High spirits
Since his start in business in Poland in 1990, Bill Carey has zigged and zagged with the changes in the market.
He arrived here set to build a division of his father's Florida, U.S.-based agri-trading company by exporting meat to Europe. But the venture soon turned to beer when he received an import license for Foster's lager. Over the next two years, Carey moved deeper into the beer business, picking up other imported brands. But that market turned flat when value added tax (VAT) and excise duties for imports were introduced.
Carey then moved into spirits. "We needed more products to put on the trucks," he said.
From beer and spirits, his company, Carey-Agri, moved into wine, leading him to build a company specializing in wholesale distribution. Carey decided earlier this year to jump into the retail business, opening in Warsaw the first of what he hopes will be nine wine stores. Now Carey is hoping to move into a new business phase - one in which Carey-Agri will have a more focused growth plan and the financial muscle to back it.
Carey-Agri's parent company, Central European Distribution Corp. (CEDC), plans to list on the U.S-based Nasdaq stock exchange within the next two weeks. If successful, the offering will raise $20 million-$25.8 million gross for the company.
Carey plans to use the equity infusion to build an office and warehouse facility in Warsaw, open the retail stores, retire bank financing, and acquire regional, Polish alcohol wholesalers.
By expanding further, Carey hopes to stake out a leading position in the wholesale distribution market just when he feels consolidation is imminent.
"There were 800 wholesalers two years ago and now there are about 400," Carey. "In three to four years, there will be less than 100."Success in wholesaling and distributing alcoholic beverages depends on building a strong portfolio of products. Retail stores, restaurants and bars would like to deal with as few vendors as possible and prefer those who can fill all their needs.
"They want to buy from one supplier," said Bill Carey, chairman and chief executive of Central European Distribution Corp. (CEDC) as well as chief executive of its wholly owned Polish subsidiary, Carey Agri. Becoming that one supplier is also crucial to generate profits in an industry where margins are razor-thin. In the United States, net margins average about 1%. CEDC's 1997 net margin was just 0.76% on sales of $40.1 million.
The cost of goods a wholesaler or distributor moves account for the lion's share of expenses that eat away at the bottom line - for Carey it was 87% of the company's 1997 revenue. And in Poland, where import tariffs on some alcoholic products can top 30%, these costs are often higher than in more mature markets.
Because margins are so thin and the market still diffused, Carey believes that the wholesaler-distributors who want to survive in Poland need to bulk up in terms of product offerings and revenue.
To do that, though, any company, including CEDC, needs to continually add brands and expand throughout the country. So far, in its six years of operation Carey Agri has amassed a portfolio of nearly 300 different beers, spirits and wines.
The company's product offering includes imported beers such as Guinness, Budvar and Corona, which it handles on an exclusive basis in Poland (Carey Agri used to handle some Polish beers but stopped distributing these at the end of 1997); liquors such as Johnnie Walker scotch, Bacardi rum, Finlandia vodka, and Jose Cuervo tequila, which it handles on a non-exclusive basis; and wines such as Sutter Home and Sophia along with a variety of champagnes.
Carey Agri is looking to expand its wine portfolio and plans to use part of the proceeds from the offering to purchase a wine importer in Poland. Discussions with the unnamed importer have begun, but are still at an initial stage, Carey said.
Carey believes that the market for imported products and different types of liquor will grow at a rapid pace as real incomes in Poland continue to rise and more Poles get in the habit of going to bars and restaurants.
So far, sales supported this belief. Since 1993, Carey Agri's revenue jumped 10 times to $40.1 million last year from $4.3 million. In the first quarter of 1998 sales of $9.8 million were up 24% in dollar terms over the same period a year before, according to the company's prospectus.
Land of vodka
But even if Poles are drinking more imported liquors and beers, this is still vodka country. And domestic vodka has become the most important part of Carey Agri's distribution business, accounting for 39% of total revenue in 1997, according to CEDC's prospectus.
The problem is that vodka is the lowest margin sale among Carey Agri's portfolio. While wholesale spirit sales generate margins of 11-14%, Carey said, margins on wholesaling domestic vodka are 5-7%.
The upside is that vodka gives a distributor entree to sales outlets. "It's not so much a question of, 'Is it worth it?' It's necessary," Carey said. "If you don't offer vodka, they don't buy from you."
