The Evolving Three-Tier System

1. The Evolving Three-Tier System

2. Agenda • A New Industry Model? • Industry Overview • Distributor Values • Consolidation • Buy / Sell Process • Distribution Systems of 2015? • Summary

3. I. A New Industry Model?

4. Historical • Slow growth, below CPI price increases, solid marketing, brand and package innovation. • Intense competition. • Long-term viability was the objective.. • Ran business like they were going to be around forever. • Family business mentality.

5. Currently • Less volume, higher margins, ineffective marketing, reduced service. • Duopoly behavior. • Short term profit as objective. • International / global companies. • Corporate mentality.

6. New Model Conclusion • Industry is in significant transition. • Change has created anxiety. • Businesses we have are not the businesses we had. • Still several family-owned distributors and family-owned craft suppliers. • Change will continue at fast pace.

7. II. Industry Overview

8. Volume • Volume is down. • Why? • Life cycle of mega brands.

9. TEXTBOOK PRODUCT LIFE CYCLE CURVES AND BRAND BUDWEISER Maturity Introduction Growth Decline Source: Mike Mazzoni

10. Volume Down (Why?) • Big 2 not focused on volume.

11. Trends of Macro Brands vs. Micro Brands Volume Volume Macro Brands: Bud, Bud Light, Lite, Coors Light, Heineken, Corona.

12. Aggressive Pricing. • October increase? • Are we selling off previously earned equity? • Ineffective marketing from Big 2. • Losing brand equity. • Competition for disposable income increasing as disposable income decreasing. • Lottery, Cigarettes, Gas. • Duopoly influence – Characteristics of a duopoly. • Aggressive pricing, reduced service, self-focused, less innovation, protect status quo. • Competition from other beverages accelerating. • Energy Drinks, Water, Vitamin Water, Coffee, Health Food Beverages. • Wine / Spirits kicking our butts.

13. BBD

14. BBD

15. Margins • “Stable” (but) … • More discounting at above premium to come. • State tax increases? (Washington example). • Retailers pushing back hard on price increases. • Ad feature, shelf space and display penalty box. • Is our industry considering the macro economic environment of our customers? • Costs • Dramatically reduced at supplier level (Big 2 – not crafts and imports). • Aggressive reduction at distributor level. • Personnel reductions while adding SKU’s? • Profits • Never been better. • Are these sustainable? • How long can beer drinkers continue to trade up? • How long can we remove cost and raise prices?

16. ABI • Distributor system is now non-exclusive. Aggressively seeking other brands. • Focused on savings / raising prices. • 1% increase in gross profit with 2.5% decline in volume is (reported) financial break-even. • 150 mega distributors do 80% of volume; 400 distributors do 20% of volume. • Over 200 distributors do less than 1M cases. • Eliminated 40 positions Oct. 1. • Raised prices Oct. 1. The original concern about InBev acquisition – “ are they brand builders”? Jury is still out but here is where the heavy lifting starts.

17. MillerCoors • Conversation pivoting to sales. • Distributors somewhat apprehensive. • 75 mega distributors do 70% of volume; 425 distributors do 20% of volume. The question prior to merger was “can they turn around Lite and if yes, can they effectively market 2 premium light beers together.” • Craft / Imports / Regionals • Looking at ABI distributors more aggressively. • Big concern is Big 2 focusing more on craft category. • Slowing margin growth. • SIG data (provided by BMI). • Average price increases (craft category, in C/E’s, supermarkets). • 2008: $1.49 • 2009: $0.95 • 2010: $0.42 • YTD 2011: $.042

18. Overview Conclusions • Conclusion • Volume will decline. • Margins will increase (maybe). • Craft discounting likely to increase due to accelerated competition. • Big 2 discounting could increase due to volume declines. • The duopoly environment will continue to have an effect on our industry. • More products are aggressively going after the shrinking disposable income of consumers. • Consumers are harder to reach with historical beer marketing. • Mega brands are old and have not effectively adjusted to new marketing methods. • Wine/Spirits are raising prices less than beer and are much more aggressive at multi-media marketing. • Profits have never been higher for both suppliers and distributors (but) ....

