Analysts See Brewers Squeezing Incremental Profits from Middle Tier


Chris Pitcher at Redburn says that A-B can also "centralise planning/routing, back office and admin functions across even non-contiguous distributorships as has been done with significant benefits to margin by some large MillerCoors distributors." What's interesting about this observation is that Chris equates MillerCoors' distributor consolidation with A-B buying branches. Could this be the model? Could the model going forward be for MillerCoors to encourage consolidation and mergers, while A-B buys up branches and fixes footprints to play catch up? Interesting to think about. There are rumblings that A-B is looking to make their California operations more efficient by fixing footprint issues. Regardless, Chris makes the case that A-B can achieve an incremental $800 million (taking their margin to a whopping 40%) by encouraging distributor consolidation, best practice sharing between brewer and distributor, acquiring more distributors, and relaxing some distributor requirements and sharing cost savings.

Chris estimates that the City Beverages deal in Chicago, based on an assumption of 19m cases (which seems high), likely went for $170m-250m, depending on the multiple used. Is was probably lower as Chicago is a tough marketing for A-B. Still, for A-B it is "a significant strategic step forward," says Chris.

That echoes the report that Trevor Stirling from Berstein wrote several weeks ago (see BBD 12-10-09), who gave an estimate of $2.4 billion in EBIT that the big brewers could squeeze from the middle tier through distributor consolidation. Chris' estimate is just for A-B, while Trevor's estimate is for all distributors, so the two numbers seem to both match up pretty well if you consider that MillerCoors has more opportunities for vertical (overlapping market) distributor consolidation and A-B's are only horizontal (contiguous market). However, while Trevor points out there there are significant barriers to A-B buying up branches, Chris estimates that A-B could conceivably legally own distributors covering about 50% of its volume. It already owns about 8% of its volume. And don't forget Carlos Laboy of Credit Suisse and consultant Mike Mazzoni, who last year at the Beer Summit made the case that the big brewers could take some $600 million out of the system, if they took only half of the savingis from consolidation (see BBD 03-05-09). So lots of eyes and wallets out for the savings that distributor consolidation could reap. Of course, it takes capital to consolidate, lots of it, and the distributors who do it go into debt. So we must consider that.

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