Dec 112018
 

Just a couple of weeks ago, the University of North Carolina announced it had hired Mack Brown as its new head football coach.  Coach Brown had previously been the head coach at NC, but left that position for a 10-year stint to the University of Texas. While at UT, Brown experienced a great deal of success, including winning a national championship in 2005.

After the announcement that Brown would return to the University of North Carolina, a sportswriter wrote a column in which he explained why Brown had left the university and why he, Brown, had now decided to returned.  During those years at NC, Coach Brown had built the school’s football program into a powerhouse, even in competition for a conference title.  Brown was twice undefeated with 10-win-seasons but had no success beating Florida State University which had runs for the national championship.

The thrust of the writer’s article was that Coach Brown had improved the football program to the point that fans, alumni, and administrators had unrealistic views of where that program should be, given that the university did not provide the resources to NC that were available to Florida State and Alabama.  Coach Brown bolted to Texas and the NC program has struggled since.

During the years I ran Warsteiner Importers Agency, our ultimate goal was to grow the brand to the size of Beck’s, a competing import from Germany.  Beck’s, at that point, was almost two and a half times larger in the U.S. than Warsteiner.  We were, however, able to make some progress until the end of 2008. At that time Warsteiner decided to increase prices and cut marketing and staff.

Despite the cutbacks, the talk continued as to why Warsteiner had to play “second fiddle” to Becks.  While I supported the goal to grow Warsteiner to the size of Becks, I reiterated the point that I needed the financial investment to reach those volumes.  The brewery’s response, however, was always the same: if you want that support, generate it internally in the U.S.

Ten years later, Warsteiner is still half of what it was in 2008, this time, however, with more internal issues than before.  Warsteiner, not unlike the University of North Carolina, did not understand the success they were experiencing at the time.  One could say that neither Warsteiner nor the University of North Carolina knew what they had until it was gone.

Coach Brown will return and will now face more realistic expectations from the NC.  Ten wins a year is truly a good season, and it appears the fans, alumni, and administration have come to accept that fact.  Warsteiner, along with many crafts and other imports have yet to reach this point of realization.  No doubt it is, and should always be, a goal of all brands to grow.  One needs, however, to have realistic expectations.  There is only one Corona!

Wholesalers continue to hear from their suppliers as to the size they desire their brand to, but is such a goal always realistic and achievable?  More likely it is not.  The rush by craft breweries to increase in size is one of the main reasons that this segment struggles today.  Had these owners been realistic when considering the investment, we might not be where we are today.

You are not defeated when you lose.  You are defeated when you quit!

 

 Posted by at 7:00 am
Dec 042018
 

In the 1960s, Willowbrook Distributing warehouse, used by Coors of Dallas, was considered an upscale building.  The facility was large, the trucks were able to load indoors, the warehouse temperature was controlled and there were rail sidings.  The warehouse also provided multiple offices, a break room, locker rooms, a hospitality room, a check-in area, and of course, executive offices.

Until this time, I had little knowledge of the differences between beer warehouses.  While at Lone Star, I had two distributors whose warehouses were actually old barns.  Both warehouses were similar with a couple of pallets of beer and a forklift.   There was an Oklahoma distributor who operated out of a former railroad station.  The trucks would pull up alongside the passenger docks and the beer was hand loaded onto the vehicles.  Obviously a great deal of manual labor was involved.

In Chicago, a number of the current beer warehouses still have roots dating back decades with little to no updates.  This is difficult to understand considering the onslaught of new brands, flavors, and SKUs.  In today’s high tech market, warehouses are computer driven with little that remotely resembles the beer facilities of 50 years ago.  Interestingly, the one exception to this rule is the beer pallets, which remain basically unchanged.

A four year old West Texas AB house is a great illustration of a state-of-the-art beer warehouse.  The storage area is computer operated, the temperature is controlled with high tech equipment, and the facility boasted all the bells and whistles one could imagine.  And, of course, the warehouse was built with future growth in mind. Interestingly, when taking a tour of the facility we discovered that the sales department was dark and empty. It was also immediately apparent that the modern-designed desks were not in use…there were no computers, no phones, no papers, no p-o-s, no glasses…empty.

