Behind the Breakthru-RNDC Deal (courtesy of IWSR Magazine)

5/7/2018

Breakthru Beverage in the News

 

This article was originally published by IWSR Magazine, authored by Alexander Smith. It is being republished here with permission from IWSR.

 

The latest move in the consolidation chess game being played by U.S. wine and spirits distributors was made last November when Breakthru Beverage Group (BBG) and Republic National Distributing Company (RNDC) announced they will merge. The deal is expected to close by the end of the second quarter. 

 

BBG, itself, is the product of a recent 2016 merger between Charmer Sunbelt and Wirtz Beverage. BBG also merged with Allied Beverage in New Jersey last year. The new BBG and RNDC entity would have a distribution footprint in 31 states and Canada, with projected annual sales of more than $12bn.

 

These groups are inevitably playing catch-up with Southern Glazer’s, with operations in 44 U.S. states as well as the District of Columbia, Canada and the Caribbean. The company formed when Southern Wine & Spirits and Glazer’s combined in July 2016 and has annual sales of $16.5bn, according to Forbes.  The merger of BBG and RNDC will create a distributor with a 27% market share versus a 29% share for Southern Glazer’s.

 

Explaining the rationale for the deal, BBG vice chairman Danny Wirtz says: “We have tried to stay ahead of change, to drive a national agenda and to find new ways to create value in the way we do business. In that way we become stronger and smarter and that in this environment is best done through partnerships and the ability for us to leverage a unified approach corporately and nationally with good strong local execution.”

 

The really astounding aspect of the merger mania in the US distributor tier is that it is taking place between family owned companies. Engineering mergers between family owned companies is notoriously difficult because of the usual unwillingness to cede control. Wirtz says: “Obviously, consolidation and mergers between what were once single family owned companies, like ours was, is difficult. But as we go forward we realize that being part of a stronger, larger whole is more important than our independence. That is the biggest change and you need perspective. We were able to make that leap [in 2016] with our merger with Charmer and we have seen how RNDC has been able to do that with multiple families and manage a workable governance model as we did with Breakthru.”

 

It helps that BBG and RNDC share many of the same suppliers such as Brown-Forman, William Grant, Edrington and Gallo. “It will deepen a lot of our supplier relationships in many cases,” agrees Wirtz. “We also have a lot of complimentary suppliers. The more that we discuss the possibilities with our suppliers and the things that we are going to be able to do as a new company, the more exciting it gets.” The unanswered question is whether the new group will be able to win back suppliers. Breakthru lost the billion-dollar Bacardi account to Southern Glazer’s in the immediate aftermath of the 2016 merger. Southern Glazer’s has also inked subsequent deals with Beam Suntory and Campari. The suppliers were swayed by Southern Glazer’s national footprint.

 

The new BBG-RNDC entity still has some geographic weaknesses, notably its absence in California and New York. The next logical move would be a merger with Young’s Market in California, although Young’s Market CEO Chris Underwood told IWSR Magazine last year that its strategy didn’t encompass consolidation.

 

On the subject of attaining a national footprint, Wirtz says: “A national footprint is an important piece for today’s environment, but is not the goal above all things. Scale is increasingly important piece to the wholesaler, but ensuring that the value we are creating is done appropriately is also key. As much as we have the desire to go broad and wide, it is still really important on our side of the business to continue to be very strong and deep. By deep I mean to continue to be the best wholesaler in each of the markets in which we operate. It is not an either/or proposition. By all means, we need to continue to attain scale, but we must do it in the right way, with the right partners and ultimately with the right model.”

 

The quest for something approaching a national footprint has been central to RNDC’s strategy. Last year, in an interview with IWSR Magazine, RNDC CEO Tom Cole, who will also become CEO of the merged entity, said: “Our mission for the last 10 years has been to be a national player. We made a decision 20 years ago when we were in Florida, Arizona and Louisiana, that we needed to be bigger. We were not sure whether we needed to be international, but we needed to have a larger geographic footprint and not be just a regional wholesaler, but to be multiregional and look for opportunities to expand and get a national footprint.”

 

According to Cole, there are more deals from RNDC to come: “If you take a map and look at who the players are in different regions, our belief is that there will be some kind of coming together. We certainly intend to be a part of that and we see ourselves as a consolidator.”

