Beer Business Unplugged

In the spring of 2012, I was in Milwaukee to roll out Krombacher.  While visiting accounts with one of the salesmen, we stopped at the Pabst Brewery, which had closed in 1997.  Developers were in the process of turning the old brewery into a hotel, retail, and residential property.  The hospitality building, executive offices and retail outlet had been purchased earlier, and the old hospitality bar was open to the public for meetings, weddings and receptions.  The building itself had not changed in years and it was like walking back in time.  The owner was there and allowed us to walk through the executive offices, which were connected to the bar.  It was like a time-warp, with nothing changed since 1997, including the desks, that still had papers on them, and ash trays, complete with cigarette butts.  It was as if time stopped 15 years ago.

Leaving the Pabst, we drove past the old Schlitz Brewery, also converted to offices and used for school administration buildings.  Another sad sight for me as I had been in both of these breweries when they were at, or near their peak in sales.

Similarly, the two San Antonio breweries, Lone Star, with its Buckhorn Hall of Horns; and Pearl Brewing, with the Jersey Lilly, have also been transformed from breweries into retail and residential spaces.  Jax Brewery in New Orleans, is now a retail center; and the Falstaff brewery is mostly empty.  Henry Weinhard’s in Portland; Olympia in Tumwater; and Rainer in downtown Seattle have all been closed for years, some transformed into offices and retail, others just sitting empty.

There are many other stories of closed breweries around the country. What happened to them?  All of these breweries were in business in 1970s, most still around in 1980s, but are now gone.  If there truly is one point in time when the industry changed, one could point to the purchase of the Miller Brewing Co by Philip Morris…the day the beer world changed forever.  With the advent of PM’s millions in marketing, and the awaking of AB to their challenge, one could attribute the death of these breweries to these two factors.

Was the growth of AB, Miller and Coors from their marketing investment? Or was it from the collapse of the other breweries, leaving millions of barrels of volume up for grabs?  The logical answer is: both. But what would have happened had those breweries not made the mistakes they did and survived?

Since InBev bought AB, their share of market continues to slip.  In recent Nielsen scans, AB in down -5.6% in volume in the last four weeks, and down -4.3% in dollars.  MillerCoors is down -4.3% in volume, too.  Yet crafts are on fire, growing near +15% this year, on top of double digit growth in 2012 and 2011.  Maybe crafts are taking advantage of what AB and MC did to the regionals years ago by sourcing their growth from the volume losses of AB and MC.  As they say, “the sun don’t shine on the same ol’dogs rear end every day!”

When Diageo was formed after acquiring the Seagram brands, they established a wholesaler network in the US by approaching all the top wine and spirit houses.  Almost every large house was invited to present their RFP.  At the time, I was the Director of Malts for Glazer’s, a Brown Forman house. Republic had most of the Diageo brands.  I was asked to submit a small part on the beer model…  a mere three slides.  I sat in on several of the RFP meetings discussing various strategies and long-term planning.  Glazer’s felt that with Diageo’s strength, and long-term marketing support, they would be a better partner then Brown Forman for Glazer’s future.

This was during the time when Glazer’s was going full-bore into building a beer portfolio, both with crafts/imports and by purchasing MC houses.  During these meetings, the COO stated that the main reason the company was pursuing the beer model so aggressively was due to the franchise protection provide by most of the states.  As he stated “Glazer’s can’t get terminated!”

I read recently that two industry consultants, brokers for the wine and spirit houses, John O’Connor and Sean McLaren, stated, “franchise protection laws make up over half the value of a beer distributor.”  This is based on the fact W&S houses sell for  three to five times EBITDA verses beer, which goes for six to ten times.  This statement by the consultants was made even as Reyes paid a much higher premium for Windy City. For them, it was all about the cost of entry into the craft segment.  Glazer’s did the same when the opportunity presented itself.  Both  Glazer’s and Reyes considered it part of the “cost of getting in.”

B schools that have studied various industries, including beer, and have concluded that a beer distributor business model is the least likely to fail.  Franchise protection aside, consider the following:  beer distributors have almost no receivables, (it’s all cash); they enjoy exclusive territories by contract (no dueling and no Subway on every corner); the law provides three tier protection; national, regional and local advertising and media support are provided by major suppliers; chain programing is available for both on and off premise accounts; distributors have growing margins; no franchise fees; training; and, of course, political presences nationally and locally.

