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January 20, 2013

After months of abstaining from writing my blog I am officially making a return before the end of the year.  It has been and exciting year in the beer business with ABI proposing to buy the balance of Modelo, Craft brands continuing to grow and expand, consolidation among wholesalers maintaining a steady pace, and a month long debate within the industry about how far a brewery can go in declining a prospective buyer who is their largest wholesaler.  Regardless of what significant event most affects you the one thing for sure is that the beer business is ever changing.  

The move by ABI to purchase the other half of Modelo should not come as a surprise to anyone who has kept up with the industry over the last several years.  Long term (10-15 years) I think this will have a direct effect on how the Modelo portfolio will be managed in the United States but I also believe the Justice Department should approve the deal.   Having an “arm’s length” agreement between Crown and ABI seems on the surface to give Crown the ability to market and price the brands as they deem necessary.  Since ABI will directly benefit from the growth of Modelo’s volume and margin, in the US, they will be keenly active to watching what happens.  While Crown has built a tremendous organization and is fully capable of growing the portfolio, I would think the culmination of this deal will place them under the ABI microscope more than ever before despite the firewalls built into the agreement.  Let’s hope it is approved as Crown needs 100% ownership of what happens in the US but I would anticipate future gravitation of Modelo products through consolidation to the ABI network as Crown will find the ABI distributor the better distributor in many markets and the ABI distributor will be more aggressive in pursuing these brands.   

The craft beer business continues to explode with more and more regional breweries popping up all around the country.  With this, the consumer is being tempted even more to move between brands.  Because of this movement between brands it will be very difficult for many of these smaller startups to grow past their regional or local footprint.  Consumers’ trading between brands does not allow one brewer to build the scale they both want and need to grow out of the self-distribution mode.   Many of the smaller startups do not feel they can give up that part of the margin pool to a distributor so they are trapped in distributing themselves knowing they are missing out on expanding their distribution by agreeing to go with a local distributor.  This is a conundrum many craft brewers, distillers, and wineries have as they are too small to generate the cash flow to service debt but not big enough to have an impact within a distributor’s larger portfolio.  I would suggest that this size issue along with the ever increasing presence by ABI and Tenth and Blake in the craft brand arena will limit the number of successful national craft brewers we will see in the years to come.   The Craft Beer aspect of the industry is exciting and has generated a lot of energy from all of the tiers and I find it intriguing to discover new and unique brands but I have concerns if we can sustain the growth of new brewers and maintain the quality and uniqueness.  Let’s hope that those entering into this arena have the passion many do today and they don’t see it as a get rich quick scheme, which I believe could directly impact the quality of the products produced and do a disservice to all.  What makes since is the consolidation of craft brewers so that they can leverage their strengths and bring capital to those who need it to expand.  

Distributor consolidation has moved forward at a sporadic pace and has done so based on what the wholesale network has generated and not so much as what the breweries have dictated.  Moves made this summer have been primarily to create the scale in a market allowing for the buying distributor to create the synergies needed. Unlike past years where the breweries dictated moves, many of the changes this summer have been driven by distributors paying a premium to help consolidate a market.  As long as the cost of money remains at an all-time low I see this past summer’s activity a trend for the future, only if buyers are willing to pay the premium needed to close the deal.  In my mind now is the time to make the acquisition you have been positioning yourself for and pay the premium you need to pay.  When interest rates increase any acquiring distributing will not be able to make the numbers work at these premium prices.  Today’s acquisition (despite the premium price) will look like a bargain in two years as interest rates rise. 

The excitement this year for some was the battle over approving or disapproving of Reyes Holdings in Norfolk, Va.  This issue did not seem to have many fence sitters as you either were all about protecting the brewery’s rights to appoint their distributor of choice or about protecting the distributor rights according to state laws.  Having been on both sides of the equation I know how difficult of a decision it was for both sides to take the action they took.  My position is not if either side was right or wrong but more about heading this issue off before it ever got to this point.  Was it not obvious that Reyes wanted to consolidate this territory since it was contiguous to their current Virginia footprint?  Also had MillerCoors not already made their point to Reyes in trying to block their purchase of Orlando and other acquisitions?  In my mind both of these questions have obvious answers.  So I think the real question is why can you not sit down and develop a strategy that works for both parties?  The solution is to develop a plan with each other so that Reyes can grow and MillerCoors gains the commitment they feel like they need in the existing markets and any future expansion.  You would think all would be better if they spent their resources on growing the brands versus litigation.  Anyone that knows the Reyes team will tell you they are the best at analyzing their market and running an efficient operation and those same people will tell you that they are equally as passionate about the brands they represent.  Before it happens again they need to come to an understanding.  

Finally I have taken this year to be more appreciative of friends and those that continue to offer support in the launching of GBS.  By “Upping my Gratitude” in writing notes to those who have done something on my behalf, I have received much more in return.  I have also learned that sometimes friendships are not as much about whom you are but as much about what you can offer someone.  In turn, my last two years have allowed me to get a great perspective on where those friends are.  Thanks for reading this year end blog and my goal for 2013 is to offer my thoughts on a regular basis.  I hope your 2012 has been enriching and you have a great 2013.  
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