Distributors Now and Then

FILED JANUARY 25, 2012

Dear Client:

I just got my dirty little hands on the NBWA's latest Distributor Productivity Report yesterday, with data from 2010. Comparing it to the 2002 data from the DPR, quite a few differences jump out at me. There's been a lot of change over the last eight years.

For one, the typical pre-sales distributor now carries an average of 549 SKUs, compared to 279 in 2002. That alone is a huge change, both in managing SKUs in the warehouse, loading trucks, selling complexity, and managing SKUs at retail. It was hard in 2002 -- now it's really hard. That might be why the median return on assets for wholesalers in 2010 was only 12%, compared to 14% in 2002. With increasing brands and packages, it takes more assets to sell and deliver the same amount of beer.

But there are some improving indicators as well. Average gross profit margins have increased from 25.9% in 2002 to 26.6% in 2010, the highest GM ever reported. Price increases and a mix shift in sales toward higher margin crafts and imports are the reasons. Still, the growth in gross margin hasn't kept pace with the big brewers. Similarly, net profit margin has increased from 3.4% in 2002 to 4.3% in 2010 as distributors have become more efficient, despite increases in SKUs and chain service levels, through consolidation and technology.

We would've thought that financial leverage would be higher today due to consolidation, but apparently distributors have been paying their debt down, as leverage is at 1.6 compared to 1.8 in 2002 and 2.2 in 1990. Either that, or distributors are so much larger today that leverage levels are necessarily lower. Interestingly, inventory turnover is much lower in 2010 as suppliers increase inventory levels, turning 14.3 times a year versus 16.7 times a year in 2002.

Payroll as a percentage of gross margin dropped to 49.4%, compared to 52.5% in 2002. Distributors are indeed running leaner.

Is bigger better? Back in 2002, it certainly was. Return on assets for small distributors (under $15 mil in sales) was 10.5%, while it was 15.1% for large distributors (over $45 mil in sales). That's quite a spread. But in 2010, return on assets for small distributors was 13.4%, while for large distributors it was 12%. Huh? Well, we note that the survey sample is not the same in 2002 as 2010, ie different distributors respond in different years. In 2010, I would submit that there are many more small wholesalers who are high share A-B wholesalers, while in 2002 there were many more small Miller and Coors wholesalers with lower share who have since been swallowed up. That would skew those numbers perhaps.

C-STORE CHECKUP: SMALL BRANDS ROLLING, BUT BIG STILL BIG

Convenience stores have had a tough time in the last few years, but 2011 was a reprieve. The beer category was actually up 0.6% for the 52 week period ending January 8 with an average price per case increase of $0.53. Not bad. Domestic sub-premium didn't have a great year, losing -0.8 case share points on higher pricing, which were swallowed up by imports (gaining +0.5 points) domestic super premium (gaining +0.2 points) and craft (+0.2 points).

A-B and MillerCoors volume share were down for the 52 weeks at -0.9 and -0.2 respectively. C-stores are increasingly a problem for A-B. Crown Imports had the best 52 weeks gaining +0.5 case share points with Corona and Modelo volumes up +0.2 each. Mark Anthony Brands (Mike's Hard Lemonade) at +0.3 and not to beat a dead horse, but was Yuengling up by +0.2. Pabst Brewing and Boston Beer were both up +0.1. Notably, New Belgium and Harpoon Brewery grew case volume by 53.9% and 80.8% respectively. Craft has arrived at the c-store channel with a vengeance. Even New Glarus registered as a top supplier in c-stores, even thought it is only sold in Wisconsin.

As far as brands go, Coors Light led the pack with volume share up +0.3, Michelob Ultra Light and Yuengling traditional lager's share were both up +0.2 and Pabst, Bud Ice (we're always watching you, Bud Ice), Natural Ice, IceHouse, Rolling Rock and Busch Ice volume share were all up +0.1.

One thing jumped out at us. We all know that Bud Light is the largest c-store brand, but we didn't realize how much bigger it is than any other brand. No other brewers even came close to touching the 187.5 million cases Bud Light sold in IRI scanned stores; The closest contender is Budweiser at 70 million. Dang that's big.

IDAHO REPUBLICAN GROUP FILES PRIVATIZATION INITIATIVE

An initiative filed Monday by the "Reagan Republicans" club would eliminate the state Liquor Division and allow fully privatized liquor sales beginning July 1, 2013. We previously reported that the Northwest Grocery Association would be leading the charge for privatization in 2012, but it seems that group has decided it would rather convince lawmakers to back a privatization bill during the 2013 legislative session, according to AP. "We had taken a look at possibly 2012, and concluded that it was not feasible to do," NGA lobbyist Roy Eiguren told The Spokesman-Review. Reagan Republicans president Jeff Ward assured AP the group has no ulterior motives to profit the private industry, they just want to scale back government in Idaho. "It was important to us that this initiative is written in regards to the proper role of government, not who would benefit by the privatization of liquor sales," Jeff said. The group must collect over 47,000 signatures by April 30 to put its initiative on the ballot.

Until tomorrow, Harry

"Loyalty to petrified opinion never yet broke a chain or freed a human soul."
-Mark Twain


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