Ippolito Christon echoes BCG analysis of 3-tier.
Boston Consulting Group concluded that by utilizing the existing Three-Tier System, craft brewers can 'leverage an effective route-to-market system [by] piggybacking on an independent distribution network ... By partnering or piggybacking with distributors, BCG estimated that craft brewers reduce the cost of self-delivery from an average of $4.20 to $1.40/case."
Ippolito reports that BCG's analysis is consistent with Ippolito/Christon's experience in calculating incremental expense, profits, and value of a distributor's acquisition of "bolt-on brands."
BCG's estimated expense differential of $2.80/case adds $28 of additional value for each "Golden Case," based on an EBITDA multiple of 10X.
"In our view, the independent 3-Tier System works well because it consistently produces profits and attractive Return on Capital Employed (ROCE) for brewers and distributors," Ippolito wrote in its analysis. "The BCG study confirms this. Since the end of Prohibition, mainstream brewers have contractually leveraged the huge warehouse, delivery, and selling function required to get their brands to market, off balance sheet, by franchising to distributors nationwide. In other words, large brewers are able to keep costly warehouses, trucks, equipment, and feet-on-the-street sales people off their own books, and therefore significantly increase their ROCE--a key Wall Street measure of the premium value of beverage stocks."
Ippolito Christon noted that craft brewers benefit because their brands gain access to market by partnering with distributors willing to build new brands while maintaining their core business. "The exceptions are for those locations where a brewery is permitted by state law to own a distributorship," they noted. "However, there seems little debate that brewery branches, or craft brewers with extensive self-distribution in permitted states, operate less profitably than independent distributors."
The company said the incremental profit of added or "Golden Cases" serves to strengthen a distributor's total operation. "As a result, distributors with the ability to manage complex logistics continually seek new 'bolt-on' brands. They will invest significant 'Skin in the Game' (via per case marketing investments, for example) to secure new brands from suppliers, or to acquire them from other distributors ... in most cases, we believe that a distributor's 'Skin in the Game' for new brands is economically rational, even Reyes' millioncase purchase of Windy City at a rumored price in the range of $50-70/case."
Ippolito Christon noted that there is a movement afoot within the craft segment for legislation to gain more self-distribution for brewers as a viable path to market access. The company says that if craft brewers succeed in modifying the three-tier system (1) Distributors would be less inclined to view new craft brands as valuable "Golden Cases" because of reduced territorial exclusivity, thus losing interest;
(2) Craft brewers will find it more difficult to partner with distributors willing to build and sustain their brands to a meaningful level of volume long-term;
(3) Young craft brewers will incur significantly higher selling and delivery costs as evidenced in the BCG Study, further stunting growth and draining value; and
(4) Large mainstream brewers will be emboldened to lobby for expanded direct ownership of distributorships, which if successful would severely limit access to market for the majority of craft brewers.
"A brewer's most valuable asset is the distributor platform," Ippolito asserts. "Without it, volume would decrease, costs would increase, and ROCE would collapse. A switch to 100% self-distribution would destroy value."
In its study, BCG stated that the "the economics of the U.S. beer business conveys significant advantages to those with scale. But." small brewers are (unexpectedly) the beneficiaries of the advantages afforded major domestic brewers."
"This means that the existing ThreeTier System extends significant benefits to producers without scale, by fostering partnerships with independent beer distributors," Ippolito wrote. "Craft volume continues to accelerate within the ThreeTier framework. Modifying current laws could turn 'Golden Cases' into 'Tin Cases' for both distributor and supplier. A distributor's incremental profit from an added SKU or brand may vary substantially. In other words, there are varying grades of gold and not all incremental volume creates pure gold."
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|Publication:||Modern Brewery Age|
|Date:||Jun 30, 2014|
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