competition to end any time soon.

b.      Expand into NAs.  This too is an on-going battle.  Wholesaler’s results have been across the board.  If the brands are decent AND you can generally stick with your presently served account base, they can provide a significant boost in profit.  If you have to greatly expand your account base, the brands had better have a pretty good volume and gross profit/unit.  Ensuring operating costs remain in control becomes a significant factor.

You also often find these suppliers are designed around serving states, not just markets and not surprisingly want distribution far beyond just licensed accounts – both of these are significant handicaps for the beer wholesaler.  Most often the beer wholesaler is not the distribution partner of choice for these suppliers, thus the stronger and more desirable brands often go to other types of distributors.  Or if they do come the beer wholesaler’s way, they realize they are very desirable and act accordingly, ala Red Bull (remember that it’s not how much gross profit they bring in, it’s about how much of that gross profit makes it to the bottom-line).  The upshot in many cases is that the beer wholesaler can only get the less desirable brands.

c.       Expand into wine and spirits.  Of all the operating choices confronting the average beer wholesaler, expanding into the wine and spirits world has the greatest potential for success and significant impact on your bottom-line.  Wine had retail sales of $24.3 billion in 2005, spirits $53.9 billion - together they represent just under 48% of all retail sales dollars spent on beverage alcohol.  48%!  On average, in every licensed account you service, your sales staff is cut out of almost half the beverage alcohol business – think of it as a pie chart, half the pie you simple ignore! Why ignore products which are a natural fit to your basic organizational design of selling to licensed retailers?  It makes no sense.

In some states you may have to slightly expand your account base – but in almost every case the new retailer shares a parking lot with an account you presently service.  This expansion even makes sense in control states. 

Just as the loss (or gain) of the InBev brands won’t generally reduce (or increase) your costs much, the addition of these types of brands don’t increase your costs much.  Therefore a great deal of this additional gross profit can be driven to your bottom-line.   This is the next step in the evolution of beer wholesaling. 

Just one problem… wine and spirits suppliers (like NAs and many craft beers) are designed around state-wide distribution.  Until a beer wholesaler can provide quality state-wide distribution, they will suffer from being far from the prettiest girl at the dance.  You will generally get brands that can’t find another home.  In most cases wine and spirits don’t enjoy franchise protection, so you can attempt to poach brands presently distributed by others and thus jump-start your entry into these markets.  A great strategy, but again you have to provide state-wide distribution.  As an example, I think you will be hard pressed to find a supplier who is presently affiliated with a wine and spirits house who will leave to join your operation in just your market, leaving the rest of the state with the present wine and spirits guy.  Never happen.  Until the beer wholesaler can provide state-wide distribution the strategic advantage rests with the state-wide distributors, i.e. the wine and spirits wholesalers.

Next piece – The Solution… The Power of Connectivity

Can beer distributors handle wine and spirits?

Many wholesalers around the country are re-examining the issue of “who they are.”  Are they beer distributors?  Beverage alcohol distributors?  Beverage distributors?  Generic sales and distribution companies?

The analysis of “who you are” is of vital strategic importance.  Wrong decisions can be costly.  We all know of the costly disasters some have had when they moved into a new area without proper analysis and then followed it up with poor execution – a recipe for failure.  But if you truly desire your business to be around in 30 years, you may have to expand your vision.

As someone who has worked with beer, wine, and liquor distributors around the country, I find a disturbing trend – especially from a beer wholesaler’s perspective.  Many wine and spirits distributors are aggressively entering the beer world, generally with crafts and imports.  And I think this blurring of the lines between beverage alcohol will only continue – it is already quite prevalent at the supplier level and there is no reason to believe it won’t continue to flow into the distribution level – so don’t just sit on the sidelines and let it pass you by.

I think a more natural and operationally superior evolution is for beer wholesalers to enter the wine and spirits world.  There are many high-end products (with GREAT margins) looking for some place to go and beer wholesalers are often the best choice.  Beer wholesalers have a much better frequency of account contact than their wine and spirits competitors.  Most wine and spirits people can’t come close to the relationships the beer folks have at retail – nor your ability to execute.