19. III. Distributor Values

20. Value of any business is its ability to generate cash. • Price of something is a different issue. • Key to getting maximum price is finding synergistic scenarios. • Vertical. • Horizontal. • Strategic • Finding non-beer synergistic situations. • Cost cutting within existing operations can, and has grown value. • Can the business position itself to get new brands as they come to market? • Unique combinations that exist today. • Wine / Spirits (NW). • Soft drinks (several states). • Each market is completely different.

21. Recent Transaction Trends 3 Year volume trends Recent selling price trends ABI MillerCoors Other Domestics Crafts Imports = National Average

22. What happens to future values? • Go up (if) …. • Consolidation continues. • Consolidation eliminates redundant cost. • Consolidation is a big reason for current profit situation. • Industry completes 2 distributors per market model, then continues to move toward mega distributor model and unique synergistic combinations. • Profits continue to grow, interest rates remain low, 15 year amortization of goodwill continues and distribution rights remain exclusive for perpetuity.

23. What happens to future values? • Go down (if) … • Government intrudes – higher state / federal taxes on beer. • Interest rates increase. • Private label grows to double digit SOM. • Suppliers are able to reduce distributor margins. • Retail revolt – Costco, 7-11, Wal-Mart? • Secondary supplier ships direct (hybrid system with invasion fee). • Consumers continue to drink less beer, switch to W/S, have even less disposable income, continue to lose brand loyalty. • If profit declines.

24. Value Conclusions • Suppliers/distributors are both doing the same thing. • Taking cost out aggressively. • Adding brands / SKU’s. • Raising Prices. • Growing profits. • Consolidation will accelerate when pain / pleasure increases. • Suppliers / distributors need to change volume attitude. • Develop a more aggressive approach. • Suppliers / distributors need a new vision to balance profit with value enhancement. • Unique supplier / distributor combinations will emerge. • Consumers have more options and are seeking them. • Retailization attitude.

25. IV. Consolidation

26. Number of Distributors These numbers represent 90% of volume.

27. Views Of Risk Buyers see Sellers see More Risk Unstable Economics Less Risk Lots of Emotion Significantgap in perceived value difference between seller and buyer. Sellers looking backwards seeing stability. Buyers looking forward seeing instability. Higher price expectation of sellers, less aggressive buyers. Slowing of consolidation.

28. What will cause the pace of consolidation to accelerate? • Pain • Less profit. • Pressure from suppliers. • Not getting “hot” new products. • Changes in legislative environment. • Poor performance by major supplier. • Consolidation (supplier or competitor). • Costco winning in WA. • Increase in taxes on beer. • Anxiety of change. • Pleasure • Buyers willing to pay more. • Ability to earn higher ROI from proceeds of sale. • More economic, less emotional approach. • Minimize anxiety of change. • Buyer willing to purchase everything. • Quality of life becomes an issue for the seller.

29. Consolidation Conclusion • Process of consolidation is more difficult, time consuming and dynamic than ever. Will only get harder moving forward.(See next section.) • Secondary suppliers often hold trump card. • We are an industry of turtles, not rabbits but this will change. • We live in a world of speed. • IBG expects consolidation to pick up in the next 12 months.

30. V. Buy / Sell Process

31. How Process Works. • Assemble team to help in process (legal, brokers, accounting, inside personnel). • Determine who is most qualified to sell your proposition. • Positioning and strategy are critical. • Very helpful to have more than one buyer. • Never underestimate the importance of selling skills. • It is more than just presenting the numbers. • Gather top-line information. • Develop buy / sell / merge strategy. • Values vary wildly depending on individual market circumstances. • Look for outside potential buyers, unique opportunities. • One of the keys to getting maximum value is creating competition. • Determine range of values. • Determine chance of success. • Notify major suppliers (ABI, MC) of intent to sell. • What does contract require? Different for each of Big 2. • Confidentiality becomes an issue. • Information requests can be extensive. • Sell the proposition.

