WE HAVE EVOLVED,
NOW WHAT?
INDEPENDENT BEVERAGE GROUP
Joe Thompson
President
Independent Beverage
Group
Todd Arnold
4370 Crestone Cir.
Broomfield, CO 80023
[email protected]
303 410-7748
Corporate Office
2591 Hwy 17 South
Ste. 302
Richmond Hill, GA 31324
[email protected]
843 681-6333 (office)
843 681-6332 (fax)
* IBG has recently changed email and corporate mailing addresses. *
I. THE EVOLUTION
3
I. The Evolution
• 1992 – 2002
• Industry volume grew consistently.
• Consolidation came of age.
• Miller objected.
• Mega strategy started.
• Profits grew slowly.
• Economy grew rapidly.
• Industry united and competitive.
• Legislative, legal, trade associations.
• Industry very competitive (suppliers and distributors).
• Distributorship value rose.
• AB’s exclusive incentive program grew.
• Lost sight of changing world.
• Non-AB distributors gained new brands.
• Weather constantly changed.
4
I. The Evolution
• 2002 – 2012
• Volume was down.
• Above premium exploded.
• Competition for craft brands grew.
• “Big 2” lost significant volume.
• “All Other” distribution system emerges.
• Consolidation escalated.
• Costs grew less than inflation.
• Margin growth largest we have ever seen.
• Profits grew dramatically (suppliers and distributors).
• Interest rates dropped significantly and stayed down.
• Attacks on the three-tier increasing.
• Distribution rights grew faster and higher than ever.
• Weather constantly changed.
5
I. The Evolution
• 2013 – Forward
• Volume will be down (-1% for next 5 years).
• Margins will be up but will increase slower.
• Labor costs.
• Number of people.
• Wages per person.
• Capital expenditures will increase faster than before.
• Consolidation will continue at same pace.
• Access to market will be expanded.
• Industry will be less stable.
• Legislative changes escalating.
• On-going violations of 3-tier principles.
• Higher taxes.
• State, federal, local.
• Equivalency issue.
6
I. The Evolution
• 2013 – Forward
• Profit will be harder to increase.
• Still good, but harder to accomplish due to more complex business
model.
• Interest rates will be higher.
• Distributorship value -??
• Transactions take longer.
• Prices will depend largely on each markets circumstances.
• Weather will constantly change.
II. VOLUME
8
Total Beer Industry Volume Declining
2020 est. based on
1% per year Decline
2014 - 2020
Significant drop starting in 2008.
BUDWEISER… and the Three “Modern”
Generations
Baby Boom
60,000
Generation X
Millennials
Rejected
by
Generation
X
50,000
Ignore by
Millennial
s
40,000
30,000
20,000
10,000
Source: Seema International based on Beer Institute 2013
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0
2012
2013
Driven by
Baby
Boomer
generatio
n
9
2014
10
Global Strategy?
Harvesting equity value.
Volume
Profits
Structural / Incentive
problem.
11
Per Capita Consumption (Gal.) – Beer Declining (Gal.)
Beer losing drinkers
and less consumption
… 6.9% decrease … -2.7 gal.
12
% of Absolute Alcohol
-12.8%
+17.8%
+21.1%
Distilled Spirits Council
13
II. Volume - Positives
• Craft category’s creativity, intellect and entrepreneurial
spirit.
• Retail environment vs. wine and spirits.
• Marketing potential.
• Import / craft marketing is fabulous.
• Major brewers marketing potential.
• Growing Hispanic demographic.
• Potential to expand consumer base with sweeter, flavored
products.
• Increasing competition.
• Gold system (Crown) is a 3rd competitor to ABI / MC.
14
II. Volume – Conclusion
• IBG believes volume will be negative for several years.
• Major suppliers have incentive to invest outside of U.S.
• Math of 70 % decline vs. 30% growth.
• Time will help as “All Other” emerges as significant
competitor and math improves.
• Craft drinkers tend to drink less.
• Sweeter, stronger products appeal more to women and
young adults.
• Wine and spirits continue to win.
III. MARGIN / GROSS
PROFIT
16
Declining Disposable Income
Source: US Bureau Of Economics. Updated 4/22/13
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Craft Share%
8
Craft Share of the U.S. Beer Market
(1980-2013)
7.5%
7
6
5
3.7%
4
3
2
1
0
Two for one effect…since 2008
Craft + 7mm / Total Industry – 8MM Bbls
17
2014
18
Distributor Gross Profit Increase Slowing
9.0%
8.1%
8.0%
7.0%
6.0%
5.9%
5.0%
4.5%
4.0%
4.5%
3.0%
2.5%
2.0%
1.0%
1.1%
0.0%
2005
2007
Source: NBWA Productivity Report
2009
2011
2012
2013 (est.)
19
III. Margin / Gross Profit - Negatives
• ABI / MC overcapacity.
• Lost 17M bbls. In 5 years.
• Complexity has kept breweries open.
• 85% - 90% capacity utilization (estimate).
• Price increases harder to get.
• Excess equity value of mega brands eliminated.
• Brand loyalty of craft drinkers is weak but growing.
20
III. Margin / Gross Profit - Positives
• Industry winning margin struggle.
• Look for suppliers to be more aggressive with distributors.
• Several suppliers moving to pay-for-performance.
• Above premium category will continue to grow.
• Duopoly has not been willing to price aggressively.
21
III. Margin / Gross Profit - Conclusion
• Recent gross profit increase has driven profitability.
• Basically 2008 – 2012.
