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The Insanity of the 21 drinking age

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

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

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

 

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

By Jen Christensen, CNN

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

Source: CNN

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

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

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

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

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

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

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

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

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

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

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

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

Developing brains

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

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

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

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

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

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

Mimicking behavior

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

 

 

 

Long-Timer or Free Rider?

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

This one captures the general feeling…

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

And another…

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

 And lastly, a longer venting…

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

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

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

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

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

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

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

 

One more thing…

Well actually a couple more… had a lot of responses to the last post.  In no specific order:

 1.     Exit values – without franchise laws exit values will plummet.  No question about it.  It will probably end the exodus of beer wholesalers from the industry.  Wholesalers will make their money from operations, not a big payday as they head out the door.

2.      IMHO, equating franchise laws and the 3-tier system is a strategic mistake.  As a factual matter they are not the same and one does not imply or require the other.  It makes our defense of the 3-tier system look entirely (largely?) self-serving.

3.      Beer wholesalers (and the wine and spirits folks too) are the last line of defense for the 3-tier system.  If not you all, who?  The gold rush mentality of the craft brewers isn’t going to change.  And neither is their self-serving belief that no “antiquated” rules should apply to them.  They will gladly tear the guts out of the 3-tier system.  I have no doubt they will cry when the results of their rampage comes back to haunt them.  And it will decimate them.  But by then it will be done.  No one will be putting this genie back in the bottle again.

Chain retail, especially off-premise, has been fighting to get rid of the 3-tier system for years.  They will gladly go along.  All of us who work the street know what will happen to the craft folks when this happens.  And they think getting distribution is difficult now!  Wait… fools.  On-premise accounts can be had for the price of a draught system.  They aren’t even bringing a knife (or even a spork) to a gun fight.  They are self-important toddlers walking into an MMA cage.  Fools.

The larger brewers can live quite nicely without the 3-tier system.  I don’t see them getting involved in the fight, they’ll just let it happen and execute their strategies on whatever future happens along.

Let me repeat… wholesalers are the last line of defense for the 3-tier system.  NO ONE else is going to fight for it.  No one.  And the compromises being offered to the prettiest girl at the dance only moves the ball in the direction of its destruction.  I know you’d all rather not mess with franchise protection.  It will crush exit values and perhaps put your businesses at risk from the big 2.  Not a great situation, but you have to analyze it versus the other possibilities.

Perhaps franchise laws made sense in a world of 80 brewers… but they sure don’t seem to be compatible in a world with thousands of brewers.

But not to worry… I have absolute confidence of the following…

The craft folks will continue to be completely self-serving.  In the end they will see the foolishness of their moves, but by then it will be too late… and of course some will make big $$ before that happens.  THAT hope is solely what is driving their actions.

The big 2 will pay lip service to the 3-tier system but basically sit out the fight (and that’s what I’d do too)

Chains will look out for what they perceive is in their best interests… and this is basically anti-3-tier… ah, the dream of direct shipping.  Oh, and brewers are going to happily pay wholesalers money for not doing anything once this happens… yea, right.

NBWA will look out for the folks that run NBWA… remember it is just a good paying job for them.  One that they’d like to keep. 

 Beer wholesalers will fight to the death to keep franchise protection.  Put those all in the hopper and what comes out is effectively the end of the 3-tier system.  Perhaps sooner than most expect.  So don’t worry.  All will be well ;-)

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

What does Ludwig say?

Yesterday The Wall Street Journal ran a great quote from the brilliant economist and philosopher, Ludwig von Mises.

As he noted, "Everyone carries a part of society on his shoulders, no one is relieved of his share of responsibility by others. And no one can find a safe way for himself if society is sweeping towards destruction. Therefore everyone, in his own interest, must thrust himself vigorously into the intellectual battle." 

 

And here is the piece from the WSJ…

Notable & Quotable

Economist Ludwig von Mises on the supremacy of consumer interests over producer interests in a market economy.

March 24, 2014

Ludwig von Mises, "Nation, State, and Economy" (1919):

One of the great ideas of [classical] liberalism is that it lets the consumer interest alone count and disregards the producer interest. No production is worth maintaining if it is not suited to bring about the cheapest and best supply. No producer is recognized as having a right to oppose any change in the conditions of production because it runs counter to his interest as a producer. The highest goal of all economic activity is the achievement of the best and most abundant satisfaction of wants at the smallest cost. . . .

Preferring the producer interest over the consumer interest, which is characteristic of antiliberalism, means nothing other than striving artificially to maintain conditions of production that have been rendered inefficient by continuing progress. Such a system may seem discussible when the special interests of small groups are protected against the great mass of others, since the privileged party then gains more from his privilege as a producer than he loses on the other hand as a consumer; it becomes absurd when it is raised to a general principle, since then every individual loses infinitely more as a consumer than he may be able to gain as a producer. The victory of the producer interest over the consumer interest means turning away from rational economic organization and impeding all economic progress.

 

Wisdom then, wisdom now.

Disruptive change - How will you respond?

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

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

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

The world is a changin.

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

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

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

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

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

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

jc

March 12, 2014

Alcohol Battles Brewing in the States

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

 By Katherine Connell

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

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

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

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

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

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

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

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

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

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

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

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

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

It's settled... legal pot is headed your way!

It’s settled… legal marijuana will soon be coming to your state.  As you respond with a well-deserved, whaaaaa?... let me explain.  The first reports on legal weed sales in Colorado have arrived and they are amazing… 50% higher than previous predictions.  It looks like the legal weed industry (both “medical” and recreational) will be a $1,000,000,000 (yeah, that’s one billion) industry.  That’s in Colorado.  Can you imagine what it would (will?) be in a state with a large population?

This will bring in a couple hundred million in annual tax revenue for the state.  How many states in the union would like to tap into this free deluge of taxes?  Where else can they find this much easy money? 

Sure, they will wrap it in “good for the children” BS but what they really are eyeing is a mountain of greenbacks… all racing to the state coffers.  Money that the politicians get to spend!  Why do you think so many big-government politicians are vocal supporters of global warming (er, climate change)?  The way they “address” this issue is to tax carbon, thereby giving them a never-ending river of money to spend… and power to grab. 

To help get this initiative passed in Colorado, the first $40 million in taxes must go to school construction… oh, those precious little tykes!  See how that makes everything all right ;-)

Of course here in Colorado our fool governor is already planning new spending on this river of free money.  That’s the reason more taxes never solves any present problem, instead the leviathan simple gets bigger and bigger… but that’s a rant for another day.

These numbers also really bring to light just how large the illicit drug trade is.  Assuming some of these sales are from pot-tourists and perhaps this legalization has slightly increased consumption, these are still amazing numbers.   Each and every day this marketplace is operating in every state in the land.  It seems it can operate above ground or below, but it is going to happen.  With this type of money flowing, it is not surprising that criminal gangs fight so hard to control it.  And now our legal criminal gangs - politicians ;-) are going to be fighting for their take too.

No question I am a cynic but I don’t see many states walking away from this fire-hose of free money.  And as I noted in a previous post, unfortunately the serious potential problems with legal pot most likely won’t be evident for years and years… but that river of tax money can start right away.  And after a couple months of legal sales, the sky hasn’t fallen in Colorado.  So far there really haven’t been any reported downsides… some concerns about stoned driving but no facts that support those claims yet.

If I were a betting man, I’d have to wager legal weed is coming to your state, probably sooner rather than later.  If this is an industry you’re thinking of joining, I recommend you move quickly.  Many states are doing the ol’ marijuana two-step… starting with medical marijuana and then heading towards full legalization… mimicking either alcohol “control” states (where the state runs the stores) or “license” states (where the stores are independently operated under a license from the state).

If you are going to jump in, get moving on the medical side first.  At least here in Colorado, they have a considerable advantage once full legalization hits.

As I’ve always told my clients (mainly because I need them to be 100% honest with me)…

1.      1.    I don’t make moral judgments… things like running the mistress’s expenses through the company ;-)

2.      2.    I’m not the IRS… things like running the mistress’s expenses through the company ;-)

So if you want to talk more about this industry, give me a call.  Unless there is a huge, unforeseen issue, one would have to guess it is here to stay.  And of course once the politicians start spending this additional money, it will be difficult to voluntarily turn off the spigot… for then they would have to find a new source of funds (dang tough to find a politically viable source which will provide this level of coinage) or they would have to cut programs and people (ain’t going to happen).  Therefore once this thing gets going, it takes on a life of its own and most likely won’t ever end.  A ton of money is going to be made by a lot of folks.  That’s just the way it is.

A grand experiment indeed.

 

What is the future for brands?

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

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

That said, here is the article…

Twilight of the Brands

 by James Surowiecki February 17, 2014

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

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

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

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

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

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

 

Holy Guacamole… continued

We are 14 days into the biggest social experiment in our lifetimes… the legalization of marijuana in Colorado (and soon Washington).  This is the first place in the modern world where weed is legal for retail sale.

It is a social experiment of immense (and unknown) proportions.  Many liken this episode to the 21st amendment which repealed alcohol prohibition and legalized (once again) its production, sale, and consumption.  I believe this analysis is actually backwards… I think a better comparison is with the 18th amendment, the one that outlawed alcohol.

You see, the 18th amendment was a grand, well intentioned (for now we’ll ignore the anti-Catholic/anti-immigrant aspects) experiment.  That’s what it was, an experiment.  Fed up with the excesses of rampant alcohol abuse, a motivated group convinced the country that the solution was to outlaw the product.  We all know how that experiment worked out.

Legalization of weed is also a grand, well intentioned experiment.  I personally believe it will work out a lot better than prohibition but that’s all that is, a belief.  No matter how one looks at the issue, it is an experiment whose long-term consequences are unknown.  And it sure looks like it is going to be copied throughout the country, years and years before these consequences are truly known.

Why is it going to be copied around the country?  Good ol’ cold, hard cash is going to drive it like a racing freight train across the country.  Not illicit cold, hard cash but cold hard cash as in a tax windfall for states that jump in the pool.

Here are some quotes from a Denver Post article, you can find the full article here… (emphasis added is mine)

Only one week into Colorado’s history-making recreational marijuana industry, one shop has already sold out of pot, others fear they may soon join it and perhaps as many as 100,000 people have legally purchased marijuana at Colorado stores.

Industry advocates estimate Colorado stores have already done more than $5 million in sales — including $1 million on New Year’s Day — though National Cannabis Industry Association executive director Aaron Smith acknowledges those are “back-of-the-envelope” figures. The owner of one store said she expects to make as much in sales in the first 10 days of January as she did all of last year selling medical marijuana.

Many shops have imposed caps on maximum purchase amounts well below the caps required under state law. Numerous store owners say they have sold out of marijuana-infused edible products. Toni Fox, the owner of 3D Cannabis Center in Denver, said she closed her store down on Monday and Tuesday this week, just to restock and give her staff a rest.

Even for stores that reported robust inventory, like High Country Healing in Silverthorne, owners said marijuana could become scarce across the industry if more stores don’t get their licenses approved and open to absorb the flood of interest.

“None of us could really prepare for what was going to hit us,” High Country Healing’s owner, Nick Brown, said on Tuesday. “I think we all thought we would see huge demand and lines. But I don’t think any of us expected what was happened over the last six days.”

More than 10,000 people bought marijuana at Colorado’s recreational pot shops on Jan. 1, according to industry estimates and tallies provided by the stores. And, while that initial surge was expected, the sustained interest was not. Brown and several other store owners said they saw only a slight drop-off in sales in the days after Jan. 1.

Colorado is looking at a flood of weed-related tax revenue flowing into the state.  It sure looks like it will be a windfall bigger than anyone expected… and other states aren’t going to just sit back and watch it happen.  Thus the experiment is taking wings right before our eyes.  Hopefully it turns out a lot better than the 18th Amendment.

It is mind-numbing to watch it happening… and this from a guy whose views lean libertarian.  The Denver Post… the major newspaper in the front range of Colorado has even started a website “exploring the culture of pot” which you can find here or just go to www.thecannabist.co.  This isn’t High Times magazine… in effect this is each of your local newspapers!

Want to know how to make the best weed-infused butter possible?  Want to check out the reviews for the “strain of the day”?  Cooking with cannabis, here’s how!  “Find a store near you”… just enter your zip code.

Want to know what the pricing and product situation is?  You can’t order marijuana on-line but you can be an educated price shopper.  Click here to see prices at one store… on a WHOLE range of products.  Of course there is smoking weed.  But edibles are huge.  Candy, flavored sprays, concentrated oils for use in vaporizers.  It’s all here.

Want the best vaporizer out there?  Check out our reviews!  Elliot, here’s a new market for FIN ;-)  Sorry, I couldn’t pass that one up.

Lots of opportunity here for everyone.  Perhaps a new income stream for Harry and Benj ;-)  Perhaps with a publication name like Wacky Weed Weekly ™?  Or Stoner’s Daily ™ or The Daily Stone™ or ??   Please send me some of your suggestions for a title.

Amazing to watch this process.  That disconnect between illegal and legal still rattles around my head.  How this all ends?  Will this prove to be a mirror image of the wisdom of the 21st Amendment or the well-intentioned but foolish 18th Amendment?

Is everyone in Colorado going to end up like this?  Seriously, you might enjoy that link and video ;-)  Or is it going to work out alright?

And what about alcohol sales?  It seems the general consensus is that legal weed will have a minimum impact.  I tend to agree but we must remember this is simply a WAG, nothing more.  (don’t know what a WAG is?  You should).

But I can’t help but believe there will be some sort of “lottery effect”.  Was all this money (and there is A LOT) being spent anyway, just in the illicit trade?  If so, this legalization is a good thing.  It also puts into perspective how MASSIVE the illicit drug trade is.

 Or more likely, a portion of this money was being spent in the black market anyway and is now circulating in the legal trade.  But one would think that at least a portion of this money is ADDITIONAL spending, and thus the lottery effect on alcohol sales.  It’s probably the later with the only question being how many additional, new incremental dollars are being spent on the weed-market and where these incremental dollars are coming from.  We’ll know the answer to that sometime down the road.

Strange world where smoking weed is more accepted than smoking cigarettes.  Will kids even bother with cigarettes?  I think weed is probably cheaper.  Or will being loaded become “uncool”?  Again, heck if I know.

And lastly a correction… I wrongly stated that out-of-staters could purchase up to 1 ounce at a time.  That privilege is reserved for in-stater’s.  If you are not from Colorado, you can only purchase ¼ ounce per retail visit.  I guess it will take more stops to fill up that glove box than I first thought ;-)  Oh, and the cops in surrounding states suggest you keep it in the trunk, not upfront with the passengers - really.  Well actually they also recommend you don’t bring it into/through their states… yeah, right.

Let me know what you all think of it.  It is amazing to watch.

Holy guacamole! Legal weed arrives in Colorado

Well in 2 days it will be weed-thirty in Colorado!  Yes that’s right, as of January 1, 2014 legal retail marijuana shops will be opening throughout Colorado.  Screw that medicinal bull; this is weed for those who simply desire it.  This became law via citizen initiative and won with strong support… 55% to 44% with almost 69% voter turnout.

Since this is a topic near and dear to many a beer wholesaler’s heart ;-), I thought I’d give all you non-Coloradoans an update on the Mile High scene.

First, it is interesting to watch and listen to people as they discuss the topic of legal marijuana.  You can hear a disconnect from many as they still think of the product as an illicit drug rather than the legal, state-regulated product that it will be in 2 days.  One would have probably heard the same types of things during the end of Prohibition.  But of course Prohibition lasted only a little over 13 years so for most adults they could remember a time when alcohol was legal.

That’s not the situation for marijuana.  There is no one alive who remembers a time when it wasn’t illegal… and for the Feds it remains a Schedule 1 drug… and for what that means I’ll let the Federal Drug Enforcement Agency’s website tell the tale (which you can find in its entirety here if you choose)

Drug Schedules

Drugs, substances, and certain chemicals used to make drugs are classified into five (5) distinct categories or schedules depending upon the drug’s acceptable medical use and the drug’s abuse or dependency potential. The abuse rate is a determinate factor in the scheduling of the drug; for example, Schedule I drugs are considered the most dangerous class of drugs with a high potential for abuse and potentially severe psychological and/or physical dependence. As the drug schedule changes-- Schedule II, Schedule III, etc., so does the abuse potential-- Schedule V drugs represents the least potential for abuse…

Schedule I

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

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

So heroin, acid, ecstasy, Quaaludes, peyote and weed are classified the same by the federal government!  Yikes!  Schedule 2 drugs (by their reasoning not as dangerous as Schedule 1 drugs) include cocaine, meth, oxycodone (OxyContin) to name a few.  Earth to the Feds… coke, meth, and hillbilly heroin are one HECK of a lot more addictive and dangerous than weed. 

As a side note to all you parents out there… the Feds also include Ritalin as a Schedule 2 drug, i.e. in the same category as coke and meth.  Yet Ritalin is handed out like candy to children (generally boys) around the country… sorry, that’s just me temporarily getting on my soap-box again ;-)

Back to legal marijuana… since this product has never been legal in the memory of any living American, it is somewhat understandable that people still think of it as illegal and build their arguments from this perspective.  Denver City Council went round and round arguing that it should be illegal to smoke weed (on private property!) if anyone else could either smell it or see you doing it.  This foolishness was finally voted down but it shows how the illegal/legal mental divide will remain with us… probably for many years.

Of course under-age use is always a concern.  This one is harder to predict but my gut says most younger folks who want weed have no problem finding it right now… from middle school on up.  Some have predicted a rise in older use since they long ago lost their connection ;-) and I’d have to guess this might be the biggest user impact of legal weed. 

And of course there is that old belief that marijuana is a “gate-way” drug that leads to harder drug use.  In a counter-intuitive fashion, I think it might just go the other way.  When marijuana is illegal you must purchase it from someone who in all likelihood has quick and easy connections to those selling (and using) other drugs.  With legal weed this connection is broken.  Someone buying legal weed will no longer be dealing with people who will readily sell them other drugs.  At least that’s my guess right now.

In addition, one comedian was talking about legal weed and teenage use and his take was that legal marijuana will end up LOWERING teenage/youth use… when the kids sit around and watch grandma and granddad passing the bong, it will change the whole ‘illicit’ attraction.  He said it much funnier than that though ;-)

This transitionary period (forward if the experiment works or backwards if it becomes a huge failure) will be one of working out a lot of kinks and contradictions.  Since marijuana is illegal from a federal perspective, the weed industry can’t find any bankers who will accept their business… this is a problem for the “medical” marijuana retailers in every state too.  Financial institutions can’t knowingly do business with any individual/organization who is committing a crime.  Thus out of self-preservation, the banks refuse to do business with the weed industry.  To solve this problem Washington State is proposing the creation of a state-owned bank solely for the weed industry.  Many think this too is destined to fail since from the Feds perspective, it doesn’t matter who owns the bank… knowingly doing business with criminals is still against federal banking and financial law… and every one of these retail establishments, their grow operations, and every consumer is labeled a criminal under federal law.

Employers in Colorado and across the country can still fire you from your job for smoking during off-hours, even though you are using a now legal product... and using it on your time.  I personally don’t think this one will stand but that’s the law right now.  Expect the marijuana lobby to respond to this injustice with alcohol as their foil… “Perhaps we should pass a law where an employer can fire you for consuming a beer or two after work or over the weekend.”  The beverage alcohol industry should be prepared to address this since it most certainly is coming.  It will be interesting to see which side NBWA and state associations take on this one.

Weed might be legal in the state BUT on federal land (think national forests, BLM land, and national monuments)… if you smoke you are breaking the law and can be arrested.

Smoking in public is also against the law as is in public establishments, i.e. bars and restaurants, concert venues, etc.  But I think any analysis of reality will tell you this will rarely be enforced.  I find it difficult to believe cops are going to be on the prowl outside (or inside) of bars looking for folks who are lighting up a quick one.

And a quick one it will probably be… A letter writer to the local paper noted that the image of people standing around smoking joint after joint is based on the past.  This legal weed packs a punch. 

As a side note, a number of years ago I heard an agricultural geneticist talk about the incredible advances in the potency of marijuana that was achieved by a bunch of backyard geneticists.  To put it in perspective he noted that if similar advances were made with vegetables, one would be growing tomatoes that were four feet in diameter and watermelons twenty feet long!  I’d have to guess this trend will only continue.

Back to the letter writer… this writer explained it is far too expensive and far too powerful for this type of use… this is the infamous one or two-toke material.  Folks will grab a quick hit or two and then go about their business… or so this letter writer’s prediction.

In fact there are products called vaporizers (and others) that allow smokers to capitalize on this feature.  The magazine High Times did a review of some, which you can find here.  Here’s their lead paragraph…

Since our first vaporizer buyer's guide in 2011, a plethora of new pen-sized vapes have hit the market – offering cannabis consumers a stealthy, convenient way to get high in almost any location or situation. But with so many options, how can John Q. Stoner know which ones are worthy of their cash and stash, and which ones are worthy of the trash? Well, fear not, loyal readers – that’s where we come in. Our diligent staff has reviewed and rated (on a scale of 1 to 5) 15 top vapor pens so that you can get ripped without getting ripped off. We’ve provided vital specs on each of the following devices and judged them based on seven criteria: affordability, durability, versatility, high, stealth, health, and ease of refill. But first, some general info ...

This whole legal world should be an interesting experiment, eh?  Weed-based tours are already set up for January 1… think craft beer tours… and this could be a pretty big out-of-state attraction.  I’m certain in the very near-term we will see combined tours… weed and craft brewers.  I’d also have to guess car-based trips to our fair state will be going up substantially in the near term… with many going home with a glove-box full of high quality weed.  It is only legal to purchase (and possess) up to one ounce… but there are a lot of stores and it is not illegal to go back to the same store multiple times… so going home with a 6-month supply probably won’t be too tough… or if you want to sell back home, you can probably pay for your entire vacation with the proceeds.

Law enforcement around the country is already complaining that Colorado (and Washington State) are flooding their states with marijuana.  Assuming this experiment doesn’t go badly, I’d have to guess legal marijuana will quickly be adopted by many more states.  As the beer, wine, and spirits industries know so well… even folks who don’t like the product LOVE the tax revenue.  I can easily see state legislatures complaining that they are getting all of the impact of semi-legal marijuana without any of the tax dollars that come along with it.  Call me a cynic but I’d bet the dollars will win every time ;-)

From the beverage alcohol industry’s perspective… what does legal weed mean for beer, wine, and spirits sales?  Heck if I know!  If anything I’d guess perhaps a slight downward push but it is hard to say.  Are stoners more likely to stay home and drink or simply stay home or head to the local on-premise establishment?  We’ll know in a year or two.

Is there opportunity for distributors here?  From your present business model I’d have to guess not.  I simply don’t see a need for warehousing and distribution of this product.  There is though A LOT of money to be made… whether it’s grow operations or retail (or perhaps retail chain?) I’d guess folks are going to make a ton of money.  Probably be a little Wild West aspect to it for a while.  Do you jump in or not?  I think this will first be decided by your feelings on the Prohibition-aspect… is this an illicit drug or a legal, state-regulated product?  Your call.  In a week or two, the view from retail.