Because of this, Carey Agri is planning to use part of the proceeds from the offering to purchase regional distributors of Polish vodka around the country. While the company already has regional offices in Krakow, Katowice, Wroclaw, Poznan, Torun, Szczecin and Gdynia, it is looking to buy wholesalers in Lublin, lodz and Bialystok.
Like the distribution business as a whole, Carey believes there will be a consolidation in the vodka sector particularly when the state-owned network of Polmos vodka producers is privatized.
Both before and after this consolidation, though, capital will be key to gaining ground in the vodka distribution market, he added. "We feel we're in a very good situation in terms of vodka," Carey said. "The Polmos are looking for cash and they're offering large cash discounts, and having a substantial balance sheet (after the share sale) we can prepay. It's a premium on cash."
Giving for growth
For Carey, the sale of 2.5 million new shares is crucial to the company's future, even though it will mean giving up his controlling stake. Carey currently has a 66.7% holding in the company through his personal stake and family-related holdings. The remainder of CEDC is owned by Jeff Peterson, who has been with Carey Agri since its inception and is executive vice president.
After the offering, Carey's stake, along with family related holdings, will drop to 27.6%. Peterson's holding will be diluted to 13.8%. Neither investor is selling shares in the offering and existing shareholders have agreed not to sell shares within two years of the offering without the written consent of underwriter Brean Murray & Co.
But giving up such a large portion of the company wasn't Carey's original plan. Initially, the offering was structured to sell just 1.15 million shares to raise about $7.5 million. In addition, the company planned to sell 1.15 million warrants, which would have allowed holders to purchase a share of stock within five years of the offering.
Under this plan, Carey would have continued to hold more than 50% of the company, which would have been listed on Nasdaq's small cap market.
But after initial meetings with potential investors, Carey Agri scrapped the warrants and increased the number of shares on offer so that the company would raise more than $18 million, allowing it to list on Nasdaq's main market.
"It was a difficult decision," Carey said. By issuing more shares, though, Carey Agri will receive the benefit of a more liquid stock through a main-market listing. In addition, the company won't have to go through an additional round of fundraising for two to three years.
After completing a U.S. roadshow this week, Carey Agri will price the shares - the range is $8-$9 a share - and list them later in June. Taking the mid-point of the price range, Carey Agri is priced at about two times net tangible assets. The price is about 35 times 1998 earnings if first quarter net profit of $246,000 is used to project year-end earnings and on the basis of 4.28 million shares outstanding.
Not alone
But even if the offering is successful and Carey Agri beefs up financially, it won't have an open playing field. While $20 million is large for a growing Polish company, Carey Agri is dwarfed by the financial resources of international drinks companies.
Many of these companies, such as Seagrams, United Distillers, UDV and Bacardi currently import their products and then use Carey Agri and other distributors.
Generally, distribution agreements are negotiated on a short-term basis, meaning that drinks companies can switch distributors with little notice or decide to build up their own networks. But Carey is hoping that although multi-national companies are looking to grow significantly in Poland, they'll follow strategies used elsewhere and focus on marketing instead of distribution.
And although the number of wholesalers and distributors are declining, members of the industry said competition is heating up in Warsaw. The only way to maintain market share, they added, is through the level of service offered to sales points.
Carey Agri does get high marks from customers for its professionalism and level of service. But it's not perfect.
"They generally have everything and a well-developed system of representatives," said Jake Vanlandingham, general manager at Blue Cactus restaurant in Warsaw. "But even with Carey Agri, we sometimes have problems getting the product we want to handle."
In some ways, Carey Agri's rapid growth has spread the company too thin, leaving gaps for rivals to fill, added Krzysztof Krzydlowski, president of PPH Maak, a Warsaw-based distributor that competes in many spots with Carey Agri. Locally based distributors are able to provide better service because they are more focused on individual clients, Krzydlowski said.
This also means that companies such as Carey Agri are fighting a three-front battle, against local, regional and national rivals. Trying to conquer all comers may cause a company to grow quickly, but it doesn't insure that Carey Agri can maintain a proper level of service. "It's too big," Krzydlowski added. With possibly $18 million in his coffers by July 1, Carey will have a chance to prove whether big is now better in the distribution market.
