Members of the California Family Beer Distributors (CFBD) gathered for the first time last week in Palm Desert, California, to discuss goals and highlight their differences from the Reyes Beer Division.
“The members in this room are independent family-owned beer distributors,” CFBD executive director Kevin Luckey said in his opening address. “They’re not based in another state. They’re based in California and they work and live in their same marketplace. And they truly have exemplified what it means to be a family business in the state of California.”
The CFBD was created in late 2020 as a way for independent distributors to have a voice in a state trade association. Two years before its founding, Constellation Brands terminated four wholesalers in the state in an effort to move its portfolio of Mexican beer brands to the Reyes network. Since 2018, Reyes has expanded its territory within California through a series of acquisitions.
“We realized that it was going to be exceptionally difficult for us to be in the same room as other much larger multinational entities that don’t really see a future for independent family beer distributors, don’t really see a reason for these businesses to survive,” Luckey said. “They really would like to see a more consolidated, more closed system.”
The organization’s goal is to be the “voice for competition in our tier” amid monopolization in the industry. Luckey pointed out that California has 14 fewer beer wholesalers than it did in 2018 and in that time, “one company has increased their market share by more than two-fold,” he added, referring to Reyes without naming the company.
In California, Constellation Brands, Sierra Nevada, Boston Beer, New Belgium and Diageo combined account for 41.2% of the market. Constellation (Modelo, Corona, Pacifico) and Sierra Nevada each have more market share in California than they do in any other state. In recent years, both brewers have terminated wholesalers in the state in favor of moving their brands to Reyes.
As larger brand portfolios move from independent wholesalers to branches of large national ones, those independent outlets’ financial stability can become jeopardized, and fewer wholesalers ultimately leads to fewer routes to market, particularly for smaller brewers.
“We’re concerned about consumers’ ability to get the products they want moving forward if we’re not highly competitive three-tier system,” Luckey said. “CFBD is here first and foremost to be competitive.”
Still, Luckey said there are reasons for optimism, even though “it can feel a little doom and gloom at times.” CFBD members can provide market access to a wide range of suppliers and products and offer “decades of industry experience” with institutional knowledge that “can’t be recreated.”
“This association working together, bringing some of the best minds in California beer together, is what is going to send us on the path to a successful future in which balance is returned back to the California beer distribution industry,” Luckey said.
Below are takeaways from the conference.
BMI: Reyes Network Sells More than Half of California’s Beer Volume, Boosted by Constellation Portfolio
More than half of the beer sold in California flows through the Reyes network, Beer Marketer’s Insights VP and executive editor David Steinman reported during his presentation on the state of California beer industry. Beyond the Golden State, Reyes has acquired more than 40 million case equivalents (CEs) and will reach more than 310 million CEs once acquisitions in Tennessee, Texas and Hawaii close.
Driving Reyes’ success in California is Constellation’s portfolio, which sells nearly as much as both Anheuser-Busch InBev’s and Molson Coors’ portfolios combined in California scan data, Steinman said. The Mexican import giant gained 2.1 sharepoints to reach more than 32% dollar share in IRI-tracked channels in the state. In the same period, A-B’s share declined -1 point, to 21.7%, and Molson Coors increased 0.2 share points, to 13.3%.
Modelo Especial is the state’s best-selling beer with 18.4% share of off-premise dollars, more than twice as big as the second best seller, Bud Light with 6.6% share, followed by Coors Light (6.3%), Corona Extra (5%), Michelob Ultra (4.1%) and Pacifico (3.7%).
DTC Still a Priority for California Craft Brewers Association
In California, only wineries have full direct-to-consumer (DTC) shipping privileges. Brewers can ship to consumers within the state, but not outside and out-of-state brewers cannot ship into California. These disparities put California at risk of violating precedent set by the Commerce Clause of the U.S. Constitution, so the California Craft Brewers Association (CCBA) has been lobbying for the expansion of shipping privileges.
“We want to make sure we keep this privilege,” CCBA executive director Lori Ajax said during a one-on-one conversation with Luckey. “The wine guys, I’ll give them credit, they accomplished this and changed the law about 20 years ago.”
California winemakers have been shipping wine to consumers in almost all 50 states for more than two decades, which Ajax said is “pretty good evidence” that DTC privileges don’t wreak havoc on the three-tier system.
DTC shipping, a proven lifeline for the CCBA’s members in recent years, remains a priority for the organization, despite two bills failing to pass this year.
“For a lot of our brewers during the pandemic, DTC probably saved them,” Ajax said. “A lot of them couldn’t have people coming into their taprooms, so they pivoted to have canning lines. And so for us, we feel it’s part of our survival.”
New Buyer Pool Involved in Distributor M&A
As the industry has evolved in recent years, so have trends in distributor mergers and acquisitions, OMAC Beverage Advisors managing partner John O’Connor said in a presentation about the state of middle-tier deals.
Relationships between wholesalers and suppliers have shifted from personal interactions with suppliers such as August Busch III “have evolved into a pure business relationship,” O’Connor said.
Deals have become much larger and are based on EBITDA multiples – with sellers recently fetching multiples of 12-13x – rather than gross profit multiples. However, “tremendous uncertainty” abounds as “inflation, interest rates and potential margin pressures” bear down on distributors.
Another massive change to the M&A playing field has been an influx of new, deep-pocketed potential buyers.
“These are names that you would not have seen 15 years ago,” O’Connor said.
Those names include BDT Capital Partners, Meritage, Franchise Equity Partners (FEP), Redwood Capital and Reyes. In a presentation slide, O’Connor noted they are “focused on larger deal sizes.”
In particular, O’Connor highlighted FEP as having an “interesting model.” The New York-based firm acts as a capital partner to franchise owners in chain restaurants, hotels, gyms, car dealers and beverage distributors.
“They’re looking to take passive and permanent flexible minority stakes,” he said. “They’re willing to take a lower than typical private equity type of returns.”
Earlier this year, FEP partnered with the KEG 1 group to bid on Tennessee-based DET Distributing, but eventually lost out to Reyes.
“The fact that they were willing to compete with Reyes on that thing and put those numbers as high as they went, [they] by definition are willing to take a lower return,” O’Connor said. “They’re an interesting player, and I think they’re gonna make some waves, and I think they’re gonna end up in the Bud system.”