Not Your Father’s Bud Distributorship

The prior generation of AB distributors had wealth accumulation winds at their back. The current generation faces headwinds.

A Wealth of Opportunities

A generation ago, the beer industry was growing, and AB was gaining share. The folks in St. Louis were crushing it. Competitors often lacked the scale and profitability required to match the AB operation’s service.  Brand portfolios were stable. Acquisition opportunities were abundant and consolidation synergies proportionally larger.  Transaction multiples were lower, and payback periods were shorter. AB owners had tremendous opportunities to grow wealth.

The current generation faces sustained industry declines, supplier struggles, and brand losses. Today, consumer preferences shift rapidly, and brands are more vulnerable. Growth is harder to come by and earnings are more volatile. Acquisition opportunities are more limited, and consolidations offer a lower level of synergies.  Transaction multiples are steep and may decline. Growing wealth will almost certainly be harder for this generation.

50 Share and Exclusivity

25 Years ago, Budweiser had begun its long decline, but Bud Light was adding cases faster than Bud was losing them. Total industry volume was growing, and the Bud Distributors’ share of it was increasing. When the A-B drivers put their handhelds (aka “bricks”) on the rack and turned in their cash, the daily dollars typically represented over 50% of the margin pool; a pool that contained unconsolidated Miller and Coors distributors operating with insufficient critical mass. Riding the AB train for all it was worth was the obvious choice. Absent an extra-large boatload of cash, selling the family business rarely made sense.

Back then, the AB system was killing it. The folks in St. Lou were pumping out Best-in-Class advertising on the regular. AB’s advertising was so good, Miller and Coors owners had to admonish their staff when they greeted each other with WASSUP. Operationally, the AB system was firing on all cylinders. Times were so good, “exclusivity” had compelling arguments.

Many AB distributor pared their portfolios. Cases and margin dollars from the likes of Heineken, Corona, Guinness, Mike’s, Boston, and Pabst were transferred to Miller and Coors operations at prices that look ridiculously low today. Buyers of these liquidated brands saw acquired GP drop straight to the bottom line. The term “Golden Cases” was coined. Multiples started upward - for good reason.

When Multiples Were Low

When I first entered the industry, AB distributors were unloading brands to buyers who understood the seller felt compelled to sell. Imports were not the industry force they are today. Crafts weren’t a thing yet. Smirnoff Ice was a new thing.  Most importantly, bankers did not love beer deals like they do today.

When I saw my first transaction multiples and worked on my first valuation engagements, I thought the discount rates applied to distributor earnings were unreasonably high, and consequently earnings multiples were too low.  These were the days of the uncompelling multiples. We are talking 2-3 GP and maybe 5-8X EBITDA. Interest rates were 8%-ish, and consolidation was not a driving force. PE folks would call touting their willingness to pay 5X EBITDA. They were 3+ turns short of non-club member pricing.

I came from a litigation consulting world where lost profits were discounted into present value awards. The long profit histories of beer distributorships, their exclusive contracts, the industry’s stability and long-term trends, the strength of primary suppliers, favorable regulations (e.g., cash laws), etc. all made for profitable and exceptionally stable businesses. I did not think the market was accurately pricing these businesses. This soon began to change.

Distributor values started to rise because the benefits of consolidation became undeniable. The process moved slowly at first but gained momentum after the first round of Miller-Coors deals. At this point, the questions concerning the benefits consolidation were settled. The expensive savings were massive, often bigger than expected. Early consolidators were able to pay down debit quickly. Buyers and bankers liked this. So, they did more deals with better terms. Technology improved and made running a mega distributor easier. Suppliers saw consolidation worked and reduced their points of contact. So, it was off to the races.

The industry was growing. The big three premium lights were growing. Higher margin imports were gaining share. Interest rates dipped. Acquirers continued to demonstrate the power of consolidation. Consolidators could pay down debt, make substantial investments, and improve execution all at the same time. Bankers were really starting to like beer deals. Multiple grew some more.