The only people in the building, outside of the warehouse, were the reception and financial staff in the front of the facility.  The most heavily used portion of the building; however, was the new gym and workout facility installed by the distributor.  The distributor indicated that the gym was most heavily used by the staff during the early mornings, late afternoons and on the weekends.

The question in today’s beer industry is what will the modern beer facility look like and how will it function?  It is obvious that a sales department, now automated, is out selling.  There is no need to go into the warehouse, except for meetings.  Will such an arrangement be sufficient going forward?  Should the empty desks be removed and a game room added?  Maybe provide a ping pong table, a couple of X Boxes and big flat screen TVs with overstuffed chairs and music.  Many of the companies who want to attract younger, educated Millennials are modifying their offices to meet this generation’s expectations.

It is safe to say that parts of the beer industry are slow to change, warehousing, however, is not.  Companies have to keep up with industry trends and this should apply to their current and future employees.

The future belongs to those who prepare for it today.

Editor’s Note.  Attention all former Schlitz employees and Schlitz Distributors: The family of James Haire is searching for a booklet created by Jim during his tenure at the Schlitz training institute years ago.  The booklet is approximately 20 pages in length with a plastic cover complete with Jim’s photo.  If you have a copy, or know where one can be located, please let us know.  The family would like be most appreciative.

 

 

 Posted by at 7:00 am
Nov 272018
 

Last week it was announced that Scott Metzger, the founder of Freetail Brewing Co. of San Antonio, had, after 10 years, left the company he created.  Despite Freetail’s success, Metzger brought in the Turner family two years ago to provide support in growing the business.  It is hard to know if this was part of Scott’s initial exit plan, but either way, Freetail will benefit from the increased support provided by the Turner family.

Freetail, like other breweries that have sold to a major brewery or capitalist, will grow in the short term. The question is, how do distributors see these somewhat successful, local breweries as continued players in their portfolios?  Which would be of more interest to a distributor: a start-up local craft brewer or an established, successful, imported brand that had never attempted to develop the U.S. beer market?

Even if the local craft has the financial support, experienced team, lab, brewpub, and commitment, the distributor might look at the local brewery with some skepticism.  Will that craft sell or will it fold?  How much time, effort, and money should be invested in this brewery?  If the brewery succeeds and sells out, will it sell out to one of my current suppliers?  Remember what happened to Goose Island, Ballast Point, Lagunitas, Revolver, Karbach, Golden Road, and others who became a key part of their buyers’ companies, a move which made their wholesalers happy.

There are other crafts that employees purchased.  Full Sail was acquired by their employees, who in turn sold the brewery to an investment firm, thereby maintaining their jobs.  New Belgium employees still own their brewery.  These breweries and others continue to do well.  But at what point does the distributor take a risk and at what point are they forced to draw the line?

This summer, after almost 100 years in business, Great Western Brewing Co. of Saskatoon, SK, Canada brought their beer into the U.S.  On the surface, a distributor might look at Great Western as a local craft.  Great Western is the predominate brewery in that part of Canada with outstanding products and a top brewmaster.  Its brewing capacity is well over 300K HL. Unlike a number of crafts, the Great Western strategy is to grow and build their volume while maintaining their long-term ownership.  They know building a U.S. market will take time, and they are committed to doing so with a strategy.

The odds are that Scott Metzger will return to the industry in some capacity and, of course, Freetail will continue to be a viable brand for its wholesalers.  Great Western will expand in the U.S. as planned.  The success of either brewery, like other breweries, will be tied to their commitment.  In the end, that is the distributor’s dilemma.

Get out, stay out, and don’t come back!

 Posted by at 7:00 am
Nov 202018
 

Thanksgiving posts in the past have been a myriad of topics within the beer industry, the majority of them; however, have focused on subjects for which we are all thankful.  The most popular Thanksgiving story was the 2014 post on Lone Star Beer.