• Heavy beer drinkers are struggling financially.
• Price increases harder to attain in the future.
• By pricing aggressively since 2008, major brewers have
harvested the excess equity value of mega brands.
• Margin growth will slow vs. last 5 years.
IV. COST
23
IV. Cost
• Size matters.
• Mega distributors.
• 16% cost / 26% margin / $1.75 ++ profit per c/e.
• 25 distributors = 30% of volume.
• Family distributorships (traditional).
• 21 % cost / 25% margin / $1.00 profit.
• 340 distributors = 60% of volume.
• “All Other” distributors will grow and will be more expensive.
• Wine, spirits and soft drink distributors will emphasize beer more.
24
WA
ABI
MT
ME
ND
VT
MN
OR
ID
X
WI
SD
X
NE
Keith &
MI
Don
UT
KS
AZ
Hensley
Dobbs
NM
X
OH
IN
IL
CA
RI
CT
PA
Hand
CO
ABI
ABI
X
IA
ABI
Stokes
MO
TN
X
WV
VA
Jefferies
NC
Hand
OK
AR
SC
TX
Nau
MS
X
AL
GA
Dormity
LA
FL
Lamantia
ABI Mega Distributors
NJ
ABI
DE
KY
ABI
Ben E. Keith
MA
ABI
NY
WY
NV
NH
MD
25
WA
CoHo
MT
ME
ND
Taylor
VT
MN
OR
NH
MA
ID
Clay
WY
Ingram
WI
SD
Reyes
Clay
CO
X
IL
MC
KS
AZ
OK
X
Clay
NM
HoBo
Andrews
OH
Monarch
X
X
Keg 1
Glazer
Andrew
s
Reyes
VA
KY
NC
X
TN
AR
SC
Glazer
Reyes
MS
LA
Goldring
/
Moffat
AL
X
NJ
DE
IN
MO
TX
MC Mega Distributors
PA
WV
CA
Goldring /
Moffat
HoBo
MI
North
Coast
IA
NE
NV
UT
Reyes
NY
GA
X
Taylor
Reyes
FL
Gold
Coast
MD
RI
CT
26
ClickWA
MT
Maletis
X
ME
ND
Sheehan
VT
MN
OR
NH
Sheehan
MA
ID
WI
NY
Sheehan
SD
WY
RI
MI
Sheehan
PA
IA
Saccani
CO
SW&S
UT
Stone
Major
X
X
Sheehan
NJ
NE
NV
CA
CT
KS
Self
AZ
Nackard
Clement
XIL
Wirtz
OH
Rucker
IN
Sheehan
XMO
X
MD
WV
Sheehan
VA
KY
X
DE
NC
TN
OK
X
AR
NM
X
Ben E. Keith
TX
Lamantia
MS
AL
SC
SW&S
GA
Young
LA
FL
Brown
Craft Mega Distributors
X – W/S with significant beer.
27
IV. Cost
• Distributors receiving more of of “pull” responsibility
(marketing cost).
•
Local / internet marketing.
•
•
•
•
•
•
Radio.
Billboard.
Magazine.
Fairs, events, etc.
Sampling.
On-premise nights.
Retailization – in-outlet marketing.
•
•
Huge attitude adjustment at store level.
28
IV. Cost – Negatives
• Brand / SKU explosion cost beginning to coming due.
• 2008 – 2012 MC went from 250 to 550.
• Now (750) ??
• Distribution system is currently stretched thin.
• More capital expenditures required.
• Human resources needed.
29
IV. Cost – Positives
• Consolidation savings still available ($800M est.).
• Low fruit already picked.
• Mega distributors more efficient at warehousing, delivery and
administrative cost.
• Automatic picking systems.
• Centralized routing.
• Enhanced personnel management.
• GPS technology.
• Family owned.
• No debt.
• Passionate management.
• Willingness to invest.
• Local influence.
• E-commerce is the future.
30
IV. Cost – Conclusion
• Costs will be harder to manage in the future.
• More investment needed.
• Industry is adjusting its service model to evolve to new
retail reality.
V. CONCERNS
32
Distributors influence being challenged.
4,500
4,000
4,000
3,500
2,975
3,000
2,800
2,615
2,267
2,500
1,905
2,000
1,500
950
1,000
500
Brewers
2020
?????????
900
650
42
0
1970
1990
1995
2000
2005
2010
2013
(Est)
2020
(Est)
33
V. Concerns - Negatives
• Dissention = disaster.
• Different state associations.
• Craft vs. supplier.
• Distributor vs. distributor.
• Distributor vs. supplier.
• Brand valuation disputes.
• Legislative / legal.
• Carve out laws.
• Self distribution.
• Increasing taxes.
• Brewery branches.
• Marijuana.
34
V. Concerns – Positives
• States right to regulate alcohol is consistently upheld.
• Double protection – franchise laws and contracts.
• Historically stable business.
• Still an industry of turtles, not rabbits.
• Change happens slowly.
35
V. Concerns - Conclusion
• Industry needs to speak with one voice.
• Stop fighting our battles in public.
36
Conclusion
• Industry volume will decline.
• Losing equity value of mega brands.
• Dollar volume should grow.
• Primarily due to above premium products.
• Consolidation will continue at a consistent pace.
• If a 25 year horizon, a great time to buy.
• If a 5 year horizon the sooner you can get out, the better.
• Values have grown significantly.
• Rate of growth will likely slow as interest rates rise and cash flow
declines.
• Less desirable markets will be difficult to sell.
• As competition grows industry will eventually get stronger.