Business consolidation happens in every industry from banking to technology. The beer distribution business is no different.
Big fish buy up little fish.
According to the NBWA there were over 4,500 traditional beer distributors operating in the U.S. in 1980.Today, there are 3,000.
Consolidation happens for a variety of reasons – to get cost savings, economies of scale, or to simply buy out a competitor.
So, how does consolidation work exactly and what factors drive the decision to consolidate?
What are all the costs involved and how does a buyer get a return on investment?
And most importantly, what does beer distributor consolidation mean for your beer business.
In this post, we’ll dig into the details behind distributor consolidation. We’ll look at the key numbers that shape a deal, and present examples of how consolidation affects buyer and seller.
Consolidation is all around us, so it pays to understand the Economics of Distributor Consolidation.
Consolidation Basics
A business consolidation can take many forms: strategic partnership, minority equity investment, or an outright purchase.
An outright purchase is simplest form of distributor consolidation and perhaps the most common.
In a purchase scenario, buyer and seller exchange information and attempt to settle on the terms of a deal.There is often a broker involved to help guide the transaction and negotiations between the parties.
The purchase usually involves a non-compete agreement where the seller is prohibited from opening up another similar business within a certain time period. The deal may also include a consulting or employment arrangement for the prior owners or key managers to stay with the new company.
There are a million and one details that go into the purchase of one distributor by another, but when the deal is done two distributors become one, and we have consolidation.
Why Consolidate? Golden Cases…
A common consolidation approach is for one neighboring distributor to buy another.
Since the distribution territories are contiguous, this allows for the possibility to deliver beer on one truck instead of two.Best of all, this allows for the purchasing distributor to receive “Golden Cases”.
The term Golden Cases was coined by Andy Christon, of Ippolito, Christon & co.Golden Cases allow a distributor to add beer (and gross profit) to an existing delivery route.
In theory, the cases are “Golden” because they do not require additional expenses to the route. The new cases are simply put on the truck and delivered along with the regular orders.
For example, let’s say a delivery truck typically makes 12 account stops per day and delivers an average of 600 cases. The truck has capacity of 800 cases, and could therefore handle another 200 cases.
If the new 200 cases can be delivered to the existing accounts without adding much time to the driver’s day, these may be Golden Cases.
Golden Cases = Incremental Gross Profit without Incremental costs
While this sounds good, there’s usually a financial catch to consider.
More cases mean more units that the warehouse team needs to pick and load on the truck. It also means more SKU’s for the inventory team to manage and sales team to sell.
More cases = More time = More expense
Golden Cases can be a great way to increase the gross profit for a delivery route and for the purchasing distributor. However, there are many costs (hidden and in plain sight) that come with more volume.
Why Consolidate? Cost Savings…Real and Imagined
In addition to growing sales and margins with Golden Cases, wholesaler consolidation offers an opportunity for cost savings.
Cost savings, sometimes called synergies, occur when there are cost redundancies between the two wholesalers.
For example, administrative and overhead personnel, top management and ownership salaries are often targeted for reduction or elimination in a consolidation.
Warehouse costs may be reduced significantly if operations can be combined. Instead of running three warehouses, a consolidation may provide an opportunity to run out of two locations.
These synergies can add up to big dollars and there are real savings at stake.
However, consolidation can also bring about a variety of un-intended and costly consequences.
When distributors combine, there is often a clash of cultures. The way one wholesaler does business isn’t the same as how another operates. Employees from the acquired distributor may not buy into the new distributor culture, and costly turnover results.
Retailers may also feel the strain of a new wholesaler to service their store. There may be changes in sales people and drivers along with new policies and delivery times. People don’t deal well with change, and neither do retailers which can lead to lost sales.
Cost savings are a big part of consolidation, and should be calculated carefully. But beware of the hidden cost increases that come with consolidation. These can add up to nasty financial surprises.
Consolidation: What it Means for Your Business
The number of beer wholesalers in the U.S. has decreased by 33% in the last few decades. There’s no reason to think this trend won’t continue.
So, what does consolidation mean for your beer business and what should you do about it?
The steps you can take right now include positioning yourself as a buyer.Or, as a seller.
Will you be the consolidator or consolidated? A lot depends on your financial position, your market position, and your appetite to take on the challenges and opportunities that consolidation presents.
Regardless of the path you choose, you can and should begin to prepare now. Start with these steps:
- Review your supplier contracts and ensure you have a signed copy of each one
- Talk to your CPA firm about conducting an internal controls audit to make sure there are no financial surprises lurking in the books
- Meet with your banker to determine your financial position and ability to borrow (or to pay off loans early)
Consolidation means change and opportunity. And as the saying goes, opportunity comes to those who are prepared.