The Great Recession and Peak Beer

2008 was monumental. It was the year of The Great Recession, InBev’s acquisition of Anheuser-Busch and the MillerCoors Joint Venture. 2008 also turned out to be Peak Beer. 17,000,000 barrels disappeared between 2008 and 2023. [It’s worth noting InBev managed to get its AB acquisition done during a banking crisis, and beer distributors survived the financial crisis while car franchisors and real estate magnates got destroyed.]

Miller and Coors may not have been all-in on consolidation pre-JV, but they were once the JV was formed. Supplier pressures and exit prices brought together most of the Miller and Coors operations. Pink slipped owners received big multiples because the acquirer’s HUGE same market synergies were going to produce MASSIVE earnings. Also, on the AB side, a more Brazilian and Belgian St. Louis was rather open to consolidation. Multiples expanded.

After the 2008 financial crisis, interest rates were exceptionally low. It was the time of free money. Without question, the game had changed. Crafts became a thing. A rapidly growing, high margin thing that pushed multiples higher.  At this point, some started to question beer distributor multiples. Beer distributor multiples were indeed notably higher than multiples in ‘comparable’ industries. A “Value Bubble” was suggested. I did not agree. Deals still made financial sense. Buyers were purchasing perpetual ownership interests. There were no flips or failures.

As the impacts of the great recession slowly faded interest rates began to rise. US Shipments continued their downward trend. Beer distributors started transforming into beverage distributors. Substantial portions of distributors’ gross profit started coming from products with poor contracts and no franchise protection. Nonetheless, beer distributor multiples continued to rise.

Just a Couple Crises

2020 brought Covid and things got once in a century crazy. The on-premise channel got hammered. Vast numbers of craft brewers and restaurants went out of business. There were equipment shortages and service restrictions. Businesses everywhere had staffing nightmares. Covid transformed service standards, sales and delivery methods, and regulations. Once again, beer distributors persevered through a massive economic crisis.

Just as the impacts of the pandemic seemed to be fading, the nation got slammed with the worst inflation in 50 years. Beer fought inflation with price increases. Volume suffered, but beer distributors waded through the tide of inflation with price increases and new brands.

To combat inflation the Fed jacked up rates. Higher rates appear to have impacted deal flow more than acquisition pricing. Transaction multiples remain strong despite rate increases. This is not surprising. Sellers require a compelling exit.

Bud Light Goes Boom

When 2023 began, beer distributors were looking to move past Covid and face down inflation. For AB distributors that lasted one quarter. The Bud Light controversy exploded. The notion brand value built over decades could be so eroded in such a short period was inconceivable. To their credit, many AB distributors backfilled a lot of gross profit with other beverages and products and made the operational adjustments required to remain profitable.

The value lessen of the Bud Light controversy is momentous. The industry made it through The Great Recession, Covid, supply shortages, and massive inflation. Yet, a single ad campaign blew a massive and enduring hole in the largest brewer’s sales. Almost overnight the family office bond investment had to be recharacterized. [Note the individuals and entities that benefited from AB’s problems fully understand they could suffer a similar fate]

Having Unprotected Portfolios

I believe a discussion of the value implications of distributor portfolio changes is warranted. Changing from a single strong contract with an iconic and exceptionally stable supplier to a situation with dozens of smaller supplier contracts featuring troubling termination provisions is no small matter. One might argue portfolio diversity provides resilience, but beer distributors have built a quite few non-franchised brands only to have them taken with little compensation. 

Such brand losses are often small enough to ignore. The termination payment and lost sales are both insignificant. However, we all know too well, this is not always the case. Most of us could fire off a half dozen examples of beer distributors taking on brands with little or no market presence and developing them into brands producing six, seven, and even 8 figures of revenue, only to have the supplier take the successful brand away. [After which the successor often tanks the brand]

Compensation for terminated distribution rights is frequently included in Other Income, as opposed to Operating Income. Historically, this made sense. The payments were non-recurring, so keeping them out of projected earnings when valuing a business was appropriate. Now in a world of vast brand portfolios laden with non-franchised products I am seeing a recurring stream of material termination payments in Other Income (aka “below the line”). Now brand termination payments might be considered an ongoing part of the earnings stream (over a multi-year period).