Many of the posts have highlighted past events for which we were thankful.  We are currently witnessing how these occurrences, for which we were once thankful, have shaped the future of the beer industry.  Let’s now project what the industry might be thankful for in the coming years:

  • Continued growth of the craft segment and the excitement that craft brings to the industry,
  • Premiumization of all beer,
  • The size of the millennial generation, the largest segment of the population in history,
  • Seltzers, FMBs, and spiked water which appear to be the beer industries’ next major growth segment and the best weapon against the onslaught of wine and spirits,
  • Taprooms and local breweries which signal a return to neighborhood connections,
  • Lower taxes and more jobs,
  • Higher incomes,
  • Lower gas prices,
  • Continued lower taxes on beer (all beer!),
  • Favorable legislation on both the Federal and State levels thereby fueling growth in the beer industry,
  • A growing export business for all makes and sizes of U.S. brewers,
  • Continued technological advancements which thereby enhance efficiencies and profitabilities,
  • Michelob Ultra,
  • Constellation Brands,
  • Boston Beer,
  • Higher quality in craft brewing.

These are just a few of the items the beer industry can be thankful for in the coming years.  If you know of additional future trends, please let me know.

By the time this is posted, perhaps there will be an end to the Pabst Brewing Co.’s suit against MillerCoors; a suit which is currently being litigated in Milwaukee.  There is much at stake for both breweries in this suit, but the outcome will also affect many wholesalers and consumers.   More on this after the suit ends.

I would like to take this time to wish all of those in the beer industry an enjoyable Thanksgiving holiday, and especially recognize all who make, deliver and service beer!  Happy Thanksgiving!

 

 Posted by at 7:00 am
Nov 132018
 

During the 60s and 70s, wholesalers represented only one brewery and the future of that wholesaler depended on the success of that one brewery.  Partnering was critical, and if the marketing did not connect with the consumer, both the brewery and the wholesaler felt the negative consequences.  The wholesaler had little choice but to support the breweries’ plans.

As previously discussed, today’s wholesalers spread their exposure across many suppliers and brands.  If one supplier hits a bump, the wholesaler might feel a slight repercussion, but the negative experience will not adversely affect the wholesaler.  Today’s model also allows wholesalers to take a more aggressive stance against a vendor when the vendor’s marketing or programs are questioned by the wholesaler.  Partnerships are strained and tenuous at best.  One really must question whether the relationship between the wholesalers and the brewery could truly even be considered a partnership.

During the summer months, majority of vendors develop their annual budget and marketing plans for the upcoming year.  Once approved internally, the vendor presents the upcoming years’ plans to the wholesaler.   These plans, which are created by the vendor, are based on the goals and strategies of the vendor.  The vendor has built their future around certain platforms and has invested their dollars against that strategy. In the business meetings, the wholesaler has input and many times these plans are modified, but typically the core plan remains.  Only when the strategy totally fails are the business plans changed.

Recently, a major AB distributor notified their beer vendors of a wholesaler–initialed price increase. The increase included price points and margins that the wholesaler was not only taking for themselves but, also what they were allowing their vendors to take!  This even included the date the beer price was to increase.

There was no discussion with any of the vendors as what effect this increase would have on their 2019 market planning, goals, or strategies.  The increases, which were deemed final, were focused on all keg sizes.  One wonders if ALL their vendors were affected or just a targeted few?  When a vendor has questioned the wholesaler in the past, the wholesaler’s continued response is “this is the policy.”

Leegin Creative Leather Products, Inc. v. PSKS, Inc. 551 U.S. 877 (2007), is a U.S. antitrust case in which the United States Supreme Court reversed the 96-year-old doctrine that vertical price restraints were illegal per se under Section 1 of the Sherman Act.  The aforementioned case replaced the older doctrine with the rule of reason. Resale price maintenance (RPM) is the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer’s product at certain prices: at or above a price floor, or, at or below a price ceiling. If a reseller (distributor) refuses to maintain prices, either openly or covertly, the manufacturer may stop doing business with the said wholesaler. This marked a dramatic shift in how attorneys and enforcement agencies addressed the legality of contractual minimum pricing and essentially allowed the reestablishment of resale price maintenance for most commercial situations in the U.S.

Simply put, if the wholesalers’ pricing has a negative effect on the vendors’ products, the vendor may have the ability to take legal action against the wholesaler.  If that happens, then who wins?

Alliances and partnerships produce stability when they reflect realities and interests.

