Modelo, ABI and US beer distributors
First a merger and acquisition note: If you believe the polls, right now the presidential contest is a flip of the coin. If you are uncertain regarding whether now is the time to exit, there is still time to get out this year… barely… or if you have an acquisition target, now might be the time to make a strong run. If the tax situation goes as bad as it could, it may diminish the potential number of transactions in the near term till the dust settles… in fact you might not see many deals for the next 4 to 5 years. Staying or going… either is an acceptable choice, just make certain you make the decision with your eyes wide open.
On to the post… OK… let me get on my soapbox one more time and use our time together for an educational moment. In all the hubbub regarding the recent ABI purchase of the remaining 50% of Modelo, many foolish thoughts have been floated (at least one by me).
First let us all repeat at least 3 times… the USA is not the center of the business world. Got that? Not every business decision is based on its impact on the US market. Amazing but true ;-) Whether the Modelo brand portfolio (Crown for now) is aligned with ABI distributors or not is not the driving issue in this acquisition… in fact I’d go so far to say that it doesn’t matter a bit in this strategic move. I’m certain ABI has their druthers on this (and many other issues) but those are not primary (or secondary or anywhere in the top 20) in the decision process. The sooner US beer distributors understand, and more importantly accept this, the better they will be able to understand this and coming moves at the supplier level.
The US beer market is a mature market. Its population/per capita growth is slow at best. Pricing/margin growth is far from easy. It is quite difficult to take share from established brands. Retail power is entrenched and growing. And due to our unique in the world system of beverage alcohol regulation, in effect suppliers deal with 50 markets, not a single unified market. If one is established in the US market it is a great cash cow… throwing off a lot of cash but not really providing a lot of great opportunities for substantial new growth. In a global beer market it IS NOT where the action is.
Thus when global beer suppliers are making strategic moves, the US is always somewhat of a factor, but it is seldom if ever THE factor. Let us go back in time... an audacious little foreign company called InBev purchases the King of Beers at a price which was ‘far too high” and completes the transaction in probably the worst financing times in tens of decades. This audacious little company, now called Anheuser Busch InBev (ABI) proceeds to take $2,000,000,000 dollars of fat off of this very fat cow.
As a side note, I can’t tell you how many ABI distributors (usually after more than a couple cold ones) rant about this… “yes, we all knew they were fat but $2 billion dollars!! I thought they were good operators!!” My analysis of this is this is what happens when a large public company is “allowed” to be run as a private fiefdom for what is in effect a small family dynasty. If it were a private company no one would care, they would be spending their own money… and would be limited by this factor. But as it was, it was the worst of both worlds… operated as basically a private company but spending other people’s money. If human nature is any guide, wild excess is certain to follow.
That is until an audacious little company decides to take them to the Slaughterhouse… but don’t cry for them, they got their share of the hide. What happens to their ‘partners” is another matter altogether.
Now back to our analysis of history. Yes, all this money just laying around waiting for someone to come along and pick it up is an important draw for this audacious international company. But in my humble little opinion, this is simply icing on the cake (and it does help provide the financial umph to push the offer price to a can’t refuse type price… and provides the fuel to drive the engine of international growth). The real value of this deal is the value of the brand(s) in the international arena. AB was simply squandering one of the most recognized and valuable consumer brand names in the entire world. Why was this?
Because the Third and his underlings were still living in the past when the US market was all that mattered. They were born and bred in St. Louis, the heartland of the country. They ruled their world. During their time they destroyed the failing regional brewers and took far more than their share of this available market share… leaving Coors and Miller to fight for the crumbs. What did they care about the world? To their view, they owned the world. Unfortunately, hubris spares no one… and they were no exception. The Free Dictionary describes hubris in the Greek tragedy as an excess of ambition, pride… ultimately causing the transgressor's ruin. Rather accurate one might say.
Now how about this little foreign company called InBev? It is already the offspring of many previous deals. They are deal makers and cost cutters. The main guy who runs it is a Brazilian who got his higher business education in the USA. His senior team has similar international life experiences. Their primary partners are Belgium… and Belgium isn’t the center of anything, but it is integral in many international dealings. Due to past dealings with AB they have already had a chance to “look under the hood” and they were most likely amazed that this golden opportunity was just sitting there waiting for someone to come along and take advantage of it. And as they say, the rest is history.
And on another side note, it’s amazing how well those ancient Greeks understood human nature… how many times they perfectly captured the various aspects of the human condition. There is little doubt the Third and his team was guilty of hubris, but what about the new dogs?
Is the new ABI team inflicted with hubris? They seem to have no need to “prove” anything to anybody regarding their business life-styles. In fact they are “counter” big business in this respect… they are cheapskates and take pride in that fact… and I say that as a compliment from a similar cheapskate ;-) But hubris appears to seep from their very pores, just a different strain than the previous folks.
- Brito and team seem to be blinded by a nationalistic obsession. I can’t see how making enemies around the globe is a long-term fruitful course of action.
- And secondly, GOING CHEAP CAN BE EXPENSIVE! Attempting to squeeze every last drop from every action you take is generally not wise from a simple cost/benefit analysis. In most things, the closer you get to 100% the more difficult and costly it becomes, quite often exponentially. You do more harm than good in attempting to squeeze every last drop from the lemon. There guys, take it for what it is worth… just remember those ancient Greeks and how hubris has a tendency to end with the transgressor’s ruin. ;-)
Back to our analysis… how is that brand name thing working out? Again, let’s go back in time in the US and look at a not-so-little brand called Budweiser. Not that long ago, one out of four beers consumed in this country was a Budweiser! One out of four! In my opinion there will never be another brand like Budweiser, mainly because the US consumer has profoundly changed… but that is a post for another day.