32. Legal Process Begins. • Letter of Intent – basic, topline, non-binding . • Purchase & Sale Agreement (Legal document). • Non-competes, consulting, leases, real estate, equipment, representations, warranties, indemnifications, schedules, environmental, etc. • Warn Act? / Anti-trust issues? / Hart, Scott, Rodino / local, state requirements? • Until you sign, a purchase and sale agreement, you have no deal. • Notify all suppliers / employees. • Applications / approval process begins. • Close.

33. Navigate the buy / sell process: • Examples of issues. • Purchaser / seller backs out. • Breaches of confidentiality is the number one cause. • One or both parties major in minors. • People stepping over dollars to pick up nickels. • Deal fatigue – Process is tedious. • Death / Divorce. • Tax audits. • Employee accidents. • Supplier consolidations occur during the process. • Financing environmental changes (2008). • Approval process delayed by one supplier. • Attorney conflicts. • Environmental issues. • Asset appraisals. • Banking issues. • Legal issues. • And on and on and on ……

34. Timelines. • Develop strategy – 1 to 4 weeks. • Sell the proposition – 3 to 4 weeks. • Legal – 2 to 12 weeks. • Application / approval – 2 to 12 weeks. Total: 8 to 32 weeks.

35. Buy / Sell Process Conclusion • The buy / sell process is a fluid, time consuming, anal, energy draining, frustrating process. • There is an enormous amount of interaction that takes place. • Recent 5M case ABI transaction required 345 emails and 281 phone calls between Joe and client / attorneys / buyer / suppliers. • Recent 1M case MC transaction required 466 emails and 70 calls between Joe and client / attorneys / buyer / suppliers. • Be comfortable with your team. Trust is critical.

36. VI. Distribution System of 2015?

37. ABI / Pepsi or MC / Coke combinations would increase the distribution profit pool substantially. • Way to dramatically improve ABI distribution efficiency. • Reduce operating cost to less than 15% quickly. • Enhanced retail channel distribution flexibility. • Catch up fast on MC mega distributors. • ABI / Pepsi currently working together. • MC / Coke? • Cultural issues. • Currently working in Wyoming, Mississippi, Kentucky, Utah, Iowa, New Mexico, North Carolina. Previously worked in New York. • ABI / Pepsi will will continue to work together closely and eventually get together. • MC and Coke will try to avoid any combination. • ABI will buy more branches.

38. One distributor per market - Separate selling system with common warehouse and delivery. Separate ownership. • Emotional reaction by suppliers. • Anti-trust problems? • Currently working in CO, AZ, MN.

39. Mergers • More prevalent but difficult to accomplish. • Extended time line to complete. • Solves money problem. • Particularly important for ABI. • Recent significant mergers. • Two in North Carolina (Charlotte, Hickory). • Tennessee (Memphis, Tullahoma). • San Diego. • Portland / Seattle. • Berkshire Hathaway / Empire Distributing. • Burlington Northern Rail. • McClane Trucking. • Empire Distributing. • Name comes up a lot. • Relationship with InBev board members.

40. Shared services. • Theoretically good but difficult to get done. • Start small. • Idaho/Phoenix/Macon. • Wine / spirits / beer. • Republic National / Crescent Crown. • Glazer’s. • Currently 21M cases of beer. • Northwest has unique approach. • Young’s / Columbia • Odom / Southern. • Conclusion: the 3-tier model of today is poised for significant change. • Our current distribution system will evolve in many unique ways and will evolve differently in each state.

41. Summary • Industry has a new model. • Industry volume will continue to decline. • Value of distribution rights will probably remain at current levels through 2012. • Profits are historically high but how long will this last?. • The pace of consolidation will accelerate if profits decline (pain) or new synergistic opportunities occur (pleasure). • Suppliers/distributors are both doing the same thing. • Taking cost out aggressively. • Selling off previously earned equity value (not all distributors and not crafts). • Suppliers / distributors need a new vision that balances profitability and equity growth. • Develop a more competitive approach. • Consumers have more options and are seeking them.

42. The Evolving Three-Tier System