Every market and state is different but this is an area I recommend investigating.  Leverage your superior sales and distribution system.  You are already calling on these accounts – and in those states where you aren’t, in 95% of the situations the new account is in the same parking lot as an account you presently service – and you are experts in the warehousing, sales, and distribution of beverage products. 

You can probably enter this new arena with only minor changes and investments.  With the types of products you will most likely be distributing, single bottle pick will be a must.  This is not a tremendous operational challenge and shouldn’t consume too much warehousing space (you probably won’t be starting with 500 SKUs).

Both mentally and physically (i.e. often different people), you need to separate the selling function from the order replenishment function (this is true for your beer operations too.)  Therefore you will probably need to add a small, specialized selling force – to begin with this may only be one or two people.  Once the product is placed, your normal sales and merchandising personnel should be able to handle order replenishment and basic pull-thru assistance.

Delivery is simple - regardless of your delivery method there should be NO additional cost in the delivery end.  Remember, your most likely first products will be, from a retailer’s perspective, “nice to have”, not “need to have”.   The exception here would be if A-B purchases Absolut – in most retail accounts this is more of a “need to have” product.  Of course having a “need to have” product makes the selling of your other products much easier, but at least to begin with this probably won’t be the case.  Therefore you will hear a lot of no’s and will have to kiss quite a few frogs before you find your princes.  Accept it.  You’re the new kid on the block.

In the beginning you most likely won’t be putting a hundred cases of wine and spirits a day on each and every delivery route (and if you are, you should be dancing around your warehouse.)  Build your organization accordingly.  Don’t spend too much time worrying about delivery and warehousing problems – they are way down the line.

Look at it this way; how many cases per truck per day could you put on your present delivery system before you believe problems would occur?  40? 50?  If you’re loading your trucks by the order, there probably isn’t any problem level since these wine and spirits cases are simply another layer on the order.  But let’s assume you think the break-point is about 40 cases per truck (a bay or so.)  And let’s assume you run 20 daily delivery routes.  That’s 40 cases times 20 routes for 800 daily wine and spirits cases.  Assume 255 delivery days per year and that’s annual wine and spirits volume of 204,000 cases.  Assume a selling price of $80/case.  That’s revenue of $16,320,000!  At a 25% margin, that’s $4,080,000!  And you’ll probably drive 50% to 80% of that to the bottom line!  As you can see, if you’re concerned about the impact wine and spirits will have on the operational side of your business you’re focusing on the wrong end of the stick.  By the time it becomes an operational problem, the volumes and profits will more than justify whatever changes you will need to make.  No, at this time your more likely problem will be obtaining brands and building volumes – your warehousing and delivery systems can EASILY handle the volume.  At some point in time this volume may slow the driver while checking in product at retail, but that too is probably a problem way down the line.

Franchise protection is always an issue and many wholesalers will find no franchise law for wine and spirits in their states.  Don’t look at this as a negative, look at it as a positive.  For once, lack of franchise protection is actually good for you since you’re the new comer.  You WANT to pick up brands.  You want suppliers to come to you, happily bringing their product with them.  Many suppliers, especially the smaller ones are not happy with the performance they get from the huge wine and spirits distributors.  These distributors have product books that go on for pages and pages.  If you’re a small spirits supplier, you get almost no share of mind from anyone in the entire organization – and unless your product gets hot, you never will.  (Of course how can a product get hot if no one is selling it?)

Contrast that with what they would find in your house.  A dedicated sales force leveraging your superior sales and distribution system – much higher frequency of account contact and a much smaller product line where each supplier is guaranteed a focused and energetic selling and merchandising effort.  Once the word gets out, I think you’ll find quality products flocking to your door.  And let me repeat – there are tremendous margins in many of these products and the incremental cost to you can be relatively small. 

Whether you’re an A-B distributor or the Coors/Miller/multi-brand house, you should investigate this (and yes, this is one of the management consulting services I provide.)  A-B is already testing the water in the spirits world – if they would enter this market and not use the A-B distribution network they would be certifiably crazy.  So if you’re an A-B wholesaler, do you want to stay with exclusivity?  We all know how well that’s worked for you in the beer world.  Bring on additional products to help cover the incremental costs of this new market entry and to help improve the bang on the street with a more robust product line.