The brand Budweiser has been declining annually for over 20 years and it is still the number three brand in the country… and it was the number two brand until very recently! Unless one “does a Schlitz” and destroys a consumer brand from within, popular consumer brands have VERY long trajectories which can prove to be VERY profitable for a VERY long period of time… and some (can you say PBR) can even rise from the dead to who knows what heights.
So let’s go global and look at one not-so little key market, China. It has over a billion people. They are very conformist and status conscious (just like people all over the world, including the good ol’ USA). Right now the brand Budweiser is very much a status symbol in China (can you think of Bud in the US a few decades ago? The King of Beers). Right now the pricing of Bud in China reflects this desirability. Right now ABI is laying the groundwork for a MASSIVE brand in China. What if they can become the King of Beers in China? One out of four beers in a country with a billion people?!! This is what the game is about, not the US distribution system. How about India? How about Eastern Europe? How about a whole lot of places around the globe?
Which brings us back to the start of this long-winded post, the recent acquisition of the remaining 50% of Modelo. If you believe anything I’ve just written, then you know this acquisition IS NOT driven by the US market. If anything the US market is an impediment to getting this deal done… basically antitrust issues. Thus ABI’s decision to attempt to address these US antitrust concerns by basically walking away from the US market for Modelo brands… Crown can do whatever they choose and ABI will have no say in it. However, the ABI team might find their hubris already starting to bite them when the feds review this proposal. Again, making friends is better than making enemies in a business based on relationship selling!
In a spur-of-the-moment analysis I had stated at a recent state convention that ABI would simply throw Crown overboard… but again ABI proved themselves to be good deal makers. Sure they’d like to control Modelo in the US but if they can’t (at least for now), that is OK too. Getting the deal done (and control of those brand names) is FAR more important than Corona pricing in the US... or whether the brands are “aligned” or a hundred other things.
So with that background, let’s think about some of the complaints about this proposed acquisition.
- Alignment? Really?! Do you really think ABI is going to walk away from this deal over whether Modelo brands are solely in ABI distributors? Let’s grow up folks. For those precious few who have had the joy of experiencing me directing a corporate planning session, who gives a damn what you want? I wish my hair wasn’t falling out and I was better looking. Whether you like it or not you need to focus on facts and reality, not your wants and wishes.
In attempting to contain antitrust issues in the US, ABI is handing Modelo to Crown (for a while my friends). Now they might - most certainly will ;-) - put some pressure on Crown to ensure their branches get the Modelo brands but I don’t see them fighting that hard for independent ABI distributors. Would you have rather had ABI sell brands (effectively market share)? Just who would they sell them to? Then many of you would be complaining about how you worked years building these brands only to have them sold out from under you. I understand sitting around belly aching (and have done so many times myself) but please, in the scheme of things whether Modelo brands are aligned – other than ABI branches ;-) - or not is very small potatoes indeed… and most certainly did not, nor will not drive the decision making process. And of course let’s end this paragraph with a little fact… in states where it is relatively easy to move brands, the Modelo brands are already with the ABI distributor. In those with strong franchise laws, the brands are where they are… and would likely stay where they are regardless of ABI’s or Modelo’s or Crown’s wishes.
- Supply and packaging issues. Again, really?! Is ABI going to make supply issues worse? Could be. So what? What are you going to do about it? How does this concern have any impact on the deal? And I’ve been in the business for quite some time, I’ve heard more than a few supply complaints regarding Corona over more than a few years.
As for packaging issues, let us forget Modelo for a moment and just think about packaging. In business today, ALL expenses should be examined to see if cutting is an option. And packaging is no exception. And packaging is somewhat unique… the savings pretty much all go to the manufacturer and the costs are shared with those down the line. Right? You all experience it each and every day. I don’t see this ending. Assume a manufacturer can save $X cents per case by modifying packaging expenses. Also assume this means there will be an increase in transit damage/breakage due to these changes. As long as the savings are more than the increase in costs, it probably makes sense to do so (especially if these damages/breakage do not impact retail or the consumer much). Does this increase the headaches in the distribution end? Oh yeah. And of course you can document these damages for supplier credit (as you should) but the real cost is in the personal to deal with the crap. So the supplier pockets the savings, less any increase in damages, and the distributor ends up, net-net eating a lot of the costs. Now tell me again why the suppliers won’t/shouldn’t do this? ;-) Of course you can complain to your field personnel (who have less and less authority to do much of anything) and they will (hopefully) take your concerns up the corporate ladder. But don’t expect too much relief here. Sooner or later this will reach equilibrium… a balance between upfront savings and downstream costs… but I’m not certain you are going to like where this equilibrium finally settles. Such is life. Build it into your business model, it is not going away and other than bitching loudly I don’t see what you are going to do about it.
Beer distributors need to understand these types of things if they are to understand (and adapt) to the reality of “playing in the international beer business.” Sure distribution is by definition local, but just because what you do is local does not mean you are immune from the tectonic shifts that are occurring (and will continue to occur) in the GLOBAL beer world. Once you accept this, these and future moves will make far more sense as you attempt to navigate this rapidly changing environment. Not that you can do much about these things, but knowledge is power… and playing an ostrich with your head in the sand will generally only lead to someone else with your head. Not my choice, hopefully not yours.