So then the question becomes, just how much value does franchise protection bring to a beer distributor?  All things being equal, would you, if offered, take a AB or MC house under a time bound contract without franchise protection that is based upon certain sales and execution goals?  Even if it was for only five years, I think most people would do so. Wine and Spirit people do.  Longer contracts for less established and supported brands might make sense to do so also.

Franchise protection laws play a huge part of current value of beer houses.  How the laws will plays out in the future is uncertain, but as to whether or not it’s 50% of beer houses value is based on knowing whom to ask.

When the Houston Astrodome first opened it quickly became the largest on premise keg account in Texas.  It was the home field for both the Astros and the Oilers, and numerous special events including concerts, motorcycle races, bowl games, etc.  When I was at Lone Star Brewing, the month sales number for the Astrodome was around 600 1/2bbls.

Since Jerry Jones bought the Cowboys, Miller Lite has been the official beer of Texas Stadium and now, Cowboy Stadium.  With Miller Lite signage everywhere, it’s almost impossible to find any other brand in the stadium.  In fact, at the Super Bowl a couple of years ago, the Miller Lite order for the game was 26,000 cases.  It was the last game in which Coors Light was the official beer of the NFL.  Coors had a hospitality tent outside of the stadium where they entertained and served their beer, but that was about the only presence the brand had at the stadium.

While beer has long been available in the professional sporting world, it is just now heading into the college stadiums.  There are about 13 division l schools that sell beer in their stadiums.  Universities are always looking for a new revenue stream, and beer is one which can easily be added.  At the University of West Virginia, $550,000 in beer sales was added to their bottom line during their last year in the Big East Conference.  The University of Texas, on the other hand, doesn’t sell beer, and $500,000 dollars in a budget which brings in $103+ million seems small.  The UT stadium, however,  is two and a half times larger than the WVU stadium.  The math is easy.  On the other hand, at the University of Minnesota, sales of wine and beer were $900,000 last year and after deducting for expenses, UM lost $15,000.  Officials tout the loss to an over-staffing issue, but only time will tell.

The pressure on college athletics to drive revenue dictates that beer sales will eventually happen in these football and basketball stadiums.  The question is, how, or will, the crafts be able to participate in this venue, which will provide a great opportunity to get brands sampled and exposed.

The alumni center at the University of Texas is across the street from the stadium and does serve beer on game days.  You can buy, Coors Light, Bud Light, Miller Lite, and Shiner Bock.  Beer is also available in the stadium, but only in the private suites.

Austin is currently a hot bed of crafts, new and established brands.  Local bars and restaurants do what they can to support these products. And the locals love their craft beers. Given that the University of Texas will soon sell beer in the stadium, will any of these local crafts be in the mix?  Like the Cowboys and the Texans, the brand rights will be up for bid, with the winner getting signage and priority placements all over the stadium.  At best, fans might find their local brands offered at a small corner bar, but not in the stadium.  You’ll be able to tailgate drinking Fireman 4, while buying Bud Light inside.

Marketing for crafts will remain grassroots for some time, in fact, this is what gives crafts the romantic touch they currently enjoy.  Meantime, as to the stadium rights, Darrell Royal, storied UT Hall of Fame coach said, “You dance with the one who brung you.”

As a young District Sales Manager for Lone Star Brewing Co., my district included West Texas with many miles to cover and a multitude of distributors on whom to call.  One was a medium size Miller/Lone Star/Pearl whose owner was in college at the same university, at the same time as I.  During my visits to this west Texas town, he and I became friends, hunted and played golf.  One night, while barbecuing, this friend brought up his desire to purchase a small distributor about 10 miles from his home market.  He told me he would pay ten thousand dollars for it (they only sold about a pallet a month, a very tiny operation) and he did not care to whom he paid the money.  That statement caught me a little off guard and it did not sit well with me.

When Coors was only available in the western states, their draft policy was to not split handles.  It was either exclusively Coors, or no Coors draft.  At the same time in Louisiana, it was legal to sell draft boxes to on premise accounts.  The account would pay five dollars extra per keg until the box was paid off.  Again, for the distributor, it was an exclusive account.

Exclusive accounts were almost always driven by market share.  At the time, I was in Kansas with a 60%+ share of market, AB and Schlitz each had less than 10 draft accounts.  As Coors entered new states and markets they had to change their policy of exclusivity.

