Sowing the Seeds of Future Demise

by BILL WADDELL

My advice to all of the younger readers is to thoroughly enjoy all of your vices while you can.  Between job responsibilities, spouses, children, financial demands and the medical community you will find that you will be forced to leave them behind one by one until you reach the point of living but a shadow of your colorful youth.  It is with nostalgia for my vice-laden youth that I am glad to have grown up in America before InBev existed - in a time when good beer was plentiful and cheap.

AB InBev is the Brazilian led, Belgium based outfit that is systematically buying and trashing the leading global beer brands.  An interesting article on BloombergBusinessweek describes the unfolding debacle: Profits up, cash flow strong, but sales shrinking.  It is a step-by-step story of exactly how the short term focus on profits, financial and marketing driven, disregard for the product and customer value approach takes place. 

Beck's was once a highly regarded German beer with a small but devoted core of American customers. Same with Bass, a British beer.  AB InBev bought them, started producing them in the USA, losing quality but at a lower cost, and sales are down.  It is a clear example of how focus on being the low cost producer is not a strategy for success, but merely a race to the bottom.

Selling Budweiser in the United States should be about as tough as selling sex on a troop ship, but AB InBev has demonstrated how to fail at it.  The high quality hops growers in Germany used to get an annual visit from August Busch III, but those days are long gone:

"A former top AB InBev executive, who declined to be identified because he didn’t want to get in trouble with his old employer, tells a different story. He says the company saved about $55 million a year substituting cheaper hops in Budweiser and other U.S. beers for more expensive ones like Hallertauer Mittelfrüh. It is hard to say whether the average Bud drinker has noticed. But then, the average Bud drinker is not drinking as much beer."

InBev is doing some leanish sort of cost management.  AB InBev CEO "Brito was just as ruthless when it came to the perks to which Anheuser-Busch employees had grown accustomed. He cut the number of BlackBerrys in half. Executives who once traveled in corporate jets now flew commercial. He removed the interior walls at One Busch Place in St. Louis and turned the office into an open-plan space. Everyone would work under the same Spartan conditions that Brito embraced. (In New York, Brito shares a large table with his head of sales and his finance chief.) 'We always say the leaner the business, the more money we will have at the end of the year to share,' he said in a speech at Stanford in 2008. 'I don’t have a company car. I don’t care. I can buy my own car. I don’t need the company to give me beer. I can buy my own beer.' "

It is a good idea to pick up pennies in the non-value adding areas like offices and cell phones.  The problem is that Brito doesn't know the difference between expenses that add value for customers and those that don't.  Costs are costs everywhere with equal enthusiasm in the minds of financially driven leaders who don't really understand and appreciate the products and customers. 

"He laid off approximately 1,400 people, about 6 percent of the U.S. workforce. He sold $9.4 billion in assets, including Busch Gardens and SeaWorld. AB InBev also tried to save money on materials. It used smaller labels and thinner glass for its bottles. It tried weaker cardboard for its 12-packs and cases. The old Anheuser-Busch insisted on using whole grains of rice in its beer. AB InBev was fine with the broken kind."

The results are predictable: "AB InBev’s CEO is a skilled financial engineer, but he has had trouble selling beer. The company’s shipments in the U.S. have declined 8 percent to 98 million barrels from 2008 to 2011, according to Beer Marketer’s Insights. Last year, Coors Light surpassed Budweiser to become America’s No. 2 beer."

Of course AB InBev's mismanagement opens doors for local and regional companies focused on the quality and value of their product; "The craft brewing industry grew 13% in 2011.  There haven't been this many U.S.  breweries since before Prohibition".  What InBev has done to beer is what so many companies have done in China in pursuit of a low cost strategy.  Without a keen understanding of value and mama bear-like defense of it, broad brush pursuit of low cost inevitably leads to low value, which can only lead to lost sales, either in fewer units or lower prices.  It is also a good example of the myth of mass markets and mass production.  Mass thinking is based on one-size-fits all products and they rarely delight many customers.

Original: http://www.idatix.com/manufacturing-leadership/sowing-the-seeds-of-future-demise/

Comments

[Jason Morin]

"The problem is that Brito doesn't know the difference between expenses that add value for customers and those that don't."

Great line and reflective of the sometimes short-sighted view of the corporate finance types.

[Robert Drescher]

Hi Bill

Personally I think AB InBev is great, after all it is helping create a huge opportunity for quality based producers to grow. Their move to using cheaper inputs allows all those quality breweries a chance at the best product to make thier product. Being Canadian I am use to better beer, but in the last few years I have experienced a lot of great American beers, many of which are better than Canada's and are starting to even rival Germanies great local breweries. Lets hope they keep it up and eventually die out, what will be left are companies that care about the product they make, and about serving the wants and desires of their consumers, instead of Wall Street.

AB InBev knows a great deal about cutting cost, they know zero about Lean because they have zero understanding of value in the eyes of consumers. But they are allowing a lot of Lean minded small brewers and large ones (The Coors and Molson group) to grow rapidly by simply putting their focus on delivering value to the consumer. Often these smaller brewers had a hard time getting the best materials, but today thanks to InBev they can and because of that they can actually start taking market share away fromn the onetime giant.

The result has been though I drink less beer than I once did, I get to enjoy it far more tha I ever could because they have allowed better producers to actually get the materials to expand their production.

And let's be honest smaller companies have always been Leaner than the giants, could be why Molson-Coors owns and operates so many small craft breweries, along with their huge operations.

[Graham]

Caveat: Ex Solectron employee, current AB-I employee, long time reader.
You guys seem to be making an awful lot of assumptions based upon the fact that they've cut costs.

Would you congratulate someone for never reviewing how much they are paying for their car insurance?

As an aside however, I see a lot of money being spent on quality assurance and the irony is I see consumer complaints because the beer is of higher quality than ever before, which may not actually be what the customer wants. So in those regards yes, perhaps the customer wants stale beer and ABI isn't recognising that.

[Bill Waddell]

Actually Graham, my opinion was based on a little more than the simple logic: they are cutting costs therefore they are bad. If you read the linked articles you will note AM InBev opted to use lower cost hops and rice that a number of beer experts assert to be of lesser quality. They completely transformed Beck’s into a local American beer in spite of complaints from loyal Beck’s drinkers that the quality had eroded. They reduced the alcohol content in beer sold in Britain in order to get to a lower tax rate. In the end they have all but ruined the Beck’s market in the United States and have reduced both their overall volume and market share in the USA. It seems there is considerable evidence their cost reduction has resulted in lower customer value.

[Paul Todd]

The cost-cutting in ingredients is ironic considering the text on the cans and bottles, memorized by many a drunken college student:

"This is the famous Budweiser beer. We know of no brand produced by any other brewer which costs so much to brew and age. Our exclusive Beechwood Aging produces a taste, a smoothness and a drinkability you will find in no other beer at any price."