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WE HAVE EVOLVED, NOW WHAT? INDEPENDENT BEVERAGE GROUP Joe Thompson President Independent Beverage Group WE HAVE EVOLVED, NOW WHAT? INDEPENDENT BEVERAGE GROUP Joe Thompson President Independent Beverage Group [email protected] 1987. com 843 384 -0828 (c) Todd Arnold 4370 Crestone Cir. Broomfield, CO 80023 [email protected] 1987. com 303 410 -7748 Corporate Office 2591 Hwy 17 South Ste. 302 Richmond Hill, GA 31324 [email protected] 1987. com 843 681 -6333 (office) 843 681 -6332 (fax) * IBG has recently changed email and corporate mailing addresses. *

I. THE EVOLUTION I. THE EVOLUTION

3 I. The Evolution • 1992 – 2002 • Industry volume grew consistently. • 3 I. The Evolution • 1992 – 2002 • Industry volume grew consistently. • Consolidation came of age. • Miller objected. • Mega strategy started. • Profits grew slowly. • Economy grew rapidly. • Industry united and competitive. • Legislative, legal, trade associations. • Industry very competitive (suppliers and distributors). • Distributorship value rose. • AB’s exclusive incentive program grew. • Lost sight of changing world. • Non-AB distributors gained new brands. • Weather constantly changed.

4 I. The Evolution • 2002 – 2012 • Volume was down. • Above 4 I. The Evolution • 2002 – 2012 • Volume was down. • Above premium exploded. • Competition for craft brands grew. • “Big 2” lost significant volume. • “All Other” distribution system emerges. • Consolidation escalated. • Costs grew less than inflation. • Margin growth largest we have ever seen. • Profits grew dramatically (suppliers and distributors). • Interest rates dropped significantly and stayed down. • Attacks on the three-tier increasing. • Distribution rights grew faster and higher than ever. • Weather constantly changed.

5 I. The Evolution • 2013 – Forward • Volume will be down (-1% 5 I. The Evolution • 2013 – Forward • Volume will be down (-1% for next 5 years). • Margins will be up but will increase slower. • Labor costs. • Number of people. • Wages person. • Capital expenditures will increase faster than before. • Consolidation will continue at same pace. • Access to market will be expanded. • Industry will be less stable. • Legislative changes escalating. • On-going violations of 3 -tier principles. • Higher taxes. • State, federal, local. • Equivalency issue.

6 I. The Evolution • 2013 – Forward • Profit will be harder to 6 I. The Evolution • 2013 – Forward • Profit will be harder to increase. • Still good, but harder to accomplish due to more complex business model. • Interest rates will be higher. • Distributorship value -? ? • Transactions take longer. • Prices will depend largely on each markets circumstances. • Weather will constantly change.

II. VOLUME II. VOLUME

8 Total Beer Industry Volume Declining 2020 est. based on 1% per year Decline 8 Total Beer Industry Volume Declining 2020 est. based on 1% per year Decline 2014 - 2020 Significant drop starting in 2008.

BUDWEISER… and the Three “Modern” Generations Baby Boom 60, 000 Generation X Millennials Rejected BUDWEISER… and the Three “Modern” Generations Baby Boom 60, 000 Generation X Millennials Rejected by Generation X 50, 000 40, 000 Ignore by Millennials 30, 000 20, 000 Driven by Baby Boomer generation 10, 000 Source: Seema International based on Beer Institute 2013 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12 62 19 19 19 60 0 9 2014

10 Global Strategy? Harvesting equity value. Profits Structural / Incentive problem. Reduce cos Equity 10 Global Strategy? Harvesting equity value. Profits Structural / Incentive problem. Reduce cos Equity Volume er up. consum , trade e prices ts / Rais value / Profits less ef fective +++ market Volume ing, les --- s brand loyalty

11 Per Capita Consumption (Gal. ) – Beer Declining (Gal. ) Beer losing drinkers 11 Per Capita Consumption (Gal. ) – Beer Declining (Gal. ) Beer losing drinkers and less consumption … 6. 9% decrease … -2. 7 gal.

