THE%20EVOLVING%20DISTRIBUTOR%20LANDSCAPE!

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THE EVOLVING DISTRIBUTOR LANDSCAPE!
Independent Beverage Group independentbeveragegroup.com
Joe Thompson 843 384-0828 ibg_at_hargray.com Jeanette Foley Corporate 125 Old Plantation Way Fayetteville, GA 30214 770 487-0277 ibg_at_hargray.com Todd Arnold 4370 Crestone Cir. Broomfield, CO 80023 303 410-7748 toddarnold88_at_msn.com
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• THE EVOLVING DISTRIBUTOR LANDSCAPE!
• Overview
• Suppliers
• Distributors
• Consolidation
• Mega Distributors
• Risk
• Conclusion

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I. Overview

• Volume
• Per Capita Consumption Beer
• Per Capita Consumption Absolute Alcohol

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Per Capita Consumption - BeerIn Gallons
2005 2011 Actual
2005 - 2011 6.9 decrease
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Per Capita Consumption Absolute AlcoholIn
Gallons
Beer (-5.1)
Spirits (20.8)
Wine (30.0)
Alcohol Industry Problem?
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I. Overview

• Profitability
• Historic high.
• Spread between highest/lowest profit has never
  been wider.
• Mega distributor 2.00 per c/e
• Traditional low SOM (gt35) .50 per c/e and
  lower.
• Margin
• Above premium growth.
• Aggressive price increases.
• Margin enhancement/maximization.
• Conclusion We are losing drinkers but profits
  are great.

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II. Suppliers

• Big 2
• Global view.
• Financially driven.
• No longer family owned (Pete Coors is exception).
• 2 tier experience.
• Reduced competitive behavior.
• Less innovative.
• Changing lately.
• Great at cost cutting.
• Selling built up equity in Mega Brands.

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II. Suppliers

• Big 2
• Already accessing distributor margins.
• Aggressive branch acquisitions.
• Slowly eroding margins at distributor level (new
  packages, new brands, discounting).
• Somewhat hidden by other factors.
• Pass along cost to middle tier (POS, sports
  venues, truck paints, per case).
• Acquire or develop craft brands.
• Be aggressive in below craft, above premium
  category.
• Hurts craft suppliers, helps their margin,
  offsets volume losses.

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II. Suppliers

• Imports.
• Solid marketing.
• Crown consistent, Dos Equis creative.
• Good price gap management.
• Crown is king maker on many transactions.
• Increasing marketing funds.
• Stella vs. Heineken.
• Crafts.
• Survivors will be solid.
• Must continually reinvent themselves.
• Boston Beer.
• Aggressive legislative influence/agenda.
• Other (PABs, pouches, malt liquors, private
  labels).
• Playing on the edges.

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III. Distributors

• Fewer distributors.
• Lowering cost.
• Consolidation.
• Changing service levels.
• Improving technology.
• Vertique.
• Routing software.
• GPS tracking.
• Higher revenue.
• Less discounting.
• Pushing back more on suppliers suggestions.
• Selling consumers on trading up.
• Mega distributors beginning to use logistics
  skill set to improve sales.
• Good at finding pennies/nickels.

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III. Distributors

• Expanding portfolios.
• Enormous increase in SKUs (MC network 250 to
  550 in last 5 years).
• New categories.
• Energy drinks, pouches, cider.
• New brands, flavors, packages.
• Becoming beverage distributors vs. beer
  distributors.
• Columbia vs. Reyes.
• More and more suppliers express their discontent.
• Are distributors earning the margin they receive?
• No fear of termination at distributor level.
• Slows elimination of underperformers.
• Suppliers sales people hesitant to cite poor
  performance.
• Suppliers more aggressive during consolidation.
• Resentment/anger/jealously/envy.

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IV. Consolidation

• Accelerating pace.
• Prices are higher than ever.
• Interest rates as low as they can go.
• Capital gains taxes lower than ever.
• 15 year depreciation of distribution rights
  available.
• Availability of Big Money.
• Meritage influence (Private Equity).
• 5.5 to 6.25 times cash flow.
• Buy off balance sheet.