The 3-tier system needs more beer distributors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Advice from Niccolo Machiavelli?

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

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

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

He is the source of great quotes.  Some are…

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

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

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

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

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

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

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

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

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

First a couple more side trips…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Technology is changing industries AND consumers

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

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

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

 

Technology Has Changed America’s Taste in Beers

By John Conlin

President, Conlin Beverage Consulting, Inc.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

------

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

Are you a panda or a cockroach?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

 

The Coming Artisanal/Craft Era

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

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

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

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

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

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

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

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

There are many things driving this profound paradigm shift…

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

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

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

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

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

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

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

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

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

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

 

Is the US beer market being milked?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Anheuser-Busch InBev invests $1.4 billion in China

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

 That Cow is goin’ be a rocking ;-)

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

A-B Taking Pricing

Dear Client:


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

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

Craft Brewers and the Prettiest Girl at the Dance-Syndrome

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

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

THE SITUATION

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

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

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

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

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

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

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

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

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

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

THE CASE FOR EXPERIENCIAL LEARNING

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

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

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

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

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

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

Random Thoughts on Craft Brewing

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

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

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

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

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

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

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

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

KNOW WHO YOU ARE

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

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

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

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

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

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

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

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

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

ABOUT RETAILING

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

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

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

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

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

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

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

Coca-Cola rethinking their US distribution plan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

UPDATING YOUR VALUATION PROPOSITION

By Stephen Cook, CMC

Great Lakes Consulting Associates, LLC

www.BeverageGuru.com

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

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

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

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

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

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

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

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

 

 

Operational Realities of the Explosion of Brands and Packages

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

AN ENVIRONMENT OF CONSTANT CHANGE

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

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

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

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

THE NEED FOR ORGANIZATIONAL FLEXIBILITY & PLANNING

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

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

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

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

A HIGH RETURN ON YOUR INVESTMENT

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

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

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

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

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

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

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

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

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

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

Line extensions and Krusty the Clown

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

A tale of two strategies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The importance of supplier/distributor alignment

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

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

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

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

Drinking age sanity

I had planned to use this post to discuss the strategies and risks behind line-extensions... but the following was just published at National Review Online and it is a must read.  I couldn't agree more!

You can find the original link here,

http://www.nationalreview.com/articles/343680/cheers-drinking-reform-charles-c-w-cooke?pg=1

And here is the wisdom of Mr. Charles Cooke...

Cheers for Drinking Reform
It should be a libertarian’s dream issue.

By Charles C. W. Cooke

Alcohol occupies a peculiar position in the culture of the United States. Like so much else besides, it is subject to the ongoing brawl between puritanism and libertarianism, two philosophies that have long jockeyed for dominance here. Americans have made many contributions to the bar — including the perfection and popularization of the cocktail. But puritanism has survived, enjoying a rich history of its own. Benjamin Rush’s inquiries into alcoholism spawned a variety of anti-alcohol movements at the outset of the new republic; in the 1850s, “temperance” overlapped uncomfortably with the Know Nothing movement’s distaste for secular principles; and in the 1920s the 18th Amendment was passed, in part on the back of widespread mistrust of immigrants and the drinks they brought with them. The role of alcohol in society, remember, is the only such question ever to have been placed within the U.S. Constitution. Nowadays, the folly of Prohibition is widely known. But in practice it still obtains for some, as a deviant exception to the rule of adulthood.

In the United States, we treat 18-year-olds as full citizens. At this age, a man may vote and he may serve as a juror — or he may search for excuses as to why he should do neither. He may smoke cigarettes and fly an airplane. He may get married, or he may eschew that road in favor of pornography and promiscuity. He may enter into contracts, max out his credit cards, and run a business into the ground. He may join the military, putting his life in danger. In some jurisdictions, he may run for public office. Less welcome but no less real are the opportunities to be executed by the state for capital crimes and to sign up for the Selective Service. But what he may not do — in any of the fifty states — is walk to a bar and buy an alcoholic drink. This is nonsense — an aberration from the usual rules. What sense does it make to deprive an adult of just one feature of adulthood, and why are the arguments in favor of doing so taken seriously?

Lobbying the federal government in the 1980s, Mothers Against Drunk Driving claimed that there was a connection between young-adult drinkers and the worrying number of deaths caused by drunk driving. Their evidence is by no means indisputable. Traffic fatalities in the 1980s decreased considerably less after the drinking was raised than they did during the same period in Europe, where drinking is common at 18 and below; and, as the research of Harvard’s Jeffrey Miron shows, the “drinking age does not produce its main claimed benefit.” But, arguendo, let’s presume that MADD was correct. A bigger question would still remain: If practicality wins out in that arena, why is it alone? Why is William Pitt’s “Necessity” justifiable as the “plea for every infringement” in this domain but not in others?

Should we perhaps raise the marriage age or age of consent to 21? And if not, why not? After all, young people often think they are in love when they are not, and young lust can lead to inordinately bad decisions. (Just ask Romeo and Juliet.) Should we make home ownership illegal until one has 20 years and 12 months under one’s belt? Again: If not, why not? Perhaps our young people need a little time to rehearse in the marketplace before they make the biggest financial decisions of their lives? In fact, given that purchasing a house is top of almost all common stressors, one might classify being forced to navigate the mortgage market while sober as cruel and unusual punishment.

The answer to these questions is that there already exists a cutoff point beyond which your personal choices are deemed to be nobody else’s business. The rapper and producer Dr. Dre had, he said, “a house, a Mercedes, a Corvette and a million dollars in the bank before [he] could buy alcohol legally.” This inconsistency is grotesque. Are we to indulge an arrangement by which a father might say, “I’m really proud of you for joining the military, son. But don’t you dare have a drink”? In Personal Reminiscences, Robert E. Lee quotes Stonewall Jackson as having claimed to be “more afraid of alcohol than of all the bullets of the enemy.” That was certainly Jackson’s prerogative; alcohol, like so many things, can be terribly destructive. But recognition of this is neither basis for wise law nor sufficient reason to deprive young adults of their choices. Guns are destructive, too. Smoking is destructive. Paint thinner is destructive — I would buy a round for the first politician who defended the notion that the state should insist on age limits for the patrons of Home Depot.

 The 26th Amendment lowered the minimum voting age from 21 to 18 and, in doing so, corrected the untenable incongruity of 18-year olds’ being drafted into the military and sent to fight in the jungles of Vietnam but asked to wait three years before they might cast a ballot. In the wake of the change, with 18 set as the new yardstick, a majority of states saw fit to lower their drinking ages. Between 1970 and 1976, 30 did so. This logical trend was cut short by federal overreach. And what an overreach! Under the provisions of the Federal Underage Drinking Act, any state that holds out and allows its resident adults to enjoy a drink before they reach the age of 21 will be punished with a 10 percent decrease in its annual federal highway funds. This is no less than legalized bribery, one of many means by which the federal government circumvents the restrictions imposed on it by the Constitution and buys off the states. That since 1988 not a single state has told the feds to bugger off and mind their own business is a testament to the craven, upside-down nature of modern American federalism. (Also to the tyranny of self-interested majorities: Whatever demographic changes are visited on the United States in the years to come, we will likely not see an electorate that cares that much that people 18 to 20 years of age are deprived of the opportunity to go drinking

The law is an ass, and it is faithfully treated as such. Winston Churchill, who, having “taken more out of alcohol than alcohol [took] out of [him],” would no doubt have opposed the status quo on libationary grounds. But Churchill also wisely counseled against contriving a legal framework that undermines respect for the law. “If you have ten thousand regulations,” he enjoined, “you destroy all respect for the law.” Quite so. With the exception of the equally asinine laws against marijuana, it is difficult to think of another law that has become such an open joke among those at whom it is aimed. It’s not just the drinking bit: We introduce our citizens to the responsibilities of adulthood by encouraging them to get their hands on — and casually and routinely use — false identification documents. This in turn causes the purveyors of fake documents to proliferate and pushes them into the mainstream.

Drinking Reform has few public champions, which is a shame, because the issue presents those who habitually exalt limited government, individual liberty, and the rule of law with a golden opportunity to prove them congruous. Truth be told, it should be a libertarian’s dream issue. Why haven’t prominent figures picked it up? Benjamin Franklin said that beer was “proof that God loves us and wants us to be happy”; he also warned that the United States would remain a republic “if you can keep it.” Federalism’s advocates are missing an opportunity to demonstrate what happens to republican principles when the federal government gets too powerful. What better way than a call for the repeal of the Federal Underage Drinking Act to introduce to the young people of America both of Franklin’s principles at the same time?

— Charles C. W. Cooke is an editorial associate at National Review.

 

Another watered down rant?!

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

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

 A classic: the cart before the horse

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

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

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

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

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

Searching for truth and objectivity

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

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

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

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

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

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

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

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

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

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

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

More on craft beer and the value of distributors

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

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

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

 

 

 

 

Is Conlin Watering Down His Rants?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

TEACHING DOGS NEW TRICKS

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

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

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

 

GLOBAL BRANDING

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

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

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

 

The ABI – Grupo Modelo Antitrust Charade

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Isn’t this crony capitalism fun?  ;-)

Can the 21st Amendment be the model?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here’s what Milton Friedman wrote in 2004…

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

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

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

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

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

 

 

Black Swans and the Future

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

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

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

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

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

The Black Swan Scenario

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

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

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

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

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

Fail to Plan; Plan to Fail!

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

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

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

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

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

 

 

 

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

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

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

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

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

For the prospective buyer, it starts with a vision!

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

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

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

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

We wish you the best during this Holiday Season.

End of Year Thoughts

Well the year is winding down and all-in-all it has been a pretty good year.  Hope life is treating you and yours well.  Thought I’d mention a few things to close out 2012 while bringing in the New Year… some personal, some beer industry related and a high value-added activity for wholesalers to consider for the New Year.

On a personal level, my wife Barb continues to fight a little Graft Versus Host Disease (that’s when her new immune system attacks the rest of her body) but other than that she’s strong as an ox – she loves it when I say things like that ;-)  This is somewhat to be expected but has gone on a little longer than planned… but all-in-all, things are going great.  Much better than being dead.

I thank God each and every day for her survival… and the wonders of modern medicine.  Without it, she would be in the ground for over 2 years.  It still gives me the shudders to think about it and the odds of survival she faced back then.  I was looking up some info on another project I’m working on and found data that chilled me to my bones as I mentally revisited that time a couple years back… and caused a little eye moistening… The American Cancer Society forecast that in 2012 there would be 13,780 diagnoses of Acute Myeloid Leukemia and 10,200 deaths.  I’ll let you do the math but I don’t think many want to play those odds. 

 

BENEFITS OF THE THREE-TIER SYSTEM

As I pull back and take a look at the industry, there is one amazing fact which leaps out… just how well the independent three-tier system actually works.  Think about it.  The top 2 brewers have 80% of the overall beer market yet in the history of the country there has never been a more dynamic time for beers, brewers, and consumers.  In many other types of markets where the top 2 players control that much share, competition is stifled (or at least they try).  Not so in beer.  It is incredibly competitive and these 2 combined eighty share companies are losing share!  So much for being able to use this market strength to crush the smaller competitors.  And competition is a funny thing… it is SO dang successful.  I don’t care what the industry, it out paces even the most determined attempts to control it.

It is a testament to the genius of those who structured this regulated system 75 years ago.  Without the independent 3 tier system, I can envision no situation where this dynamic marketplace would exist.  Much like the greatest document ever written by man, the US Constitution, many don’t understand the vision and brilliance (and compromise) which created the documents.  Tinkering with either is fraught with the peril of unintended consequences.  Changing either for some supposed short-term gain is foolishness on stilts.  You can take that to the bank.

 

THE CRAFT CONUNDRUM

And not surprisingly, the friction between the craft folks and “big beer” continue.  Just like the prettiest girl at the dance, more is never enough.  All rules must be bent to their desires and once they are… they need to bend even more.

Now some of the craft folks want to fight “faux-craft” beers…“craft versus crafty”… crafty, craft-like beers and “true” craft beers.  Their gentle sensitivities are all a-flutter that “big beer” is actually making products which “hide” their true ownership.  They call for “transparency in brand ownership and information to be presented in a way that allows beer drinkers to make an informed choice about who brewed the beer they are drinking." 

I guess their point is if ABI or MillerCoors (or god forbid Pabst!) makes a world-class IPA it’s not REALLY a “craft” IPA… just more bilge from some huge factory pumping out liquid swill… and the consumers are just too stupid to follow their taste buds.  I guess I had better toss one of my favorite beers, Pilsner Urquell in the trash… dang thoughtless taste buds… what do they know?!

What happens when one of these “craft brewers” cross their arbitrary volume line between craft and non-craft?  Do they then become crafty too?  Do the brands magically become faux-craft and swill like their fellow mega-brands?  The prettiest girl doesn’t think that far out since she doesn’t have too. 

Next they’re going to be telling me Little Debbie isn’t really making those cakes!  Or that Aunt Jemima isn’t a true master of maple syrup!  Say it ain’t so.  Cover the children’s ears!  Get the FDA involved!  Where is truth in advertising when we need it?

Sadly it seems whether big or small, almost everybody out there wants to use government and its’ enormous power to either help themselves or to hurt the other guy.  That’s one of the reasons I’m an advocate for small, limited government.  Human nature being what it is, folks will always attempt to use this power to their advantage.  It is far better to let free people freely interacting with other free people to determine most of these issues… under of course a general structure of laws and regulations.  But that’s my political soapbox.

But speaking of crafty, now I can’t get that great Beastie Boys song out of my head, She’s Crafty.  I can envision a great TV ad… hot babe drinking a craft beer (faux or “real”) with this song as the theme.   Some of the lyrics…

She’s crafty, like ice is cold  - This could become the tag-line for the first craft line extension from Coors Light!  You guys owe me!  Mid-six figures at least.

She's crafty, she's gets around

She's crafty, she's always down

She's crafty, you know she's got a gripe

She's crafty and she's just my type

She's crafty

I seen this girl I could never forget

Now, I like nothing better than a pretty-girl smile

And I haven't seen a smile that pretty in a while

The girl is crafty, she knows all the moves

Dang it gets better the more I think about it.  I’ve GOT to stop giving this genius away for nothing.  If anyone takes this and runs, please send the checks to my corporate offices.  She’s craaaafty!  And don’t forget to Fight for Your Right to Party!  ;-)

For one of the many YouTube videos of She’s Crafty, go here http://www.youtube.com/watch?v=4k9DE1zycg0

 

PRICING, PRICING.......PRICING

And speaking of strategy (how’s that for a segue?)… ABI is all about making money and their pricing strategy reflects this.  And as it is with most markets, when the market leader wants to make money (especially via pricing), then everybody makes money.  But like all decisions in life, there are unintended consequences… this strategy has allowed a lot of room for those small, crafty craft brewers to also increase their prices.  Is this price-maximization strategy in effect opening the door to the demise of the big-boy’s mainstream products? 

As we all know, it’s all about brand positioning at retail. Are they actually planting the seeds of their own destruction… as the moth flies too close to the flame?  Is it giving room in the marketplace for marginally profitable small craft brewers to grow and expand their market share?  A situation which might not be possible if ABI were more interested in share and/or keeping overall beer pricing lower?  Would the industry not be seeing as much growth in small craft brewers and the loss of share of stomach to wine and spirits if their pricing strategy were different? 

Looking at this as a case-study, the structure of a market has significant impact on the moves of the participants (and in all honesty, what makes sense).  A market with three major players (perhaps market shares of 50, 30, 20) will in all likelihood be much more price competitive than one with two major players with more equal share (whether volume or GP $).  Why?  Because in the first situation with 3 players, it will probably make sense for one of the smaller two to use strategic price competition as a weapon and a means to grow market share.  Note that the share leader in almost any market will be a fan of the status quo… they’re the leader, why would they want to mess with that?  If those two smaller players would happen to merge (can you say MillerCoors), then the market becomes more balanced between more equal competitors… and price competition becomes less effective in growing share for anyone.  No one has to collude or anything like that… the reality simply becomes one where price competition isn’t as effective for anyone.

So on one hand the present market structure tends towards less price competition… depending on your point of view this might be good or bad… but at the same time the present market structure and the pricing structure it brings allows very fertile ground for young start-up breweries to spring into life across the country… something that would be very difficult if there were aggressive price competition from the big boys.  Take a buck or two off the price of a craft brewer’s 6-packs and their world changes dramatically.  I’m not advocating anything, just analyzing the present market.  I LOVE the craft beer explosion and the excitement it brings to all aspects of the beer business.   Just something to think about.

 

A VALUE-ADDED NEW YEAR’S ACTIVITY

Consider bringing in 2013 by having Conlin and Cook do an objective financial valuation and industry comparison profile for your business.  Many of our wholesaler clients continue to benefit from our high value-added, no-nonsense financial analysis with industry comparisons report.   This isn’t some report you just toss to your accountant.  This report will form the basis of many strategic and tactical moves… for 2013 and many years out.  This is a strategic and operational document.

In some cases, especially for our smaller and medium size wholesalers, it is a real eye opener to properly compare profitability, revenue streams and operating costs to the industry, to actual, to short and long term trends.  Although incredibly valuable for all wholesalers, this analysis is extremely important if you are a high-share ABI distributor (or any size).  Your world is changing dramatically and you MUST be able understand where present trends lead.  This is probably the most important strategic planning tool you can have.

So hope you have a wonderful Christmas and holiday season.  If you want to spread some Christmas cheer might I recommend www.EndtheEducationPlantation.org ;-)  It’s a good cause and I hear the guy running it is a freaking genius (or so his mom tells him).

With what’s going on in DC (and what’s already baked in the cake), 2013 is going to be one wild ride regardless of your political leanings.  So hold on to your beer (crafty or not) and enjoy the show.  One way or another, the sun will still rise.

 

 

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

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

Here are a few random thoughts from Littleton…

Your people are what matters.

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

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

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

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

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

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

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

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

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

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

More on Chesbay

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

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

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

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

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

Portfolio Growth

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

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

In the Haze

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

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

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

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

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

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

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

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

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

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

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

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

So there are three experiments here…

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

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

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

 

 

Prepare for Opportunity

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

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

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

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

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

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

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

  • Retool and update your business systems and processes…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

Chesbay, MillerCoors, City Beverage and Freedom

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

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

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

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

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

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

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

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

Have a Drink of Guinness

November 5, 2012 3:00 A.M.

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

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

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

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

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

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

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

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

GUINNESS: Awareness of domestic dangers was a characteristic emphasis of the Founders, and they learned it from their reading of classical writers, such as the Greek historian Polybius and the great Roman orator Cicero. Curiously, the Founders actually downplayed the danger of external enemies and emphasized the menace of internal enemies, such as Polybius’s notion of “the corruption of customs.” The present generation of Americans, on the other hand, has done the opposite, and so concentrated on external menaces (Homeland Security, and so on) that it has almost completely ignored internal dangers. In the long run, the internal dangers will prove the more important.

LOPEZ: How is freedom the greatest enemy of freedom?

GUINNESS: The rewards of freedom are always sweet, but its demands are stern, for at its heart is the paradox that the greatest enemy of freedom is freedom. There are several reasons for this, but the deepest concerns a simple moral fact: True freedom requires ordering, and the only ordering appropriate to freedom is self-restraint, yet self-restraint is precisely what freedom invariably undermines when it flourishes. So the most common way to lose freedom is to allow it to slide down into permissiveness and then license.

LOPEZ: What do mean when you say that freedom could prove to be “America’s idol”?

GUINNESS: By “idol,” I mean the Jewish and Christian understanding of the term as something of great human importance and value that is elevated into being a supreme ground of trust and then an object of devotion, when it should not be asked to bear that weight and it will always disappoint its devotees. Freedom is often idolized like that in the U.S., as if it were supreme, self-evident, and self-sustaining. I refuse to take part, for example, when Americans sing the hymn about freedom’s “holy light.” I have lived under totalitarian Communism, so I prize freedom as much as anyone and have long fought for freedom of conscience and speech. But freedom must be understood and guarded with great realism, and we must never forget its limits and its duties.

LOPEZ: What is “sustainable freedom”? It sounds as if it might have something to do with green jobs.

GUINNESS: “Sustainability” is a vogue term today. People talk about sustainable pretty well everything — sustainable development, sustainable capitalism, sustainable environments — but curiously no one talks about sustainable freedom. The American Founders, in contrast, knew that they faced three tasks in establishing this great Republic: winning freedom (the Revolution), ordering freedom (the Constitution), and sustaining freedom (or “perpetuating our institutions,” as they put it). Needless to say, the third task is ours today, but I have only ever heard one American (John Gardner), and not a single national American leader, address the need to renew freedom in every generation. That is amazing because the Founders’ view of how to sustain freedom is probably the most brilliant and audacious proposal the world has known, but at the very moment they most need it, modern Americans ignore it.

LOPEZ: What do you mean by the “golden triangle of freedom?”

GUINNESS: “The golden triangle of freedom” is my term for the means by which the Founders believed they could create a free society that could stay free forever — which, if you think about it, was and is an extraordinarily daring idea. Alexis de Tocqueville called it “the habits of the heart,” but the Founders themselves never gave it a name. It runs like this: Freedom requires virtue, virtue requires faith of some sort, and faith of any sort requires freedom — which in turn requires virtue, and so on ad infinitum. From orthodox and conservative Christians such as George Mason right across to deists and freethinkers such as Thomas Jefferson and Ben Franklin, there was virtual unanimity over this emphasis. But it nearly goes without saying that all three legs of the triangle are either contested or openly dismissed today. But if the Founders’ system is abandoned, what will go in its place? I have never heard anyone give a moment’s thought to that question.

LOPEZ: How is the problem of freedom the “problem of the heart”?

GUINNESS: From St. Augustine to Machiavelli to John Kenneth Galbraith, many commentators, despite their very different worldviews, have blamed the instability of free societies on the restlessness of the human heart. This is made worse today because of the way our consumer societies are deliberately fuelled through stoking restlessness. We have replaced the notion of the good life with our consumer ideal of the life with goods, and in the process we have plunged ourselves deeper and deeper into debt, and we cannot stop. Have you ever pondered the irony of the prevalence of addictions and recovery groups in the land of the free?

LOPEZ: How have Americans become their own worst enemies?

GUINNESS: There are many varieties of freedom in America today, but they share a common characteristic: In Isaiah Berlin’s terms, they are essentially positive and not negative. This means that Americans have both abandoned the Founders’ view of sustainable, negative freedom (the freedom not to be interfered with) and espoused notions of positive freedom (the “freedom” to have various guaranteed benefits) that are unsustainable in their essence. Thus it is only a matter of time before American freedom will undermine itself. If things go on as they are now, the time will come when, as the designer of the Titanic said, it will be a mathematical certainty that the ship will sink.

LOPEZ: How can we be better stewards of freedom? Why should we be?