He arrived here set to build a division of his father's Florida, U.S.-based agri-trading company by exporting meat to Europe. But the venture soon turned to beer when he received an import license for Foster's lager. Over the next two years, Carey moved deeper into the beer business, picking up other imported brands. But that market turned flat when value added tax (VAT) and excise duties for imports were introduced.
Carey then moved into spirits. "We needed more products to put on the trucks," he said.
From beer and spirits, his company, Carey-Agri, moved into wine, leading him to build a company specializing in wholesale distribution. Carey decided earlier this year to jump into the retail business, opening in Warsaw the first of what he hopes will be nine wine stores. Now Carey is hoping to move into a new business phase - one in which Carey-Agri will have a more focused growth plan and the financial muscle to back it.
Carey-Agri's parent company, Central European Distribution Corp. (CEDC), plans to list on the U.S-based Nasdaq stock exchange within the next two weeks. If successful, the offering will raise $20 million-$25.8 million gross for the company.
Carey plans to use the equity infusion to build an office and warehouse facility in Warsaw, open the retail stores, retire bank financing, and acquire regional, Polish alcohol wholesalers.
By expanding further, Carey hopes to stake out a leading position in the wholesale distribution market just when he feels consolidation is imminent.
"There were 800 wholesalers two years ago and now there are about 400," Carey. "In three to four years, there will be less than 100."Success in wholesaling and distributing alcoholic beverages depends on building a strong portfolio of products. Retail stores, restaurants and bars would like to deal with as few vendors as possible and prefer those who can fill all their needs.
"They want to buy from one supplier," said Bill Carey, chairman and chief executive of Central European Distribution Corp. (CEDC) as well as chief executive of its wholly owned Polish subsidiary, Carey Agri. Becoming that one supplier is also crucial to generate profits in an industry where margins are razor-thin. In the United States, net margins average about 1%. CEDC's 1997 net margin was just 0.76% on sales of $40.1 million.
The cost of goods a wholesaler or distributor moves account for the lion's share of expenses that eat away at the bottom line - for Carey it was 87% of the company's 1997 revenue. And in Poland, where import tariffs on some alcoholic products can top 30%, these costs are often higher than in more mature markets.
Because margins are so thin and the market still diffused, Carey believes that the wholesaler-distributors who want to survive in Poland need to bulk up in terms of product offerings and revenue.
To do that, though, any company, including CEDC, needs to continually add brands and expand throughout the country. So far, in its six years of operation Carey Agri has amassed a portfolio of nearly 300 different beers, spirits and wines.
The company's product offering includes imported beers such as Guinness, Budvar and Corona, which it handles on an exclusive basis in Poland (Carey Agri used to handle some Polish beers but stopped distributing these at the end of 1997); liquors such as Johnnie Walker scotch, Bacardi rum, Finlandia vodka, and Jose Cuervo tequila, which it handles on a non-exclusive basis; and wines such as Sutter Home and Sophia along with a variety of champagnes.
Carey Agri is looking to expand its wine portfolio and plans to use part of the proceeds from the offering to purchase a wine importer in Poland. Discussions with the unnamed importer have begun, but are still at an initial stage, Carey said.
Carey believes that the market for imported products and different types of liquor will grow at a rapid pace as real incomes in Poland continue to rise and more Poles get in the habit of going to bars and restaurants.
So far, sales supported this belief. Since 1993, Carey Agri's revenue jumped 10 times to $40.1 million last year from $4.3 million. In the first quarter of 1998 sales of $9.8 million were up 24% in dollar terms over the same period a year before, according to the company's prospectus.
Land of vodka
But even if Poles are drinking more imported liquors and beers, this is still vodka country. And domestic vodka has become the most important part of Carey Agri's distribution business, accounting for 39% of total revenue in 1997, according to CEDC's prospectus.
The problem is that vodka is the lowest margin sale among Carey Agri's portfolio. While wholesale spirit sales generate margins of 11-14%, Carey said, margins on wholesaling domestic vodka are 5-7%.
The upside is that vodka gives a distributor entree to sales outlets. "It's not so much a question of, 'Is it worth it?' It's necessary," Carey said. "If you don't offer vodka, they don't buy from you."