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IV. Consolidation

• Future value determined by
• Profit.
• Interest rates.
• Taxes.
• Footprint strategies (competition for your brands
  or business).
• Mega.
• Brewery influenced (ownership/partner/bank).
• ABI.
• MC/HOBO.
• Legislative/legal challenge.

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Number of Distributors

• By end of 2012 IBG estimates ABI will have 2 more
  branches. ABI branches centralizing functions
  (horizontal shared services).
• IBG predicts that by 2020, 200 to 225 will do
  90 of volume.

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Macro Brands vs. Micro Brands(Logistics
distributor vs. brand builder)
Macro (-8.8), Micro (8.0). Mike Mazzoni is
right. Mega brands are old. We cant get younger,
neither can they!
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Own/Control with no time restrictions. Limited
partner Limited Partner and duration. Loan
Only. No ownership or loan. ??
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ABI
ABI
ABI
ABI
ABI
ABI
Jefferies
Hand
ABI
ABI
Hensley
Dobbs
Ben E. Keith
Nau
Lamantia
ABI Mega Distributors
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WA
CoHo
ME
MT
ND
Taylor
VT
MN
OR
NH
MA
ID
WI
NY
SD
Clay
HoBo
WY
RI
MI
CT
Reyes
PA
Ingram
NJ
IA
NE
NV
Clay
OH
Monarch
CO
DE
IN
IL
UT
MC
MD
WV
Reyes
VA
KS
MO
CA
KY
AZ
NC
Goldring / Moffat
Reyes
TN
Clay
OK
Glazer
AR
SC
Reyes
NM
United
HoBo
GA
Andrews
MS
AL
TX
Keg 1
Goldring / Moffat
LA
Reyes
Glazer
Taylor
FL
Gold Coast
Andrews
MC Mega Distributors
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WASHINGTON
NORTH
MAINE
MONTANA
MINNESOTA
DAKOTA
VT
OREGON
NH
WISCONSIN
MASS
SOUTH
IDAHO
DAKOTA
NEW YORK
MICHIGAN
WYOMING
RI
CONN
IOWA
PENN
NEW
NEBRASKA
JERSEY
NEVADA
OHIO
DELAWARE
INDIANA
UTAH
ILLINOIS
COLORADO
MARYLAND
WV
KANSAS
VIRGINIA
MISSOURI
KENTUCKY
CALIFORNIA
NORTH
CAROLINA
TENNESSEE
ARIZONA
ARKANSAS
OKLAHOMA
SOUTH
CAROLINA
NEW MEXICO
MISS
GEORGIA
ALABAMA
TEXAS
FLORIDA
LOUISIANA
IBG Transactions
ALASKA
HAWAII
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V. Mega Distributors(Big part of the future)

• Macro numbers.
• Economic trends of mega distributor
  consolidation.
• Mega distributors have lower cost (14 - 18 of
  sales).
• Gross profit is higher due to pricing power (24
  - 28).
• Profits have risen from an historical level of
  .50-1.00 to 1.50-2.25 profit per CE 2012. AB
  distributors at .55 at the 2005 Dallas
  convention.
• Mega distributors are more efficient, may or may
  not be more effective. Size / scale does matter
  in lowering cost and raising margins.
• Mega distributors get traditional 3-tier model
  margins with logistics cost.

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V. Mega Distributors

• Performance.
• Mega distributors have changed traditional 3-tier
  model.
• No local ownership, management that can be fired,
  more profitable, more logistics oriented,
  different brand building process, outside
  resources/skills.
• Reduce cost by centralizing functions (horizontal
  shared services).
• Tel-sell, payroll, inventory management, H.R.,
  payables, receivables, routing.
• Different service to lower volume accounts,
  minimum drop size, aggressive tel-sell, better
  technology.
• 90/10 rule, not 80/20 is new reality at
  retail/supplier.
• W/S and soft drinks system very consolidated.
• Historical beer distribution system unique. Mega
  distributors can help middle tier improve

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V. Mega Distributors

• Performance.
• Effective service to high volume / chains.
• Merchandising, headquarter calls, entertainment,
  ipads.
• Different service to very low accounts.
• Example 2,400 accounts 500 do 96 of volume,
  1,900 do 4 of volume.
• 1-2 underperformance?
• Do the math 200 x 2 4M bbls.
• Has this hurt industry volume? Image?
• Do suppliers do the same thing?
• Urban markets vs. other markets.