 GUINNESS: In today’s climate of atomistic individualism, we rarely think of our ancestors and even less of our children’s children. (“What has posterity ever done for us?”) But like a precious family heirloom, freedom is not just ours to enjoy, but to treasure, protect, and pass on to future generations. The missing key to sustainable freedom is civic education and transmission. It used to be understood that in a free society, everyone is born free, but not everyone is capable of it. Citizens have to be educated for liberty, which was once called liberal or civic education. Yet this practice has disappeared all over the Western world, and certainly in American public education since the 1960s. Without civic education, freedom can never become a “habit of the heart.”

LOPEZ: You write: “Unless America succeeds in revaluing citizenship, in restoring civic education, and in revitalizing education that proves as powerful as the potency of mass entertainment and consumer advertising, the American unum will no longer be able to balance the American pluribus, and America’s freedom itself will continue to wither.” We can’t exactly do that before November 6, can we?

GUINNESS: No, restoring civic education and forming the habits of the heart will take at least a generation, and it will have to start with serious leadership that America so obviously now lacks. But unless such a restoration happens, the consequences will be severe, for E pluribus unum is not only America’s motto but also its greatest achievement and its greatest need. The American unum has been lost since the Sixties. If this continues, there will soon be no unifying American identity and vision to balance the pluribus, and the days of the Republic will be numbered.

LOPEZ: Does all this matter to Europe in a particular way?

GUINNESS: Your Founders called America the novus ordo seclorum, and historians termed the U.S. “the first new nation,” but the rest of the world went on its ancient way unimpressed. Today in the global era, however, almost all the world is experiencing the gale-force winds of modernity that the U.S. faced and answered — mostly with striking success — more than two centuries ago. Seen this way, never has America been more relevant to the world than now. Thus the European Union now talks of “unity out of diversity” instead of E pluribus unum. But at the very moment when the American model is more relevant than ever, America has lost its sense of identity and lost confidence in its own way. The brilliant settlement between religion and public life, for example, which James Madison called “the true remedy,” is being squandered through the now-50 years of fruitless culture wars. Yet who dares say “a plague on both your houses” and then find a way forward in the interest of all Americans? No one, to my knowledge.

LOPEZ: Could today’s time of testing be as decisive as the Civil War?

GUINNESS: The crisis of freedom touches the very heart of America, and as it is deepened and intensified by the many movements coming out of the 1960s, it will prove more decisive for America than the depression years of the 1930s, and it may even rival the Civil War era for the decisive stamp it puts on America.

LOPEZ: “No self-respecting American will ever be opposed to freedom any more than to love” — you have hit on the problem there, haven’t you? Who is going to believe that the Obama administration is truly eroding religious freedom? Who will believe that the president doesn’t value it as we have in the past? He must obviously value it on some level, by definition.

GUINNESS: The Obama administration has been talking, but not walking its own talk. If you listen to the president’s remarks on religious freedom, and even more to the powerful speech by Secretary of State Hillary Clinton, you would hear statements worthy of Roger Williams and James Madison. But their health-care mandates tell a different story. Kowtowing to the LGBT agenda, this administration stands in shame as perhaps the greatest official violator of freedom of thought, conscience, religion, and belief in American history.

LOPEZ: If Americans would immediately appreciate only one thing about our freedom, what would you hope it would be?

GUINNESS: I would hope that Americans would thank God for their freedom and celebrate the achievements of their great pioneers of freedom — with an equally frank admission of the egregious blind spots and shortcomings. But at the same time, they need to reexamine the subtle challenges of freedom, and in particular face up to the tough requirements of what it takes to sustain freedom. The American Founders got slavery and the place of women badly wrong from the start. But the world has never seen a more brilliant and daring answer to the instability and transience of freedom than theirs. The question today is whether, as their heirs, you are worthy of that gift and are able to keep it going. I hope and pray you are and will.

— Kathryn Jean Lopez is editor-at-large of National Review Online.

 

Something to think about from the descendent of a great beer-man.  You might know my thinking on this… this can only be solved by fixing this country’s K-12 public education system.  Until that is done, all is for naught.  www.EndtheEducationPlantation.org

 Still accepting checks and money orders ;-)  And we do NEED the money.  How’s that for blatant pan-handling?

 

 

 

MillerCoors, Chesbay and assorted ramblings

Well the 75th NBWA convention has finished up and a good time was had by all… at least I think it was.  Based on distributors who came up to speak to me, from 80 – 90% liked my past couple posts and 10 – 20% thought I’d lost my mind.  For me, that’s pretty good! 

 

So let’s tumble through some random thoughts from warm and sunny San Diego.

  • First, one more time on my last couple posts, which you can find here and here.  My point was (and is) very simple… if franchise protections are going to be put in play, then you had better be prepared to address some of the issues surrounding them.  A look of a deer in headlights is not the correct response when some reporter (or elected state official) asks you why you deserve these special privileges… and trust me, they are special privileges… whether you like or accept that reality or not.  You had better have a clear, concise and honest answer.  If at their root all you have is some protectionist goal, then long-term you are going to lose.  Don’t shoot at me, that’s the way I see it and I don’t see any error in this reasoning.

 

  • And regarding the MillerCoors and Chesbay lawsuit.  Let us step back and attempt to look at this in a completely unbiased, don’t have a dog in this fight view.  First, I’m at a loss to see how MillerCoors’s desire to retain the right to control which independent wholesaler distributes their products is a threat to the independent three tier system… and as my readers know, I regularly beat MillerCoors and ABI corporate like a bongo, so I don’t think I’m being a stooge for these two. 

 

Let us try to think about this just as a business student in an MBA class.  Is our position that a manufacturer of some product which chooses to go to market through an independent distribution channel can lose all rights to who actually distributes THEIR product via state law?  That once they choose a distributor in that state, that distributor now controls who distributes that product?  Forever?  And you wonder why the craft folks aren’t fans of this?!

 

I think I know beer distributors pretty dang well and I don’t know a one of you who would willingly accept this if you were the manufacturer.  I can hear each one of you now… “It’s my damn product!  I make it!  I own it!  Who are they to try to take this right away from me?”  Tell me I’m wrong here.  I think the logic and “rightness” of this is a stretch.  Could it be worse?  Maybe.  Some non-beer beverage suppliers, i.e., Gallo, take a more “pay-for-performance” approach. They control and own the distribution rights, which are not for sale and can’t be transferred!  Meanwhile, the lucky wholesaler gets the opportunity to add more gross profit per stop and improve their bottom line on an exclusive territory basis if they continue to meet the suppliers expectations.

 

I realize we’re all beer distributors (or black hearted mercenaries like me serving the industry) so we cheer for our side but again, pulling back and trying to look at this thing objectively… why is MillerCoors the bad guy in this?  Why isn’t Chesbay the trouble-maker here?  They were going to get their money… they were going to be made whole and lose nothing… so why didn’t they just take their money and leave?  They got rich in this industry and were getting paid wealth that will go on for generations in their exit… so why isn’t a “don’t let the door hit you on the way out” attitude acceptable?  Isn’t it their action which is the root cause of this dustup?  A dustup which like ripples on a pond may spread to who knows where with results none of us can predict?  They are leaving the industry so why put the entire industry at risk for their personal needs?  Isn’t that logic just as valid as MillerCoors being some rotten SOBs trying to destroy the independent three tier system?

 

None of us outside of the participants know all the facts but it would seem a possible reason this fight is occurring is because of a “binding agreement” Chesbay signed with the Reyes Beverage Group.  Perhaps the merger and acquisition advisor who “helped” Chesbay should be horse whipped – and I know just the horse to do it ;-)   Perhaps all of this boils down to some pretty bad advice?  All I know is the results speak for themselves. 

 

It will be interesting to watch it all play out and many in this industry may find they rue the day this whole thing started.  I’ve got nothing against the Chesbay folks but this is like any type of conflict, there is more than one valid opinion here and the reality is often much more complicated (and twisted) than any of us will ever know.  Once things are put in motion, one never can be certain where they will end up.  Perhaps we need to be more careful about what we put in motion. 

 

  • And as a side note, you are all asking A LOT of your state association execs.  You want them to defend franchise protections which many of you find difficult to produce coherent, logical and NON-protectionist arguments for… and trust me, getting upset at Conlin is not an argument ;-)  For many states, these franchise laws were written and enacted a relatively long time ago… when your political power was MUCH greater than today.  Many states have term limits for their state-level elected officials, so many of this industry’s friends… folks who actually understood this industry and knew why it was a good idea… they are long gone.  With term limits the education process is a continual one… in effect the game never ends… and this industry’s very valid points take more than 15 seconds to explain.  In addition your execs are attempting to deal with an exploding craft beer industry which is just beginning to flex their political muscle. 

 

Right now you have more money but they have everything else.  Long term that is a problem (and short-term ain’t that good either).  And of course you have large suppliers who plan to harvest your profits… yeah, the life of a state exec is a cake-walk ;-)  And we want to get into a fight for Chesbay and get all this crap in play?!  What are the odds things get better?  What are the odds things get worse? Have at it state execs ;-)  We’ll blame you (and Conlin) when it doesn’t work out that well.

 

And a side, side note about supplier owned branch operations… some might think they see a discrepancy with my recent posts and my vocal support of outlawing branch operations.  No such discrepancy exists.  I’m against allowing branches for two reasons:

1.         At a higher level, I’m against them on philosophical grounds.  How can one support a three tier system and think branches are acceptable?  To my simple mind you can’t have a true three tier system and branch operations.  It is simply the merging of two tiers… and thus the three tier system is somewhat of an illusion.  I think that is a dangerous course to walk, “kind of” having a three tier system while at the same time accepting the disappearance of the distribution tier in many locations.  There is a legal doctrine where if over time you refuse to exercise your rights, you lose them.  We don’t want to go there.

2.         At a nuts-and-bolts level, I’m against allowing branches since it permanently changes the dynamics at the elected state level.  Once a branch enters a state, the reality at the state legislature changes.  Unanimous distributor support for wholesaler-friendly legislation generally won’t happen again… the branch is a subsidiary of the supplier, not an independent distributor, and will thus vote accordingly.  If the supplier supports the legislation, the branch will too.  But if the supplier does not support the legislation, guess what?  That branch isn’t going to be supporting it either. 

 

And this makes the life of an elected official MUCH more difficult.  These folks can’t be experts in every freaking industry.  And with term-limits, their depth of understanding shrinks ever further.  Thus they often look to unanimous support from all members of the state association to help them make decisions on whether to support or oppose specific legislation.  For them it is much easier to punt on the decision when there isn’t unanimous support, i.e. it makes it more difficult for state execs to move the legislation along.

 

And think about the actual dynamics… the 21st amendment dictates state-based regulation of alcohol.  Thus there is no more important area for this industry than state legislatures.  Since disagreements with suppliers are certain to occur and often laws/regulations will be the solution… this industry practices unilateral disarmament at the state level when it allows branch operations.  In effect it gives away (or severely weakens) this route to address conflicts with suppliers when they allow a branch operation to take root.  It’s a poor move anyway a distributor looks at it.

 

  • And lastly but certainly not least; a couple posts ago I made some comments regarding some customer service issues regarding the Reyes’s operations.  Ray Guerin (he’s the guy who runs the Reyes Beverage Group) had some exceptions to these comments.  Ray brings a tremendous commitment and passion to his job (and I have to admit some impressive credentials and results too… and to this black hearted mercenary, ultimately results are ALL that matter).  Rather than attempting to throttle me, he invited me and my associate Steve Cook to tour their joint venture in San Diego, Crest Beverage.  Crest is a joint venture between the Reyes’s and the Sourapas family.  Great story there… one was the Coors distrib, the other the Miller distrib and both wanted the other to leave (with their respective supplier lined up behind each)… but when it was clear that wasn’t going to happen they instead went to Plan B and formed a very successful partnership.  Something many distributors could learn from.  Although I’m not intimate buddies with the brothers, I’ve known Chris and Jude for years and have met all the brothers over the years.  From what I hear you can take their handshake to the bank… and in my book that is about as important as it can get. 

 

Anyhow, Ray drove us to Crest and we got a great presentation on how they go to market and a tour of their operations.  Their go to market strategy is world class and they really know how to use their size, power, and technology to their advantage.  It’s all about eliminating waste and holding themselves accountable to doing things right the first time.  Something we can all learn to do a better job at. Perhaps more fundamentally, it is obvious they grow great managers… without them, the rest is meaningless.  Many a management team could learn a thing or two from Dean McMillan’s Crest team.  I’m certain I’ll still piss Ray and the brothers off now and then – it’s my gift ;-) but they run great business and are a class act.  Here’s a very public thank you… and now you owe me a beer or three next time we meet ;-)

 

  • And just to end by letting my warm and fuzzy side out for a walk… this past summer I was invited to speak at several state annual conventions.  At one such state convention they had a pirate-themed reception prior to dinner which proved to be an epiphany for me.  And by epiphany I don’t mean the Christian festival but rather the other meaning. 

 

Def: epiphany - A sudden manifestation of the essence or meaning of something or a comprehension or perception of reality by means of a sudden intuitive realization

 

All from some pirate-themed reception at a beer convention?!  Yep.  There was pirate stuff for all… bandanas for pirate head coverings… pirate hats… eye patches… earrings… a plastic sword or two… gold coins.  As the reception got going EVERYONE was sooner or later in pirate garb… grandchildren had grandparents on the run – until those crafty grandparents did a rear-guard action and turned the tables and had the kids on the run… there were at least 4 generations in the room… laugher and sheer silliness were everywhere (and I am a big fan of silliness).  And it grew and grew.  The Bud folks and the MillerCoors folks simply disappeared… suppliers and distributors gone… all that was left was a multi-generational party of happy, loving people… all that was left was simply joy.  Wearing my bandana, I pulled back and watched this in awe.  I think I saw it clearer than the others because I often observe outside myself, but this really was the essence of joy… I wish I could bottle it. 

 

After the convention I wrote to these distributors asking them to remember this time, this moment in space when this joy was like an exploding firecracker.  I reminded them that conflicts are certain to occur… often times with both sides having very valid points… but to hold fast to this memory, to hold fast to this joyous occasion when these points of friction occur.  To remember that just because we might disagree, that doesn’t mean the other side is evil or bad… we just disagree.  To hold fast to this joy because each one of you… whether owner, employee, supplier or black hearted consultant… has something very special here.  And you’d be foolish to put it at risk over some temporary disagreement which in the end will most likely prove to be ephemeral.  If this industry wants to see another 75 years, it could do worse than to stand back and learn a thing or two from these wild and crazy pirates.

Even more on MillerCoors, Chesbay, and Reyes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MillerCoors, Chesbay, Reyes and an industry in play

For those who follow the public equity markets you have probably heard of the phrase “in play”… as in when a company is “in play”.  Companies are often put in play by a hostile takeover bid.  In general, most companies’ senior management team don’t want to be in play… for once in play they often lose control of the situation

Why is this?  Well every company has competitors and when one of them makes a move it requires the others to analyze this move.  “if it makes strategic sense for them, we’d better take a hard look too”.  It often brings new people into an area… folks with different backgrounds… folks with different expertise and different goals. These interloping folks will most certainly view the company (and opportunities) differently than the present management team.  And since we’re talking about public companies, most of the present senior management just wants to enrich themselves anyhow and will do what it takes to protect their present situation.

What does this have to do with beer wholesalers?  Everything. 

This “in play” thought has been bouncing around my head ever since I heard of the pending purchase of Columbia Distributing by the Meritage Group.  I don’t mean that Columbia Distributing was put in play… I mean that our entire industry IS in play.

That’s right, not a single company but an entire industry is in play.  Where does it all end up?  I have no idea but it is an absolute certainty that it will be different than it is today.

So when did this industry get put in play? 

  • Was it the audacious purchase of AB by InBev? As a side note, I’d bet that AB would have been put in play by InBev’s move even if InBev had not been able to complete the transaction.  Once InBev made the move, AB was never going to be the same.
  • Was it the creation of MillerCoors in the US?
  • Was it the merger of Coors and Molson to form MolsonCoors (I have to admit, I sometimes even forget about this one)
  • Was it when Bond purchased Heileman?
  • Was it when Phillip Morris purchased Miller Brewing Company?
  • Was it when Miller Brewing Company purchased Meisterbrau to get their hands on Meisterbrau Light… the parent to Miller Lite.

Was it literally hundreds of other moves?  In all honesty, heck if I know… I just know this entire industry is in play TODAY and pretty much every assumption you have needs to be reexamined.

As beverage wholesalers, you are now in the process of discovering why companies (management teams) don’t like being put in play…

  • not just because they lose control over the situation,
  • not just because things can come out of left field and surprise the heck out of you,
  • not just because things that you KNEW could never happen will happen.
It’s because “in-play”rips to shreds the façade that you can actually control your destiny.  Yikes!  Yikes indeed.

So let’s see where things stand at the moment…

  • ABI has been quite clear that they plan to “harvest” substantial additional profit from their distribution network.  MillerCoors has better PR (well up until recently I thought so) but they would be fools to not do the same.  In many situations the only reason MillerCoors doesn’t follow ABI (like for branches) is they simply don’t have the market share to make the moves work… trust me if they did, you’d see MillerCoors branch operations around the country.  Again, I would if I were in their shoes.
  • Both MillerCoors and ABI are in the ongoing process of “cleansing” undesirable distributors from their ranks.  ABI has a list (I’m told from pretty good sources) and I’d be shocked if MillerCoors didn’t also (I would if I were them).  They want the remaining wholesalers to be pliable (especially pliable), less profitable, but happy to still be kicking (and in all honesty, still making a boat-load of money for work that is far from rocket science).  Many of you are reading this and saying, not me… never!  Well trust me, plenty of you will agree to these terms.  Plenty.
  • You now have at least one large private equity group in this industry.  If you think they will be the last you are living in a dream world.  In the past month I’ve had 3 calls from various Bloomberg reporters looking for information about this industry.  That pretty much screams the industry is in play.

You’ve all probably seen that visual joke where a line of people are asked for volunteers to step forward to do some undesirable task.  But rather than anyone stepping forward, everyone but a couple saps take a step backwards… leaving them out in the cold as the only volunteers.  As an industry I think a similar thing is occurring… LOT’S of other industries have taken this step backwards (mainly due to tough financially times and in some cases the complete erosion of their business model… think newspapers, travel agencies, even Microsoft and their PC-based world… it’s funny just I was writing this Bloomberg sent out the following headline… Google Inc. has surpassed Microsoft Corp. to become the world’s second-largest technology company as computing over the Internet reduces demand for software installed on desktop machines.).  So a heck of a lot of industries have taken a step backward and who’s left standing out there with their backsides exposed to the wind?  Hello beer distributors!

And speaking of erosion of business models…

Do you really think this industry is immune?  State-based alcohol regulation does not mandate a bunch of beer wholesalers making a great deal of money.  One does not demand the other. 

Although I haven’t had any recent channeling experiences, go back and read my Tough Love from the Other Side, which you can find here

  • It’s not big news that most suppliers (big and small alike) think you make WAY more money than the value you bring.  I don’t really care if this is right or not, that’s the way they see it.  But you might consider the reality that the owner of a medium sized distributor probably makes more money annually than all but the most senior executives at the major suppliers.  And trust me, their jobs are just a little more difficult than yours.
  • You’ve got the craft brewers (still the prettiest girl at the dance) who have been very successful in getting exemptions from various laws and taxes, based solely on their volume.  And of course once they grow and cross this volume threshold they want the volume limits increased to continue their exemptions.  These are permanent erosions that are far more likely to expand than contract. 
  • Big retail isn’t going anywhere and they still don’t think you add all that much value to the game… oh and wait, as the self-life of beer gets longer and longer… your value in many situations gets less and less.  Other than the regulatory nature of the product it is becoming more like a can of vegetables.

And lastly you have the little dust up between the Reyes’s and MillerCoors over the acquisition of Chesbay… yes I’m getting to this.  As my dad would say, “hold your horses.”  But you might not like my take… make certain you’ve taken your blood pressure medicine before continuing…

Many different angles on this one… I’ve heard rumors from years back when the industry was going through some crazy price competition that the Reyes brothers weren’t overjoyed with some of these decisions and flexed their muscle.  The rumors were that both Miller and Coors were not too happy with this muscle action and they decided the Reyes’s would not be allowed to get any larger.  But of course they have been “allowed” to make acquisitions since then so either the rumors were wrong or they weren’t set in stone.  This whole thing could be as simple as that… from the MillerCoors perception, the Reyes operation is as large as it is going to get and that’s that.  And they are using whatever means possible to ensure this is the case.  It might be no more complicated than that.

Or it could be that and other factors.  Here is a quote from a long response from the Reyes’s regarding this…

...”MillerCoors' agenda is clear. It aims to seize control over, and convert for itself the value from, its vast nation-wide distribution network.”

Well as my son would say, duh!  OF COURSE this is their agenda.  If you ran MillerCoors wouldn’t it be your agenda?!  As for MillerCoors changing their tune… again, duh.  Circumstances change.  People change.  Commitments change.  Many have had the sometimes heartache and sometimes euphoric experience of a divorce. … well stuff happens.  That a major corporation changes its mind is really not too surprising. Necessity dictates a change of heart and thinking.   In addition, MillerCoors faces a new reality, ABI rather than just AB.  Operating decisions which might have made sense versus AB might not make as much sense versus ABI. 

And don’t be naïve… just as I emphasize that your true partners are your fellow beer distributors.  For ABI and MillerCoors, at some level they are partners too.  Simple fact.

Then there is the performance issue… here goes one really BIG potential client… I just must be in the mood to piss people off – see End the Education Plantation, www.EndtheEducationPlanatation.org  ;-). 

I have always been amazed at what Miller and Coors (now MillerCoors) has let Reyes operations get away with.  I’m all for minimum order quantities (whether in dollars or cases) but Reyes operations appear to be extremely aggressive and potentially in conflict with MillerCoors expectations when applying retailer service policies and minimum order quantities.  I would love to implement levels like that when I help re-organize a distributor… it makes it a lot easier to drive a ton of money to the bottom-line.  But MillerCoors (or ABI for that matter) would have come down on my client and me like a ton of bricks if we had tried.  So that could be sticking in MillerCoors’s craw too.  I’m not upset with the Reyes’s, just jealous ;-)

In some ways it seems like the Reyes business model and corporate strategies are becoming less aligned with MillerCoors… perhaps representing more of a logistical model than a DSD/value model.  If you’re the size of the Reyes operations (and considering their other endeavors which ARE logistical) a logistical model might make the most financial sense.  But does it make sense for MillerCoors?  Perhaps that’s part of the fight too.  And as a side note, does a logistical model make sense to all you other beer wholesalers out there?  I certainly don’t think so.  I think turning your businesses into a logistical-based system is a path to your demise.  There are A LOT of companies out there who can deliver stuff.  Becoming more one-dimensional decreases the customer value proposition.  If you become just one of many then you probably cease to exist.

But as a tip-of-the-hat to Ray and the brothers – I’ve got to try to get out of this hole at least a little bit ;-)… they have been executing a superb long-term strategy.  They have owned a number of large distributors for quite some time.  I would assume these are basically debt-free and therefore throwing off a ton of free cash.  And they have used this cash flow to fund some serious acquisitions.  Ray and the brothers aren’t bottom-feeders; they step to the plate and get deals done.  When other folks cry “I can’t pay that much” (which is really saying I don’t want to pay that much), these guys step to the plate.  It’s not their fault that others don’t play the game as well as they do… or have the huevos to write the big checks and accept the longer payback periods.

