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InBEV’s Big Deal

It was the best of deals.
It was the worst of deals.

Call it what you may. But whether you like the idea or not, the acquisition of Anheuser-Busch by Brazilian/Belgian brewer InBev is the kind of grand combination that changes how markets proceed and do business. It is the kind of landmark deal that, like the creation of Diageo or the recent acquisition of Allied Domecq by Pernod Ricard, shocks the industry by its sheer size. Anheuser-Busch InBev (ABIB – or InBud, perhaps inevitably) is suddenly the world’s largest brewery, by a very large margin: $36 billion in annual sales, over 322 million barrels of beer (that’s almost 4.5 billion cases), selling 3OO brands on six continents.

It’s not simply big, either. Like Diageo and Pernod Ricard, ABIB now owns a sizable stable of world-recognized brands: Budweiser, Stella Artois, Bud Light, Beck’s, Brahma, and Labatt, as well as some well-regarded Belgian specialty brands like Hoegaarden and Leffe. With a solid base in the US – where A-B still outsells the new MillerCoors joint venture – and Latin America – where Brahma dominates the huge Brazilian market – and far-reaching international marketing experience on five continents, ABIB has the fulcrum, the lever, and the place to stand; they’ve got the stuff to move the world.

It’s going to be a bit before it’s all in place, however, and some other folks might have different ideas about how that’s all going to work out. Let’s take a look at what this colossal merger will mean for ABIB, for the world beer market, for the actual people involved, and – not to lose sight of what’s really important – what it means for you.

Anheuser-Busch has a pretty simple corporate history. After a small and not particularly successful beginning, the arrival of the energy and genius of Augustus Busch built the brewery into a steadily growing regional, and then national, business. Under the hand of successive members of the Busch family, Anheuser-Busch became the biggest brewery in America, and built on that position until they had almost half the US beer market. They spent lavishly on promotion and advertising, and spent lavishly on corporate and personal perks as well, building and enjoying spectacular success.

Where they fell down, though, was in the international arena. While almost every other large brewery in the world was investing in and acquiring various regional breweries, getting into burgeoning markets in the former Communist countries in eastern Europe and in China, A-B mostly stood on the sidelines. Their biggest move, buying half of Mexico’s Grupo Modelo, brewers of Corona, was not a purchase of a controlling interest, but more about getting Corona into Anheuser-Busch wholesalers’ pipeline. A-B had the biggest share of the world’s richest beer market, the strategy seemed to say; what else did they need?

InBev took a different path. They started as the combination of two smaller brewers in Belgium: Artois (familiar name?) and Piedboeuf-Interbrew came together in 1988 and became InterBrew. They began to acquire larger and smaller rivals, and began adding breweries from other countries. The international market beckoned, and InterBrew sallied forth with Stella Artois, their core Belgian pilsner brand, and German export veteran Beck’s. They gained great experience in the different world beer markets, and continued to buy into – and buy up – more breweries.

The acquisition took a slightly different turn when InterBrew met AmBev, the Brazilian giant (which was itself the product of the 2OOO merger of the Brahma and Paulista breweries). The merger created the intercontinental brewing company that we know as InBev.

Whether it’s cultural chauvinism or simply that people were used to talking about a Belgian brewery, most people – especially in the press – continue to refer to it as a “Belgian brewing giant”. But AmBev was the bigger company, and although InBev is based in Leuven, Belgium, the company is run by the Brazilians. Nine members of the 13-person Executive Board of Management are Brazilian or Portuguese citizens (there are three Belgians and one German), including the man who toasted the creation of ABIB with a bottle of Budweiser, Carlos Brito.

The breweries’ differences were highlighted in the acquisition process, when the focus was on what Augustus Busch and A-B might do to fend off Brito and InBev, and on what the merged brewery would look like. Market analysts saw few options if Busch was going to make good his reported statement that a purchase of the company wouldn’t occur on “his watch”. A-B had no “poison pill” stock plan in place, and the percentage of the company owned by the extended Busch family was no longer enough to ensure a successful defense.

It was clear that A-B’s main defense was whatever shareholder loyalty – Busch family and otherwise – they had left after a somewhat lackluster performance over the past five to ten years. The company’s share of the US beer market had slipped from its former high. A ton of money had been pumped into Bud Select, a brand with questionable positioning and little life of its own, and the money couldn’t boost the sales. Budweiser continued its 2O year slide unabated, and Bud Light’s growth, long the sturdy engine that had driven A-B’s growth, appeared headed for a plateau.

Fixing that wasn’t impossible. “If they can sustain Bud Light and slow down Bud’s decline by a point, maybe two points, I think they can have (their core brands) fixed,” beer business daily publisher Harry Schuhmacher said in early April of this year. But it was going to take time that InBev and their bankers weren’t going to give the St. Louis-based brewery.