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V. Mega Distributors

• Are Mega distributors good partners?
• Take cost out of the traditional 3-tier system.
• Tough negotiators with suppliers because of other
  options.
• Push back attitude.
• Changing balance of power
• Professional management.
• Increased influence on pricing.
• What happens when financial times get tough?
  (Price wars, fuel cost escalates, volume loses,
  etc.).
• Diverse background with different skill sets.

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V. Mega Distributors

• Middle tier neighborhood image difficult to
  maintain.
• New underdogs are craft brewers.
• Energetic, risk takers, creative, growing,
  represent change.
• Hiring people locally gives them more influence.
• Fewer distributors due to consolidation.
• More craft suppliers due to expansion.

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V. Mega Distributors

• Strained relationships, but are they to blame?.
• Overall distributor performance is different not
  necessarily worse.
• Less time to sell.
• More efficient, more options, less dependent.
• 25 margins are for brand building. 15 margins
  are for logistics.
• Many suppliers feel they are paying more, getting
  less.
• Opportunity to change model for the better.
• Use current financial performance to improve
  overall system.

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V. Mega Distributors

• Strained relationships, but are they to blame?.
• Are suppliers losing control?
• What is too big?
• Crafts getting aggressive.
• Carve out laws.
• Self distribution.
• Work together to solve small retailer service.
• Internet orders, separate sales forces, allocate
  more resources to selling, unique upcharged
  delivery.
• Improve local consumer marketing to offset
  difference.

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IV. Mega Distributors

• Impact on Value.
• How does this affect value of non-mega
  distributors within footprint?
• Mega distributor/supplier branch may be only
  buyer.
• Skilled negotiators.
• Can wait for distributors within their footprint
  circumstances to change.
• You could bring contiguous value.
• What if outside footprint?
• No real need to worry or rush.
• Mini Mega distributors evolving.

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IV. Mega Distributors

• Impact on Value.
• Significantly affect day to day decisions of
  smaller distributors within footprint.
• Sell in your territory.
• Get new brands / sub-distribute.
• Influence pricing.
• Influence marketing (stadiums, arenas, per
  case).
• Significant influence with supplier / retailer.
• Small distributors lose independence/control.

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V. Mega Distributors

• Reduced competition, no fear of repercussion and
  protective state laws lead to finger pointing and
  conflict.
• Resentment is growing.
• More cost conscience. Changing historic beer
  service behavior.
• We need to use Mega Distributor skills to adjust
  selling and marketing capacity of 3 tier system.
• Continue to be logistics oriented.
• 15 operating cost as a of sales target.
• Need for leadership focused on building a better
  model.

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V. Mega Distributors

• FOLLOW THE MONEY
• Distributor Money.
• AB Branches.
• Big Family Money (Reyes, Ben E. Keith, Ingram,
  Dobbs)
• ABI Chicago/MC HOBO Meritage.
• Next???

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VI. Middle Tier Risk

• Could lose legislative influence as,
• Craft influence increasing in legislative.
• More aggressive legal challenges.
• Internal division among distributors increasing.
• Challenges to franchise protection at state level
  increasing.
• Cash laws.
• Carve out laws.
• Self distribution.

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VI. Middle Tier Risk

• State tax increases.
• WA state increase (1.10 per c/e Big 2, nothing
  craft).
• Wine and spirits attacking.
• Availability, price, marketing.
• Lose equivalency argument.
• Now 18/bbl., if passed, 49/bbl.
• Beers with ABV from 3 to 55.
• Craft Brewers with distilleries on site.
• Growing division between suppliers and
  distributors on expectations.

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VII. Conclusion

• The Traditional 3-tier model has changed as
  Mega Distributors have grown.
• Should utilize Mega Distributors unique skills to
  improve distributor performance.
• Doing nothing to implement solutions and address
  differences is hurting everyone.
• Great time to buy, great time to sell.
• We are growing profits but losing drinkers.
• Consolidation is accelerating. Prices are higher.