And since I seem to have the shovel out and am digging furiously, why not add a little more to the hole?  As I upset you with the following please don’t forget the basis of this post… this entire industry is in play.  I’m just going to tell you what you don’t want to hear but what many of these new players might think.

Again I will quote from the Reyes response…

The MillerCoors lawsuit has nothing to do with trademarks. It amounts to a foreign invasion of our laws and our values and yes, our US Constitution.

"We appreciate the incredible outpouring of support over the past several days and we promise you one thing above all else: with your continued support, we will not let MillerCoors take our business, or yours."

Man, that sounds like I could have written it!  First I think it is a little hyperbola to state that MillerCoors is trying to take their business.  I think MillerCoors is simply refusing their bid to get larger within the MillerCoor network. 

But the big dog, the elephant in the room is the impact on state franchise laws.  Here comes some tough love.  I believe an intellectual case could be made that franchise laws are simply the result of the political power of a small group of politically connected businesses… businesses whose goal is to simply enrich themselves (don’t shoot the messenger!) by crafting state laws which gives them multi-generational rights to distribute the products of others.  In some ways these laws are based on an argument that once you have these distribution rights, they are yours forever… unless YOU decide to do something with them.  Have you ever heard of a distributor walking away from almost any significant brand?  Nope, these laws are for one side and one side only.  And please note, you don’t need franchise protection/laws to have an independent three tier system.  These laws are for your benefit and few others (again, I’m just telling you what you are going to encounter). 

Now the distributor will of course respond with the argument… I worked hard to build these brands and I should be protected and rewarded for doing so.  Again a little tough love… I remember back in the days when Corona was rocking, up 30+% annually in many markets.  I’d be having a beer with a distributor and sooner or later he’d start pounding his chest about how he is kicking booty with Corona.  On and on it’d go about what a great a job this distributor was doing.  After a while I’d note, gee so-and-so north of you is up just as much as you… in fact so-and-so south of you is up even more… so are the distribs east and west. 

So how can it be that these Corona trends are based on your spectacular performance?  These other distributors aren’t you and they match your trends.  In fact the trends are pretty much the same around the country.  There must be a little more to it than your spectacular performance.  In fact I don’t think I’ve been to too many markets where one distributor is rocking with some major brand and his adjacent distributor’s sales of the same brand are terrible.  Take out demographics, population trends, etc. and generally the sales trends are pretty even… that’s not saying distributors can’t/don’t have an influence but it is more in the single digits.  That’s just the way it is today. 

So when you are pounding your chest about building these brands one could ask, then why are they performing similarly across this area?  So perhaps you didn’t build those brands as much as you would like… perhaps your “ownership” of these brands is much less than you acknowledge.  Perhaps you didn’t really “build” these brands at all; you simply followed the demand generated by the supplier and the general marketplace.  Perhaps any decent distributor would have generated the same outcomes… the facts seem to support this proposition.  And as for all the “investments” you made in these brands… they all generated a positive rate of return so you have already got your rewards… what are you crabbing about? ;-)  Remember, tough love?

And lastly, the main goal of franchise protection, to ensure these brands can’t be taken away without cause and that you are fairly compensated for all your past work and effort in building these brands.  As for the building of the brands, read the last few paragraphs (other than a new craft beer it simply probably isn’t the case).  As for ensuring you are rewarded/compensated… some might say you have already been rewarded by the gross profit dollars and net profit you have made for years and years… some might say your years and years of some big dollar profits have already rewarded you for these brands… some might say that in effect state franchise laws are an attempt to have beer distributors paid twice for the same thing… and to ensure the gravy train is never interrupted for a handful of lucky folks.  Look at your financials over the past 20 (60?+) years… some might say you have been rewarded nicely, especially when compared to the “average” family business.  I’ll trade checking accounts any time ;-)

Even the “without cause” aspect is open for argument.  Whose brands are they in the first place?  Why does a suppler give up their right to control their brands forever once they go with some distributor?  Why can’t they have whoever they want distributing their brands?...  without paying a large ransom to get them back (or more likely finding someone else to pay the large ransom). 

Let’s go even further and think about what these franchise laws mean to a supplier.  EVERY time a transaction occurs, who in reality is paying for that transaction?  Distributors will of course say, well I am you oaf.  But what are you paying it with?  With the gross profit dollars of that very supplier.  So in effect a deal that is priced at 3 times gross profit means that in a very real sense, for that supplier for the next three years every dollar of gross profit provided in that territory is being used to further enrich someone who is no longer even associated with that supplier.  Think of that… for three years not a single gross profit dollar provided to that distributor is helping them build or sell their brands!  It is really rather remarkable.  What about the 5 and 6 times gross profit deals?!

In a very real sense the supplier is paying for you to make these acquisitions and pay the ransoms.  It’s their hide, not yours.  Yeah, I know the risk is yours but I’m trying to make a point ;-)

But of course these deals are structured over a much longer time period than that.  So a more accurate reality is that after a transaction, a not insignificant portion of the gross profit dollars their brands bring to the table will be drained off for the next 15+ years to further enrich someone who is no longer associated with their brands.  If you were in their shoes would you celebrate this use of YOUR gross profit dollars… for decades?!!  And it happens with EVERY transaction.  It might be an interesting exercise to add up all the deals done over the past few years and calculate the net gross profit dollars which are being drained away from suppliers.  I think it would be a staggering amount.

And lastly think about numbers… in some situations I think there are more craft brewers in a state than beer distributors.  As the number of beer distributors shrinks, your political power also shrinks (unless you all consciously fight to keep it).  When this franchise protection is only for the benefit of literally a handful of businesses in a state filled with millions of businesses, one has to ask how long (or if) it is long term viable.

Perhaps instead of our much discussed “erosion of the independent three tier system” the real challenge will come from the destruction of state franchise laws?  Remember being in play… one loses control of the situation.  Perhaps MillerCoors, ABI, other major suppliers and small ones too, new entrants, and even a few beer distributors will see this as the opportunity to rid themselves of onerous franchise laws.  Perhaps they will see this as the opportunity to re-set the system so that THEIR gross profit dollars are used to actually sell their brands (or kept in their profits rather than yours), rather than providing multi-generational wealth to a handful of lucky folks.  Perhaps they will push to make the paradigm one where you make money while in the business, not when you exit. 

And perhaps the Chesbay dustup will present (force?) this unplanned opportunity on MillerCoors? (and by extension ABI and other suppliers of all sizes)  These players might ultimately look at this as similar to getting rid of a union… if the opportunity presents itself, you know it will be painful for a while but think it will be worth it in the end.  I might think that way.  And they might just join hands and present a united front in this assault… the pain might be less for all if they did.  Remember again, at some level, big or small, brewers are partners.  The suppliers could keep a heck of a lot of money either in the market or in their pocket if they made a hard run at state franchise laws.  And many of their arguments are not without merit.

Many of you won’t like the above paragraphs of this post.  Guess what?  A LOT of people are going to think that way.  A LOT of people are going to be making these types of arguments.  Some will say, so what if MillerCoors or ABI can reassign these brands to someone else?  They are THEIR brands and you’ve already been nicely rewarded.  You haven’t earned nor are you owed any additional payment.  New entrants to this business might be quite happy to operate without franchise protection… somehow the wine and spirits folks make do… as do the vast majority of wholesalers in a wide range of industries.  Look in the mirror, you have no special right to be a wealthy beer distributor whether you like that reality or not.  If these debates enter the mainstream, you in all likelihood will lose.

How do you plan to respond?  That is the next challenge.  You are going to learn why no company wants to be put in play.

Are employees an asset or an expense?

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

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

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

And now the post…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Modelo, ABI and US beer distributors

First a merger and acquisition note: If you believe the polls, right now the presidential contest is a flip of the coin.  If you are uncertain regarding whether now is the time to exit, there is still time to get out this year… barely… or if you have an acquisition target, now might be the time to make a strong run.  If the tax situation goes as bad as it could, it may diminish the potential number of transactions in the near term till the dust settles… in fact you might not see many deals for the next 4 to 5 years.  Staying or going… either is an acceptable choice, just make certain you make the decision with your eyes wide open.

On to the post… OK… let me get on my soapbox one more time and use our time together for an educational moment.  In all the hubbub regarding the recent ABI purchase of the remaining 50% of Modelo, many foolish thoughts have been floated (at least one by me).

First let us all repeat at least 3 times… the USA is not the center of the business world.  Got that?  Not every business decision is based on its impact on the US market.  Amazing but true ;-)  Whether the Modelo brand portfolio (Crown for now) is aligned with ABI distributors or not is not the driving issue in this acquisition… in fact I’d go so far to say that it doesn’t matter a bit in this strategic move.  I’m certain ABI has their druthers on this (and many other issues) but those are not primary (or secondary or anywhere in the top 20) in the decision process.  The sooner US beer distributors understand, and more importantly accept this, the better they will be able to understand this and coming moves at the supplier level.

The US beer market is a mature market.  Its population/per capita growth is slow at best.  Pricing/margin growth is far from easy.  It is quite difficult to take share from established brands.  Retail power is entrenched and growing.  And due to our unique in the world system of beverage alcohol regulation, in effect suppliers deal with 50 markets, not a single unified market.  If one is established in the US market it is a great cash cow… throwing off a lot of cash but not really providing a lot of great opportunities for substantial new growth.  In a global beer market it IS NOT where the action is.

Thus when global beer suppliers are making strategic moves, the US is always somewhat of a factor, but it is seldom if ever THE factor.  Let us go back in time... an audacious little foreign company called InBev purchases the King of Beers at a price which was ‘far too high” and completes the transaction in probably the worst financing times in tens of decades.  This audacious little company, now called Anheuser Busch InBev (ABI) proceeds to take $2,000,000,000 dollars of fat off of this very fat cow. 

As a side note, I can’t tell you how many ABI distributors (usually after more than a couple cold ones) rant about this… “yes, we all knew they were fat but $2 billion dollars!!  I thought they were good operators!!”  My analysis of this is this is what happens when a large public company is “allowed” to be run as a private fiefdom for what is in effect a small family dynasty.  If it were a private company no one would care, they would be spending their own money… and would be limited by this factor.  But as it was, it was the worst of both worlds… operated as basically a private company but spending other people’s money.  If human nature is any guide, wild excess is certain to follow. 

That is until an audacious little company decides to take them to the Slaughterhouse… but don’t cry for them, they got their share of the hide.  What happens to their ‘partners” is another matter altogether.

Now back to our analysis of history.  Yes, all this money just laying around waiting for someone to come along and pick it up is an important draw for this audacious international company.  But in my humble little opinion, this is simply icing on the cake (and it does help provide the financial umph to push the offer price to a can’t refuse type price… and provides the fuel to drive the engine of international growth).  The real value of this deal is the value of the brand(s) in the international arena.  AB was simply squandering one of the most recognized and valuable consumer brand names in the entire world.  Why was this?

Because the Third and his underlings were still living in the past when the US market was all that mattered.  They were born and bred in St. Louis, the heartland of the country.  They ruled their world.  During their time they destroyed the failing regional brewers and took far more than their share of this available market share… leaving Coors and Miller to fight for the crumbs.  What did they care about the world?  To their view, they owned the world.  Unfortunately, hubris spares no one… and they were no exception.   The Free Dictionary describes hubris in the Greek tragedy as an excess of ambition, pride… ultimately causing the transgressor's ruin.  Rather accurate one might say.

Now how about this little foreign company called InBev?  It is already the offspring of many previous deals.  They are deal makers and cost cutters.  The main guy who runs it is a Brazilian who got his higher business education in the USA.  His senior team has similar international life experiences.  Their primary partners are Belgium… and Belgium isn’t the center of anything, but it is integral in many international dealings.  Due to past dealings with AB they have already had a chance to “look under the hood” and they were most likely amazed that this golden opportunity was just sitting there waiting for someone to come along and take advantage of it.  And as they say, the rest is history.

And on another side note, it’s amazing how well those ancient Greeks understood human nature… how many times they perfectly captured the various aspects of the human condition.  There is little doubt the Third and his team was guilty of hubris, but what about the new dogs? 

Is the new ABI team inflicted with hubris?  They seem to have no need to “prove” anything to anybody regarding their business life-styles.  In fact they are “counter” big business in this respect… they are cheapskates and take pride in that fact… and I say that as a compliment from a similar cheapskate ;-)  But hubris appears to seep from their very pores, just a different strain than the previous folks. 

  • Brito and team seem to be blinded by a nationalistic obsession.  I can’t see how making enemies around the globe is a long-term fruitful course of action.   
  • And secondly, GOING CHEAP CAN BE EXPENSIVE! Attempting to squeeze every last drop from every action you take is generally not wise from a simple cost/benefit analysis.  In most things, the closer you get to 100% the more difficult and costly it becomes, quite often exponentially.  You do more harm than good in attempting to squeeze every last drop from the lemon.  There guys, take it for what it is worth… just remember those ancient Greeks and how hubris has a tendency to end with the transgressor’s ruin.  ;-)

Back to our analysis… how is that brand name thing working out?  Again, let’s go back in time in the US and look at a not-so-little brand called Budweiser.  Not that long ago, one out of four beers consumed in this country was a Budweiser!  One out of four!  In my opinion there will never be another brand like Budweiser, mainly because the US consumer has profoundly changed… but that is a post for another day.

The brand Budweiser has been declining annually for over 20 years and it is still the number three brand in the country… and it was the number two brand until very recently!  Unless one “does a Schlitz” and destroys a consumer brand from within, popular consumer brands have VERY long trajectories which can prove to be VERY profitable for a VERY long period of time… and some (can you say PBR) can even rise from the dead to who knows what heights.

So let’s go global and look at one not-so little key market, China.  It has over a billion people.  They are very conformist and status conscious (just like people all over the world, including the good ol’ USA).  Right now the brand Budweiser is very much a status symbol in China (can you think of Bud in the US a few decades ago?  The King of Beers).  Right now the pricing of Bud in China reflects this desirability.  Right now ABI is laying the groundwork for a MASSIVE brand in China.  What if they can become the King of Beers in China?  One out of four beers in a country with a billion people?!!  This is what the game is about, not the US distribution system.  How about India?  How about Eastern Europe?  How about a whole lot of places around the globe?

Which brings us back to the start of this long-winded post, the recent acquisition of the remaining 50% of Modelo.  If you believe anything I’ve just written, then you know this acquisition IS NOT driven by the US market.  If anything the US market is an impediment to getting this deal done… basically antitrust issues.  Thus ABI’s decision to attempt to address these US antitrust concerns by basically walking away from the US market for Modelo brands… Crown can do whatever they choose and ABI will have no say in it.  However, the ABI team might find their hubris already starting to bite them when the feds review this proposal.  Again, making friends is better than making enemies in a business based on relationship selling!

In a spur-of-the-moment analysis I had stated at a recent state convention that ABI would simply throw Crown overboard… but again ABI proved themselves to be good deal makers.  Sure they’d like to control Modelo in the US but if they can’t (at least for now), that is OK too.  Getting the deal done (and control of those brand names) is FAR more important than Corona pricing in the US... or whether the brands are “aligned” or a hundred other things. 

So with that background, let’s think about some of the complaints about this proposed acquisition. 

  • Alignment?  Really?!  Do you really think ABI is going to walk away from this deal over whether Modelo brands are solely in ABI distributors?  Let’s grow up folks.  For those precious few who have had the joy of experiencing me directing a corporate planning session, who gives a damn what you want?  I wish my hair wasn’t falling out and I was better looking.  Whether you like it or not you need to focus on facts and reality, not your wants and wishes. 

In attempting to contain antitrust issues in the US, ABI is handing Modelo to Crown (for a while my friends).  Now they might - most certainly will ;-) - put some pressure on Crown to ensure their branches get the Modelo brands but I don’t see them fighting that hard for independent ABI distributors.  Would you have rather had ABI sell brands (effectively market share)?  Just who would they sell them to?  Then many of you would be complaining about how you worked years building these brands only to have them sold out from under you.  I understand sitting around belly aching (and have done so many times myself) but please, in the scheme of things whether Modelo brands are aligned – other than ABI branches ;-) - or not is very small potatoes indeed… and most certainly did not, nor will not drive the decision making process.  And of course let’s end this paragraph with a little fact… in states where it is relatively easy to move brands, the Modelo brands are already with the ABI distributor.  In those with strong franchise laws, the brands are where they are… and would likely stay where they are regardless of ABI’s or Modelo’s or Crown’s wishes.

  • Supply and packaging issues.  Again, really?!  Is ABI going to make supply issues worse?  Could be.  So what?  What are you going to do about it?  How does this concern have any impact on the deal?  And I’ve been in the business for quite some time, I’ve heard more than a few supply complaints regarding Corona over more than a few years. 

As for packaging issues, let us forget Modelo for a moment and just think about packaging.  In business today, ALL expenses should be examined to see if cutting is an option.  And packaging is no exception.  And packaging is somewhat unique… the savings pretty much all go to the manufacturer and the costs are shared with those down the line.  Right?  You all experience it each and every day.  I don’t see this ending.  Assume a manufacturer can save $X cents per case by modifying packaging expenses.  Also assume this means there will be an increase in transit damage/breakage due to these changes.  As long as the savings are more than the increase in costs, it probably makes sense to do so (especially if these damages/breakage do not impact retail or the consumer much).  Does this increase the headaches in the distribution end?  Oh yeah.  And of course you can document these damages for supplier credit (as you should) but the real cost is in the personal to deal with the crap.  So the supplier pockets the savings, less any increase in damages, and the distributor ends up, net-net eating a lot of the costs.  Now tell me again why the suppliers won’t/shouldn’t do this?  ;-)   Of course you can complain to your field personnel (who have less and less authority to do much of anything) and they will (hopefully) take your concerns up the corporate ladder.  But don’t expect too much relief here.  Sooner or later this will reach equilibrium… a balance between upfront savings and downstream costs… but I’m not certain you are going to like where this equilibrium finally settles.  Such is life.  Build it into your business model, it is not going away and other than bitching loudly I don’t see what you are going to do about it.

Beer distributors need to understand these types of things if they are to understand (and adapt) to the reality of “playing in the international beer business.”  Sure distribution is by definition local, but just because what you do is local does not mean you are immune from the tectonic shifts that are occurring (and will continue to occur) in the GLOBAL beer world.  Once you accept this, these and future moves will make far more sense as you attempt to navigate this rapidly changing environment.  Not that you can do much about these things, but knowledge is power… and playing an ostrich with your head in the sand will generally only lead to someone else with your head.  Not my choice, hopefully not yours.

 

 

Leveraging Distribution

Well summer is here and I’ve decided to re-visit a few long ago posts which seem to be relevant today.  Or it could be that I’m simply lazy.  Anyhow, long ago in 2007 I wrote a three part series on leveraging the strength of your distribution… how the simple act of reaching out and joining hands to create a single distribution entity could drive a tremendous shift in power.

 Even though they are five years old, they remain relevant to this day. 

The first, Leveraging Distribution and Who Controls It – Part 1 can be found by clicking here.

The second, Leveraging your distribution system and investigating wine and spirits – Part 2 can be found by clicking here.

The third, Leveraging Distribution - Organizational Impact and State-Wide Associations - Part 3 can be found by clicking here.

Since then a number of distributors have created state-wide associations/agreements, most for the booming craft beer industry.  The idea still has tremendous merit.

In 2008 I explored the idea that power might be shifting back to distributors, that piece can be found by clicking here.  If we have the wisdom to take advantage of our unique sales and distribution power, I think distributors can remain powerful players, in control of our own destinies (at least as much as is possible).  No one can, nor will they realistically be able to come close to the power beer distributors bring to the market.  Never forget this.

Now in 2012, ABI (and MillerCoors) have their eyes set on your profits.  Never has it been more important to stick together… to act as one… to reach out and grab hands… to become A Band of Brothers.  And with the explosion of craft beers (and beverages of all types) the strength of connectivity cannot be over-emphasized.

And lastly as a fun (hopefully) article on fairness, "That’s not fair" and other "irrational" behavior, which can be found by clicking here.  ABI corporate (and most suppliers) might want to give this one a read too.

Enjoy.

Conspiracy or Just Good Strategy or Just Plain Crazy?

OK… I try to stay away from conspiracy theories as much as is possible, the black helicopter crowd and all.  But as has been noted, you’re not paranoid if they really are after you ;-)

What brings up my conspiracy paranoia?  When things just don’t make sense… and some things coming from ABI just don’t make sense.  I have no idea if the following is correct or not (and haven’t decided if I believe it or not), but it is my feeble attempt to put some meaning to actions I don’t understand…

First of course we have the audacious run at, and purchase of Anheuser-Busch… a fat, bloated cash cow if there ever was one… and one that was simply squandering an internationally known brand name of tremendous value.  The wizards of InBev showed they were better than most at spotting corporate waste and identifying national and international value… in addition to being pretty dang good financiers… and pretty good at strategy. 

Also, I hear the ABI folks are great planners, they have a plan for everything… quite detailed plans for almost every possible action.  They most definitely aren’t shoot-from-the-hip-type guys.

Then Brito lets slip that ABI thinks they could self-distribute at least 50% of their US volume… from ABI’s viewpoint, the independent three-tier system has had its uses but is a rather antiquated concept whose time has come and gone (at least that’s my read on their thinking).  And as they have proved in their past actions, they are pretty good at spotting value and squeezing profits out of a system.  Unfortunately for beer distributors, those profits (and cost savings) they are targeting are YOUR profits.

But how to get them?  Yes “wholesaler margin management” and “distributor profit pool optimization” and “system-wide cost mutualization” will get them a fair share of your profits but is there a bigger play going on here?  One which helps get rid of the entire concept of a mandatory three-tier system?  Allowing all manufacturers of the product to legally distribute if they so choose?

This is where the black helicopters start flying ;-)

First is the Dallas bitch-slap where distributors are told in no uncertain terms that they are to get rid of almost anything that isn’t an ABI product.  As I noted, when I first heard this I thought it was jaw-droppingly stupid.  This country is experiencing a brewing renaissance that is unprecedented anywhere in the world.  The Brewers Association reports

  • Growth of the craft brewing industry in 2011 was 13% by volume and 15% by dollars compared to growth in 2010 of 12% by volume and 15% by dollars.
  • Overall, U.S. beer sales were down an estimated 1.3% by volume in 2010.
  • Imported beer sales were up 1% in 2011 and up 5% in 2010.
  • The craft brewing sales share in 2011 was 5.7% by volume and 9.1% by dollars.
  • Craft brewer retail dollar value in 2011 was an estimated $8.7 billion, up from $7.6 billion in 2010.
  • 1,989 breweries operated for some or all of 2011, the highest total since the 1880s.