12 % of Absolute Alcohol -12. 8% +17. 8% +21. 1% Distilled Spirits Council 12 % of Absolute Alcohol -12. 8% +17. 8% +21. 1% Distilled Spirits Council

13 II. Volume - Positives • Craft category’s creativity, intellect and entrepreneurial spirit. • 13 II. Volume - Positives • Craft category’s creativity, intellect and entrepreneurial spirit. • Retail environment vs. wine and spirits. • Marketing potential. • Import / craft marketing is fabulous. • Major brewers marketing potential. • Growing Hispanic demographic. • Potential to expand consumer base with sweeter, flavored products. • Increasing competition. • Gold system (Crown) is a 3 rd competitor to ABI / MC.

14 II. Volume – Conclusion • IBG believes volume will be negative for several 14 II. Volume – Conclusion • IBG believes volume will be negative for several years. • Major suppliers have incentive to invest outside of U. S. • Math of 70 % decline vs. 30% growth. • Time will help as “All Other” emerges as significant competitor and math improves. • Craft drinkers tend to drink less. • Sweeter, stronger products appeal more to women and young adults. • Wine and spirits continue to win.

III. MARGIN / GROSS PROFIT III. MARGIN / GROSS PROFIT

16 Declining Disposable Income Source: US Bureau Of Economics. Updated 4/22/13 16 Declining Disposable Income Source: US Bureau Of Economics. Updated 4/22/13

5 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 5 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Craft Share% 8 Craft Share of the U. S. Beer Market (1980 -2013) 7. 5% 7 6 3. 7% 4 3 2 1 0 Two for one effect…since 2008 Craft + 7 mm / Total Industry – 8 MM Bbls 17 2014

18 Distributor Gross Profit Increase Slowing Source: NBWA Productivity Report 18 Distributor Gross Profit Increase Slowing Source: NBWA Productivity Report

19 III. Margin / Gross Profit - Negatives • ABI / MC overcapacity. • 19 III. Margin / Gross Profit - Negatives • ABI / MC overcapacity. • Lost 17 M bbls. In 5 years. • Complexity has kept breweries open. • 85% - 90% capacity utilization (estimate). • Price increases harder to get. • Excess equity value of mega brands eliminated. • Brand loyalty of craft drinkers is weak but growing.

20 III. Margin / Gross Profit - Positives • Industry winning margin struggle. • 20 III. Margin / Gross Profit - Positives • Industry winning margin struggle. • Look for suppliers to be more aggressive with distributors. • Several suppliers moving to pay-for-performance. • Above premium category will continue to grow. • Duopoly has not been willing to price aggressively.

21 III. Margin / Gross Profit - Conclusion • Recent gross profit increase has 21 III. Margin / Gross Profit - Conclusion • Recent gross profit increase has driven profitability. • Basically 2008 – 2012. • Heavy beer drinkers are struggling financially. • Price increases harder to attain in the future. • By pricing aggressively since 2008, major brewers have harvested the excess equity value of mega brands. • Margin growth will slow vs. last 5 years.

IV. COST IV. COST

23 IV. Cost • Size matters. • Mega distributors. • 16% cost / 26% 23 IV. Cost • Size matters. • Mega distributors. • 16% cost / 26% margin / $1. 75 ++ profit per c/e. • 25 distributors = 30% of volume. • Family distributorships (traditional). • 21 % cost / 25% margin / $1. 00 profit. • 340 distributors = 60% of volume. • “All Other” distributors will grow and will be more expensive. • Wine, spirits and soft drink distributors will emphasize beer more.

24 WA ABI MT ME ND VT MN OR ID X WI SD Keith 24 WA ABI MT ME ND VT MN OR ID X WI SD Keith & MI Don X NE UT CA ABI AZ Hensley X IA ABI Dobbs NM KS ABI Stokes MO TN X WV VA Jefferies NC Hand AR SC TX Ben E. Keith Nau MS X AL GA Dormity LA FL Lamantia ABI Mega Distributors NJ ABI DE KY ABI OK X OH IN IL CO RI CT PA Hand MA ABI NY WY NV NH MD