 

 Posted by at 6:00 am
Nov 062018
 

Recently announced third-quarter results for ABI showed that; once again, the company’s depletions are down -1.5%.   ABI’s market share also continued to decline this quarter -.5%. This all equates to a year-to-date market share loss of -.45%.  Even with all the cutting and consolidations that ABI has done in recent years, their debt exceeds $100 billion!

ABI also announced that they will be cutting their dividends by 50%, thus saving four billion dollars per quarter to pay down the aforementioned debt.  The markets’ response to ABI’s announcement was a 40% drop in the beer giant’s stock value.

Is the clock ticking on Carlos Brito?  Regardless of the fact that under Brito’s leadership, AB has lost millions of barrels in volume and market share, it is the financial results that have afforded Brito the ability to be the darling of Wall Street and his shareholders.  The industry knows all too well that Brito’s cost-cutting measures and aggressively price increases have produced great financial results and returns for the company.  The question is, now what?

Brito has accomplished this position by buying large beer companies and applying ABI’s cost-cutting measures and pricing tactics.  In recent years, AB, Modelo, and SAB Miller have all gone down Brito’s path.  Perhaps Brito has run out of beer companies to buy and costs to cut.

Diageo is not going to sell Guinness. And for generations, Carlsberg and Heineken have been tied into a family and will not sell.  While nothing is certain, it is safe to say that these companies have no interest in selling to ABI.  What else is there?  There are still some nice breweries out there, including the six million Hectoliter Krombacher, but that, too, is family owned.  Unless ABI jumps deeply into China’s breweries, there is nothing with significant volume remaining to be purchased.

What about Pabst?  Since Pabst is a virtual brewery, adding that volume to the declining volume of AB would certainly help with the latter’s excess brewing capacity.  Pabst’s portfolio, however, does not fit ABI’s strategy.  ABI, not known for effective brand marketing, would up-selling Pabst’s products resulting in accelerating ABI’s declining volume even more.  In addition, ABI might violate their DOJ agreement regarding the purchase of more U.S. companies.

How does Brito increase shareholder equity, make his board happy, and reduce ABI’s debt for future expansion?  What if Brito sells all or part of AB in the U.S.?  Why not?  When ABI acquired Modelo, brand rights were sold to Constellation Brands in the U.S., similar to the situation in which Miller was sold to MolsonCoors when they bought SAB.  By selling the U.S. market, ABI could retire the debt, AB stock would soar, and ABI would be in a much stronger position to buy Coke or Pepsi!

In the end, Brito is not going to continue doing what he is doing now. His make-up will not let him.  He will, however, do something to move the needle for his board and selling AB in the U.S. might just be the icing on the cake!  Sound crazy, well nobody thought AB would ever sell either!

Egotism is the anesthetic that dulls the pain of stupidity.

 

 Posted by at 5:00 am
Oct 302018
 

It was again reported last week that Reyes made another major purchase, this time buying the rights for Constellation Brands in southern California from three wholesalers: Markstein, Triangle, and Beauchamp.   In all, these purchases represent just under six million cases of STZ products.

It is also estimated that Reyes paid up to $37 per case which translates to approximately seven times GP for the STZ brands.  In doing the math, Reyes paid $200 million for these products.  Did Reyes overpay or not?

Traditional wisdom has always stated that if the buyer can recoup their investment within five years, then the purchase was considered a “good deal.”  In today’s market, however, if a distributor is a long-term player, meaning they have no intention of selling-out, the traditional ROI methods can be thrown out.

Today, if given the opportunity to purchase STZ brands, a wholesaler might look at this as a once in a once in a lifetime chance and would surely pay whatever the asking price.  Take for example, the AB wholesaler who, years ago, turned down the Model brands.  This represented what many at the time thought was an unrealistic price.  If those wholesalers had a mulligan, one would speculate that they would now write the check.

Reyes paid the wholesalers what some have called a “premium multiple.”  Obviously, this multiple was not in dispute as this deal had been negotiated and agreed upon.

In past decades, when a multiple was in dispute, the usual method of resolution was through the courts.  Such disagreements were typically resolved using industry expert witnesses who determined a range of value.  Some experts used DCF as a way to determine the value and others used ROI.  In recent years, however, several courts have determined that the ROI projections represented a better value for a brand over the DCF method.  If the multiple is at seven times or more, neither party seems to have an issue with that valuation.

