THE DISTRIBUTION SYSTEM
OF 2015!
Independent Beverage Group
independentbeveragegroup.com
Joe Thompson
(843) 384-0828
ibg@hargray.com
Jeanette Foley
Corporate
125 Old Plantation Way
Fayetteville, GA 30214
(770) 487-0277
ibg@hargray.com
Todd Arnold
4370 Crestone Cir.
Broomfield, CO 80023
(303) 410-7748
toddarnold88@msn.com
Gary Styles
(916) 791-3505
9637 Swan Lake Dr.
Granite, CA 95746
gstyles1@me.com
Agenda
I.
Industry Overview
II.
Supplier Changes
III. Consolidation
IV. Perils of Not Eliminating Redundant Cost
V.
Distribution Systems of 2015!
VI. Summary
I. Industry Overview
•
Volume
–
–
Volume is down and it will be for awhile.
Why?
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•
•
•
•
•
•
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Leadership
Life cycles of mega brands (6)
Pricing
Marketing
Mega / non-mega confusion
Competition for other beverages accelerating
– Energy Drinks, Water, Vitamin Water, Coffee, Health Food Beverages.
Competition for disposable income increasing.
– Lottery, Cigarettes, Gas.
Duopoly influence
•
Characteristics of a duopoly.
– Aggressive pricing, reduced service, self-focused, less innovation, protect status
quo.
» Are we less competitive?
TWO TEXTBOOK PRODUCT LIFE CYCLE CURVES
Introduction
Growth
Maturity
Decline
Budweiser
Standard Product Life Cycle
I. Industry Overview
 Margins
 Stable (but)
 Costs
 Starting to escalate.
 Profits
 Good but no longer growing.
I. Industry Overview
• Conclusion
– Volume will decline.
– Profits will begin to leak slowly.
– The duopoly environment is having a predictable effect on
our industry.
• We are becoming less competitive.
– Many products are aggressively going after the shrinking
disposable income of consumers.
• Consumers are harder to reach with historical beer marketing.
• Mega brands have not effectively adjusted to new marketing
methods.
II. Supplier Changes
 ABI
 ABI network is going non-exclusive.
 If ABI does nothing they will lose retail performance.
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Hard for distributors to adjust from old regime to new.
ABI focused on savings.
Distributors focused on other brands.
ABI / distributors are out of sync.
The original concern about InBev acquisition – “ will they be brand
builders”?
II. Supplier Changes
• MillerCoors
– Focused on savings.
– Culture issues still exist.
– Distributors somewhat apprehensive.
The question prior to merger was “can they turn around Lite and
if yes, can they effectively market 2 premium light beers
together.”
• Craft / Imports / Regionals
– Looking at ABI distributors more aggressively.
Conclusion: 80% of volume focused on saving money.
•
Old model: volume, brand building. New model: margin, short-term
profit.
III. Consolidation
Views Of Risk
Buyers see
Sellers see
Less Risk
Emotion
More Risk
Economics
20%++ gap in perceived value difference between seller and buyer.
Sellers looking backwards, buyers looking forward.
Less aggressive buyers
Intense emotion / litigation
Slowdown in reducing redundant cost through consolidation.
III. Consolidation
• ABI consolidation.
– Branches in several major markets.
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New York, Boston, San Diego, Los Angeles, Miami, Denver.
Will buy more major markets when possible.
Extra opportunity for markets contiguous to branches.
– Economics more difficult than MC.
•
•
Stand alone / horizontal vs. vertical.
Buying 50% SOM (stand alone) vs. putting together 25% / 25% (vertical).
– This problem creates an opportunity for ABI to seek synergies with
another system.
– Mega distributor trend vs. culture of control creates potential
conflict.
– More sellers now than in past.
•
•
Lost emotional hook associated with previous administration.
Fear of unknown.
III. Consolidation
• MC current consolidation.
– 75% combined.
• Several others in play.
• IBG predicts 90% in next 3 years.
– Price / size of remaining non-consolidated distributors an
issue.
• NY, Ft. Worth, Austin, Philadelphia, Minneapolis, Las Vegas.
– Low fruit already picked.
• People left are able to stay.
