Although the record pace of beer distribution mergers and acquisitions continues the value of the brands of number three or four distributor in an individual market may in fact be declining. Brand values for the number 3 or 4 distributor in a market have to be based on the gross profit dollars they can provide to an acquiring competitor. Valuing brands for same market consolidation by any other method is meaningless.

The less gross profit dollars brands contribute to a consolidated organization the less value they possess. Many, if not all, of the number 3 or 4 distributors are heavily burdened with declining second tier brewery brands. These brands are producing lower and lower gross profits each year. This alone is lowering their value each year.

Another factor in value determination is the market share the brands of the number 3 or 4 distributor hold. As market share erodes so does value. This is not unique to the beer distribution industry. It makes no difference whether a company is selling cars, toothpaste, or beer; a declining market share lowers the value of that company’s brands. As stated earlier, the number 3 or 4 distributor in a market has many declining brands. These declines imply a lower market share and thus a lower value for the brands.

Market share also implies economies of scale. The higher the market share the better the economies of scale (for the acquiring distributor), thus the more valuable the brands.

The third factor to consider for brand valuation of the number 3 or 4 distributors in a market is their sales trend. Why should an acquiring company pay a premium for brands that have a declining sales trend? It doesn’t happen in cars or toothpaste; and it won’t happen in beer distribution.

Taken together, value for the brands of the number 3 or 4 distributor is not declining at a single factor rate. They are declining at a triple factor pace. The value for these distributorships is similar to the status of a train that has just reached the crest of a mountain pass. It is at the peak; its immediate future is sure to be fast, faster, and always declining.

If you are a number 3 or 4 distributor in a market and the "other guy" just sold to the number 2 distributor in the market the value of your brands just took another major decline. Now the need for the number 2 distributor in the market to acquire your brands is very small. The number 2 distributor has little if any economies of scale to gain by acquiring your brands. A small gain equates to a low or no value for your brands.

Don’t be the last to sell. If possible, work together and sell or merge with the number 2 distributor at the same time; this "working together" will help to maximize the values for both the number 3 and 4 distributorships.

Below is a real life example of how the three factors of gross profit dollars, market share, and sales trends affect overall brand value. In 1994 the distributorship had the following market factors:

By the end of 1998 this same distributor had the following market factors:

Starting with a gross profit multiplier of 1.00, adding to it the market share of +0.21 (21%), and adding to this the 1993 to 1994 sales trend of +0.01 (1%) a gross profit multiplier of 1.22 is attained. By multiplying 1.22 times the 1994 gross profit dollars of $1,600,000 a brand value of $1,952,000 is determined for this distributorship. This equates to $3.90 per case equivalent in 1994 dollars for primarily second tier brewery brands.

Moving on to 1998, and again starting with the gross profit multiplier of 1.00, adding to it the market share of +0.17 (17%), plus the sales trend of –0.05 (-5.0%) a gross profit multiplier of 1.12 is attained. By multiplying 1.12 times the 1998 gross profit dollars of $1,300,000 a brand value of $1,456,000 in 1998 dollars is determined for this distributorship. This equates to $3.64 per case equivalent for the same second tier brewery brands.

Overall the brand value of this distributorship declined by 34.1 percent in 5 years. This is almost 7.0 percent per year (it is even greater when the inflation from 1994 to 1998 is included) and significantly faster than the 5.0 percent case equivalent sales decline. When using this method to value the brands of a distributorship the important factors of gross profits, market share, and sales trends affect value. When considering the sale or purchase of brands within the framework of a same market consolidation there really are few other factors to consider.

The use of a gross profit multiplier that is affected by market share and sales trends speaks directly to not only the value of the brands, but also to the economies of scale (also known as the ability to produce a profit) the acquiring distributor will achieve. Without the ability to achieve improved economies of scale there is little reason to make same market acquisitions.

These economies of scale include financing costs for the acquired brands. The higher the brand value, the higher the financing costs, the lower the economies of scale, and ultimately the lower the overall profitability. Should interest rates rise and drive up financing costs this may also put downward pressure on the value of the brands now held by the number 3 and 4 distributors in a market.

The economies of scale the acquiring distributor achieves in warehousing, delivery, sales, and administrative costs will be significant. However, all these economies of scale will be eliminated if the amount paid for the brands and the associated interest expense is excessive.

If you are the number 3 or 4 distributor in a market consider the following five questions:

 

1. Is your market share less than 20 percent?
2. Have your gross profit dollars declined 3 of the last 5 years?
3. Are your cases per stop less than 20?
4. Did you have sales declines 3 of the last 5 years?
5. Is your market population less than 1,000,000?