Winning strategies in the consolidation game: Buy now or wait? - brewing industry

Modern Brewery Age, March 25, 2002 by Karl Edmunds

Nestled in a sleepy beer town, somewhere east of the Pacific lived Mr. Ostrich. aver the years, Mr. Ostrich managed a moderately successful beer distributorship. Ostrich Distributing was a solid business, but a distant second in sales and market share when compared to his competitors.

One day, Mr. Ostrich had a discussion with his business advisor who suggested he purchase one of his local beer competitors. Ostrich knew his competitor's business was declining and assumed it to be suffering financially. His advisor assured him the competitor was motivated and ready to sell now, and despite the recent negative trends, the advisor felt the acquisition could be an excellent business opportunity. Mr. Ostrich told the advisor he would thoroughly consider the acquisition that night and be prepared to discuss the merits of the purchase the following day.

When confronted with crucial business decisions, Mr Ostrich often turned to the tranquility of the sand. That night, with his head deep in the sand, he had a revelation. Rather than buy the weakened competitor now, he would simply wait and buy the distributor later at a substantially reduced price. "Why spend precious capital needlessly?" he thought. "Perhaps I can even get the brands for free from a disgruntled supplier in the near future!"

The next day Mr. Ostrich met with his trusted advisor to discuss purchasing the competitor. Although he was already convinced his "wait and buy later" vision was a shrewd course, Mr. Ostrich patiently listened to his advisor's reasons for moving forward now:

#1 OPERATING SYNERGIES

If you buy the brand now you gain strategic operating synergies. Operating synergies should be available on your sales and delivery route and gross profit per stop should increase. Labor costs in the warehouse can be reduced. If you have space in your warehouse, there will be little added capital spending requirements. In addition, the overall increase in gross profits derived by purchasing now can reduce your cost per case for administrative and management functions. All of this translates to a higher level of profitability.

Of course, you must also recognize that adding additional brands and packages increases the complexity and management issues within your organization and can increase costs in some areas. These incremental costs must be weighed against the value of the gross profits contributed by the brands and the purchase price paid for the brands. This is essentially the crux of your purchasing decision.

#2 COMPETITIVE SHARE OF MARKET

Let's say you are in a market with four competitors; one with a 45% share, two others with a 22% share each and a hold-out with a 11% share. If you buy the hold-out or your competitor with a 22% share, you gain a competitive operating advantage in the market If you integrate the brands properly, you should be significantly stronger and more competitive relative to other wholesalers. You should have greater impact on in-store shelf sets, displays, promotions etc. The economics of your business improve, giving you the ability to invest more effectively in your market and brands.

#3 BRAND EROSION

While you wait for an opportunity to purchase your competitor's brands, perhaps at a lower price, remember the potential lower price reflects the erosion of the brand's value in the market place. Brand erosion is just another way of saying fewer people are buying the product People switch brands that are no longer relevant to their needs.

Without investment in the brand, new product innovations or repositioning by the supplier, the decline is unlikely to be reversed. If a supplier refuses to invest or ineffectively manages the brands to meet consumer preferences now, do you think a change of heart will occur five years in the future? You can choose to actively manage the decline by owning the brand now or you must be prepared to respond to your competitor's market tactics.

As consumers begin to search for new brand loyalties, owning the consumer's current brand choice gives you the ability to implement strategies that may sustain their loyalty in the near term. Also, you can simultaneously implement strategies from other brands in your portfolio to retain their loyalty within your business.

Nevertheless, if you cannot see a strategic value for the purchase of your competitor's brands, it is not advisable to purchase them just to keep them out of the hands of another competitor.

#4 COMPETITOR'S ENDURANCE

Another critical factor in your "buy now or wait until later" decision is that most distributors underestimate the endurance of their competitor. Many distributors who probably should sell but refuse have been in the business a long time. They often do not invest in their market or brands and they have paid off their debts. They can choose to ride the brand and cash flow into the ground and may have no intention of ever selling. These distributors have held on for years, unwilling to examine the financial implications and opportunity costs associated with their stubbornness. In this situation, potential buyers lose good business opportunities by clinging to a "steal it" mentality.