– Mega distributors to buy / merge mega distributors soon.
III. Consolidation
• What will cause consolidation to accelerate?
– Pain
• Less profit (volume, margin, cost).
• Pressure from suppliers.
• Costco winning in WA.
• Increase in taxes.
– Pleasure
• Industry volume growth (craft, import, regionals).
• Buyers willing to pay more.
• Cost of money remains low (double edged sword).
III. Consolidation
• Conclusion.
– Process of consolidation is more difficult, time consuming
and dynamic than ever. Will only get harder moving
forward.
• Secondary suppliers often hold trump card.
– Should eliminate redundant costs vs. cutting service or
brand building activities.
– We are an industry of turtles, not rabbits but this needs to
change.
• We live in a world of speed.
IV. Perils of Not Eliminating
Redundant Cost
 Retail distribution systems are getting better.
 Box stores and some supermarkets can warehouse and
deliver beer for 12% - 15% (not rotate and merchandise).
 Wal Mart puts product on their shelves @ 10% less than
its closest competitor.
 They obsessively measure cost.
 Are any retail distribution systems more efficient than
our current 3-tier model at logistics?
 Retail initiatives.
 7-11 Southern Cal test (fewer trucks, night delivery, private
label).
 Costco.
 If middle tier becomes logistics oriented and loses brand
building skills why does it deserve 25% margin?
IV. Perils of Not Eliminating
Redundant Cost
 Status quo will be impossible to maintain much longer.
 Decide whether we want to be logistics systems, brand
builders or something in-between.
 7 to 10 point spread between operating cost and gross sales?
 Consumers want lower prices.
 Suppliers want fewer distributors.
 Government wants more money.
 Environmental and social concerns will become more
prevalent (carbon footprint, traffic congestion, DUI,
ignition locks, .08).
V. Distribution Systems of 2015!
• ABI / Pepsi or MC / Coke combinations would increase the
distribution profit pool substantially.
– Way to dramatically improve ABI distribution efficiency.
• Reduce operating cost to less than 15% quickly.
• Enhanced retail channel distribution flexibility.
• Catch up fast on MC mega distributors.
– ABI / Pepsi currently working together.
– MC / Coke.
• Cultural issues.
– Currently working in Wyoming, Mississippi, Kentucky, Utah,
Iowa, New Mexico, North Carolina. Previously worked in New
York.
– IBG prediction: ABI / Pepsi will will work together more and
MC and Coke will fight to prevent any combination.
V. Distribution Systems of 2015!
 One distributor per market.
 Emotional reaction by suppliers.
 Anti-trust potential.
 Economic reality in some markets.
 Rural
 Major markets?
 SOM imbalance.
 Separate selling from warehouse and delivery.
 Currently working in CO, AZ, MN.
V. Distribution Systems of 2015!
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Mergers
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More prevalent but difficult to accomplish.
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Extended time line to complete.
Solves money problem.
Particularly important for ABI.
Recent significant mergers.
– Two in North Carolina.
– Tennessee.
– San Diego.
– Portland.
Berkshire Hathaway / Empire Distributing.
– Burlington Northern Rail.
– McClane Trucking.
–
Name comes up a lot.
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Relationship with InBev board members.
V. Distribution Systems of 2015!
• Shared services.
– Theoretically good but difficult to get done.
– Start small.
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Idaho.
• Wine / spirits / beer.
– Republic National / Crescent Crown.
– Glazer’s.
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Currently 13M cases of beer.
– Northwest has unique approach.
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Young’s / Columbia
Odom / Southern.
• Conclusion: the 3-tier model of today is poised for significant change.
– Will evolve in many unique ways.
VI. Summary
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Industry volume will continue to decline.
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Suppliers/distributors are both doing the same thing and blaming each other.
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Consolidation will accelerate when pain / pleasure increases.
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Develop a more competitive approach.
Distribution system needs new vision to balance logistics and brand building.
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With beer distributors it takes pain and pleasure.
Suppliers / distributors need to adjust duopoly attitude.
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Taking cost out aggressively.
Unique combinations will emerge faster.
Consumers have more options and are seeking them.
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Pricing has been too aggressive particularly at below premium.
Independent Beverage
Group