If you’re the Coors/Miller/multi-brand house, do you want to let your A-B competitor have this market to themselves?  The odds sure look like sooner rather than later A-B will enter the spirits market.  Do either of you want to let the wine and spirits guys further invade your turf?  Patting you on the head as they attempt to take your businesses.  Not if you truly want to be around in 30 years.

There is one problem with beer wholesalers from a wine and spirits viewpoint – coverage.  Most of these suppliers are used to dealing with state-wide or multi-state distributors.  They often don’t have the time nor people to attempt to cover a state with multiple wholesalers.  This issue can be addressed in a couple of ways.  In many cases as long as they have the major population centers covered they can live with multiple wholesalers – not ideal but livable.

Or better yet, how about if we expand our thinking and we create a network of wholesalers who can give complete state coverage (this can be a formal organization or a more informal agreement between wholesalers.)  This gives the supplier “instant” state-wide coverage and a single point of contact for the state.  I recommend the network hire an experienced hand from the wine and/or spirits world to run this (kind of like a state association exec but this person only represents the interests and goals of the network’s wholesaler members.)  The exec’s goal is to identify and obtain hot brands – the wholesalers are completely relieved of this duty – the exec targets the type of brands based on consensus agreement of the network members.  This network also provides easier and better product ordering – larger orders and the savings associated with them flow to the network members.

Supplement the exec with a good office manager, throw them in an executive suite and you’ve got your organization.  This should be more than break-even within a year at the most.  A win-win for everyone.  It really doesn’t take that much time to build this network (and yes again, this is also one of the management consulting services I provide.) 

We’ve all heard of business synergies, where 1 + 1 doesn’t equal 2 but instead equals 3 or 4 or 5.  For a little up front effort we can build this network and take the synergies through the roof.  We take the strengths of each of your individual markets (and each of you generally out performs your wine and spirits competitors), combine these in a low-cost network of wholesaler partners, thereby leveraging your present sales and delivery system.  We don’t integrate your businesses, each wholesaler remains completely independent – this is simply a means to expand our product line and offer suppliers instant state wide distribution  1+1=6  But you have to take the first step.  This may be the next big thing in beer wholesaling. 

If up-front we spend the time and effort to build this network, we will now have a sales and distribution system for wine and spirits that exceeds anything the present wine and spirits folks bring to the table.  And once built, if desired, this network can use these same strengths to expand into other products too.  Seems to be worth a little analysis to me.

Shared Services - Is this for you?

Shared services are becoming a hot topic again.  Should you investigate sharing merchandising services or completely combining your warehousing and delivery operations with a competitor or adjacent wholesaler?  Each market is different, and on the issue of sharing services, it truly does take two to tango.  Moving forward with shared services requires at least two willing participants – it can’t be done any other way. 

Shared services are a win-win for retailers and suppliers.  Service frequency, service levels, merchandising – all improve in a well designed shared services environment.  Significant savings are generated which can be driven to each partner’s bottom-line or re-invested in their respective operations.

Here are a few items to consider as you begin investigating shared services:

·                    This is a significant change.  It should not be entered into lightly.  As many couples have discovered, getting married is much easier than the divorce. 

·                    It will only succeed if it is truly a win-win relationship.  If either party sees this as an opportunity to gain an advantage over their partner(s), it will fail – and failure can have a high cost for all parties.  If satisfying your ego is more important than success, don’t attempt this.  Please read these two points again.  They cannot be over-emphasized.

·                    Do you need a third-party, like me, to assist in planning and implementation?  I would not attempt it without some third party buffer.  At the beginning it helps keep important information confidential and helps in building trust.  In addition, a relatively disinterested third-party professional can focus on the total picture, rather than on one or the other’s specific interests.