Expecting material termination payments in future years is now strangely reasonable. A distributor gets a nothing brand for almost nothing and turns it into something. The distributor gets to briefly enjoy the sales and earnings lift, but ultimately loses the brand and its profits. When the brand goes away the distributor collects a one-time payment for a brand with low initial investment. The process repeats itself every couple of years. Welcome to the Churnatorium.®

Apologies, I digress.

Contemplating the Future

So here we are starring 2025 in the face. The current generation of owners do not have the wealth accumulation opportunities their parents did. Today’s AB owners don’t have a huge scale advantage over their competitors. Growth is harder to come by. The industry isn’t growing, and AB isn’t crushing it like they did in the glory days. Current owners can’t dance with the horse that brought them. Current owners must persistently wrangle a stable of suppliers; a stable with suppliers prone to bolting. Sales and profits are more volatile. The competition is far stronger. Transaction multiple increases are not going to create a 50%+ wealth increase – again.

Don’t get me wrong, there are still plenty of growth opportunities for AB distributors. It is possible the beer industry will return to growth (soon would be nice). Ultra and some other AB brands have mojo. Consumers could return to Bud Light in large numbers. AB could produce a non-beer product that more than offsets beer declines. Most importantly, AB Distributors possess formidable sales, delivery and warehousing operations in a world where the line between the beverage alcohol segments has blurred. Most distributors have the capacity to derive revenue from all beverage alcohol segments, and NAs. 

Without doubt this generation has revenue opportunities. Thing is, the prior generation had sales and earnings momentum.

Beyond earning growth, it is almost certain the current generation’s wealth will not benefit from multiples expansion like happened over the last two decades. A similar cost of capital reduction is exceedingly unlikely. Interest rates may go down, but 60%+ down? The equity component simply cannot make a similar downward move. We went from PE Firms comically offering 5X EBITDA 15-20 years ago, to family offices outbidding well-healed, aggressive, synergistic buyers at pricing that looks like the buyer used a 5% cap rate (the legendary 20X).

At the start of the millennia, I thought beer distributor multiples looked low. A quarter century in, I no longer feel that way. Even if the days of free money return, one should not expect significant multiples expansion. Lower multiples seem more likely.

EBITDA multiples are high. Payback periods are extended. It’s been that way for years. Cheap money and operational synergies put multiples where they are today. Cheap money and synergies can’t continue to push multiples higher, they are already baked in. Moreover, interest rates are up, and after years of consolidations, deal synergies tend to be proportionally smaller. Taking people off the street and closing warehouses was easier and cheaper in the aughts. All these factors suggest lower multiples may be appropriate.

If you are running a profitable business with a solid future and you have succession lined up, then transaction multiples don’t matter much. If profits are more than sufficient to sustain the business and provide healthy ownership earnings, what a consolidator would pay for your business isn’t particularly relevant. If you have a low leverage operation, then earnings volatility is less problematic. If you have acquisition opportunities that allow you to grow wealth through leverage, that is an important thing because growing wealth through acquisition is still a tasty proposition. If you live in a growing market and have opportunities to consistently increase sales (despite suppliers bolting and brands imploding), then long-term earnings growth can overcome intermittent brand losses. 

However, if you are trending down and have been unable to bolster sales with other products, you must be realistic about your circumstances. Will sales be 30% lower a decade from now? Will your EBITDA be less than half what it is now? Will owner earnings have declined substantially? Do you have 0 acquisition opportunities? Will you be running a less profitable business in a world where multiples are 25% lower? Will you find yourself thinking about the wealth you and family could have accumulated had you taken a deal based on your current earnings and today’s pricing?

What will the future bring? No one can say. What I can say is that for this generation, holding onto the family business is not the obvious wealth creation choice it was a generation ago.