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Our Changing Distribution System

Our Changing Distribution System. I. Pace II. “Value Bubble” ? III. Evolving Landscape. IV. Unique Approaches V. Conclusion. Beverage Consolidation. 3. 5. 10. 10. 5. 25. A-B branches counted as one. Number of Distributors.

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Our Changing Distribution System

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  1. Our Changing Distribution System I. Pace II. “Value Bubble” ? III. Evolving Landscape. IV. Unique Approaches V. Conclusion

  2. Beverage Consolidation 3 5 10 10 5 25 A-B branches counted as one.

  3. Number of Distributors Average rate of consolidation 1990 – 2005 = 69. IBG’s forecasted average rate of consolidation 2005 – 2010 = 126. Does not include approximately 500 insignificant distributorships.

  4. Supplier Concentration – IBG’s 5 Year Forecast At least 80% of volume will be done by Mega distributors.

  5. Average Size Mega / Small 5 Year Forecast Calculation • Average # of cases A-B / Other Mega: 6,501,893 • Average # of cases A-B / Other small: 1,390,203 • Average # of cases M/C/O Mega: 8,393,602 • Average # of cases M/C/O small: 1,008,846 • Average # of cases No big 3: 35,222 Based on Industry volume of 214M Bbls. In next 5 years A-B will have 30% of All Other volume, Miller/Coors will have 68% of All Other volume and those with No Big 3 supplier will have 2%.

  6. Pace is Deceptive • Conversation is greater than actual. • Mega distributors are picking up steam. • Regional roll-ups emphasis. • Miller/Coors JV impact on consolidation. • Couldn’t stop, can’t start . • State franchise laws and contracts will have huge impact on emphasis. • Remaining distributors are status quo survivors (no profit, no pressure, no problem attitude). • JV must be aggressive to accomplish synergies. • How does A-B react?

  7. Pace is Deceptive • Prices are escalating – buyers and financial institutions expressing concern. • Approval process is slow and getting more difficult. • Suppliers use process to gain financial commitments. • Some distributors major in minors.

  8. What Alters Pace?Combination of: Pain Pleasure • Supplier pressure. • Declining profit. • Losing brands. • Failing to get “hot” new products (internal or external). • Poor performance by major supplier. • Consolidation (supplier or competitor). • Legal, legislative, tax changes. • Premium price. • Continued employment. • Confidentiality. • Better ROI elsewhere. • Ease of process. • Sell everything. • Quality of life.

  9. “Value Bubble”?

  10. Gross Profit Multiples (Synergistic Transactions through Oct., 2007) Weighted Average For 2007 Is 3.02, up 20% in 22 months! Brands and businesses – asset sale. 1995-2005 +3.8% per year / 22 months +20%.

  11. Gross Profit Multiples(Supplier Breakdown) Recent trends • A-B 3.30 = • Miller 1.83 = • Coors 1.96 • Other domestics 1.20 • Crafts 2.83 = • Imports 3.25 • National Avg. 3.02 ? Sources: 117 IBG transactions, IBG valuation work, Litigation, Verified Trade Publications.

  12. EBITDA Multiples (Enterprise Value Through Oct. 2007) EBITDA weighted average is 8.65, up over 15% in 22 months! 2000-2005 +1% per year / 2005-2007 +7.4% per year. Asset sale.

  13. Some Major Causes • Increased profit caused by growth (volume and margin) with aggressive cost containment by distributors. • A-B (distributors and corporate) began aggressively buying. • Consolidation works. • Low cost of money. • Panic.

  14. Does The Value Bubble “Pop”? • Probably not. • Franchise laws, families and fears won’t change. • Industry of turtles, not rabbits.

  15. Evolving Landscape

  16. Evolving Landscape • Past (1996) – mostly dominated by single system at supplier / distributor level. • IBG’s definition of dominance is any share advantage of more than 2 to 1. • A-B = 45.4% SOM • Miller = 21.9 SOM • Coors = 10.0% SOM • Others = 22.7% SOM

  17. Evolving Landscape • Current (2006) – Supplier / distributors becoming balanced primarily caused by perfect storm of events. • Consumers trading up. • Wine & spirits growth. • Marketing shift (macro to micro). • Non-A-B distributor consolidation. • Exclusivity incentive program. • A-B = 48.1% SOM • Miller / Coors = 28.7% SOM • Others = 23.2% SOM. • Industry now more competitive.

  18. Competitive Shifts

  19. Competitive Shifts

  20. Markets To Watch That Could Alter Competitive Situation • New York • Philadelphia • Charlotte • Birmingham • San Diego • Sacramento • Seattle • Portland • Salt Lake City • Omaha • Memphis • Austin • Denver • Las Vegas • Reno • Minneapolis • Milwaukee • Raliegh IBG has direct knowledge of conversations in 10 markets above.

  21. Unique Approaches

  22. Macro Brands vs. Micro Brands(Logistics distributor vs. brand builder) Should all brands be treated the same?

  23. Logistics Distributor vs. Brand Builder • Not all suppliers, retailers, consumers, distributors or brands are the same. • Logistics Distributor . • Minimum drop size. • Heavy tel-sell. • Limited retail promotion or local marketing. • Work high volume accounts / handle the rest. • Push mentality at retail.

  24. Logistics Distributor vs. Brand Builder • Not all suppliers, retailers, consumers, distributors or brands are the same. • Brand Building Distributor. • Total market service • Strong in-outlet merchandising. • On / Off premise promotions. • Community involvement. • Pull mentality at retail.

  25. Problem: How to reduce operating costs to 15% and still provide brand building services. (Focus). • To be brand builders you must have time to sell. • Assume: • 50 hour work week, 75 stops per week, 10 minute drive time between accounts, 30 brands, 300 SKU’s.

  26. Is Shared Services A New Solution? Emotions of one distributor per market will never fly! Eliminates redundant cost thus allowing more focus on selling functions (15% operating cost target). Distributor retains intangible value. Vertical and horizontal potential.

  27. Conclusion

  28. Conclusion Pace and concentration will pick up. Are prices of brands and businesses peaking? Are distributors logistics providers , brand builders, or both ? Shared Services is a way to reallocate focus and reduce cost. Competitive landscape has changed.

  29. Observations • We must continue to eliminate redundant cost. • Target 15% operating cost as a % of sales. • Reason: Consumer and retail pressure. • Traditional system could evolve to various combination of: • Two distributors per market consolidation • Sharing resources (vertical and horizontal) • Hybrid system: Macro brands or certain packages of macro brands could be sold and delivered to mega retailers by suppliers but serviced by distributors for a fee • Micro brands sold, delivered and serviced by traditional three-tier system. • In all scenarios the distributor could retain distribution rights.

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