At the recent Beer Business Daily’s Distributor Productivity conference, Joe Thompson, John O’Conner, and I had the opportunity to visit.  The three of us, along with Mike Mazzoni, were the expert witnesses in many of the beer industry disputes on valuations over the past 30 years. Interestingly, none of us, including Mike, were involved in any expert witness cases at this time.  Part of this was our decisions to no longer accept such cases.  One has to believe, however, that if companies like Reyes are now willing to pay multiples of seven times or more for products, there will be very few, if any valuation disputes.

In addition, many states now address GP multiples for breweries desiring to leave a distributor if they fall into that state’s definition of their percent of the distributors’ business.  This eliminates any issues and moves away from any lawsuits, a good move for the industry.

Going forward there will always be situations where an expert witness will be needed, but in the current market, the seller will more than likely get their asking price.

An expert knows all the answers – if you ask the right questions.

 

Beer Fodder;

 Posted by at 6:00 am
Oct 232018
 

The last Coors distributor convention I attended was in Hawaii in the early 2000s.  As with many others, the highlight of this convention was Bill Coors’ speech featuring that year’s business overview.  As with every other Coors convention, Bill received a standing ovation from the distributors following his speech.  The ovation was not for his comments, but for his many years of contributions to the beer industry and his decades of successful leadership at the helm of Coors.

In the late 1970s, when the annual Coors convention was held in Phoenix, I was the general manager of Coors of Kansas, one of the five largest volume Coors houses in the nation.  The trip from Kansas to Phoenix required me to change plans in Denver. As I boarded the plane in Denver, I noticed Bill Coors sitting next to an open seat.  I happily joined him on the flight to Phoenix.

At the time, Coors was just beginning to expand their footprint into the eastern U.S.  The expansion was the result of the excessive volume caused by a California Farm Workers and gay right boycott.  Yet, despite the boycott, Coors remained the number one selling beer in their western markets.

During the plane ride, as Bill and I discussed this topic and others, I gleaned additional appreciation for the challenges the brewery was facing.  I was thankful for Bill’s time during the two-hour-long plane ride. Then, as is true now, it was most difficult for a distributor to have the privilege of spending time with such a storied industry leader.

That convention in the late 70s proved to be interesting given what the brewery was facing in California.  Coors had arranged a barbeque for the distributors at an area ranch during the convention.  The conversation on the bus ride to the ranch was focused on the California distributors and their complaints of lost business due to the Coors family’s anti-union policies.  The distributors were having a difficult time understanding why and how our Coors business in Kansas was still growing despite the turbulent times in California.

Many years have come and gone since the Coors convention in Phoenix, but the recent announcement of Bill Coors’ passing puts an end to a period in the beer industry where dynamic leaders backed their beliefs with actions, sometimes to the determent of their wholesalers.

I have had the opportunity to work for, and spend time with, a number of beer industry leaders during my years in the industry including Harry Jersig, Bob Uhlien, Paul Kalmanovitz, Jack Joyce, Bill, Joe Coors, and others.  All have left a lasting legacy on the industry.  Decades from now, the leaders of the craft movement might be viewed in a similar light to these great leaders.  For the well-being of the beer industry, let us hope that holds true.  Their shoes are very big!  Yes, it has been an interesting career.

“I’ve taken my kicks, but I have a fascinating life and I have been richly rewarded.” – Bill Coors

 

Beer Fodder;

 Posted by at 6:00 am
Oct 162018
 

Like many college students, I was uncertain about the direction of my professional career following graduation.  During the summers I worked as an assistant on Coors beer trucks and it was at that time that I developed an interest in the beer industry as a potential career.  It became clear to me that in the industry, one could work for either a brewery or a distributor.

These two employment options remained static until the 90s when the beer industry digested the Bush administration’s doubling of the federal excise taxes.   It took years for the industry to return to its annual growth rate and for companies to begin the hiring process following the legislative act.  During this time the beer business experienced extremes in cultural differences within certain companies.

Perhaps the most desirable beer importer to work for was Wisdom Imports.  This company hosted a growing and fun portfolio along with an employee-centric culture.  All that changed, however, when InBev bought Labatt’s.  Sound familiar?

