Are Brazilians drinkers of beer
One man’s sorrow is another’s joy
Brazilian investors have turned a small beer brewer into the largest beverage company in the world. The shareholders are pleased. The beer fans are horrified.
The raised index finger with which the former Brazilian soccer star Ronaldo celebrated his goals (“One more!”) Gave the marketing strategists of the Brahma brewery an idea 25 years ago that would change Brazilian pub culture. The footballer's gesture became the symbol of the rising Brahma brewery: "Corn over, Brazil!" Since then, it is enough to lift your index finger in Brazil's bar and the waiter brings a new beer. The Brahma advertisement played skilfully with the national pride of Brazilians, their passion for football and one of their idols, who rose from the slums of Rio de Janeiro to the Olympus of global football.
Trimmed for returns
Similar to Ronaldo, it happened to Brahma. The family-run company became the nucleus of a global corporation. With the management methods developed by Brahma, the group has become a Brazilian-Belgian-North American conglomerate after several takeovers and mergers. AB InBev is now the world's largest beverage company and number five among the global manufacturers of consumer goods. The meaningless company abbreviation hides the continental beer dynasties that have gathered behind it. Brahma merged with Brazilian competitor Antarctica in 1999 to become AmBev, the largest brewing and beverage company in Latin America.
This merged in 2004 with the Belgian Interbrew - the number two worldwide at the time - to form the world's largest brewery InBev. Four years later, the Brazilian-Belgian InBev took over the North American market leader Anheuser-Busch, the leading brewer in the USA. But despite this two decades long, continental takeover tour, the most important individual investors and almost all of the top management at AB InBev come from Brazil. They had previously trimmed Brahma for returns.
They managed to build AB InBev into a huge company that brews just under half the beer in the world. In Latin America, the group controls the markets like a monopoly. It is the market leader in the United States, number two in Russia and third in China. Among the 200 types of beer are brands such as Budweiser, Stella Artois and Corona, but also traditional companies such as Franziskaner in Germany or Boddingtons in England. Investors on Wall Street thrilled the group's ongoing stock rally. Its rate has increased almost eightfold in five years. On the stock exchange, it's worth as much as Coca-Cola. Nobody else brews beer with such a return.
For every dollar of beer sold worldwide, 36 cents land in the cash register as a profit. Even when sales are shrinking, like last year, the group succeeds in increasing profits because it can charge more for its beer. Competitor SAB Miller, number two worldwide, produces only about half as much as AB InBev and posted a profit margin of 23% before taxes, depreciation and amortization for the twelve months to March 2014, compared to 39% for Ab InBev for the whole of last year.
The world market leader now wants to make extra profits at the World Cup. That shouldn't be difficult for the group. Its operating return on its home market is 45%, more than two thirds of the market are in its hands - undisturbed by the cartel office thanks to a lobby that functions like a charm. Budweiser is also an official FIFA sponsor. The world football association even enforced the otherwise banned serving of beer in the stadiums in Brazil. Only Budweiser may be sold within a 2 km radius of the arenas. But even if fans have overcome the Budweiser ban mile, they have little choice but to drink beers from AB InBev: Brahma, Skol, Original, Antarctica - almost all popular beer brands in Brazil belong to the beer multinational.
Welcome to the brave new AB-InBev world - because what inspires investors is a real nightmare for beer fans around the world. In Internet search engines you can find AB InBev in combination with swear words in various languages. Beer drinkers from regions with their own beer tradition such as Germany, England, Belgium or the United States are particularly outraged. The accusation is that AB InBev, as a monopoly, is leveling the global variety of beer to a mass taste. With its pursuit of profit, the group does not stop at sacred cows in the industry.
In the United States, AB InBev sells Beck's, which is not brewed according to the German purity law of April 1516. It should also be clearly different in taste from the original from Bremen. In England, amid the protests of the boulevard, the company is reducing the alcohol content of its traditional beers overnight in order to save taxes - the analysts applaud the tabloids foaming.
For AB InBev, resistance in developed markets is a twofold problem. Beer consumption has stagnated there for some time. More and more young people no longer drink beer, but rather healthier juices, harder schnapps or beverages containing caffeine, and they use the industrially brewed beers from AB InBev less and less. For the first time, the Bud brand lost second place as the best-selling type of beer in the USA. Beer fans prefer to drink locally brewed beers (“craft beer”).
It is true that the group buys local beer manufacturers such as Goose Island in Chicago in order to sell their brands through its nationwide sales networks in the premium segment. But is that enough to keep demanding and suspicious customers in the industrialized countries in line? Even the management of the beer company admits that it will probably take longer for the core brands to grow again in the established brands.
However, the critics should not be too hasty to triumph. AB InBev's rise is far from over. Like no other brewing group in the world, the company has what it takes to grow in the next few years wherever per capita incomes rise and consumers can afford more and more expensive beer. This is the case in Asia and Latin America, but Africa could also become an important new sales market. Hardly any other group in the world has perfected its strategy for conquering these markets as perfectly as AB InBev.
If you want to understand what makes the world's largest beer company tick, you have to discover its origins in Brazil. It quickly becomes clear that the company was designed from the start as a money machine that also produced beer by chance. The managers could also operate supermarket chains or airlines lucratively - or just trim a traditional beer brewer for profit. You can talk to them for a long time without saying a word about hops, barley or malt. You have little in mind with brewing tradition and all the more with business indicators.