·                    The reason far too many discussions/negotiations fail is because the parties mistakenly focus first on where they disagree, rather than on where they agree.  This leads to arguments and stalemate.  ALWAYS focus first on where we agree, on our common goals.  Note those areas where there may be disagreement and address them later (kick the can down the road).  We don’t need to settle how the trucks are painted in the first meeting.  Often in the process of building the new organizations, these supposed disagreements fade into the mist. 

·                    Trust building is important – both parties must work over-time in building this.  Trust doesn’t just happen and much like virginity, once it is lost it is quite difficult to get back.

·                    Although there are many business/organizational arrangements that may work, generally I recommend investigating the formation of a new business organization whose focus is on providing the shared services.  In these cases the wholesalers are the owners of this new organization and direct it through the board of directors.  It is run at an arms length from all partners.  This organization can be operated as a break-even operation or more as a for-profit organization.  If desired, its strength can even be leveraged and its services offered to other non-partner wholesalers.  NA products, beer, wine and spirits, all can be added to turn the new organization into a profit center for the shareholders.

·                    Cost allocation is generally not that difficult and can (and should) be reviewed on an annual basis.  If the goal it to truly assign actual costs to the activity, this is relatively simple.  If the goal is to shift costs to your partner, re-read the first two points.

·                    Supplier issues can be significant.  Do you and your partner(s) have the desire and strength to stand up to them?  I can’t answer this question.  Don’t even think about this if either partner is going to fold like a cheap suit as soon as some supplier push-back starts.  I firmly believe properly executed shared services are also a win for all suppliers (but some would disagree with me).  Your sales forces can still fight aggressively on the street (and whatever services you choose not to combine) and total retail service/execution should increase.  There is little to no down-side for anyone involved, if it is done correctly, but you must remember to keep your suppliers informed and sell them on the advantages of these new organizations.  These advantages can be substantial.

Tremendous change is occurring throughout the entire beverage wholesaling world.  The lines between NAs, beer, wine, and spirits are quickly eroding.  Are shared services in your future?  Who can say, but don’t write them off too quickly.

How not to re-organize your business

How not to re-organize your business – an analogy

If you wanted to improve the efficiency of a V8 engine you would not simply pull off a couple spark plug wires; thereby “turning it into” a V6.  The results would leave you more than a little depressed.

Yet many wholesalers do effectively that when they look to improve the efficiency of their business – cut a route or two and that’s that.  Wrong.

It is possible to build a V6 which is more efficient, quieter, faster, and more powerful than the old V8.  But to do so you must start from scratch – start anew.

If you truly want to improve the efficiency of your business you need to re-design it from the ground up.  You need to design it for the world of today and tomorrow – not yesterday.

How?  In business-speak you need to begin with strategic planning. Start with a completely blank slate.  Your territory is where it is, the roads are where the roads are, the bridges are where the bridges are, and the retailers are where the retailers are.  Your warehouse is where it is but this can be changed in the mid- to long-term.  Do you see my point?

As a mental process assume your organization has no employees since there is no organization yet.  Therefore things like present routing or compensation or employee concerns or a thousand other issues don’t restrict our thinking since none of them exist – we are building a new company.  This is the first step in building a new organization, not pulling off a couple spark plug wires and watching your “new” V6 sputter and lurch down the street.

From there you develop a plan and then implement the plan.  Simple.

Why do I post free consulting advice?

Why do I post “free” consulting and let other’s see my advice for A-B and multi-brand distributors?

Most businesses not on the cutting edge of technology are much like a professional sports team.  There is no magic or super special secrets that separate the winners from the losers.  The rules apply to everyone.  Whatever anyone does is quickly and easily noted by all the other teams.  The same pool of players is available to all.

So what makes a winner?  Two simple things. 

First, all business success is based on clear strategic thinking.

·                    You must know who you are

·                    What you want to accomplish

·                    An understanding of your external environment and trends in this environment

·                    The resources available to you – money, people, facilities, everything

·                    A clear understanding of your organizational strengths and weaknesses - we want to maximize our strengths and minimize, and correct our weaknesses

·                    What opportunities and threats are on the horizon - prepare to take advantage of opportunities when they present themselves and prepare to deal with the threats if they come to fruition.