With these market dynamics ABI wants “their” distributors to walk away from these products and this exploding marketplace?!  As I noted in my Who’s Your Daddy here and Who’s Your Buddy here pieces, from an ABI distributor perspective this is incredibly stupid… for the MillerCoors folks it’s like finding money on the street.  It also makes it more difficult for the explosion of craft brewers to get to market… more on this later.

But one could argue ABI simply wants “their” distributors to focus solely on their products… and it isn’t new, the old AB under Three Sticks had the same plan under “100% share of mind”.  Although the market dynamics of the craft beer world have changed dramatically since then, one could still make the case… and it still might be a stretch but one could make the logical case for it.

But what I’ve heard over the recent past simply does not make sense.  ABI field personnel are pushing distributors to simply walk away from brands with the argument that these brands will simply exit the marketplace!  And we’re not talking about some minor, never heard of craft beer here; we are talking about some major suppliers who have been around for years.

Now I know of no one in their right mind who knows anything about the distribution business who would state that with a straight face… just walk away from these suppliers and they will exit the marketplace?!  The MillerCoors distributor won’t pick them up (for no cost!)… nope.  The supplier will just meekly accept their departure from the market?  Yep.  Yeah, and I’ve got a bridge to sell you.

None of this makes sense… and thus the conspiracy starts spinning in my head.  What if this is all part of a fiendish (might I say insidious) plan to dismantle the independent three tier system?  What if the market leader decided it was in their best interests to “become” the second tier but couldn’t do so outright (or they didn’t want to take the heat for trying)?  What if they needed cover for their plans and saw a way to use the prettiest-girl-at-the-dance (the craft brewers) as a means to implement their plans?

Put on your tin foil hats and follow me for a while…As Harry pointed out in April, “An estimated 10% of ABI’s total volume (98 million BBls) is sold through their brewery-owned branches or 130 million case equivs........ABI branches sell nearly four times what Boston Beer Co. sells in a year.”  A-B has never owned so much of its own volume. What does it mean?

This is a regulated product.  That is an important point.  In an independent three-tier system the brewer MUST go through an independent distributor to reach the retailer and consumer.  But what happens when a brewer can’t find a willing distributor?  Short answer, they go out of business.  Now they might have gone out of business for a whole number of reasons… but the forced restriction on distribution is like an intellectual “get out of jail free” card…

“the reason and the only reason my company went belly up is because I couldn’t find a distributor who would willingly carry and sell my product.  How is that fair?”  I could have distributed it and I had willing retailers but this stupid law put me out of business”

This is an easy argument to make and it is very difficult to prove there isn’t at least a little truth to it.  Every failed/failing brewer will make this argument to some degree.

Now the truth about distribution of any consumer products good (or any good for that matter) is that distribution is a bitch to get.  That’s just the way it is.  If many of these brewers instead baked cookies or potato chips they would find distribution extremely difficult to obtain (and many would simply go belly up)… ah, but in the cookie or potato chip aisle they could distribute themselves, assuming they could find any willing retailers  (and they would a few for at least a while).

But since this is a regulated product, that option isn’t open to them and thus they get the intellectual “get out of jail free” card… and work to change the law… because they are a sympathetic lot whose business travails are severely damaged by this mandatory three tier silliness… and the erosion starts. 

I believe every state in the nation presently has some exemption from three tier laws allowing brewers, based solely on amount of brewing output, to operate in the second and sometimes, third tiers… sometimes in all three tiers.

What if the market leader wanted to accelerate this pressure?  Much like water rising behind a dam, sooner or later it will find its way.  In a market duopoly like the US (the two big boys controlling over 80% of the market) the options for distribution are pretty small… what happens if the market leader would cease to be an avenue of distribution for an exploding brewer population?  Sure the MillerCoors distrib would pick up some but market dynamics simply don’t support a single-distributor model anywhere in the real world.  And of course in areas with fairly high population densities a third “craft beer’ distributor can be supported… or of course a wine and spirits distributor.

But it would still put additional pressure on accepting accommodations for brewers… then the latest move, telling distributors to drop some pretty major suppliers and noting they will simply exit the market.  Ahhh, no they won’t.  And if they can’t find distribution they too will join the chorus for second tier accommodations (like the end of the requirement for an independent three tier system… bye bye independent distribution tier).

Sooner or later, either through lawsuit or legislative action, the entire reason for the independent second tier will be questioned. 

“These folks have been self-distributing for years and the sky hasn’t fallen”…

 “equal treatment under the law”…

 “I run a family business, work hard, and my entire business is put at risk because I am forced to go through an independent business for distribution… one who won’t focus on my products… etc” 

 Which all plays into the hands of ABI and their desire to self-distribute… not today, but in the not too distant future.  And it’s a win-win for ABI… forcing distributors to focus solely on ABI products ensures them the maximum effort from distribution… and withholding 50% of the nation’s beer distribution capacity from an explosion of brewers is certain to add pressure on state-by-state accommodations for brewer self-distribution.  Both work to their favor, regardless of how completely successful they are.  And once one accepts the notion of self-distribution (and the sky hasn’t fallen), then the only, and the last battle is solely over the size limitation… sooner or later an easy win.

And unfortunately for the prettiest-girl-at-the-dance (those craft folks), they may find their handsome new supporter doesn’t really have their best interests at heart.  Anyone want a carbonated soft drink?  Most may find they rue the day they thought self-distribution was such a great idea… and thinking they can contain self-distribution based on some arbitrary volume output is most likely wishful thinking (if they’ve even thought that far ahead).  The craft folks won’t know what hit them when ABI (and of course MC) put their tremendous power to work directly at retail.  Instead of a 500 case deal, they will be talking about a 50,000 case deal.  They will own on-premise.  I know the street pretty well and blood will flow… unfortunately most of it will be spilled by the craft brewers.  But that’s a side point. 

Is this ABI’s insidious plan or is the high altitude in Colorado getting to me?  Heck if I know.  I know they are detailed planners.  I know they think strategically.  I know they want to self-distribute a fair amount of their beer.  I know the “alignment” issue (carrying only ABI products) is at best self-serving.  I know attempting to remove 50% of the nation’s beer distribution capacity from any other brewer is certain to add to the pressure from the bottom to allow self-distribution.  I know the erosion has already occurred in every state in the country… some arbitrary size limitation is the only thing stopping full self-distribution in every state in the country.

Are some of these latest moves on simply dropping products a strategy to get one of the mid-sized brewers to make a break for it and attempt to go direct again? (Pabst tried it in California years ago and failed… but the world has changed since then).

Conspiracy or crazy?  You know the best conspiracies are never discovered, that’s why they were the best.  Paranoid?  Not if they are really after you.  Heck if I know if this is the plan… but some of these actions will generate other distant actions which are all aligned with ABI interests.  Isn’t that what a conspiracy (or just good strategy) does?  It sets in motion actions which influence the flow of things… all towards a desired end-point… and all without anyone’s fingerprints on it.  Or I guess it could all be a coincidence… who knows?

Remember, “Just because you are paranoid DOES NOT mean they ARE NOT out to get you!  Now take off the tin foil hats and get back to work ;-)

High Stakes Poker and Consolidation

First, please subscribe to this blog… to the left of this text enter your email address… and you will be emailed anytime I post a new blog.  Second, the post…

I’ll start this post with an acknowledgment that values for beer distributors have not gone as I would have predicted… and I kick myself because what did happen should have been easily predicted… I erred in my analysis by putting too much weight on my own experiences, my own checking account… and I don’t play high stakes poker.

So let’s back up.  I would have guessed that values for beer distributors would have been experiencing downward pressure over the recent past.  Sure margins are great (thanks to ABI and crafts/imports) but sales are generally flat to down.  Lots of uncertainty and risk still remains, COSTCO-type moves, ABI wholesaler margin management, various cost/expense increases, etc.

Yet just the opposite is happening.  Values are heading up, big-time.  In fact my associate Steve Cook and I were recently discussing the present state of affairs and we both believe the days of buying as a financial asset have gone for good.  These deals are all strategic and the prices paid reflect that.  And when I say strategic, that doesn’t necessarily mean adjacent or one with a lot of operating synergies, it means fitting into a longer-term plan.  These values also reflect what it takes to get a reluctant seller out the door.

So what does this have to do with high stakes poker?  At some point in a high stakes poker game the remaining players are all sitting in front of large piles of chips and the bets start getting bigger and bigger.  They must if someone wants to win… plus in many cases the person is playing with other people’s money.  If the bets don’t increase, everyone simply sits around playing with their chips until something breaks the equilibrium. 

Although the analogy is not perfect, this captures the dynamics occurring in beer distributor deals… all those who were primarily concerned about asset protection have already left the game.  This is where my previous prediction veered off course… driven by my checking account.  Based on my financial position, I would be most concerned with locking in the value.  But if you’ve been in this business for years (or generations) you have already accumulated significant financial assets.   Thus you will play the poker game much different than me.  You will be much gutsier in your bets… for even if they all headed south it would in all likelihood have very little impact on your personal financial situation.  Add to that the fact that in many ways you too are playing with other people’s money… this also puts upward pressure on deals.

Thus deal prices are heading up.  Now most brokers hold onto the magic number (or range) like it is the only thing of value they bring to a deal.  Well I think Steve Cook and I bring a lot more value to the table than a simple number.  So here it is… these recent deals are going for north of 4 times gross profit (just for distribution rights)… some pretty far north.  And yes, I know how to value a business but we often need a common means of measurement and a multiple of gross profit seems to capture this at a 40,000 foot view… plus it makes unsolicited offers easier since it requires no intimate knowledge of the other distributor’s financial performance.

Unless these are complete vertical integrations (and these aren’t), at these numbers you will almost assuredly have to supplement the earnings of the acquired distributor with cash flow from another operation.  The days of having the acquired company pay itself off in 6 to 10 years are long gone.  At these multiples the payback will take far too long… possibly into the 15-20+ year range depending on buyer circumstances.

This is one of the advantages of being a consolidator… having multiple operations which can help fund future acquisitions.  Folks who made acquisitions years ago now sit on debt-free cash producers which can easily provide cash flow for more and more acquisitions.  There is an advantage to always thinking long-term and strategically… and it is not too late to join this club if you have the desire and the stomach for it.

But this isn’t everyone’s cup of tea… but just like that high stakes poker game, you get to play, not set the betting rules for everyone else.  The big dogs are out running… if you want to play, get off the porch… if not, sit there and play with your chips.  In the next few months we will see a lot of folks who thought they were buyers turning into sellers.

Why?  Because the financial incentives strongly point in that direction… mainly because of our ol’ friend taxes.  Let’s look at a simple, back of envelope example…

  • A distributor with $50 million in annual sales.
  • 25% margin, or $12.5 million in gross profit
  • Driving 7% to the bottom-line, or $3.5 million in pre-tax profits
  • At 4 times gross profit the selling price for distribution rights is $50 million (plus all other assets)
  • Assuming a present capital gains tax rate of 15% on 100% of the net value of the distribution rights, this equals $42.5 million in after tax proceeds… plus of course 85% of the selling price of all other assets.
  • If one keeps the business you will have annual income of $3.5 million in pre-tax profits; assuming a personal tax rate of 43% (federal + state + local).  Thus $2.0 million in after-tax proceeds (plus whatever personal compensation and benefits you take).
  • At $2.0 million in annual after-tax proceeds, it will take over 21 years to payback or earn the equivalent of the after-tax sales proceeds… and this ignores the time value of money!  If one assumes a 3.25% cost of money (cheap by historical standards) it will take around 35 years to equal the after-tax proceeds of the sale of just distribution rights, we're ignoring the proceeds from the sale of all other assets… but of course, in the end you still own the asset.
  • And don’t forget, for those 35 years you aren’t just hiding the sale proceeds under your mattress… they too are earning income.  At a 5% rate of return, that’s over $2.1 million annually (pre-tax).

THESE are the reasons it makes sense to consider these offers… whether one wants to or not. 

Of course not all things are equal… if one has as much money as one needs or many family members involved in the business it may be the case that no number will make sense for the entire family, thus you remain in business.

So, if you want to run with the big dogs you had better open the check book and move quickly (don’t forget, you can’t hurry brewery approvals and they do take time).  After the election the tax situation just might get A LOT bleaker… in fact we may find the entire industry enters a 4 year lull in deal flow.  Why would one pass on a sale today yet sell in a year or two when after-tax proceeds will be substantially less?  Don’t forget, after-tax proceeds are all that matter.  If it doesn’t get done this year (and Obama wins), it would seem to make more sense to wait until the political situation changes in Washington at the end of Obama’s second term.

Lots of moving parts but the big dogs are beginning to up the ante in this little poker game of ours… as I noted, I would have already taken the money and ran for the door… but the question you must face is do you have the stomach for this level of poker?  If so, get the deals done this year.  If not, you can of course stay put or hope for that unsolicited offer to visit your inbox.

 Interesting times in the beer distribution business indeed.

Conlin... the trouble-maker

First, please subscribe to this blog… to the left of this text enter your email address… and you will be emailed anytime I post a new blog.  Second, the post…

Well the NBWA Legislative Conference has come and gone… thanks to all who allowed me to participate in some cost mutualization… I drank and they paid ;-)  You’ll understand that concept in a few paragraphs.

Independent beer distributors of the United States unite!  For those who studied Latin… "tous pour un, un pour tous"  the famous motto of The Three Musketeers “all for one and one for all”.  I believe The Beer Musketeers should adopt this motto as our own.

It is about unity and sticking together, strengthening the bonds of the brotherhood and sisterhood of beer distributors.  The absolute necessity of hanging together and acting as a single, unified force at both the federal and state levels.

If you think about it, the reality we face is pretty straight-forward.  When we discuss the erosion (or destruction) of the independent three tier system, we are discussing your demise, no one else’s.   The first tier, the producers/suppliers are going to continue to exist… if there is any product to distribute they must.  The third tier, the retailers are going to continue to exist… someone has to sell it to the end consumer.

But the good ol’ second tier, independent distributors, what about them?  When we talk about the erosion of the 3-tier system we are basically talking about the erosion or death of your businesses… you’re the only ones who might be leaving the party.  Never forget that reality.

Think about your fellow independent beer distributors…  I don’t care if you love them or hate them.  I don’t care if you compete with the dirty, rotten SOB or have a great relationship.  Your fellow distributors are your brothers and sisters.  They are your true partners.  If you don’t stand together you will most certainly fail.  If you turn on each other, you will most certainly fail.  

Never ever forget… it is your businesses on the line.  Not the retailers… not the suppliers…It’s YOUR asses on the line.  100% of the “erosion of the 3-tier system” comes out of your hide.  100%! 

If the independent three tier system goes away, that means most of you go away… and those who remain will face a world profoundly different than the one you face today… a world where your power, your profitability and your value are all far less than they are today. 

All who know me know I am a strong supporter of NBWA - even when I profoundly disagree with some of their tactics… which is probably more than Craig and his crew would like ;-)  I am also a loud supporter of strong, unified state associations.

The federal level is important but in this battle the state level is where the real warfare will take place… and a unified voice is incredibly important.  A unified voice is a must for accomplishing legislative action, whether at the federal, state or local level.  Without a unified voice, the odds are very great you will not be able to generate the support and votes you need to accomplish your tasks.

Now some pundits out there say Conlin is just making this stuff up, trying to generate business by being a trouble-maker (and I freely admit to being a trouble-maker)… causing strife and friction between suppliers and distributors where none existed before.  I guess it was the Garden of Eden until I came along.  Now I don’t know what world these folks are living on… or whether they have already been cowed by the power (and possible retribution) of the major suppliers.  Something you all should think about. 

I freely admit my blog is a marketing mechanism which is aimed at…. here’s a surprise, marketing.  But me making this stuff up?  My Bitch Slapped in Dallas, here was a direct quote from one who was there.

Although my Slaughterhouse analogy, here might have crossed the line of good taste… I think it reflected (and continues to reflect) the reality on the ground.  My Who’s Your Daddy piece, here reflects a very real conflict of paradigms between ABI and every single one of you.

And although ABI is right now the primary spear catcher you all must realize that success forces competitive response.  Every distributor has lived this… a competitor makes some stupid move, like bringing in 30 packs or some crazy pricing move.  You and your management team correctly say, “that’s crazy and we’re not doing it”… but if it turns out to be short-term successful, you will respond.  You all have lived it.  Thus it ultimately doesn’t matter whether it’s ABI or MC or Pabst or whoever… if the actions are successful, they will force competitive response… whether that company or person really wants to do it or not.

If you recall, a couple months ago Morgan Stanley came out with an investment piece on ABI,  Another Billion? Time to Look at US Distribution Profits.  This heartwarming piece ;-) explained their thinking on ways ABI could “extract” at least $1,000,000,000 of incremental profit from “their” distribution channel.  If you haven’t read much about this in the trade press you might want to ask yourselves why… but that’s a story for another day.

Well Morgan Stanley came out with another ABI analysis on March 8th.  These analysts are cold blooded mercenaries (I can relate to that)… and they are putting their reputations (and incomes) on the line with their projections.  I can assure you they have not been influenced by any Conlin trouble-making.

And what do they think?  To put it in my terms, they think distributors are going to get their asses kicked… they are betting against your ability to stop the pillaging of your income… at least $1 billion.  And yes, that word begins with a b.  And that’s only from the ABI network.  If you believe MC will just watch this happen without responded you are living in a fantasy world.

So what do these disinterested financial vultures think?  The following are all direct quotes from the piece (the underlining and bold are mine)

  • Stock price is targeted to go up 20%

 

  •  Potential distribution profit pool optimization: We believe ABI in the US could grow EBITDA by $2bn through 2015

 

  • For more than six months now, ABI's sales organization has had new management in place –which has substantially affected the way the company executes in its No. 1 market.  Wholesaler feedback points to the introduction of very detailed operating instructions and targets. While some distributors have not welcomed this, many are starting to realize the value of this improved focus on execution.

 

  • Importantly, we believe compliance at the wholesaler level is high, because: a) the "carrot" of potentially being part of the "Anchor" wholesaler group (those wholesalers that will be allowed to act as consolidators); b) many wholesalers agree with this new strategy; c) wholesalers are unwilling to risk going into a termination procedure which at worst could go through and at best would involve a costly legal battle.

 

  • In our note on ABI, Another billion? Time to look at US distribution profits (10 November), we envisaged ways in which ABI could extract more profits, at least $1bn incrementally, through greater system-wide cost mutualization and wholesaler margin management. Our conversations with distributors suggest that the "low hanging fruit" is being captured at the moment, involving important cost transfers to wholesalers (reduction in brewer funding of trade marketing, logistics-related costs) and what we would refer to as "Level 1" mutualization (e.g. making the Managed Freight Program compulsory for all wholesalers). "Level 2" mutualization, e.g. admin cost externalization to ABI's own share service centers, is seemingly more in the cards post-selection of anchor wholesalers.

 

  • Meanwhile, wholesalers themselves are cutting costs and consolidation will drive efficiencies, in which we believe ABI will partake to the extent that it gets to decide – via its pre-emption rights on any distributorship sale – who can actively participate in consolidation and who cannot.

Cost mutualization… that sounds like some freaking word made up by some consultant.  In my world of cost mutualization, I drink and you pay.  In ABI’s world they mutualize costs by having you cover some of their costs… as freaking many as they can.

Wholesaler margin management.  Distributor profit pool optimization.  Do you think any of these actions are in your favor?  The power of the anchor wholesaler concept (they insidiously won’t disclose who this golden anchor is… thus everyone has the “chance” to win this golden ring).

These aren’t my words.  These aren’t my descriptions.  This is what is coming your way and your ONLY freaking hope of fighting this is to hang together.  The entire concept of the anchor wholesaler is to pit ABI distribs against other ABI distribs.  There is tremendous power in connectivity… in unity… in truly living one for all and all for one.  To phrase it another way, setting it up so it’s every man for himself is a certain way to weaken you all.  And as I mentioned above… if ABI’s wholesaler profit management and cost mutualization are successful, MC will be right behind them.

As a side note on the insidious anchor wholesaler concept, there is a way to fight this.  STICK TOGETHER!  If every ABI distributor in a state does the same thing (picking up a new supplier or whatever), then nothing changes in your position relative to each other… all basically remains the same as before the action.  If you all act as one, the anchor wholesaler plan cannot work in turning one against the other… and yes I know, almost all of you want to purchase the other guy, but allowing ABI to get you all in a knife fight while they sit back and laugh is not the way to accomplish this.

And for a piece of self-promotion – I know, when aren’t I?  ;-)  Next time you decide to spend some money on an outside service provider, whether buying or selling or making operational improvements perhaps you should think… who should I use?  Someone who is a strong, vocal AND PUBLIC supporter of this industry?  Someone who pays a very real cost for this defense… trust me, I do.  Or someone who remains quietly on the sidelines… willing to accept your money but not willing to come to your defense when you are being attacked.  Who would you rather have next to you in a fight?  I know wholesalers, and I’d gladly have you all covering MY back.

I say the following as an outsider… whether you ever use my services or not, never ever forget…

You all have something very special here… very special.  I implore you to not simply give it up without a fight…for once lost, this special thing will never come back again.

Print the above paragraph and put it on your refrigerator at home, right next to your kid’s pictures (and perhaps your grandparents)… if that won’t focus your mind then nothing will.

Are you a franchisee or do you have a franchise?

The answer to this question will shape the future of the beer distribution industry… so ask yourself, are you a franchise or do you have a franchise? 

Perhaps a little clarity is in order…

As we all know, words quite often have multiple meanings and serious confusion can occur when one applies one meaning to another situation.  I think the beer distribution industry is facing a similar situation with the meaning of this franchise-thing… and the course it takes will forever shape this industry.

From the online Free Dictionary, a commercial meaning of the word franchise is…

*          Authorization granted to someone to sell or distribute a company's goods or services in a certain area…

*          A business or group of businesses established or operated under such authorization…

*          Commerce authorization granted by a manufacturing enterprise to a distributor to market the manufacturer's products

I believe the first and third meanings fit into what is generally meant in the beer distribution business when we discuss franchise… as in franchise rights.  The second starts to head in another direction.  The first and third meanings imply you have a franchise, the authorization to distribute and sell a company’s goods in a certain area.

The second starts down the road that you are a franchise.  What’s the difference?  Well to quote Mark Twain…

“The difference between the almost right word & the right word is really a large matter--it's the difference between the lightning bug and the lightning.”

If you have a franchise to distribute ABI or MillerCoors or Sam Adams or Flying Dog… then you are an independent business which simply has a franchise right(s) to “sell or distribute a company’s goods or services in a certain area”.  It might be for one supplier, it might be for hundreds, but you remain an independent business.  And you can operate your business as you see fit (as long as certain standards are met) and can buy or sell these rights under certain conditions defined by both law and supplier contract… but you are an independent business.