25 WA Co. Ho MT ME ND Taylor NH ID WI SD Clay WY 25 WA Co. Ho MT ME ND Taylor NH ID WI SD Clay WY Ingram NY Reyes Clay CO MC CA X KS OK X Clay NM Ho. Bo Andrews Keg 1 OH IL X X Andrew s Reyes VA KY NC X TN AR SC Glazer Reyes MS LA Goldring / Moffat AL X NJ DE Monarch IN MO TX Glazer MC Mega Distributors PA WV AZ Goldring / Moffat Ho. Bo MI North Coast IA NE NV UT Reyes VT MN OR GA X Taylor Reyes FL Gold Coast MD MA RI CT

26 Click. WA MT Maletis X ME ND Sheehan VT MN OR ID NH 26 Click. WA MT Maletis X ME ND Sheehan VT MN OR ID NH Sheehan WI WY RI MI Sheehan PA IA Saccani NE NV CO SW&S UT CA Sheehan Stone Major X X KS Self AZ Nackard Clement MA NY Sheehan SD X IL Wirtz OH Rucker IN Sheehan MO X MD VA Sheehan NC TN OK NM AR X Ben E. Keith TX Lamantia MS AL X SC SW&S GA Young LA FL Brown Craft Mega Distributors X – W/S with significant beer. NJ DE X WV KY X CT

27 IV. Cost • Distributors receiving more of of “pull” responsibility (marketing cost). Local 27 IV. Cost • Distributors receiving more of of “pull” responsibility (marketing cost). Local / internet marketing. • • Radio. Billboard. Magazine. Fairs, events, etc. Sampling. On-premise nights. Retailization – in-outlet marketing. • • Huge attitude adjustment at store level.

28 IV. Cost – Negatives • Brand / SKU explosion cost beginning to coming 28 IV. Cost – Negatives • Brand / SKU explosion cost beginning to coming due. • 2008 – 2012 MC went from 250 to 550. • Now (750) ? ? • Distribution system is currently stretched thin. • More capital expenditures required. • Human resources needed.

29 IV. Cost – Positives • Consolidation savings still available ($800 M est. ). 29 IV. Cost – Positives • Consolidation savings still available ($800 M est. ). • Low fruit already picked. • Mega distributors more efficient at warehousing, delivery and administrative cost. • Automatic picking systems. • Centralized routing. • Enhanced personnel management. • GPS technology. • Family owned. • No debt. • Passionate management. • Willingness to invest. • Local influence. • E-commerce is the future.

30 IV. Cost – Conclusion • Costs will be harder to manage in the 30 IV. Cost – Conclusion • Costs will be harder to manage in the future. • More investment needed. • Industry is adjusting its service model to evolve to new retail reality.

V. CONCERNS V. CONCERNS

32 Distributors influence being challenged. Brewers 2020 ? ? ? ? ? 32 Distributors influence being challenged. Brewers 2020 ? ? ? ? ?

33 V. Concerns - Negatives • Dissention = disaster. • Different state associations. • 33 V. Concerns - Negatives • Dissention = disaster. • Different state associations. • Craft vs. supplier. • Distributor vs. distributor. • Distributor vs. supplier. • Brand valuation disputes. • Legislative / legal. • Carve out laws. • Self distribution. • Increasing taxes. • Brewery branches. • Marijuana.

34 V. Concerns – Positives • States right to regulate alcohol is consistently upheld. 34 V. Concerns – Positives • States right to regulate alcohol is consistently upheld. • Double protection – franchise laws and contracts. • Historically stable business. • Still an industry of turtles, not rabbits. • Change happens slowly.

35 V. Concerns - Conclusion • Industry needs to speak with one voice. • 35 V. Concerns - Conclusion • Industry needs to speak with one voice. • Stop fighting our battles in public.

36 Conclusion • Industry volume will decline. • Losing equity value of mega brands. 36 Conclusion • Industry volume will decline. • Losing equity value of mega brands. • Dollar volume should grow. • Primarily due to above premium products. • Consolidation will continue at a consistent pace. • If a 25 year horizon, a great time to buy. • If a 5 year horizon the sooner you can get out, the better. • Values have grown significantly. • Rate of growth will likely slow as interest rates rise and cash flow declines. • Less desirable markets will be difficult to sell. • As competition grows industry will eventually get stronger.