The pressure to obtain and maintain draft handles grew to the point that many retailers leveraged that pressure to their advantage.  Free kegs, glassware, discounts, p-o-s, and even furniture (including the dispensing boxes) were some of the many requests certain retailers added to the product on tap.  Menu prints, credit card charges, in store media sponsorships, then on to third party funding stepping outside of traditional channels all have been, and are still used.

Franchise laws today not only protect the distributor from termination, but such laws have also allowed distributors to divorce themselves from under-the-table payments to retail since the inception of  consolidation at the middle tier.  Now there may only be two (three) distributors in the market with all the brands.  Therefore, all the pressure to obtain taps falls squarely on the shoulders of the vendor.  Field sales teams are usually bonuses on market performance.  I know one vendor who requires all field people to sell in two new accounts each week!  The pressure on these people (mostly young) to make numbers could easily result in questionable practices.

Today’s crafts face similar problems; consider the revolving handles.  When we introduced Krombacher in DFW we ran (with the distributor’s participation) kick off draft incentive and achieved a number of key accounts.  Within six weeks, Krombacher was no longer in many of those places, served only as the beer of the month on the revolving handles.  It cost both of us quite a bit of budget money.  Now, was it good for the brand exposure?  The next quarter sales indicated it wasn’t.

As more and more crafts enter the market, the pressure will increase on the breweries from investors, distributors, and retailers.  How the craft market handles this pressure will be telling.  As General Eisenhower once said, “the supreme quality for leadership is unquestionably integrity!”

Back in the mid 1970′s when Coors entered South Texas, San Antonio was awarded four distributorships.  They as a group, had to compete against one Budweiser house, one Schlitz house, one Pearl house, one Lone Star house and one Falstaff house (true, still around then).  Because Coors had divided up the market into the four houses, individually they were all smaller than their competitors making it difficult for them to compete.  Obviously, it didn’t take many years to force the consolidation of the four into one house.  Remember they were exclusive, too.

At that time, most competing houses were exclusive, too.  A Schlitz house might have an import or two, but no other domestics.  In Texas, Pearl houses usually had Miller, or they had Falstaff, especially in small towns.  Some distributors had Lone Star/Pearl/Jax, but that was in markets where sales weren’t great.  Consolidation wasn’t an issue then and the “big” boys usually made things difficult if you were taking on additional brands.  In fact, a number of established distributors sold their line when Coors came in as a condition of appointment.  Sometimes it worked out, and sometimes it didn’t.  In fact, Barry Andrews of Andrews Distributing benefited when the Miller wholesaler in Corpus Christi sold the brand when he received the Coors brand.  Coors never took off, but Barry was able to buy the Miller operation about the time the brand exploded.  Timing is everything.

Windy City, a craft/import house in Chicago, recently sold out to Reyes after some dramatic growth. This is the latest example of a specialty house selling out for a premium.  It wasn’t many years ago, that some of these failed just like the early craft brewers did.  Some were very successful, including CR Goodman, Fresh, and Little Guy Distributing and, of course, Click.  Just as there are many new craft breweries opening, you will see many new distributors opening soon, too.  It’s where the opportunity abounds.

Last week, at the Miller/Coors convention, a comment was made regarding how the craft breweries are taking advantage of the MC distribution system, by using the distribution system to get the these brands delivered.  These comments, along with ABI’s program of Anchor wholesalers, could be the beginning of a push back on new brands and a return to exclusive houses now that both ABI and MC are offering products in hot categories that they did have in the past.

Along with this thinking, is the movement of some crafts to charge wholesalers for the rights for distribution.  This would create a whole new approach.  First, if this happened it would involve more government restrictions. Selling these rights might be subject to franchising laws similar to those of  McDonald’s, Taco Bell, Subway, etc.  In theory, one would think that if the wholesaler paid for the rights said wholesaler would put more effort into selling the product.  When I was running Warsteiner, in almost every case, when a wholesaler acquired the brand, it took years for the new wholesaler to show sales increases.

Heavy investment by the wholesaler in incentives, promotions, truck paints, people, etc. could be considered in some ways as buying a brand, however, the question really is, are we seeing a shift in the distribution model with the beginnings of a return to exclusivity of houses to selling distribution rights?  If we are then, be careful, remember, the buyer always knows better than the seller.