If you are a franchise then a whole other reality takes shape.  Let’s use fast food franchises as the perfect example… if you own a McDonald’s franchise, you are called the franchisee and McDonald’s corporate is the franchisor.  But you are not remotely an independent business.  When you purchase the McDonald’s franchise on the corner of here and there you are in effect purchasing the use of a brand name and trademark.  In addition, the franchisor provides a detailed formula and proven method of operating the business along with a significant amount of assistance in starting and managing the business.  You agree to operate only within this formula.  ALL operational decisions are made for you, your job is to simply follow them.  All materials come from your franchisor… EVERYTHING.  You do nothing that is not part of this formula, down to the frequency of cleaning the restrooms.  In effect you are simply an extension of the franchisor.  Let’s repeat that point again since it becomes extremely important… in effect you are simply an extension of the franchisor.   This business structure is used by a manufacturer as an efficient means to come to market… while retaining 100% control over all aspects of bringing the product to the end consumer.

Those companies which have a franchise are sometimes called product distribution franchises.  Those which are a franchise are called business format franchises.

Now let’s look at the beer distribution industry through this prism… are you or have you?  Are you a franchisee or do you have a franchise?  Historically distributors have had franchises from many suppliers.  With the dominance of Anheuser Busch over the past few decades, Three Sticks started to steer “their” distributors way from a having a franchise and towards being a franchisee… from a product distribution franchise to a business format franchise.  With the new owners of ABI, we see this process accelerate.  These “foreign corporate raiders” clearly plan to implement a world where ABI distributors ARE franchisees… with all the associated control that a franchisor has over the franchisee… in effect they are transforming ABI distributors from independent businesses to franchisees.  Look at everything ABI corporate already “provides” for their distributors.  They have already lulled many ABI distributors into accepting this evolution from having a franchise towards being a franchisee… smiling all the way to the Slaughterhouse. 

And of course by definition the power a franchisor has over the sale of a franchisee is FAR MORE than that which a manufacturer has over the holder of a franchise distribution right.  I’d guess pretty much all franchisors have the first right of refusal on any sale of their franchisee.  In a franchisee world, does it really matter if the specific location/territory is owned by a third party or the franchisor?  From any type of operational perspective, there is no difference; the specific business entity will operate exactly the same regardless.

But if one has a franchise, by what right does the primary supplier get first right of refusal on the sale of the company?  Of course they retain some control over the sale of their specific distribution rights, but of the entire company?  Trucks?  Warehouse?  Land?  Other suppliers?  That is a franchisee world.   

This brings up two points… first all you ABI distributors, do you REALLY want to become a franchisee of ABI?  Do you really understand the implications of this?  If you did, you’d be gathering the pitch forks and torches.  You are handing over your independence to your now and forever daddy.  And once done, it’s done… this is a one-way street… and you are already pretty far down the road. 

On a larger front and more importantly for the entire industry… (if foolish ABI distributors want to willingly walk into the Slaughterhouse, so be it)…

But on a larger front I ask how can an industry with a mandated three tier system be compatible with a world where distributors ARE a franchisee?  If the distribution tier is simply a 100% extension of the supplier, doesn’t the second tier in effect simply disappear? 

If the distribution tier is simply an extension of the supplier, doesn’t the second tier in effect simply disappear?

Doesn’t this completely destroy the entire reason for the design and implementation of a three tier system?  Doesn’t it simply mean there is a two tier system (at least for the ABI network).  What are the legal implications of this?  How is it legal?  Where does it lead?  And all you MillerCoors folks, don’t be too happy… success drives competitive response… so if this is very successful for ABI, MillerCoors is certain to follow.  That’s just the way it is.

Perhaps one might want to change the law to ensure it is illegal.  Do we really want to use this back-door method to dismantle the present three tier system?  How does it work where ABI distributors ARE a franchisee and all others HAVE a franchise?  What are the implications of this?  How can the “McDonald’s model” of a franchisee be compatible with a three tier system?!  I certainly don’t see it.  It destroys the entire reasoning behind a mandated three tier system.

For my simple mind, if beer distributors cease being independent businesses which have certain franchise rights, then the three tier system has no meaning. 

And what about branches?  How are supplier-owned branches compatible with a three tier system?  There is a natural conflict of interest!  Why is it considered acceptable for ABI to own branches?  If they can “become” the second tier through branches or franchisees, why can’t they “become” the retail tier and open and operate their own retail establishments?   The only reason it is “acceptable” is because this erosion was allowed in the past and it is now considered “normal”.  The distribution tier has been treated like a red-headed step-child for too long… do we really want to voluntarily continue to play this role? 

It may already be too late to change this but that doesn’t mean distributors should just meekly accept their position as the least important of the three-tier system (in fact distributors are sometimes seen as an impediment which brings no value; just protection of their own entrenched, self-serving businesses)… come-on, why don’t we just accept a two tier system and be done with it?  And if so, what makes a two tier system so desirable?  Let’s just get rid of the entire separation of tiers.  Why not?  I know of many who would like this and who could take serious advantage of it.

Or perhaps these past mistakes need to be revisited.  I ask again, if branches are OK, then why aren’t ABI package stores?  Or ABI convenience stores?  Or ABI Pub and Grub?  Or better yet… a national chain of supplier-owned “gentleman’s clubs”.  Those places sell A LOT of beer… yes, I’ve been in more than a couple ;-)  What a great way to build a brand! 

Why don’t they simply create franchisees to own and operate these businesses, thereby becoming a seamless extension of the supplier?  I don’t claim to be an attorney - one of my few bright spots ;-) but I sure can’t see why franchising retail locations (both on- and off-premise) wouldn’t be acceptable with the present thinking… tied houses here we come!    

Can you imagine the uproar if they attempted this?  Yet both are just as serious an erosion of the three tier system as the other.  Why do we allow one when not the other?  Are there reasons for a mandated three tier system or does it belong in the dustbin of history?  That’s a rather simple question… yes or no?  My future doesn’t depend on the answer to this question… does yours?

As a side note, I recently spoke to a pretty smart fella and he pointed out we all need to use the proper language in this process… we need to emphasize not just a three tier system, but an independent three tier system.  Now he’s an attorney so he is used to playing word games but this one is important.  He noted that many may claim to support the three tier system but in reality they don’t support an independent three tier system.  Remember that Mark Twain quote at the beginning of this post… the right word being the difference between the lightning and the lightning bug.  Supporting an independent three tier system is what most of us mean when we discuss the issue… three tiers all with separate, independent ownership.  But some support a three tier system and they simply mean different companies in each tier, but no necessarily different ownership, i.e. branches.  Under this thinking, one could be a loud and vocal supporter of the three tier system while at the same time owning separate businesses in all three tiers. 

This somewhat bastardizes the entire reasoning for the three tier system but logically I guess one could make the case (especially if you want to use words to hide and confuse rather than to disclose and clarify).  Therefore we need to expand our language to always include an independent three tier system.  Without that word, branches are not a violation of the three tier system.  Without that word, brewery owned retail establishments don’t violate it either.  I appreciate this insight… that word is DANG important as we fight these fights.  You might want to ask your suppliers whether they support the three tier system or an independent three tier system… ahh, that difference between the lightning and the lightning bug.

There you are distributors… go your state associations (and of course NBWA) and get in gear on ending these abominations… it’s only your and your children’s future you will be fighting for.  Or walk quietly towards the Slaughterhouse… it’s your call.

 

 

Tough Love For Craft Brewers

Since I have a knack for stating the obvious, let me state that craft beers/brewers are the prettiest girl at the dance… and they know it.  My blog has recently been discovered by a number of craft beer and craft brewer web sites… places like the Craft Brewers Association (http://brewersassociation.org )... And BeerNews (http://beernews.org) ... And Guys Drinking Beer (www.guysdrinkingbeer.com), got to love that name, says it all… and then there is Aleheads (http://aleheads.com )...

After my Who’s Your Buddy post, which can be found here, I noted a lot of visits from this place called Aleheads.  If you recall my Who’s Your Buddy post suggested that MillerCoors fully embrace the craft beer world, using their strength and “their” distributors to help this market flourish. 

I must admit I hadn’t heard of Aleheads before but I don’t generally visit beer geek websites (and I truly say beer geek as a compliment).  But please do go to these sites and you’ll find many more great craft beer sites to visit ….  I went to Aleheads to see what was up and lo and behold there was an article with my lovely picture under the headline “All Hail the Conlin”  It was a pretty good article – with a title like that how could it be anything but?  ;-)  Here is the link to the Alehead post, http://aleheads.com/2012/01/06/all-hail-the-conlin/#more-13546   

And for beer distributors it is rather insightful on what even dedicated beer fans know (or don’t know) about beer distributors and this industry… I have to admit I sent the link to that article to a few friends and most thought I had written the thing!  It’s the title-thing… my friends know me and my ego.  I have henceforth requested all who communicate with me begin their speech with a hearty “All Hail the Conlin” but have found compliance is very poor, to say the least.

Well back to these craft beer drinkers and brewers.  I communicated with a few of these folks and thought I’d directed a post more to them… to give them at least my take on the history of the beer business and why they have the opportunity to exist.  That last part might have more than a few thinking what does that mean?  Opportunity to exist?  Some probably believe this market opportunity just popped up, like most do, and not the result of an industry structure set up long ago.

Well Sherman, let’s take the Way Back Machine and see what things were like about 100 years ago in this country regarding beer and alcohol.  In a word, things were bad ;-)  Not from a consumption viewpoint, consumption was rocking and rolling.  That was the problem… there were many excesses prior to Prohibition… many.  Ken Burns in his three part piece on Prohibition called this a Nation of Drunkards... you can watch his film on your computer at this link http://www.pbs.org/kenburns/prohibition/watch-video/#id=2082675582   Pretty good stuff if you can ignore his liberal worldview… I know, I can’t keep off my political soapbox ;-) 

Anyhow, prior to Prohibition most bars/taverns were what are called “tied houses”… a tied house was a tavern or bar that was partially or totally owned by the local brewer (pretty much all brewers were local then, and there were A LOT of them).  In a tied house you could only purchase that specific brewer’s products.  Tough luck if you and your buddy liked different beers, you wouldn’t be drinking together at the same tavern… it wasn’t possible.

Competition for customers was fierce and the brewers found owning the individual taverns helped them in their search for customers.  Showing the law of unintended consequences cannot be fought, some cities raised the cost of a liquor license in the hope of stamping out what they considered were too many bars.  This move just pushed the retailers even further in the tied house direction.  This took many forms…they sold to “their” taverns on extended credit terms, provided the equipment and supplies, sometimes charging low or no interest, often paying rebates for pushing their brand or carrying it exclusively.   Or they took the whole enchilada and owned the place outright.  The focus being on maximizing sales… period.  Things like gambling and whore houses on the second floor were initially introduced as draws to sell more product.

Now these tied houses weren’t the only reason for “A Nation of Drunkards”, but they certainly did contribute to the problems… and these problems contributed to that failed experiment call Prohibition.  As it became quite evident that Prohibition was a pretty bad idea, many ideas were considered… the people had clearly spoken and they prefer legal alcohol… but what to do to ensure the pre-prohibition excesses don’t again raise their ugly head?

As a political solution the 21st Amendment to the Constitution was passed.  This amendment repealed Prohibition and also gave states the authority to regulate the production, importation, distribution, sale and consumption of alcohol beverages within their own borders.  Yeah for state’s rights!!

Another facet of this solution was the introduction of a regulatory system known as the three-tier system.  It takes its name from the regulatory feature it implemented, three separate and independent “tiers” which would be responsible for the production, distribution, and retail sale of alcohol.  Thus one tier is the brewer who manufactures the product.  Another tier is the independent distributors who warehouse and sell the product to retailers.  And the last tier those licensed retailers who sell the product to the consumer… both on-premise (where the product is consumed on site) and off-premise (where the product is taken home for consumption).

Tied houses would no longer exist in this new world.  And right there is the reason EVERY craft brewer and craft beer drinker should on a daily basis salute the three-tier system.  For without the three tier system, those brewers would not exist and therefore neither would their succulent craft beers.  Read this paragraph three times… if not for the three tier system, you folks would never have had the opportunity to exist.

Think of an alternative world where the three tier system never took hold and tied houses ruled the marketplace… assuming retail establishments matched market share, AB (now ABI) would own and operate about 50% of all bars, taverns, and restaurants in the country.  Is that freaking scary or what?!

Other major brewers would own the rest (there probably never would have been a MillerCoors organization).  In this world of tied houses, where would the vibrant, exciting craft beer business be?  It wouldn’t.  Sure a small local brewery might open and operate a bar or tavern here or there but there is no way they could get beyond that… state-wide coverage?  Not going to happen.  Broader distribution than that?  Dream on.

It is very important that one understands and appreciates that the laws and regulations introduced to further separate the tiers were all to your advantage.  In many states credit sales are not allowed… nor are consignment sales (pay me once you sell it)… brewers or distributors owning retail accounts is not allowed… the brewer or distributor can’t give “anything of value” to the retailer.

Assuming a small brewer could overcome the weight of the tied houses (and they couldn’t have), what of the impact of these other laws.  Hey Mr. Retailer, you need a draft system?  I’ll give you one if you only sell my product.  Hey Mr. Retailer, you want generous credit terms, no problemo… but of course we’d want you to focus solely on our products.  Need a new coat of paint or a new bar or free advertising on the radio or TV or Internet (or glassware or signs or lighting or…), again no problemo… but there’s that thing about those competitive beers you sell.

How would you like to be an undercapitalized small brewer (and all small businesses are undercapitalized) trying to compete against this.  It wouldn’t be a problem because you couldn’t compete against it.  The existence of almost every one of these laws is the reason you have the opportunity to exist.   That is a cold, hard fact.

Now anyone who reads my posts knows that my political beliefs lean towards conservative/libertarian.  When I first started working in this industry I somewhat scoffed at this system… I’m a small government, individual freedom type guy.  But even in my libertarian heart I have found that it works pretty darn well… I might mess with it around the edges but in general I can’t think of a better system to accomplish the goals of society in preventing pre-prohibition excesses.  In addition it is a great method to ensure taxes are paid (in the real world this was one of the factors which pushed some reluctant politicians towards supporting the 21st amendment) and to ensure product quality and consumer safety.

And from the craft brewers and craft drinkers perspective, it prepared the soil so you could flourish.  Not to beat a dead horse, but without all this the odds of you all existing today is next to nothing.  The major brewers would control everything and you would never have had the opportunity to be anything more than a brew pub… and even that would have been tough.

So what do craft brewers attempt to do the minute they enter this industry?  They attempt to seek exemptions from the laws which made their existence possible.  

  • Waaahh… I don’t want to pay the same tax rate as everyone else!  Let me ask you, who does?  I want special tax treatment since I’m small… and of course if I grow and exceed the  volume threshold, I’ll want to change it again in my favor… that’s just human nature.  I’ve been involved in start-ups and small businesses for well over 30 years… guess what, they all would like to pay a lower tax rate than their larger competitors.  I think this industry is making a profound mistake in granting special tax privileges to ANY group, especially just because today they happen to be the prettiest girl at the dance.
  • Waaahh… I don’t want to operate under these “silly” and “arcane” three-tier laws.  Like far too many, once they are where they want to be, they want to change the rules to now favor themselves.
    • If you don’t want to operate in a regulated environment, then brew root beer.  You knew this was a regulated product (as it should be… even in my libertarian heart) when you entered the industry, don’t cry about that fact after you enter it.
    • I want to self-distribute because I can’t find someone willing to distribute my product.  Bullshit!  That might have been true years back but not today… distributors have teams out looking for craft brewers to represent.  In the annuals of consumer products I doubt if any small manufacturer has EVER had such a favorable distribution and sales environment.   Here’s some tough love… go out and start a cookie company or a chip company or any consumer product and you will find getting distribution is a bitch… that’s just the way it is.  You are facing nothing special; in fact you’re not facing this at all.  No, if you really listen to what many craft brewers are truly saying, they simply don’t want to pay the margins to their distributor partners.  Money is tight, etc.  As I noted above, in ALL small business start-ups money is tight… get over it.
    • I even want to go further… I want to brew it, distribute it, and sell it to consumers too!  Forget the three tier system!!  I want to be all three tiers at once!  Why?  Because I want too.  It would be soooo much easier and I could make more money.  And if I get lucky and really take off?  Then damn the three tier system and let me race across the country.  Of course the competitive response this might drive might just take us back to the tied house days but what do I care?  I’ll have cashed out and be on the beach.  My focus is solely on MY business… not the regulatory environment which got me here… not on what my exceptions might bring about… not on anything but what I see in the mirror… and that’s me.
    • How about this all you craft brewers… why does size matter?  Why don’t we offer ABI, MillerCoors and all the big boys the same rules and regulations which you hope to operate under.  That would only seem to be fair.  What would the world look like?  What would your prospects be?  Very poor indeed is what your prospects would be.
    • Waaahh, I give my distributors great margins but they simply don’t focus enough on my brands.  First this is a complaint from every supplier in any distributorship with more than one supplier.  Every single one.  Again, this is nothing special to do with you.  Is it the supplier’s job to get more than their fair share of mind from the distributor’s sales and distribution staff.  That’s your job… quit whining about it and go do your damn job.
      • And speaking of that, what exactly do you bring to the table?  You’ve gone out and got approval for a label (I bet that whole process surprised you) but what else?  In chain driven markets do you go out and get chain approvals?  Nothing is sold through a chain unless it has been approved… what do you bring to the table here or is this something you expect your “overpaid” distributor to accomplish for you?
      • Or do you expect your distributor to basically build your brand for you?  Really?!  Tell me where else on the planet in any industry this occurs?  Oh, but you’re the prettiest girl at the dance so nothing applies to you.
      • What of your production processes?  How do you perform here?  If your distributor goes out and gets a few handles for your brew, can you get it to them when they need it?  The distributor is the retailer’s beer consultant… YOUR failures become the distributor’s failures… and each one erodes their standing as a high-quality, believable beer consultant.  Retailers might put a cup on a tap handle for a day or two waiting for the product, but not much more than that.  Can you do your job and get the product there or did the distributor’s sales rep waste all that time and energy (and credibility) getting the handle in the first place when you can’t get them the product for a repeat?  Guess what, those sales reps are only going to put up with that a few times before they quit bothering with your product.  Again, that’s just the way it is.  Is that their problem or yours?
      • What of advertising?  Is your distributor’s sign shop your primary advertising medium?  What do you bring to the table?  As a freebie (something I am loath to do) let me give you some advertising advice… table tents sell beer.  Especially new beer but they are good for all.  You can take that to the bank.  If you take nothing else from this rant, take that.

In a roundabout way let me help you understand the industry you have entered.  Long ago, in the mid-80’s a milestone was reached in the grocery business.  As an industry they made more money renting real estate than they did on the actual sale of groceries.  Here’s how the retail world thinks about things… those eyes and ears that walk into my stores each and every day are mine.  Got that?  Those folks who walk in are “mine” and if you want an opportunity to reach them, you must pay me for that opportunity.  I don’t care if your product sells or not, but you will pay me in an attempt to reach them.  The more eyes and ears I provide, the greater exposure I provide to your product, the more $$ you provide… that’s before a single product has been sold.

Now because we are a regulated industry with the three tier separation, nothing of value can be given to retailers thus we do not operate with these same rules… something which bothers the chain stores and which they’d like to change.  What would the world be like for you craft brewers if you had to pay slotting fees for every product you were lucky enough to place?  Think you are cash strapped now?!  Again, you couldn’t compete in this world if it were to be allowed to occur… your distribution would be seriously damaged as a result.  As a side note, you should all thank the National Beer Wholesalers Association (www.nbwa.org) for fighting this fight for you… in the mid-90’s there was a concerted effort by retail to allow slotting fees for this industry… and you don’t see no stinken’ slotting fees today, do you?  How many retail outlets would you not be in if there were?  How about an end-cap… those cost money my friend, for everyone but beverage alcohol folks.

Now let’s take this thinking about eyes and ears to a distributor.  What does a distributor provide to you?  First, a beer distributor will service every single licensed retail account in their territory… every single one.  In a small market this might be “only” a few hundred… in a major market this might be in the thousandsThousands of retailers become available to you in one single move.  How many eyes and ears go into these retailers each and every day?  But there is much more.  Not only does the distributor provide weekly (if not more) service to these accounts, they know the accounts intimately.  You don’t need (or want) to be in every one of these retailers… you want to be in the right retailers.  The distributor provides this knowledge and the sales execution for every one of these retailers.  That alone is not a little thing… in fact in is an incredible thing.

One could make a strong argument that you should pay distributors directly for the opportunity to reach these eyes and ears… that’s not going to happen so let’s look at how you do pay them… by providing good margins to them.  But here’s the rub… they only get these margins if your product sells.

Let’s assume you bring a margin of $10 per case to the distributor… what is your sales potential?  If they sell 1,000 cases in a year, they earn a whopping $10,000.  But that’s gross dollars… what about all the overhead?  What about the sales rep’s salary?  What about the driver’s salary?  What about the merchandiser’s salary?  And speaking of merchandisers, again in chain-driven markets, the off-premise retailers don’t refill the shelves, that’s the job of the distributor.  If you self-distribute do you think you can be in these accounts 4 – 14 times per week filling the shelves?   What about the distributor’s  profit after all these costs?  The distributor brings a hell of a lot to the table to build your brand for the chance to make a whopping $10,000 before any expenses.  And how many of your brands will sell 1,000 cases in a year in an average market?  They get the chance to make a few thousand dollars and you get the chance for them to build your brand into a powerhouse (or even a little pony) which you can then sell to ABI or MillerCoors for retirement money.  You expect a lot from a distributor.

In on-premise accounts who cleans the draft lines?  They don’t magically clean themselves… and when the bartender pulls your tap handle and a chunk of stuff which closely resembles horse snot (yes I know horse snot) comes shooting out, do you think this might affect the person who just ordered your succulent brew?  You only get one chance to lose a customer. 

Do you have the staff for on-premise nights high-lighting your products?  Do you have the staff to hang your merchandise (if you bring any to the table in the first place)?

And what of old beer?  Who takes care of that?  And when a distributor eats the cost of old beer, they are eating the full cost of it, not just their margin.  One case of old beer eats up the profits from at least 4 cases of beer… leveraging but in the wrong direction.

On a side note, speaking of old beer… all you craft brewers had better start paying a little bit more attention to the quality of your product.  I was recently in a major liquor store here in Colorado (not a chain market) and was listening to a sales rep talk to the store manager about various craft beers he was trying to sell.  The sales rep noted a craft brew on the cold shelf which was a 2009 product!  How many old six packs are out there?  How many bombers are WAY past their prime?   I’ll repeat what I said above; you only get one chance to lose a customer.  I realize there is a fine line between pushing distribution and generating a lot of old beer but I see a storm a-coming on this front.

Now some of this is simply the result of the category being so hot… and with soooo many new entrants each fighting for a very limited share of mouth.  Many craft beer- focused retailers have far too much space devoted to craft beers… it is simply not possible to keep it all fresh.  They don’t really care since they just want the foot traffic… those eyes and ears… and competitive forces drive them to have every craft brew out there.   The same liquor store I just discussed has doors and doors and doors of craft beers (that’s great)… more than triple what they have for larger domestic brews… but even just filling the cold shelves probably is more beer than their traffic can keep fresh.  Just the pack-out of these cold shelves is around 5 cases.  Don’t even get me started about bombers.  Do the math… how many brands do you have?  In how many packages?  What type of turns do you need to keep the product fresh?  In many situations it simply doesn’t work.  And ultimately the retailer doesn’t care because the distributor will be forced to eat this old product, whether this is legal or not it will happen.  That’s the real world. 