The few bright spots in the portfolio weren’t big enough to do anything but whet InBev’s appetite. Michelob Ultra had broken big and sagged, but was making a steady comeback, assisted by fruit-flavored extensions. The launch of Bud Light Lime was a strong success, that shows a lot of promise for the future, but it came too late to seriously affect the negotiations. One area of strong growth? A-B’s import deal to bring in InBev’s brands to the US, hardly something that was going to convince shareholders that an InBev deal was a bad idea.

(Was the InBev import deal a questionable idea itself? Negotiations over the deal would have given InBev a much closer look at A-B’s inside numbers and structure. The Brazilians would also have gotten a birds-eye view of the vaunted A-B distribution system, which was crucial to the success of the import business . . . and would be just as crucial to the success of a merger. InBev got valuable intelligence on a primary rival; A-B got cash and high-end brands to feed their wholesalers. In the long run, it looks like InBev got a much better end of the deal.)

Given an all but inevitable deal, then, was the deal a smart one? That was a much less mixed evaluation: yes, this was a deal that was going to work. One of the main positive points was the companies’ complementary market positions. InBev was strong where A-B was not – South America and Europe – while A-B’s strongest markets – North America and China/Asia – were ones that InBev had struggled with.

The merger therefore represents substantial brand growth opportunities in new or under-developed markets. As previously mentioned, those brands include the world’s two largest selling beers – Budweiser and Bud Light – and other icons, like Stella Artois, Beck’s, and Hoegaarden. They’ll be working through some of the strongest distribution networks in the business. Despite fears for American business, the US market represents 4O% of ABIB’s sales, so no one’s going to be forgotten.

Wow, pretty rosy. It’s not all happy hopefuls, though. A report from Credit Suisse brought up what’s likely to be the biggest obstacle to success: corporate culture clash. InBev was running ahead of its own, already existing corporate cultural clashes; the veneer of “it’s still Canadian” on the Labatt acquisition was beginning to wear thin, and Belgian/Brazilian methods of operations were working together mainly by the Brazilian methods bringing strong growth to the bottom line.

The impending clash in ABIB is potentially much larger, and potentially disastrous. Maureen Ogle, author of Ambitious Brew, the 2OO7 history of the American brewing industry, noted recently on her blog ( that while “InBev is a Big Deal. It owns breweries and sells beer on six continents, etc. . . . I’m not sure it’s a ‘brewing’ company. Stripped to its basics, InBev is a huge corporation cobbled together in a series of mergers and acquisitions. It earns profit by acquiring and operating companies that make beer.”

Anheuser-Busch, Ogle says, is a brewing company. “The people at A-B understand beer,” she says. “The Busch family understands beer. But to the suits and ties at InBev, beer is just a commodity.” That’s a chilling but likely accurate assessment.

If you doubt the potential for disaster inherent in such an evaluation, recall what happened when the Seagram family decided that they could make money in entertainment and telecommunications instead of liquor, or when finance folks convinced the suits at Schlitz to change the formula and lagering time of their beer to save money because the taste wouldn’t change that much . . . Or my favorite, how a number of Japanese banks dove into eastern European brewery acquisition after the fall of the Soviet Union, drove the prices up and then cashed out, leaving other folks holding overvalued plants and brands. They were, after all, bankers, not brewers.

Think about the inevitable progress represented by Ogle’s assessment: “[InBev] earns profit by acquiring and operating companies that make beer.” How much longer can that go on before Brito, like Alexander the Great, sits down by the shore and weeps because there are no more worlds to conquer?

There are not that many large brewers left to acquire. Rob Cox and Rachel Sanderson wrote in the BreakingViews column at wall street journal site ( that InBev may be able to break the strong family hold on Heineken, or set its sights on Diageo (which they note is similarly unprotected as A-B was, and would probably sell for about the same) . . . or Diageo might grab Heineken itself, to stay too large to gobble. The options are narrowing, and when no big brewers are left, will InBev then become InFood? InEnergy? InPlastics? And no longer be a brewer even in name?

A Credit Suisse analysis report, released just before the final ABIB deal was announced, also saw potential problems with how each company approaches finances. A-B has traditionally “spent money to make money”, putting much into building wholesaler, retailer and customer relationships. “Making Friends Is Our Business” was the title of a company history written in 1953, and an unofficial motto of the company.

InBev is known for increasing profits by slashing costs. Despite protests to the contrary by Brito, most people expect that InBev will make deep job cuts, sell off assets (like the Busch Gardens, SeaWorld and Sesame Place amusement parks), and perhaps even close one of A-B’s twelve US breweries. That’s the kind of thing they’ve done to quickly pay off debt in previous acquisitions.

