Industry expertise | November 2024 Consolidation accelerates in the beer distribution space

The pursuit of economies of scale drives both organic and acquisitional growth. Distributors can improve operational efficiency by acquiring a business that covers territory that’s geographically contiguous with their own.

Distributors can then run the combined territory as a hub-and-spoke network with more efficient, fully scaled operations. Consolidating the old and new businesses boosts profit margins by driving down costs for staffing, systems, and overhead. Increasing profitability of businesses in today’s world reflects operating scale, operating efficiencies and operating leverage to yield better profitability. EBITDA/CE (case equivalent) of $2.00/CE—once the holy grail of profitability—is regularly achieved or exceeded by top operators, with consolidation and ongoing premiumization allowing some to reach $3.00/CE and higher.

As owners of family-run distributorships reach retirement age, multi-generational businesses don’t always have family members ready to step into an ownership role. Current leaders have seen the industry grow far more complex than it was when they took the reins, and advances in technology and competitive pressure, combined with the required investment of managerial energy and funds, are unlikely to slow in the coming years.

Owners are considering what’s best for themselves and their families, not to mention the business they’ve nurtured for so many years. Truist has observed average EBITDA multiples for selling distributors of 14x over the last several years. Exiting now, while legacy seller valuations remain relatively high, can be an attractive option, particularly for businesses that offer their buyers targeted synergies. While the impact of the rise in market rates (and the course of their easing) on future valuations is yet to be determined, businesses considering a sale should be well positioned.

A growing pool of family offices are drawn to the steady cash flow that beer distributors can deliver. The franchised structure entices investors by providing exclusive distribution rights within a market while protecting the revenue stream through enduring agreements with globally recognized brands.

The brand-oriented market space, stable cash flow, and growth in enterprise value over the long term, makes distributors stand out as a compelling acquisition for family offices and, to a lesser degree, private equity investors. Like other industry players, these buyer groups see the opportunity to further increase profitability by making multiple acquisitions that, combined, form more competitive entities.

A combination of continued premiumization and consolidation in the wholesale tier has put beer distributors in a strong position, with most seeing robust profitability and steady cash flow. The ongoing changes in this sector of the beverage industry are mostly positive—but the horizon isn’t entirely cloud-free.

As more states allow recreational use, the trend toward legalization of THC and CBD creates future concerns from additional competition to alcohol. Beer could also lose some ground to RTDs as regulatory barriers, which keep them out of some channels, continue to drop. While it’s important to watch these trends, the overall outlook remains bright for beer distributors.