During the same time period, Modelo was imported by Gambrinus and Barton Beers.  While both companies had similar portfolios, the cultures of the two distributors were polar opposites.  Many previous AB, Miller, or Coors employees who transferred employment to Gambrinus had the perception that they could easily adapt to the Gambrinus culture.  They soon discovered they were only kidding themselves.

Perhaps the personification of a culture change was the dramatic shift instituted by InBev during their take-over of AB.  Most former AB employees lamented those changes as they moved on to other brewers and careers.

Likewise, many of today’s successful crafts have also undergone cultural changes.  When a start-up craft begins to find some traction in the market, the company’s culture begins to shift.  Over time, brewers like Sierra Nevada, New Belgium, and Founders have discovered that experienced and professional beer executives are needed to continue the growth curve.

With 7,000 breweries currently in the market and more to come, the talent pool is limited.  A big challenge is for potential employees to decide with which brewery to hang their hat.  Will the potential brewer meet the expectations of the employee?  Because many small, start-up brewers work with an unstructured entrepreneurial culture, few provide much in the way of policies or procedures.

Recently a young, highly qualified sales rep with a new brewer was concerned over the lack of structure in his company.  Perhaps this individual would have preferred a more structured and formal company, though he may not have realized such a need for more structure without first experiencing work in a start-up brewery.  This is especially true for those individuals who have high career aspirations.

Many early employees of Sierra, New Belgium, and Founders have moved on as these breweries were no longer a fit.  Finding the right culture is a challenge for both the brewery and for the individual. Perhaps this is the underlying reason that companies attest that they cannot find qualified employees and qualified employees say they cannot find top jobs.

Keeping customers is about the experience, and frequently the employees control the culture and temperature of the business.  Never forget that.

 

 

 Posted by at 6:00 am
Oct 092018
 

There is no doubt that the beer business has many convoluted laws governing the industry.  The law dealing with beer packaging, however, might take the cake.  Take, for example, the law that required Florida and Texas to implement 12-ounce packaging restrictions.  In Texas, a beer with 5.0% ABV or less could only be sold in either a 12-ounce package or a 32-ounce package. The law stated beer of that ABV had to be in a 288-ounce case.  Schlitz, thinking outside the box, came with a 12/24 ounce can.  This package turned out to be a huge success for Schlitz.

So do creative packages like Michelob’s teardrop bottle aid in sales?  The Michelob bottle and Corona’s clear longneck bottle might be considered the two most successful packages in years.  Even with the success of the Michelob, Schlitz, and Corona packaging, however, these containers two of them are long gone, and only the Corona packaging continues today.

A couple of years ago, ABI increased the can volume from 24 to 25 ounces in their single serve c-store cans, thus providing the consumer with an extra ounce of beer for the same price.  Perhaps this technique has not worked like no other major brewery has followed ABI’s lead.

The c-store trade channel which has long been dominated by both AB and MC has now become a target of the craft industry.  In recent years, this channel has seen Constellation Brands, with their single serve offerings, chip away at both the AB and MC’s market share.

Both Texas and Florida changed their packaging restrictions years ago by eliminating the 12-ounce requirements, thus opening the door for imports to move from their .355 ounce packages to their .33 (11.2 ounces) package. This 11.2-ounce package is now used worldwide as it is more convenient for international breweries.

Crafts have discovered the 19.2-ounce package.  By reducing the amount of liquid in the can or glass container, as other CPG companies have done, the volume can be lessened instead in lieu of increasing the PTC. As an example, the product might be in a 12-ounce product but instead of a price increase, the product is now an 11.2-ounce package.

Crafts are offering their beer at a PTC near or at the domestic price, but only giving the consumer a 19.2-ounce package versus a 24-ounce package.  Everyone but the consumer wins with this model.  It becomes incumbent on the craft brewer to prove that their beer is worth the cost versus a larger size competitor.

One wonders how these crafts would do if packaged in a 24-ounce bottle/can when competing against the main domestics or imports?  This c-store trade channel is one of the last remaining strongholds of the domestic premiums.  If these crafts can steal market share from the big boys, then the 19.2 package wins.

Sometimes life gives us lessons sent in ridiculous packaging.

 Posted by at 6:00 am