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The impacts of distributor consolidation.

Many distributors are receiving visits these days from suppliers during which the main topic of discussion is the ongoing consolidation of the wholesale tier of the beer industry. While in many cases specific direction from the suppliers is lacking, the overall objective of reducing the number of wholesalers is clear. We are all aware of the fundamental economic reasons for this objective: rising costs of doing business, low-volume growth, etc. However, distributors suddenly thrust into the "buy/sell" decision should also understand the intangible, less quantifiable factors driving these changes. This understanding could aid distributors in making important decisions about the future of their businesses at such a crucial time.

Why is Beer Distribution Consolidating?

It is widespread and referred to in many ways: downsizing, rightsizing, re-engineering, re-configuration, re-design. These are just a few of the often heard (and perhaps overused) buzzwords describing fundamental changes taking place in business. Corporate America is changing the way it does business and the results are apparent in increased productivity levels, strong corporate earnings trends, and inflated stock market values (at least as of this writing).

In beer distribution, labor (and labor-related) cost is the single largest expense of operation. Rising labor costs continue to plague the industry, due primarily to the impact of commercial driver's license (CDL) requirements and increased benefits and workman's compensation expenses. This has occurred during a time in which retailers are demanding more and higher-quality services, and suppliers are slowly but surely shifting more marketing costs and responsibilities to the local level.

The Impact of Suppliers

Major brewers may now be influencing current restructuring as much as the changing economics of the beer business. After all, many distributors have already made changes in response to rising labor costs and many have experienced recent increases in pricing and gross margin levels. As a result, some have actually seen an uptick in profitability. While in most businesses re-engineering efforts are driven almost entirely by market and economic factors, in beer distribution suppliers are now a major driver of change. They are encouraging a significant restructuring of the beer distribution business.

During the facilitation of this change, brewers continue to offer testimonials to their commitment to the three-tier system. It seems the problem lies not in the concept of three-tier but in its current structure: there are just too many distributors. Recent improvements in wholesaler profitability aside, suppliers believe a significant reduction in the number of distributors is required to ensure the long-term financial viability and operating effectiveness of their distribution networks. This belief is likely more complicated than the simple conclusion that unused truck and warehouse space has become too expensive. In addition to fundamental economic realities of the business, there are qualitative factors influencing this belief.

Quality of Management and Systems

One of the reasons larger wholesalers achieve better economics is an increased ability to attract quality managers. Larger organizations offer more career opportunities and increase the justification for investments in training and development. In smaller organizations, managers are mostly doers - the organizations are not large enough to allow for much delegation. In large organizations, managers must have a greater focus on delegation and the ability to achieve through others. This difference should not be underestimated. In fact, as companies grow, management assets become increasingly important (and usually more expensive). Family operations in particular need to perform critical self-analyses to determine the strengths and weaknesses in management resources. It is critical to put all family issues aside and consider the organization as objectively as possible. In each functional area, which managers are the most effective in working through others? Which managers have limited potential for further development? What kind of training programs should be developed for each manager in preparation for the management of a larger operation? Are there any possibilities for promoting managers from within, or will outside managers need to be hired? How will each family member/owner react to outside managers? Will outside managers be provided opportunities for stock ownership?

Managers, to a certain extent, are limited in their performance by the quality of information and control systems in place to ensure performance is measured and improved. While small operations can be run successfully using less formal systems, growth must be supported by an ever improving corporate infrastructure. In each functional area, companies must improve methods of developing performance objectives, measuring actual performance, and providing managers with necessary and timely information. What are the key operating indicators (KOIs) in sales, distribution, warehousing, and administration? How are these performance indicators measured? Does the operation compare favorably to industry standards? What are the best ways to use KOIs developing management objectives and/or incentives?

External Forces

There are also forces external to distributor operations demanding improved information technology. More retailers will be requiring electronic data interchange (EDI) communication with distributors. If your company has not yet invested in hand-held computers and quality information system software, it is likely falling behind. Again, it is difficult for small companies to justify such investments while large firms can benefit economically from such automation.

As the sudden growth in specialty and imported beers has clearly demonstrated, customers are demanding more variety in their products and appear to have less brand loyalty. Product life cycles are likely to continue to shorten, and distributors of all sizes will be challenged to manage more and diverse products to realize comparable levels of profitability. Marketing techniques will become more sophisticated, and local market knowledge and execution will become increasingly important. Ironically, while "neighborhood" and/or "micro" marketing strategies will be integral to success, a major objective of consolidation is to better align distributor territories with those of major retail chains. This process should improve the consistency of services and pricing throughout major chain territories currently serviced by numerous distributors.

The purchase prices of neighboring distributor operations and/or distribution rights, therefore, may only be the beginning of the investments required by the current consolidation wave. The development of management and technological resources, and the increasing requirements of distributors to improve local-marketing and sales execution will likely demand continued investments of capital and time.

The Buy/Sell Decision

Suppliers have an objective to develop a more sophisticated distribution system capable of providing diverse services for a variety of products. Larger wholesalers, it is believed, will be more likely to provide the financial resources, management talent, and market focus increasingly required in the competitive marketplace.

Owners of distributorships need to ask themselves some important questions concerning their readiness to operate in such an environment: Do I have the financial (and human) resources to make the kind of investments the business will require? Am I ready to assume the risks associated with such investments? Does my family really have the management talent to be successful owners of larger, more diverse operations? If not, will the family be able to work with and perhaps provide equity ownership to outside managers?

Many owners have postponed the sell decision because they are uncertain what they will do once out of the beer business. This kind of change is an intimidating prospect to some; however, it should not delay a prudent business decision. While specific outcomes of the current changes taking place are uncertain, there will likely be a time window during which distributor sale prices are at their peak. Delaying the sale of a company for personal, rather than business, reasons may result in reduced sale prices. Do not make the mistake of holding on to a business of declining value for the primary purpose of keeping jobs for family members.

Maximize the Sale Price

One thing is certain, when you make the decision to sell your business, you should receive the maximum sale price available in a free market. A fair purchase price is arrived at through free and fair negotiations between informed buyers and sellers. While some may indicate distributor values are simply calculated by the application of per-case multiples, or by taking a multiple of annual gross profit dollars, your company may have a value significantly different. These multiples are, at best, simply averages that likely reward under-performing operations and penalize owners who have successfully managed their businesses, wisely invested in the development of brands, and now wish only to receive a fair return on the investment.

The current restructuring of the distribution tier of the beer business represents more than just the creation of fewer and larger wholesalers. Inherent in the change is an anticipation of more sophisticated operations with greater abilities to attract quality management and make additional contributions to local marketing and product development efforts. There are many distributors prepared to make this transition. Those who are not should seriously consider ways of maximizing the resale values of their operations.

Lamont Seckman is a principal of DMG Financial, Inc., a Denver-based consulting firm specializing in financial and valuation consulting services for beer distributors.
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Title Annotation:wholesale beer distributors
Author:Seckman, Lamont
Publication:Modern Brewery Age
Date:Jan 29, 1996
Previous Article:Computer system update & index: vendors field new computer products and systems for wholesalers.
Next Article:Fighting for space.

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