Wholesale Consolidation: Facts & Fiction.

Dispelling the "5" biggest myths surrounding wholesale consolidation

As consolidation in the middle tier of the malt beverage industry continues to accelerate, several predominant presumptions nave emerged. These presumptions, or "myths," have not only been widely publicized, but also all-too-often accepted as fact. This article intends to review these presumptions, discount the "fiction" and present the "facts" associated with wholesale consolidation. In addition, recommendations for avoiding the pitfalls created by the myths are identified. For ease of explanation, the article is written from the perspective of two wholesalers engaging in consolidation, with "Wholesaler A" acquiring "Wholesaler B."

MTYH 1:

When Wholesaler A acquires Wholesaler B, the outcome is a larger, more viable Wholesaler A.

REALITY:

When Wholesaler A acquires Wholesaler B, it becomes Wholesaler C, not a larger, more viable Wholesaler A. Systems, processes, products and, most importantly, people from the two former organizations create a new entity. Despite the fact that the new entity most likely retains the name of Wholesaler A, the entire business model and related processes are substantially different from the original Wholesaler A. The new entity should select certain best practices from both Wholesalers A and B and develop the remaining systems, processes and management techniques to meet its new needs. Those acquirers that embrace the need for new, post-consolidation business dynamics have a much greater likelihood of long-term success. In fact the inability to integrate the post-consolidation culture into a Wholesaler C is the single greatest cause of consolidation failure or underperformance. As shown on the following chart, Tamarron's experience has been that approximately 25% of wholesalers reach the targeted level of integrati on (i.e., A + B = C). Many of them (roughly 60%) keep doing business as the buyer, Wholesaler A, had done previously (i.e., A + B = Larger A), not enhancing their business practices in order to recognize the benefits of their elevated market position. In these cases, synergies are often not realized to their full extent resulting in fewer funds for market investment. Finally, there is a small group of consolidated wholesalers (an estimated 15%) that does not reach any level of integration. In these instances, the staff from Wholesaler A continues with their historical business practices, while the staff from Wholesaler B continues with their historical business practices (i.e., A + B = A + B). As a result, a "we vs. they" environment develops, and the cultures never merge.

The best time to map out the transition or integration approach necessary to reach the targeted A + B = C is prior to closing deal.

RECOMMENDATIONS:

Approach the consolidation as one would approach creating a new organization. Understand the implications the new entity has on structure, systems, staff, strategies, etc. Review the existing processes and information systems of both organizations to determine the proper alignment with post-closing organizational needs. Develop and prioritize strategies that touch on the required integration of all aspects of the business. Communicate strategies to employees to minimize speculation, misguided focus and

MYTH 2:

Wholesaler A can determine the purchase price for the distribution rights of Wholesaler B based on a multiple of Wholesaler B's gross margin.

REALITY:

The myth of multiples is prevalent in our industry. The process of determining the value of the multiple is as much a myth as the multiples themselves. Although many of these multiples have been published in recent industry publications, the reality is that this rule of thumb valuation approach is relatively arbitrary and subjective.

While it is appropriate for the value of the multiple to change based on market conditions, sales trends, type of acquisition (e.g., stand-alone, horizontal consolidation, vertical consolidation), market structure, etc., it is virtually impossible to incorporate all of these factors into one multiple. However, a multiple valuation may be useful as a "reasonableness" check after using sound business valuation techniques, or as a valuation technique for individual brands. It is necessary even under both of these circumstances to research the underlying factors in determining the multiples to be used for comparison purposes in order to ensure that the environmental factors are similar to those of the current valuation target. The relevance of published information for comparison purposes is questionable, as all critical transactional data is rarely disclosed. Such articles have unintentionally given many wholesalers unrealistic views of the value of their businesses, as they have assumed that these multiples can be applied universally. Ideally, when calculating acceptable purchase and/or sale price ranges, wholesalers should understand the value of their stand-alone businesses (i.e., the value associated with their current positions along the first business life cycle curve on the following chart), as well as the value of the consolidated entity after incorporating estimates of operating synergies/savings (i.e., the value at the top of the second peak on the following chart). A fair purchase or sale price would fall between these two values, allowing some premium to the seller and consolidation benefit to the buyer.

RECOMMENDATION:

Incorporate proven business valuation techniques (e.g., discounted cash flow) to determine purchase and sale price ranges. Translate the resulting business values into industry terminology, such as per case and gross margin multiples. Negotiate a win/win purchase/sale price affording benefits to both the buyer and seller.

MYTH 3:

Wholesaler A will receive transitional and/or on-going support from its key suppliers as a result of having received their approval for the consolidation.