I strongly recommend craft brewers work more with their distributors to ensure product freshness (one of the many values of beer distributors).  The good name of your products depends on it.

How’s that for a long winded rant?  Craft brewers and craft beer drinkers… this is an exciting time and one with tremendous opportunities.  Don’t try to change the rules which have allowed you to come into existence.  Don’t underestimate the value your distributors bring to the table.  Definitely don’t underestimate the value of the three-tier system. 

Is it sometimes difficult to change distributors?  Sure.  Remember they are the ones probably building your brands… they aren’t putting in that effort to make a couple extra thousand dollars in a year.  They want to reap the short- and long-term rewards of their efforts too.  Can you blame them?

The beer industry, all tiers, is a great industry.  Rather than working to change the rules for your short-term advantage, instead work to make and help sell the best beer you possibly can. 

And lastly a business plug - I don’t do this stuff for free ;-)  

My strategic partner, Steve Cook, has extensive business development experience in helping suppliers bring their product to market and addressing all of the issues I discussed above (and many more).  If you are a craft brewer and would like or need a business partner to help you take your business to the next level, give me a call or email and let’s talk about how we can use our expertise to help your beers be the ones that survive and prosper.  Trust me, it is worth the time and effort… and yes the $$ too.

How’s that… first I piss you off then try to sell you something… such is life until “All Hail the Conlin”  ;-)

A Few More Observations From Littleton

First on the VERY scary front… if one were a betting person, one would bet that major war is coming to the Middle East.  The present estimates are Iran is 6 to 12 months away from a nuclear bomb… and if you take the Iranians at their word, nothing is going to stop them from this attempt.  Obama has stated that he will not allow the Iranians to get a nuclear bomb (one can debate how much his bluster matters but he has stated it many times and it is official US policy).  For the past few years the Israelis have been warning anyone who will listen that they cannot live with a nuclear-armed Iran… basically imploring the world to halt this before they have to take matters into their own hands.  I’m afraid that time is coming sooner rather than later… and no matter what actions the US takes, we will be drawn into this.

Very possibly this will be a war like the West hasn’t experienced in decades… it could turn into a religious war the likes of which the world hasn’t experienced for hundreds of years.  The Iranians are promising to bring it to our shores.  They have threatened to unleash their terrorist proxies across the globe.  With the turmoil of the Arab Spring, Israel may (almost certainly will) find itself attacked on many fronts.  Countries in the region will likely be drawn in regardless of their ruler’s desires.  The jihadists streamed into Iraq to fight the Great Satan (that’s what they call us)… the rush to exterminate the Little Satan will likely draw an even larger flood, especially if they sense this might be the opportunity to finally push the Israelis into the sea.  Israel’s next door neighbor, Egypt, just elected Islamists to over 75% of their parliament.  Does anyone really think they’re just going to sit on the sideline?  If this thing starts, the odds of it spinning out of control are very high indeed.  Do the Israelis go nuclear to protect their very existence?  Would you?  Will it matter if they do?  Or do they quietly accept extinction?  That may be the choice they face.

Regardless of steps taken, or bluster exhaled, if it happens THE PRICE OF FUEL WILL MOST ASSUREDLY ROCKET UP.  The Saudis have stated they will make up for any Iranian oil… but there will be an incredible spike in prices regardless.  And the Saudis, home to more than a couple jihadists, may find it difficult to control their own situation.  Protect yourself however you can from this coming fuel Armageddon.  Estimates are that if the Israelis attack, it happens before the fall (perhaps sooner rather than later)… and then Katy bar the door.  

And to quote Rahm Emanuel, “never let a crisis go to waste”… if this happens use the opportunity to re-set delivery systems for effective and efficient service levels across the board.  Have a plan in place NOW.  Spend some time with your management team thinking about how you can turn these events to your advantage.  Neither you nor I can stop what is coming… at least prepare your business for a very likely and very scary future… and it is only months away (if that). 

 

BETTER TRENDS AND MORE PRESSURE ON DEALS

On a more positive front, it seems like deal flow is kicking into high gear… and the multiples are heading up!  Big time.  It seems the dogs have left the porch (big and small) and if one wants to run with the pack, action is required.

Both of these trends somewhat surprise me… I wouldn’t have predicted it. (that is called honesty.  I could say I saw it all along but that simply isn’t the case).  I guess there are a number of reasons deals are jumping…

  • Taxes are of course a big deal.  If Obama wins reelection, capital gains taxes are going up at least 100%, at least another 15% lost to Big Government… a total of 30% off the top!  Regardless of the size of the deal, this takes A LOT off the top of any sale.  Heck, if Obama wins reelection, dang near every tax is going up… but that’s a story for another day ;-)
  • It seems a lot of smaller and mid-sized folks have looked at the chess board and have determined the odds are great they don’t have a long-term place on the board.  Therefore they are more amenable to an exit… especially considering the first point and the high demand side of the equation… they certainly are in demand.
  • Another MAJOR factor in driving this is the multiples being offered.  Buyers have also looked at the chess board and decided if they want the opportunity to remain, they have to get these deals done… and to give reluctant sellers a little push, the multiples are WAY up.  The days of ANY solely economic purchase are long gone… these deals are all strategic and the prices being offered reflects this.  Get use to longer payback periods, that’s just the way it is.  That or go back to the porch while the other dogs run.
  • In the ABI network specifically, there are a lot of smaller wholesalers… and whether the three points raised above or ABI’s muscle flexing, many are getting out while the getting’s good.
  • It seems many larger wholesalers (MC and ABI) are also trying to strengthen and expand their footprints versus their fellow large distribs.  Once someone gets a deal done, it’s done and a wanna-be purchaser will most likely be forever out of that specific territory.  Makes one move whether one wants to or not.

If you fit into any of these categories let Steve Cook and I help.  As a selling client once noted, you only get one chance to get the sale of your business right.  And if you’re a prospective buyer, you might (and this is a big maybe!) get more chances but the impact of some less than optimal choices will haunt you and your business for years to come.

In some cases, potential buying opportunities have been squandered due to basic human nature.

  • You never considered your options or thought they were limited.
  • You were not proactive and got “left in the dust.” – “I would have, but....”  You were still sleeping on the porch while the other dogs were long gone.
  • You didn’t get a “professional opinion.”  I can do this myself.
  • Change is scary so inertia settled in.
  • Don’t have a plan or the plan fails to consider outside forces.

“You don’t know, what you don’t know”  That is a truism which affects us all.

We don’t claim to bring any magic to the table … just honesty, integrity, objectivity and an intimate understanding of every aspect of this industry.  And the investment in our services is not as much as you might think… Bringing high value has always been the goal and our mantra.… whether it’s M&A work or operational improvement.  Bringing high value ensures our long-term success, and we don’t just talk the talk, we walk the walk.  Cook and I can help you navigate these waters.

Many deals could also involve the possibility of brands not transferring.  Whether a buyer or a seller there are strategies and methods to address this… but it is one point in time when suppliers have the maximum leverage and they most assuredly will attempt to steer the process to their liking.  Who can blame them?  Again, timing is critical!

Right now it looks like there might be a flood of deals for the rest of the year.  If this is your course, don’t delay.  One can always attempt to hurry the process along but there is one area over which we have no control… brewery approvals.  Brewery approvals are seldom timely… ABI is taking an incredibly long time to approve deals… and that’s for some “anchors” which have the green light from the highest authorities.  Don’t push this off until late in the year when there may be a backlog of approvals waiting.  If you want to do this, you’ll want to close this year.  You don’t want to be sweating bullets waiting for approvals as the clock ticks towards midnight on December 31st.  The tax implications would be profound.  And it gives suppliers the opportunity to extract an extra pound of flesh as you become more pliable as this deadline approaches.  Don’t delay if this is your path… there is nothing to be gained by waiting.

 

And lastly, you’ve got to love beer wholesalers… after my last few posts where I attempt to warn wholesalers about the existential threat posed by some ABI corporate moves I received quite a few emails (mainly from ABI distributors) which in general read something like…

“John, I agree with everything you say but I’m still looking to buy… keep me in mind”

 Gotta love it.

 

Random Thoughts From Littleton

For those who haven’t read ABI’s “Wholesaler Family 2011 Consolidation Guide”, I recommend you do so, even non-ABI distribs if you can get your hands on it.  It is certainly an interesting read and clearly shows they plan to be actively involved in driving and controlling consolidation.  Although consolidation remains “voluntary” (how could it be otherwise?) their desires are pretty obvious… fewer ABI wholesalers and more corporate control over those who remain.

ABI sure looks like they plan to be VERY active in controlling the consolidation process.  In fact they put themselves first in line for EVERY transaction which occurs… they get the first right of refusal on every deal in the country.  Right now I’d be a little surprised if they allowed any transaction to occur in a major market without taking the thing for themselves… you know how important those branches are for territories which are unprofitable ;-)  The only thing which may prevent this is ABI’s top-dog bonus program… they may not want to accumulate any additional debt until their big payday.   Just a guess on my part… for some reason Brito and Dave don’t call me with regular updates… but I will accept the call when it comes.

What does this first right of refusal mean to values?  Nothing good if you’re a seller.  A first right of refusal on any property generally makes the property less saleable.  A potential purchaser has to rightly ask themselves whether it is worth the cost in dollars and time to go through the entire purchase process with the knowledge that some other party only has to match the offer to get the prize… their cost is zero… the wannabe purchaser’s cost could easily be in the hundreds of thousands dollars, weeks (if not months) of time.  Just lining up financing is more than a small task and it isn’t free.  You only move forward if you are fairly certain the holder of the first right of refusal doesn’t plan to execute their right.   Does ABI plan to execute their rights? If they did on just a few deals, what impact would it have on ALL future ones?   I’d hazard a guess the impact could be substantial.   If I were a wholesaler in ANY state, I’d be racing to take this “right” away from them… in whatever manner I could. But then again, I’m a trouble-maker.

This “right” gives ABI tremendous power over wholesalers.   You want to make an acquisition? First question, are you an “anchor” wholesaler for ABI?  For those who haven’t read the consolidation guide, a major factor in being ‘allowed” to grow your territory is your alignment with ABI. i.e. do you carry other brands or are you on the 100% share of mind ranch?  This is an incredible club to have over the distributor’s head… play the game as we tell you (who’s your daddy again?) or you ain’t going to be making any stinken’ ABI acquisitions.  This isn’t a game of tiddlywinks… this is power, pure and simple.  Distributors need to do something to change this equation, otherwise the brewery (your daddy) has the power… you don’t… and that’s that.

A recent ABI transaction illustrates this power and its effect on transactions… Mr. Seller decided to exit.  He struck a deal with Mr. Buyer.  Mr. Buyer was an adjacent ABI distributor, in good standing, etc. But for whatever reason, ABI decided Mr. Buyer isn’t who they desire so they “redirect” the transaction to another purchaser.  So, Mr. Original Buyer forfeited all the time, effort, and $$ it took to get the deal done and is shown in none-to-subtle terms that he has no long-term future in the ABI network.  Mr. Redirected Buyer got the transaction (for almost no effort) but probably owes his soul to the company store (there’s that song again).   “Who’s his daddy?” is now not in doubt. 

Short-term it was good for Mr. Redirected Buyer but long-term?  It gets even worse… for whatever reason (whether ABI or Mr. Redirected Buyer) someone didn’t want to pay the price Mr. Original Buyer was willing to pay, so Mr. Seller took a haircut and sold to Mr. Redirected Buyer at a LOWER price than originally negotiated.  Both Mr. Original Buyer and Mr. Seller took it in the shorts.   This was a true shocker since Mr. Seller accepted this lower price.

Why would Mr. Seller accept this?  Suppliers generally retain the right for a redirection as long as it is under the same price and terms as the original deal… the seller isn’t damaged and Mr. Original Buyer has no standing to sue since he never owned the thing.   Did Mr. Seller simply roll over and accept the haircut just to get the deal done?  Or was there more?  Did ABI flex their legal & financial muscle and force the thing? 

ABI has attorneys on staff… lawsuits don’t really have an out-of-pocket expense for them (at least in the beginning).  Not so for a distributor…  business lawsuits are REALLY expensive (you’ll spend a couple hundred thousand so fast it will make your head spin).   Litigation also could take a great deal of time, longer if appealed (and they very often are).

Mr. Seller faced a couple less-than-preferred options.

1. Accept the haircut, curse and walk away (I do not know the amount of the haircut but was told it was a pretty big haircut relative to the deal).

2. Fight ABI… suing and being tied up in the courts for YEARS? Probably spend at least a million dollars (very likely more).  And what does he fight for?  He has already agreed to sell his business (see the consolidation guide) so for all those years he has no distributorship to fund the fight… they just might stop shipping to him.  He would then have no distributorship AND no money because he never consummated a sale.  Sure he might “win” in the end but at what cost?  Don’t think it can happen to you?   Think again.

I have noted in the past that I had the unpleasant experience of dealing with venture capitalists… I received more than my fair share of kicks in the groin but I did learn a few lessons… one being contracts quite often can be close to worthless.  You also must have the desire AND the financial means to enforce the contract… I have noted in the past that for 99% of beer wholesalers, you can take their handshake to the bank.  Unfortunately that’s not the way it is in a lot of the world out there.  In the world of pure power business, those inches and inches of contract might in effect be worthless firewood.  How long will it take to win?  How much will it cost to win?  What are the odds of not winning?  Do I have the financial and emotional resources to fight for years and years?  And what does “winning” look like? (sorry Charlie Sheen)  Are you going to spend years (decades?), a million or two in real out-of-pocket $$, probably lose the income from your business during this time all in the hope of enforcing a contract which might gain you a million or two?  Even if you might win double or triple that?  Is it worth it?  Yeah we all know about Maris (but how many years did that go on?).

One of my learning groin kicks was that people sign contracts all the time which they have no intention of honoring. It may shock naïve school girls like myself, but that is the way many play the game.  Welcome to that world.

In summary, I must take this opportunity to pass along my own spanking to far too many wholesalers out there. I’ve been telling distributors FOR YEARS if they wanted to get out of the business, sooner was better than later. I believe my direct quote was… either take your chips off the table and run to the door or prepare your business (and your industry) for long-term survival. Either one is acceptable… nothing else is. I noted there was little if any upside in staying (unless you planned to realistically stay for the long-haul… and market dynamics would allow it) and TREMENDOUS downside… were the odds more that good things would happen or bad things?  Well that future is now staring you in the face.  It’s not too late to exit at a great multiple but I have no idea how long this will be true.  And no, that’s not just a ploy to get you to engage our brokerage services - although if you are selling you should ;-)… it’s the truth and worthy of your consideration!!

It might be that the door has already closed… it is obvious it is beginning to close.  Wake up!  I have no idea how ABI plans to proceed on their control of transactions but the evidence isn’t good.  And MillerCoors distributors are potentially far from immune for this reduction in value.  And that’s just the risk from your suppliers… what about the Costco’s of the world?   Do you think chain grocery and c-stores have had an epiphany and forever abandoned their desires for central warehousing and shipping direct?   Is the world poised for a change where the protection of the three tier system is now everyone’s goal?   Is the world going to race back to 1980 and allow beer distributors to go about their business as they always have?  So where’s the upside anywhere one looks?

Right now, either find a willing buyer or prepare your business and perhaps even more importantly your industry for long-term survival.   For you larger distributorships, don’t be lulled into the false comfort that you can position yourself to be the last one in the line walking into the Slaughterhouse, and they’ll close the door before you get there… that is a pretty big bet and the implications of losing it are not very comforting.   Fight for your industry… it is under assault! When you’re in an existential fight (that’s a fight for your very existence), take the directive from a past world leader…

"Not One Step Back"

Who’s Your Buddy?

I’ve spent the last couple posts discussing the evolving relationship between ABI corporate and ABI distributors.  A clash of paradigms indeed.  But what of MillerCoors corporate?  Some observers think MillerCoors wants to follow the ABI corporate path… an attempt to be “their” distributor’s daddy.  Whether this is true or not, I’ll give my free advice nonetheless…

First let’s take a stroll down memory lane.  Years back, before the Miller Coors merger there was unhappiness among some of the independently consolidated Miller Coors distributors (most distributors had already become Miller Coors by this time).  Distributors felt they were getting unfairly financially squeezed by both. … some were more upset with Miller… some more with Coors.

There was little joy in Whoville for these Miller Coors distributors, except for some joy generated from a very surprising supplier… good ol’ Pabst.  Now Pabst at this time was resource poor.  Its brands were what they were and the trends were what they were.  Its power over distributors was what it was… they weren’t going to be anyone’s daddy.  But you know what?  During this period Pabst was incredibly distributor-friendly.  Rather than squeezing pennies from their distributors, they brought pretty good margins.  Rather than attempting to use power over their distributors, they instead were the distributor’s friend.  They actually lived the “what can we do to help?” attitude every time they walked into the warehouse.  And they even meant it!  Note that again, they actually listened and saw their role as helping the distributor “sell more beer” in whatever manner they could.  They knew they couldn’t beat up their distributors… and even if they could have, to what end?

Now I’m not so naïve to believe they did this out of the kindness of their hearts… who knows, if they had the power perhaps they would have made “a bunch of foreign corporate raiders” seem like girl scouts in comparison.  But they didn’t have the power and instead they played the hand they were dealt… and they played it pretty darn well.  When Miller or Coors personnel walked into the warehouse the grinding of the teeth started… when Pabst folks showed up they were actually welcomed.  Usually by the entire organization!  Look at Pabst trends from this period.  This “Who’s Your Buddy” strategy had a distinct positive impact on Pabst and their distributors… and the good feelings (and all the positives associated with them) lasted quite some time. 

So what does this warm and fuzzy tale have to do with MillerCoors corporate?  I offer the following guidance and perspective as they decide which path to walk… hopefully they will not attempt to emulate the “who’s your daddy” power play of ABI and instead continue to create their own paradigm, the “who’s your buddy” strategy.

  1. Rather than attempting to limit and control “other” craft beer product, instead embrace them allHelp your distributors become the craft brewer’s best friend.  Help your distributors become THE desired distributor for every craft beer on the planet.  ABI corporate, in their insidious genius, is actively working to limit their distributor’s ability to attract other suppliers.  Go in exactly the opposite direction and work to strengthen your distributors.  Of course you want to build your brands but I would argue you AND your distributors are stronger and better positioned to do this if you embrace the hottest category in the entire industry.  Use your technology and power to assist your distributors in this arena, not work to limit them.  Help your distributors gain state-wide coverage… heck perhaps nation-wide!  Put out the welcome sign for Yuengling and everybody else… “hello friend, you are welcome and desired here”

Let ABI corporate plant their seeds of fear, you should continue planting seeds of partnership and goodwill.  You’ve started down this path with the MillerCoors Distributor Doctrine and other moves.  Don’t change directions and go for the Ring of Power just because you hear its siren song.

As with most things in life, it is possible to create a virtuous circle where one good thing generates another good thing which generates another good thing, etc., etc.  Let’s assume MillerCoor corporate follows the buddy strategy… where will the bulk of the craft beer end up?  With MillerCoors distributors.  What strategic advantages can MillerCoors corporate gain from this?

  • Their distributors become the marketplace leaders, probably in units but definitely in gross profit dollars.  This allows tremendous leverage at retail… look at AB over the past 30 years and how they used their market strength to their advantage.
  • After the shake-out and consolidation in crafts (it happens in all new, dynamic markets), where will the “winners” most likely be?  In the MillerCoors distributor network.  This sure makes an acquisition or two more likely for MillerCoors corporate.  On the other side, if ABI wants to make an acquisition of one of these winners, THEY can gain from the acquisition but at the distributor-level their distributors are screwed.  The brands will in all likelihood already reside in the MillerCoors network.  And in a whole lot of the country, forcing a distributor to divest a brand is far from an easy task (impossible in many states)… to say nothing of the multiples it will take to get this done… 5X to 10X gross profit.  Either way, the MillerCoors distributor network AND corporate are sitting in the best possible position.  The lay of the land will make an ABI acquisition in this space more difficult and will limit the synergies the acquisition generates.  Just the opposite for MillerCoors.  This is a tremendous barrier for ABI to overcome.

The gross profit these highly desired brands bring to the distributor could generate more bottom-line profits for MillerCoors corporate without impacting the distributor’s power at retail – I might be warm and fuzzy but I do live in the real world ;-)  You can be quite honest about this… you help the distributor in attracting and managing these brands and in return you get a little more $$.  Win/Win.  And not “managing” these brands by keeping them down… managing the brands to give them all the greatest possibility of success.  Let the consumer decide.

Helping expand the entire craft beer segment will only help your efforts in this category.  This doesn’t hurt Blue Moon or the 10th and Blake stuff, it helps them all.   Again, win/win.  Look at any new, growing category… helping grow the category ALWAYS helps the present participants, always.

 “Focus” on maximizing the selling opportunity… ah that “F” word.  I can hear some of the corporate people repeating it like a mantra… “but the distributors will lose focus on our brands”.  To this I ask why?  Is it not the field people’s job to get more than their fair share of mind from a distributor and grow share.  That’s job #1 of every supplier.  Aren’t your people up to the task?  If so, why?  I’ve met more than a few MillerCoors field people and from what I see, I think your people are more than up for the task. 

The MillerCoors distribution network has years of perfecting the art of distributing multiple brands from multiple suppliers.  They are well prepared to execute on anything which comes their way.  You will win more being their buddies than attempting to show them who their daddy’s are.

For distributor and supplier alike, leverage this power at retail.  Become the retailer’s #1 beer consultant.  Do what is best for the retailer, knowing that sooner or later this will work out to the advantage of all.  Rid yourself of self-serving tactics, do retailers really need 15 linear feet of Bud Light? 

Consider expanding and leveraging the “who’s your buddy strategy” for FMBs, energy drinks, whatever.  The power play of “who’s your daddy” will in all likelihood create tremendous opportunity for MillerCoors corporate and distributor alike.

MillerCoors competes in a duopoly and due to your competitors “insidious genius” you currently have a huge tactical advantage staring you in the face… hopefully, you will stay the course and not choose to follow the power play of your competitor and avoid reaping the very real negative fall-out.  Don’t create more opportunities for the huge wine and spirits houses to become permanent, big-time players in this distribution market.  Follow the “who’s your buddy strategy” for both your distributor network and every craft brewer out there.  Do you fight your natural instinct to grab for power?…  Or instead leverage your size and embrace (in every sense of the word) a win/win partnership with the entire craft beer world. 

As I’ve noted before, I know what choice I would make.  Now of course everything I’ve just said works for ABI corporate too… but I won’t hold my breath waiting for them to change their stripes.  Sooner or later I predict they will change course… but only after multiple kicks to the groin (I expect them to be slow learners, especially for something they don’t want to learn).  But until they do learn this lesson, MillerCoors corporate and distributors should put on their pointy boots and, as they say in the country, make hay while the sun shines.