 

This fixation on geographic spread when comparing distributors tends to obscure the fact that distribution, and indeed the larger market, is changing in many ways. How those distributors address that changing market provides another key point of differentiation and competitive advantage. “If the market and customer base evolve, we have to evolve with it and move with the times. The ability to manage that change is really what will set us apart,” explains Wirtz. He also notes that the role of wholesalers now extends far beyond logistics. “There is a strong need, more than ever, for the distributor to own ‘the last mile’ of the brand execution and play a part in that brand-building experience,” explains Wirtz. “If you consider all of the investment and the creative ways that brands can be built through advertising, social and digital, it is really impressive. But at the end of the day we own that last piece of the puzzle where consumers see the brand in an on- or off-premise environment and push them over the line to make that purchase.”

 

Disrupters

E-commerce is proving the ultimate disrupter in putting the wholesalers’ ability to move with the times to the test. Retail is changing, particularly outside alcohol, as those retailers who operate across categories are at the sharp end and contending with the challenge and opportunities presented by e-commerce. It has hit other categories much faster than alcohol. While the total impact of e-commerce is still small in the liquor industry, it is emerging extremely fast and is taking on different forms. Many big box retailers are adapting through ‘click and collect’ strategies. Independent retailers are also utilizing on-demand delivery companies like Drizly, Minibar and Saucey, based around rapid delivery times. Wirtz observes: “Every retailer seems to be approaching it in their own way and not necessarily trying to copy others. It is actually a great position for us to be in as distributors, to be able to see the different types of models that are emerging and to be part of the evolution of some of these new businesses.”

 

Wirtz notes that there is a new perspective from retailers around the so-called digital shelf. “That’s a dramatic change in terms of how we work with them,” he says. “Historically, we worked with retailers within their four walls and what happened within those walls was the whole customer experience. We now have to become much more dynamic and omni-channel in our approach. That is changing how we sell and work with our suppliers to enhance that point-of-sale now that it extends beyond the store.”

 

The onus is on the wholesalers and retailers to create that availability that consumers look for, but also use technology to try to bring the supply chain to a more workable model. “The challenge is to figure out how we shorten that gap and remove the friction in the system to meet the needs of that consumer,” says Wirtz. “Consumers expect variety and assortment in a relatively short period of time. While that used to be an in-store experience, online opens opportunities for us to think and work differently with our retailers. That probably involves more back-ofhouse collaboration than ever before.”

 

The challenge from e-commerce is also forcing the bricks-and-mortar retailers to enhance the experience within the ‘four walls’ through tastings and experiential events. Distributors are playing a pivotal role in developing and executing those programs. “Retailers who have been able to enhance the in-store experience continue to thrive,” says Wirtz. ”It is helping to continue to bring people to the bricks-and-mortar outlets and bring an element of excitement.”

 

There are other challenges and disruptors out there, such as the growth of retailer private-label products. Certain retailers such as Total Wine & More and BevMo! have a heavy focus on privatelabel because of the superior margins.

 

Wirtz says: “You definitely see more own-label out there. That is going to continue to be a piece of our industry. We have to find ways to bring our brands to market in the best way possible. We still have very strong national and international global brands that are investing heavily to build consumer demand.”

 

The dramatic growth of craft spirits and beer has been one of the distinctive features of the US

market and one that Breakthru tapped into by creating a specialist craft unit called Trident. “Rather than us getting caught in the circular conversation defining craft, we put forth a strategy and structure at Breakthru that focused our efforts collecting and working with the right partners in this craft space,” explains Wirtz. “We are focused on identifying craft suppliers that are going to be the most viable long term, be it at a local, regional or even international level, and then bring them into the market in the right way. The number of new brands coming to market has exploded in the last couple of years, but leaving it to chance and hoping that we hit upon one or two viable ones is not a good strategy. We put some discipline around that process and the partners that are part of our Trident division within Breakthru are seeing the results of that focus, attention and execution.”

 

The sheer number of new entrants has led some to speculate that a shake-out is inevitable. Wirtz adds: “We haven’t seen a shake-out yet, but clearly this is a highly competitive market. Keep in mind that spirits don’t have the [sales] velocity that beer does, and obviously the competitive set is extremely tight. While it is exciting that we are seeing this renaissance of distilling, some brands will inevitably fall out of the market and other owners may have to recalibrate their expectations. Some are going to be very strong local brands, and some will have the ability to scale to a regional level, but it is still the case that to become a national spirits player takes a tremendous amount of resources, time and attention to really get there.

 

“We are on the front end of an exciting time for our industry, one that is marked by growing entrepreneurship and this is as true for our midsize and larger suppliers as it is for the craft guys. They all have the ability to create brands and even resurrect brands. This is all very positive, but the industry has always been extremely competitive and not really for the faint of heart. That is one constant that won’t change.”

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