·                    Time frame to accomplish your goals – is this a sprint or a marathon?

·                    From this you develop your plan

Second, you must execute this plan.  And since the world doesn’t stay in one place while you execute you must also modify and adjust as you keep driving towards your goals.  There’s a saying in the military that no battle plan survives intact after first contact with the enemy.  Although to a much lesser extent, the same is true with business planning.

There is no magic.  I don’t have some special 3-ring binder where I keep the solution to this or that wholesaler problem.  Therefore I can publicly talk about what I believe A-B wholesalers should do to improve their businesses.  I can do the same for the multi-brand houses.  They can each read the other’s recommendations.  It changes nothing.

What do I do?  I help organizations by bringing extensive business knowledge to the table with fresh, unbiased thinking.  Regardless of how hard you may try, you and your people will find it difficult to think outside of your own company.

I help by directing a focused process of analysis, design, and implementation.  I have re-organized over 100 businesses; hopefully I’ve learned something in the process.

Ultimately, I help people and organizations change for the better.

Brief consulting advice for the Coors/Miller/multi-brand wholesaler

Most of you are Coors/Miller/multi-brand houses (unless you are in a major metropolitan area, those who aren’t should either quickly sell or purchase).  You most likely already have the experience of running relatively lean organizations.  Your present operating environment is one of:

·                    Decreasing margins (although increased sales of imports and crafts are helping cushion, and in some cases mask the true margin erosion.  Be aware or this can come back to bite you)

·                    Skyrocketing operating costs led by fuel and fuel surcharges (although fuel prices will come down some, I don’t think there will be any tremendous change here for the next few years – and it always can get worse!)

·                    Tough selling environment – difficult to grow overall sales volumes

If you are looking to cut expenses (and it’s either that or the resignation that you will be making A LOT less money for the rest of your business existence), there is generally only one area to look.

Generally there is not a lot of cost savings available in the warehouse (although there may be some).  In fact in many cases warehousing costs are increasing as more and more wholesalers load by the account rather than for the route.  This makes perfect sense, especially since trucks and class-A drivers are far more expensive than warehousing personnel. I think the future for many wholesaler’s delivery system is a straight truck with lift gate and a cart system supplemented by bulk where possible and side-loaders where necessary.

Nor is a lot of cash wasted in office operations.  Most of you don’t have excessive managerial or staff positions (but some do).  Often the only place where considerable cost savings is possible is in the sales, merchandising, and delivery areas.  I don’t say this with any joy; it is simply the way it is.

You need to completely re-examine the market you serve.  What are its demands today? We don’t need to worry about yesterday.  What is desired?  What opportunities present themselves?  Then, thinking outside the box as much as is possible, consider every possible method that you can use to effectively meet the needs (not necessarily the wants) of your retailers.

The world of the beer wholesaler has changed dramatically in the past few years.  Your major suppliers have taken away many of your selling functions – I believe to the detriment of all but that’s another piece.

Wholesalers used to be true sales and marketing organizations, this is not as true as it once was.  In many cases you are now order taking, merchandising, and delivery organizations.  Especially in chain-driven markets, you must examine your sales and merchandising organization.  Perhaps it would be better to have fewer (and better) true sales reps while increasing the number of merchandisers (or driving additional money to the bottom-line).

Look at both the type and frequency of service you are providing to retailers.  Now, under the cover of higher fuel prices – which everyone can understand – is the perfect time to make adjustments.  Less frequent service does not necessarily equate to poorer service.  This either/or thinking is a false choice.  It requires better planning and performance from all – that is your managerial challenge.

The combined Coors/Miller/multi-brand distributor has many advantages over your A-B competitor.  You are supported by many world-class suppliers.  Your market shares are much closer than in the past.  You have many, many more weapons in your sales arsenal – use them to your advantage.  A-B has no possible response for this.  Although many thought it would never happen, you have higher percent margins.

Now is the time to ensure you use this opportunity – start with clear strategic planning, put the right organization on the street, maximize your various competitive advantages, and most importantly, execute.  You have the opportunity to forever change the competitive landscape.  Do it and do it wisely.