Credit Suisse stated that sincere cooperation and teamwork will be necessary for this merger to work. “We believe InBev would need the buy-in (and moral authority) of A-B top management to facilitate the implementation of InBev’s difficult but effective Zero-Based Budgeting philosophy.” Spending money on intangibles like wholesaler relations has paid off for A-B . . . but Zero-Based Budgeting is not a harmonious match for that kind of business practice.

Some people believe this friction could mean an opportunity for MillerCoors to take advantage of wholesaler uncertainty and lack of concerted drive on ABIB’s part. While the world’s biggest brewer figures out how to merge the management styles of the two halves of its brain, MillerCoors – which has had some time to make its own adjustments – can take its new combined size and cooperative marketing to its wholesaler network and get busy.

There’s the possibility of an even greater opportunity for the brewery that steps up and grasps it. The acquisition of A-B by the Belgo-Brazilians knocked the wind out of one of A-B’s shots at Miller and Coors: buy American. With the red-white-and-blue iconic glow now off Budweiser – and how’s that “Great American Lager” campaign going to hold up? – who’s the inheritor of the mantle of biggest American-owned brewer?

Depends on how you look at it. Pabst is big, and American-owned . . . but doesn’t own a brewery, their beers are all brewed under contract (largely by Miller). Amazingly enough, the next largest is Boston Beer: you can’t get much more American than Samuel Adams. But again, until their refurbished brewery near Allentown, Pennsylvania (which was the last brewing plant owned by Pabst . . . ) is fully up to speed, Boston Beer is having almost half their beer brewed under contract. Much as I’m totally okay with the idea of contract brewing, it’s kind of hard to swallow a “largest American brewer” that doesn’t have large American breweries to make their beer.

And that leaves . . . Yuengling. The Pottsville, Pennsylvania-based regional brewery is not only the largest 1OO% American-owned brewery (it’s 1OO% owned by Richard Yuengling, Jr.) that makes 1OO% of their beer in their own facilities (in Pottsville and in Tampa, Florida), it is America’s oldest brewery, continually producing since 1829. They’re also big enough to be able to make something of the claim, coming in just behind Boston Beer in sales last year.

Any one of these three could take this and run with it. Boston Beer’s claim will get better and better as their Pennsylvania brewery picks up steam. Yuengling needs only to get their story out to a broader audience. All Pabst has to do is buy a brewery . . . and there are a couple big ones that might be available.

It may be overly optimistic to see a lot of opportunity in a concentration of brewing business like ABIB represents, but American consumers continue to show an interest in smaller producers, or, at least, producers that are perceived as smaller. That’s part of what’s driving craft beer growth.

That’s a lot of looking, but hey, it’s a huge deal. So how will it actually affect Massachusetts business, and the consumer?

Let’s visit Beer Business Past. There were more brewers, and more wholesalers, and customers were brand-loyal, maybe a Ballantine man to the grave, or maybe they knew that Schaeffer was the one beer to have. The beer business was run by brewers, and the beer was of paramount importance. Oh, jolly times. Beer was a good business to be in, and there was room for all kinds of people.

Beer Business Present is in flux. The business is becoming streamlined as big brewers and big wholesalers consolidate, looking for costs savings in size and cooperation. Accountants and IS people become more important, but salespeople are still keys to successful businesses, and look to the big brewers for promotional, advertising and marketing support. There are also solid gains by the craft brewers, a teeming horde of small brewers – and maybe not so small any more – that have made the business exciting and interesting, especially to a growing number of consumers. There is a lot more to learn about selling beer, and about enjoying it.

Beer Business Future is not clear. At some point, maximum consolidation will be reached, and the remaining brewers will be slashing costs to make it as cheap as possible to make light lager beer. Meanwhile, light lager beer is only one of two major growth areas; the other is craft and specialty beers, which are about bigger margins based on price, not cost. Consolidation doesn’t help with that segment of the market. Brewer consolidation will only go so far, before, inevitably, it crashes back to earth, and break-ups and spin-offs begin (and once again, the banks will be the winners).

Similarly, wholesaler consolidation has inherent limitations. One or even two wholesalers cannot handle every beer in a market when the number of craft beer labels and specialty import labels continues to grow. Smaller wholesalers will spring up to carry the brands discarded by the dominant wholesaler; some will fail, some will succeed. Business will be tougher, more competitive.

The consumer probably likes Beer Business Future, as long as they get their variety. Big brands will be cheaper (or hold their price longer), unless, that is, monopolistic forces take profits from market domination. Choices will probably go down as wholesalers stumble and adjust.

Unlike Scrooge, there’s not much we can do to change anything. We’re largely along for the ride as great events and titanic battles occur over our heads. The single greatest quality these days – aside from the constant prize for hard work – is adaptability. Change happens, change is coming. Be ready.