I guess the only question is whether MillerCoors can take advantage of this gift from ABI and deliver a true win/win strategy.  Or will they take the other path and play a self-serving and ultimately futile game of “who’s your daddy”?  Time will tell.

Who's Your Daddy?

A conflict of paradigms, or to put it in my usual professional manner… who’s your daddy?  For all you ABI distributors, that question has been answered… or at least ABI corporate is trying to answer it for you… THEY ARE.  Do you see the Slaughterhouse doors right there in front of you?  ‘Cause if you don’t, you aren’t looking. 

It is truly amazing the paradigm that has been established here.  For those in need of a refresher, the Free Dictionary describes paradigm as:

A set of assumptions, concepts, values, and practices that constitutes a way of viewing reality for the community that shares them

It’s basically a framework through which you view the world.  As an example, one paradigm was once the world is flat.  It of course was replaced by the reality-based paradigm, the earth is round.  This is an important point… paradigms can and do change.  New facts change paradigms… Newtonian physics to relativity.  Personal growth and observation can change paradigms… one’s political beliefs might have at one time been big government socialism but based on real-world feedback they evolve to small government libertarianism.

So what is the specific paradigm I am discussing?  The paradigm that independent businesses which distribute ABI (and in the past AB) products are by definition THEIR distributors.  Miller and Coors never really had this paradigm. 

Let us take a mental field trip and think about the evolution of the beer wholesaling industry.  Anheuser Busch wasn’t always dominant.  There are more than a few distributors who long ago decided to go with Stroh or MisterBrau (or someone) and dumped AB.  But over time AB did gain dominance and in this process it created the paradigm… AB distributors were part and parcel THEIRS.  Ownership was separate but that was about it.  Remember that paradigms are mental frameworks… for all non-science based paradigms; they exist because we allow them to exist… and over time this paradigm took hold, pushed aggressively by AB corporate.  Miller and Coors would have probably also liked to create this paradigm but their market situation was much different than AB’s.

In all honesty more than a few AB wholesalers actually enjoyed this paradigm.  They didn’t have to think about their businesses… they didn’t have to plan too much… they just sat back and let good ol’ AB tell them what to do and it worked out pretty well for them.  Well if you haven’t noticed, good ol’ AB has been put out to pasture and the new sheriff in town has very different plans for you… to say nothing of a rapidly changing consumer market which doesn’t necessarily favor the offerings of ABI.

But don’t feel too bad, AB corporate and more importantly Three Sticks, were very good at creating and propagating their desired paradigm.  They did it “upstream” too.  Although the extended Busch family owned only a fraction of the shares of Anheuser Busch, the stock market allowed them to run the thing as their own private family business.  It was incredible to behold.

Note the concept of creating and propagating their paradigm.  Well as time went by and the marketplace changed…

  • Miller and Coors distributors became one in most markets, thereby increasing their financial strength and impact at retail.  For years AB distributors laughed all the way to the bank as the Miller and Coors guys fought over “their” remaining share.  Being a 60 share distributor competing against 25 share and 15 share wholesalers is MUCH different than competing against a single 40 share distributor.
  • A lot of very high profit product within a more diverse portfolio was also included in this 40 share… over time this made the MillerCoors distributor the gross profit dollar leader in many markets.   To top it off in many markets the AB distributor sold A LOT of less profitable sub-premium product.
  • The MillerCoors distributor continued to get A LOT better and became much more competitive.   The net result was in many markets the MillerCoors distributor organization was much better at being a true multi-brand distributor than their AB competitor.  As I remind both, it’s not that the MillerCoors people were inherently superior… they simply faced a reality of becoming better or dying… and this has a tendency to focus one’s mind ;-)
  • The growth of imports and even more importantly, the craft beer segment continued year after year… by now I hope it has ended any confused thinking that this is some sort of short-term fad.  And with AB’s paradigm, the vast majority of this product went to the MillerCoors distributor.  Thereby increasing their power at retail in the only really “hot” segment of the beer category… and greatly increasing their bottom-line.
  • And expanding beyond beer, the energy drink category (and others) was also putting down pretty good roots during this time… again feeding the MillerCoors distributors.

These and other factors slowly challenged the validity of the AB desired paradigm… that “they are your daddy” and know best.  Over time many AB wholesalers broke from this paradigm and guess what?  The sky didn’t fall.  The world didn’t collapse.  They got a little grief from AB (in some cases more than a little) but they went about their business and many became more competitive, great multi-brand distributors.  And this momentum gained.  It made tremendous strategic sense from the AB distributor’s perspective… leverage your already impressive power at retail to gain the best brands available.  Some leveraged this even further, using the power of an entire state’s AB distributor network to pick up brands.  The paradigm that AB distributors were THEIRS for the simple fact of distributing their product was quickly being put to rest.

Ahhh, but not so fast.  Along comes InBev and now we have ABI.  Whether they are a bunch of “foreign corporate raiders” or not, they are much different from the past.  From various ABI corporate statements, it becomes clear they would like to take over a fair amount of their distribution.

They also don’t really like this new evolving distributor paradigm and much prefer the old, who’s your daddy paradigm.  Thus the recent meeting in Dallas where they yanked pretty hard on the ol’ leash.  As thousands have learned over thousands years, once you allow someone to be your daddy, they don’t easily relinquish this power.  Especially those who come from a very power-centric culture.

So now the question to the ABI distributor is what paradigm do you choose to live by?  Is the world flat or round?  Are you an independent business or is ABI your daddy?  Remember, YOU choose to allow this paradigm to exist.  You allowed it to exist in the past and you allow it to exist today.  It might have made sense in the past but the past is just that, the past.  It might have made sense when 1 out of 4 beers consumed in the country was a Budweiser… there will never be a brand like that again.  The consumer has profoundly changed since then.  The rear view mirror isn’t where you need to be looking; you need to be looking at what is coming at you from the future.  InBev’s (and now ABI’s) history of growing brands is rather poor to say the least.  Sure they can lower the price of Stella but can they build a brand?

ABI corporate’s goals are clear… the paradigm remains the same - you wholesalers are THEIRS.  They are your daddy… they control you… and the new ABI corporate sure looks like it intends to make that point very clear… for some reason an old country song just popped into my head as I write this… “I owe my soul to the company store.”  

But does this make sense from a distributor, or more importantly from a market place perspective?  As markets continue to change, the businesses which serve them evolve (whether one likes it or not)… the net result being something better for our consumer goods industry.  Better systems, more consumer choices all designed to capture market share by “giving the consumer what they want when they want it.”  Unfortunately, the progress made during the ABI transition and what appeared to be a very positive paradigm shift for the once stagnant AB wholesaler network (which didn’t know how to sell high-end products and was finally gaining steam and becoming true multi-brand distributors) might be for naught. Unless, unless you stay the course.

For the ABI distributor network we believe it is the time to continue your paradigm change.

Today’s beverage wholesalers are smarter, stronger and know their business.  Why?  They needed to do so to stay competitive.  What was a WIN/WIN paradigm for the previous generations has become a WIN/LOSE narcissistic supplier driven paradigm for the current ABI network.

Perhaps the more rational paradigm is that you are independent businesses which distribute beer and beverage products… and yes, ABI is a significant part of that business (in some cases the only part) but that still doesn’t mean you are THEIRS.  You are YOURS and you should act accordingly.  Of course you should do a great job for ABI products… you should do that for all your suppliers…  I wrote in the last post that Carlos and company come from a “big man” culture… one big boss and almost everyone else waits for the next command; no independent consult with those who are affected the most… I think in many ways that’s the definition of a “who’s your daddy” culture.   You are not an equal partner, but rather an entity subservient to your daddy’s wishes. 

  • Do you really want to voluntarily put that leash back on?
  • Will you stay the course or will you chase the Golden Ring of being the Anchor Wholesaler?  An “Anchor” wholesaler who ABI won’t identify… thus giving everyone the “chance” to chase the Golden Ring.  Insidious genius ;-)
  • Will you sell off brands and ignore new ones as your MillcrCoor competitor dances to the bank?  
  • Will you in effect force the wine and spirits houses to become a permanent big-time player in the beer distribution world?  

Most of you are in this for the long haul… the folks who want to be your daddy now probably won’t be around in 10 years… you’d better think long and hard about the long-term strategic implications of what you are doing.  And you are discovering… once you allow that someone to be your daddy, they don’t easily relinquish this control over you.  To continue my use of offensive metaphors, it’s getting to nut cutting time and you had better decide which side of that fence you want to be on.

This quote is perhaps overused but it does capture the reality one sometimes faces…

First they came for the Socialists, and I did not speak out --
Because I was not a Socialist.

Then they came for the Trade Unionists, and I did not speak out --
Because I was not a Trade Unionist.

Then they came for the Jews, and I did not speak out --
Because I was not a Jew.

Then they came for me -- and there was no one left to speak for me.

-Pastor Martin Niemöller-

Currying favor in the hope that you can position yourself to be the last one to walk up the chute in the Slaughterhouse is simply a flawed strategy… as many have discovered.

And what of consolidation?  For those looking to sell, there is good news on that front… at least a little.  Since the Dallas meeting I know of a couple of unsolicited offers… these unsolicited offers weren’t “let’s start talking” offers but “I want to purchase you now” offers.  These offers were based on strategy… and from a strictly financial viewpoint these offers were absolute no brainers, it would take a couple decades to earn from operations the after-tax proceeds that the seller could pocket upon sale.  I tip my hat to those making the offers… they stepped to the plate and did what is necessary to ensure their vision of the future is the one that occurs.

For the rest who plan to stay I have a couple suggestions…

  1. Work to strengthen state franchise laws on many fronts.  The more corporate can limit who can purchase, the more they depress the market price.  And they more they control your lives.  Work to cut these strings which they use to make you THEIR distributor.  Outlaw branch operations… they are the camel’s nose under the tent… they are long-term assaults on the entire industry.  And to any ABI corporate folks reading this… don’t worry about those “unprofitable” territories which “require” a branch operation… I can have willing and qualified buyers lined up today to purchase any you care to sell… so stop with the bull.
  2. Don’t forget your true long-term partners are your fellow distributors, even the competitor down the street.  I’ve quoted it before and I’ll repeat it again, Benjamin Franklin’s famous admonition during the signing of the Declaration of Independence…

          We must all hang together, or assuredly we shall all hang separately.

Follow the example of Three Sticks and create the paradigm you desire… or let a bunch of bankers who have no interest in you or the US beer distribution industry become your daddy and see how that works out.  I know which choice I would make.

 

 

Bitch slapped in Dallas

“Nothing like getting bitch slapped on a Monday morning.”  That’s how one ABI distributor described the start of their recent national distributor sales meeting… another, “My great granddad started this business and I’ll be damned it I’m going to let a bunch of foreign corporate raiders tell me how to run it.”  Whee-doggie, sounds like a grand time in Dallas!  “Never saw so many pissed off people in one place before.”   And another, “I’ve never walked out of a meeting before feeling true fear of my supplier”

Trust me… Benj and Harry kind of sugar-coated the degree of anger at that Monday meeting… they have to sometimes walk softly as to keep their sources… but I have no such limits so full speed ahead.

5 years ago who would have thought AB distributors would be where they are today?!  MillerCoors distributors have had a pretty good run over the past few years, in many markets becoming the gross profit dollar leaders.  With the new ABI directive back towards exclusivity (which certainly helped the MC climb), the MillerCoors folks will be dancing around their desks… tomorrow and for years to come.  The value of these folks just went up.

When I first heard this was coming down the pike I thought… “this is jaw droppingly stupid”… but of course I view the world through a distributor’s eyes… and for the ABI distributor it is “jaw droppingly stupid”… but for ABI corporate maybe not.

For those who are unaware, ABI doesn’t believe it is getting adequate focus on their brands from their wholesaler network… I guess in their view the reason Bud and Bud Light are down is because their wholesalers aren’t performing… they’re losing focus as they chase other brands and suppliers.  Sorry corporate guys, you’re barking up the wrong tree if you believe that.  Look at Coors Light… it is sold and distributed by wholesalers with MANY other brands but somehow it is growing.

Therefore ABI wants to head back to the “100% share of mind” ranch for their distribs.  They use other words but that’s the gist of their desires.  And anyone audacious enough to compete against an ABI branch operation with non-ABI brands is an insidious swine or some such thing ;-)  Ditto for selling products outside your territory against other ABI distribs.  For those who have forgotten or missed it the first time, please read my little ditty called “The Slaughterhouse… a Modern Fable” which you can find by clicking here to get a better understanding of how this game is played… and if you are not careful, your role in the game.  Right now I think they are trying to line you all up in the loading chute ;-)  I certainly wouldn’t voluntarily walk onto the killing floor… metaphorically speaking of course.

So where to start?  Let’s just jump in and see what floats to the surface.  First, I don’t know of any ABI distributors who are planning on selling off brands… but there will probably be a few – give me a call and Steve Cook and I can help you maximize the price.

But for most that ship has already sailed.  For those who are willing to sell brands, they will most likely find a willing buyer in their MC competitor… who will laugh all the way to the bank.

How about Yuengling?  Whether corporate likes it or not, Yuengling gets AT LEAST 50% of their volume out of ABI’s hide.  Now if that’s going to happen regardless, the ABI distrib is MUCH better off with it in their house rather than MC – sorry all my MC clients, just talking strategy.  If it’s in the ABI house they will trade 50% of the Yuengling volume from their other brands and gain 50% from their competition.  If Yuengling “only” gains 5 share, the ABI house gains 2.5 share… not too shabby.  But if it goes to the MC guy, the ABI distributor losses 2.5 share… a 5 share difference in the two outcomes.  What if Yuengling gains 8 share?  And guess what… the Bud handle is generally the most vulnerable handle out there (if you work the streets you know this to be true)… I know the wholesaler’s sales reps would much rather be able to keep that handle in their house rather than losing it to the competition.  But from ABI’s perspective maybe this will make the distributor work that much harder in an attempt to regain this lost share.

And what of providing state-wide coverage for a supplier?  This has been shown time and time again a better strategy for obtaining quality brands than a market-by-market approach.  In the ABI network the Tennessee folks were the first to pull this off with none other than Yuengling.  The strength of state-wide coverage is indisputable… it is much more in line with what many smaller suppliers desire.  But here’s where the ABI corporate strategy becomes genius… insidious perhaps, but genius none the less.   

With this one move ABI corporate has made the possibility of a state-wide ABI distributor network push for a supplier very, very unlikely.  Why?  In all likelihood there will be AT LEAST one wholesaler who won’t want to buck ABI… for whatever reason.  They may be chasing that carrot that they will be the chosen anchor wholesaler who will be approved as the chosen consolidator.  I think a metaphor for this dream is captured by the cartoon strip Peanuts where Lucy continually pulls the football away from Charlie Brown’s attempted kick… only to have Charlie Brown attempt it again and again.  But of course someone will be this consolidator… perhaps this one time you will be the one to get the carrot.  Talk about betting on the come.  This course of action will require a lot of trust from the wholesaler… and sadly, trust of ABI corporate at this point in time is very low.  That’s true for wholesalers AND the bulk of ABI employees.

Others won’t join a state-wide push simply out of fear of retaliation.  Whatever their reasons for not participating, it will be very difficult to put together a state-wide ABI distributor coalition in any of the continental states.  The MC network will be dancing to the bank.  That’s just the way it will be.  If the remainder of the ABI distributors in a state want to forge ahead, they will have to be creative in filling the hole left by the non-participating distrib.  And of course ABI has already stated their feelings on distributors who go into other’s territory… it will take some gutsy adjacent ABI wholesalers to do this.  Or the ABI folks will have to consider having the MC distributor (or someone) fill this hole.  Add these all up and in one single move, ABI has just fundamentally changed the landscape for attracting new brands… in my opinion to the severe detriment of ABI wholesalers and to the extreme benefit of MC wholesalers.  But as I noted above, this may be jaw droppingly stupid from a distributor’s viewpoint, it is insidious genius from corporate.  You ABI folks WILL focus on ABI brands since corporate’s actions have severely limited your ability to attract other suppliers.  You’ll have few other choices.  Freaking genius. 

And of course any state where ABI has a branch operation is similarly screwed.  How do you fill this hole from a potential supplier’s viewpoint?  Anyone audacious enough to compete against a branch operation is an insidious swine, or some such thing ;-)  Looks like my MC clients will be pocketing a lot more gross profit dollars as suppliers will again find they have few other places to go.  I think the wine and spirits guys will also win as they find more and more desirable beer brands coming their way.  Is this good for the beer business?  Does ABI corporate give a damn?   Why should they?  Their motto has changed from “we’re in the business of making friends” and creating a Win/Win with our business partners to “we’re in the business of making money” and we Win even if you Lose.

Although it won’t change a thing, I’d like to recount my early experiences in consulting to the beer distribution business.  ABI corporate is concerned about FOCUS, let me tell you about focus.  When I first started in this business in the mid-80’s a lot of my first jobs were working with Stroh, Pabst, Heileman, etc. distributors who were fighting for their lives.  I remember one owner who noted he was afraid to bring me in since he didn’t want to scare his employees with how bad things might be.  As I told him, your employees knew you were in trouble probably before you did.  Your folks aren’t stupid… a driver used to put off 500 cases and now he’s putting off 250… he, and everyone in the company knew.  They had EXTREME focus… every employee knew everyone’s jobs were on the line.  Although it was very difficult to keep morale up, every employee had extreme focus.  Yet where are these distributors today?  They were sold.  There is a hell of a lot more to it than focus.  And anyone who doesn’t believe that an AB distributor bleeds Bud doesn’t know distributors.  Or at least they used to bleed Bud.  But ultimately the consumer must want to purchase what you distribute… as a wise beerman once told me, the last 12 inches are the consumers.  THEY have to be the ones who reach into the cold box (or across the bar) and grab the product.

As I freely note, I am a mercenary who works for whoever is paying me for that week or to complete a transaction.  So in the beer world I’ve worked with Miller folks, Coors folks, MillerCoors folks, and of course ABI folks.  And from an unbiased, don’t have a dog in this fight, perspective… AB had the most loyal, dedicated network of wholesalers in the entire country.  This loyalty was an amazing thing to behold.  THIS LOYALTY WAS BASED ON TRUST; a trust that both parties would do what’s right to succeed. AB distribs would do things that were clearly not in their short-term interests simply because they trusted AB (and AB make most of them rich).  I think the entire beer industry used to stand back in awe at this loyalty… and strength.  AB wants 100% distribution?  The wholesalers would click their heels, salute, and go get it done.  Simple as that.  In a short period of time ABI corporate has thrown this trust in the trash can… or are in the process of making the throw ;-)  I believe it is a profound mistake... but again, I view things from a distributor’s perspective.  And once loyalty is lost, it will not be easy to re-earn wholesaler’s trust.  But what if loyalty is over-rated?

Loyalty (trust) or fear (lack of trust)?  Both can be used to motivate someone over the short-term but only loyalty will work for the long-haul.  ABI corporate clearly thinks fear is a better choice.  I think this is a reflection of culture.  In a past business I traveled extensively in Mexico focusing on high-tech businesses.  It was an amazing, eye-opening experience.  I’d walk into a company with 100, 200 professional employees and only the boss would have Internet connectivity!  This was the norm.  NO ONE else would have it.  In the rare occurrence where employees had some access, there would be a communal table (much like a library but with less privacy) where a few computers set offering Internet access.  It is a reflection of their culture… note to us, everyone doesn’t think like we do.  It is not a collaborative, warm and fuzzy management style… it is a “big man” culture where there is one big boss and almost everyone else is a peon.  You can see it clearly in Latin American companies, in their politics, in most areas of life.  Carlos and company come from the “big man” culture.  And they treat their employees (and their distributors) from this cultural perspective.  This isn’t a moral thing, it’s just the way it is.

As I understand it, few ABI employees below Peacock knew of this new push toward exclusivity and the planned tone of this meeting until the actual distributor meeting!  Obviously these folk’s opinions were neither asked nor desired.  I find that shocking but this is clearly not an American-type culture.  ABI corporate is an international company run by a few Brazilians.  Guess what?  That ain’t going to change, whether you or I like it or not.  And to top it off… the very, very top of this company is awaiting a tremendous payoff (is it $1 billion or $2 billion?)… I’d guess walk away money for all of them.  Their idea of long-term (if it even exists) is MUCH different than a distributor’s idea of long-term.  Their great granddaddy didn’t start their company and they frankly don’t give a damn about your granddaddy.

And the insidious genius of their plan follows this culture… they don’t have to convince the majority of you… they only have to co-op a few with dreams of being the chosen distributor… or a few with fear… or a branch here and there… and it accomplishes their goals regardless of what the majority of the ABI distributors want.  Jaw droppingly stupid or genius… depends on which end of the stick you are holding.  And what are you distributors going to do about it?  You have very little power in this game… “here’s where the line forms for those who want to sell… otherwise shut the hell up and do what we tell you.”  ABI is dismantling the strongest, most loyal distributor network the country has probably ever seen (sorry MC folks but you know it has been the truth… note the past tense).  And once that toothpaste is out of the tube, it is impossible to put it back.  The ABI distribution network is going to be left tattered and torn while a handful of corporate big dogs pocket an amazing amount of money.  I can guarantee you your granddaddy is rolling in his grave.  Amazing times. 

My gosh, think of markets where craft beers have a 30 share.  Under the new ABI push, the ABI distributor will get what, maybe 5 share?!  Maybe.  That leaves 25 share for their MillerCoors competitor!  25 share of VERY high margin product.  That is a HUGE profit pool.  But I guess it will force the ABI distributor to focus on ABI products… what other choice will they have?

What about Yuengling as they continue their expansion?  Are they going to be comfortable going with ABI distribs when they know the strong feelings of their major supplier… and if push comes to shove, is the wholesaler going to go with a supplier who is perhaps 5% of their business… or the supplier who is 95% of their business?  Not a tough call.

The same is true with all new brands as they examine their distribution choices… it just got A LOT harder for ABI distributors to make their case for new brands and suppliers.  And the genius of the ABI corporate move is that it ultimately doesn’t matter what an individual ABI distributor says… the damage is done… their actions will limit distributor choices regardless.  Jaw droppingly stupid or insidious genius?

I’ll write more of this in a future post (or hire Steve Cook or me to help you design and build it) but my advice to the MillerCoors folks is to prepare your companies for this new future… you’ll have to develop an organizational structure which allows you to fully sell and support ALL of these new brands and suppliers.  It sure looks like many will be coming your way.  Don’t give them any excuses and force them into a wine and spirit house.  Grab the opportunity that insidious genius provides you.  State-wide associations?  Get them up and running NOW.  The next year or two is going to shape the beer distribution world like never before… as I’ve said before, grab the future by the throat and ensure the future that comes is the one you desire. 

And for ABI distributors… yikes!  Yikes indeed.

This thing is getting a little long so we’ll end it now and continue in the next post… a Morgan Stanley analyst thinks ABI corporate can “source” $1 billion from wholesalers in what he calls a “win-win” for both corporate and distributors.  He is missing one thing… culture.  Why in the world would he just assume ABI corporate desires a win-win?  He’s putting his cultural bias on top of a culture which doesn’t think like he does.  A fatal mistake…