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.