REALITY:

Suppliers' focus typically shifts from assisting in accomplishing the consolidation pro-close, to expecting expedient performance improvement post-close. Certain suppliers offer at least some level of assistance during the transition process, but such involvement is generally limited. While wholesalers should take advantage of all available resources to expedite the transition period, they should remain aware that managing a wholesale operation is not a core supplier competency. Therefore, directing the transition process (i.e., effectively managing all available resources in order to minimize the time frame from closing to achieving performance commitments) is primarily a wholesaler's responsibility.

RECOMMENDATION:

Develop a transition plan that aligns wholesale needs and requirements with the available internal and external resources. Do not under-estimate the time period required to achieve expected results. Consider supplier requests in developing and implementing a transition plan, but never lose sight of the fact that ultimate success or failure will be attributed to the wholesaler. Above all, be realistic about the effectiveness of immediate and on-going support offered by suppliers.

MYTH 4:

Wholesaler A has successfully acquired brands/companies in the past without a transition plan, and, therefore, it can achieve the same level of success without a transition plan in its acquisition of Wholesaler B.

REALITY:

This myth is two-fold. The first aspect of the myth involves the definition of "successful." Some wholesalers feel that success is achieved if their post-close performance improves over their past performance. In reality, success with regard to consolidation is based on achieving optimum post-close performance in a relatively short period of time. This leads to the second aspect of the myth-that transition plans are not required to achieve success. Based on the sheer number of factors necessary to achieve optimum performance, it is virtually impossible to be successful in a consolidation scenario without a detailed roadmap. This roadmap should address all the critical functions of a wholesale business (e.g., Sales/Marketing, Financial Management, Operations, Administration, Information Systems, etc.). Always remember...no two markets are the same; no two acquisition targets are the same; no two portfolios are the same, etc.

RECOMMENDATIONS:

Use a detailed transition plan early in the buy/sell process to identify hurdles and potential outcomes. Do not assume that all consolidations are alike. Prioritize transition strategies, identify timelines, and assign responsible parties. Appoint a key leader or an independent third party as a Transition Manager, whose sole responsibility is to ensure that the transition strategies are achieved. Do not over-simplify!

MYTH 5:.

Wholesaler A's sales force can "sell" the consolidated portfolio of 450 - 500 SKUs.

REALITY:

First of all, it is not likely that Wholesaler A's sales staff effectively "sells" its current book of 275 SKUs. Invariably, the sales staff and/or management team has defined certain brands/packages to sell and certain ones on which to take orders. By nearly doubling the number of SKUs in its portfolio, Wholesaler A is forced (for all the right reasons) to redefine its portfolio management strategies and communicate them to its sales force. If management does not clearly define and communicate a new portfolio management direction, the members of the consolidated sales staff will likely follow the portfolio processes of their previous, respective operations. This will ultimately lead to conflicting priorities and less than optimum results. While Wholesaler A may not "sell" all of its post-consolidated SKUs, it can maximize sales results by properly "managing" those same SKUs.

RECOMMENDATIONS:

Evaluate all brands based on profit and potential.

Identify the strengths and weaknesses of your current portfolio and those of the consolidated portfolio. Consider supplier relationships. Identify the opportunities that exist within each. Use a thorough account profiling process to identify opportunities within retail channels and individual accounts. Align your portfolio and structure your staff toward capitalizing on the identified opportunities and maximizing revenue potential. Systematically manage the entry and exit of all brands/packages. Be realistic about the number of SKUs your sales people can effectively sell, Align compensation systems, investment dollars, and commitments to/from suppliers with portfolio priorities. Use funds freed up from consolidation synergies to invest in programs that support brand growth and development.

Many wholesalers are currently facing one of the most important business decisions (if not the most important business decision) they will ever make: whether or not to consolidate their businesses. If you are one of those wholesalers, it is imperative that your decision be based on the realities of wholesale consolidation, and not on the myths, Undoubtedly, relying on myths and industry rules of thumb may simplify the consolidation process; however following this path of least resistance may lead you to justifying, not celebrating, your post-consolidation results.

Gregory A. Hopkins is the president of Tamarron Consulting, a firm specializing in the malt beverage distribution industry. Tamarron's service offerings include merger & acquisition negotiations and assistance, business valuations, performance survey administration and interpretation, and management training & consulting on a variety of industry topics. Its staff has more than 90 years combined, first-hand, malt beverage industry expertise that ranges in scope from management, sales, and operations to accounting, valuations, and economics.

[Graph omotted]

Post-Consolidation Culture Integration

15% A + B = A + B

60% A + B = Bigger A

25% A + B = C "The Target"

cultural clashes, all of which inhibit performance.