Because of this, Carey Agri is planning to use part of the proceeds from the offering to purchase regional distributors of Polish vodka around the country. While the company already has regional offices in Krakow, Katowice, Wroclaw, Poznan, Torun, Szczecin and Gdynia, it is looking to buy wholesalers in Lublin, lodz and Bialystok.
Like the distribution business as a whole, Carey believes there will be a consolidation in the vodka sector particularly when the state-owned network of Polmos vodka producers is privatized.
Both before and after this consolidation, though, capital will be key to gaining ground in the vodka distribution market, he added. "We feel we're in a very good situation in terms of vodka," Carey said. "The Polmos are looking for cash and they're offering large cash discounts, and having a substantial balance sheet (after the share sale) we can prepay. It's a premium on cash."
Giving for growth
For Carey, the sale of 2.5 million new shares is crucial to the company's future, even though it will mean giving up his controlling stake. Carey currently has a 66.7% holding in the company through his personal stake and family-related holdings. The remainder of CEDC is owned by Jeff Peterson, who has been with Carey Agri since its inception and is executive vice president.
After the offering, Carey's stake, along with family related holdings, will drop to 27.6%. Peterson's holding will be diluted to 13.8%. Neither investor is selling shares in the offering and existing shareholders have agreed not to sell shares within two years of the offering without the written consent of underwriter Brean Murray & Co.
But giving up such a large portion of the company wasn't Carey's original plan. Initially, the offering was structured to sell just 1.15 million shares to raise about $7.5 million. In addition, the company planned to sell 1.15 million warrants, which would have allowed holders to purchase a share of stock within five years of the offering.
Under this plan, Carey would have continued to hold more than 50% of the company, which would have been listed on Nasdaq's small cap market.
But after initial meetings with potential investors, Carey Agri scrapped the warrants and increased the number of shares on offer so that the company would raise more than $18 million, allowing it to list on Nasdaq's main market.
"It was a difficult decision," Carey said. By issuing more shares, though, Carey Agri will receive the benefit of a more liquid stock through a main-market listing. In addition, the company won't have to go through an additional round of fundraising for two to three years.
After completing a U.S. roadshow this week, Carey Agri will price the shares - the range is $8-$9 a share - and list them later in June. Taking the mid-point of the price range, Carey Agri is priced at about two times net tangible assets. The price is about 35 times 1998 earnings if first quarter net profit of $246,000 is used to project year-end earnings and on the basis of 4.28 million shares outstanding.
Not alone
But even if the offering is successful and Carey Agri beefs up financially, it won't have an open playing field. While $20 million is large for a growing Polish company, Carey Agri is dwarfed by the financial resources of international drinks companies.
Many of these companies, such as Seagrams, United Distillers, UDV and Bacardi currently import their products and then use Carey Agri and other distributors.
Generally, distribution agreements are negotiated on a short-term basis, meaning that drinks companies can switch distributors with little notice or decide to build up their own networks. But Carey is hoping that although multi-national companies are looking to grow significantly in Poland, they'll follow strategies used elsewhere and focus on marketing instead of distribution.
And although the number of wholesalers and distributors are declining, members of the industry said competition is heating up in Warsaw. The only way to maintain market share, they added, is through the level of service offered to sales points.
Carey Agri does get high marks from customers for its professionalism and level of service. But it's not perfect.
"They generally have everything and a well-developed system of representatives," said Jake Vanlandingham, general manager at Blue Cactus restaurant in Warsaw. "But even with Carey Agri, we sometimes have problems getting the product we want to handle."
In some ways, Carey Agri's rapid growth has spread the company too thin, leaving gaps for rivals to fill, added Krzysztof Krzydlowski, president of PPH Maak, a Warsaw-based distributor that competes in many spots with Carey Agri. Locally based distributors are able to provide better service because they are more focused on individual clients, Krzydlowski said.
This also means that companies such as Carey Agri are fighting a three-front battle, against local, regional and national rivals. Trying to conquer all comers may cause a company to grow quickly, but it doesn't insure that Carey Agri can maintain a proper level of service. "It's too big," Krzydlowski added. With possibly $18 million in his coffers by July 1, Carey will have a chance to prove whether big is now better in the distribution market.