When the investment banker Jorge Paulo Lemann bought the Brahma brewery from the German-born owner families in 1989 for $ 60 million, his colleagues were amazed. “From banker to brewer?” They asked Lemann, a Brazilian with a Swiss passport, astonished at the time. The former Brazilian Davis Cup player had studied at Harvard and built his investment bank Garantia based on the model of Goldman Sachs in Brazil.
How did Brazil's leading investment banker - an ascetic who doesn't drink a drop of alcohol - want to make money with the run-down brewery? He knew what he was doing because he had observed that the richest business families in neighboring countries had become wealthy with beer. "Not all can be geniuses," said Lemann to himself and convinced his partners at Garantia. Beer in the tropics seems to be a lucrative business, was his credo. This finding should also quickly apply to Brahma under Lemann. He ran the brewery like an investment bank. He put three of his best partners at their control centers. They left no stone unturned. First, they took a close look at the costs. For them, master brewers, who controlled the fermentation process in the kettles by feeling, were just as superfluous as consultants who talked shop for hours about hops in strategy meetings.
They radically cut down the privileges of directors and workers. Later at Anheuser-Busch, just a few weeks after the takeover in St. Louis, they banned the two cases of free beer for each employee, sold the aircraft fleet for the directors and tore down the mahogany-paneled offices of the directors, which from now on are all in one room sat.
The boss Carlos Brito took the subway to work at the new corporate headquarters in New York. His predecessor still flew by helicopter. Brito said he didn't need free beer or a company car from his employer. He could also buy it himself. It's no wonder that likenesses of Brazilian directors on dartboards quickly became popular in St. Louis bars.
Brazilian management training company
The Brazilian managers knew that from Brazil they only had one chance to conquer the world market. They had to get better returns than the competition. Because of this, the smaller Brahma could also swallow the larger, but less lucrative Antarctica in Brazil. And that's why the smaller AmBev brewery from Brazil was able to take over the reins of the much larger Interbrew in Belgium after just one and a half years. The group, led by three Belgian noble families, represented the entry into South America as a "merger of equals", although the families of the de Spoelberchs, de Mevius and van Dammes actually owned the majority of the new group after the share swap with the Brazilians. But unlike Beck's, Diebels or Löwenbräu, which they had previously bought, the Brazilian takeover did not become a mere expansion of the Belgian brand range.
The Brazilian managers soon had the say in Leuven, Belgium. In terms of finance, purchasing, IT, market research, controlling and the markets of Latin America, North America and Belgium, around 30 Brazilian managers were soon at the controls. Most of them were between their late 20s and early 40s - and with their age alone they started a revolution in the venerable brewery. They all came and come from the best management school in Brazil - Lemann founded it with his colleagues at Brahma. Every year, the brewery sifts two or three dozen future executives from applicants from all over South America. In 2012, 24 out of 74,000 candidates were accepted at the end of the year. Since 1990 only 600 trainees have completed the program.
Two thirds of them now hold management positions in the group. “We need people who are willing to take risks and who want to grow with us,” says Magim Rodriguez, one of the founders of the in-house trainee program. Jobs at AmBev are popular. Those who achieve the goals will be royally rewarded with profit sharing. But the trainee program is feared because of the high competitive and performance pressure among the trainees - the weak are relentlessly presented. If you fail to meet the weekly targets twice, you have to leave.
The Brazilians were able to prevail in Belgium because they earned the money in South America. Half of the world's leader’s profits came from Latin America. And soon the group was ready for a much larger takeover in the USA.
Warren Buffet full of praise
"Dear August", Brito, who became head of InBev at the age of 45, began a public letter to August A. Busch IV in May 2008. The Brazilian did not want to take anything other than the group away from the legacy of the North American brewery Anheuser-Busch. But he resisted. His resistance, however, was futile. Busch IV soon had to give up. Brito convinced the shareholders - among them Warren Buffet as the most important single shareholder - that he could do more with the largest brewing company in the USA than the unfortunate August. The Brazilians took over an icon of the US economy for $ 52 billion. Lemann was the brain behind the takeover and the largest single shareholder in the new group.
During the takeover, his colleagues showed what they can do best: In the midst of the worst financial crisis in a long time, they kept the banks in line. No institute left. In just one year, they cut Anheuser-Busch's production costs by $ 1.1 billion. With sales such as that of the amusement park “Busch Gardens” and of breweries in ailing Eastern Europe and in China, they took in $ 9 billion. In just three years instead of the planned five years, they brought debt below the target of two and a half times operating profit. Starting in 2012, Brito received € 144 million, the first half of the historically highest bonus ever received by a CEO. The same amount will follow in 2019 if he meets the requirements. A total of 39 top managers received $ 1.3 billion in bonuses last year.
The investor Warren Buffet is full of praise for the Brazilians. He doesn't know anyone who manages corporations as efficiently as Lemann and his troops, he said - and together with Lemann and his most important comrades-in-arms, he took over the ketchup manufacturer Heinz for $ 23 billion last year.
But their success also makes the managers at AB InBev driven. You are good at taking over large corporations and radically trimming them for returns. Such increases in profits are difficult to achieve in everyday business. In order to continue to grow in double digits, the group has to swallow up new competitors again and again. Last year, AB InBev increased its stake in the Mexican market leader Groupo Modelo, which brews the Corona fashion beer, by $ 20 billion. But what's next? A few days ago in Oklahoma, Buffet indicated that it is likely that they will soon be working together again on some very large businesses.
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