One year after sale, Anheuser-Busch InBev is transforming a St. Louis icon
This article first appeared in the St. Louis Beacon, Nov. 10, 2009 - Benj Steinman vividly recalls comments from an InBev executive, delivered a few weeks before the Belgian-Brazilian brewer completed its acquisition of Anheuser-Busch in November 2008.
"The InBev culture will exist," said the executive in a speech to New York beer wholesalers. The culture is "non-negotiable," said the executive, adding that employees are "on the bus or off the bus."
Judging from 12 months of changes in and around St. Louis, it's no surprise that the new corporate culture is "radically different," says Steinman, publisher and editor of the trade publication Beer Marketer's Insights.
The question is whether these changes will help the company become a stronger brewer, expand the Budweiser family brand internationally and provide a better investment for shareholders.
The quick answer is that it's too early to tell, especially because the company has focused heavily on reducing debt during the last 12 months.
The complex answer is that it will take time for the InBev management to install its corporate structure and preach its philosophy as well as to identify the A-B employees who will buy into the new system.
"I don't look at the new culture as either good or bad," says Lee Konczak, who worked for A-B from 1993 until May 2008, one month before InBev made its initial takeover bid. "Any acquisition leads to a big cultural change. Longer-tenured people will have to adapt. Some will decide this isn't for them. Some will adjust. Some will sit on the fence."
Konczak is now senior lecturer in organizational behavior in leadership and development at Washington University's Olin Business School. His last A-B job was director of executive development and employee selection systems -- a key human resources job that puts him in a good position to assess the dynamics of corporate cultures.
Successfully completing a corporate culture change can take several years, he adds. "Now, it's a question of getting more people in the right places and setting new hiring standards," says Konczak. "It takes time to shake things out."
The shaking is well under way. Although the old A-B was moving to reduce costs and trim payroll, the new managers moved much faster. A few weeks after the takeover was completed, the company said it would fire 1,400 salaried workers, fail to fill 250 open jobs and eliminate 415 contractor jobs. More than 1,000 employees took buyouts just before the takeover was completed, including most top executives.
The Post-Dispatch reported earlier this year that retired salaried employees younger than 65 will pay an increasingly larger share out of pocket for retiree health benefits. Company-sponsored retiree life insurance won't be provided starting in 2010 although a retiree can convert this benefit to an individual policy.
Teamsters Union members at Anheuser-Busch InBev's 12 U.S. breweries have been spared. They signed a new five-year contract last year while A-B was still in charge. The new contract runs until early 2013.
MOVING QUICKLY AND DECISIVELY
The new managers, who declined the Beacon's request for interviews, emphatically believe their system will achieve the goals of more sales and profit. They have imposed their will on Pestalozzi Street with policies that have become its signature in other markets -- whether it's U.K. employees using both sides of copy paper, as the Wall Street Journal reported, or Canadian employees staying in standard hotels while traveling on company business.
In St. Louis, managers, including top executives, don't have offices anymore. Employees fly on discount airlines rather than first class. White-collar pay has been revised. Corporate jets have been sold. Perks have been reduced.
"They wasted no time," says Juli Niemann, executive vice president of Smith, Moore & Co., a Clayton-based financial advisory firm. "They delivered exactly what they promised. They demolished the executive suite."
Changes are taking place externally, too. Anheuser-Busch InBev is revising its relationship with advertising firms, dropping some and reducing some marketing events. Vendors used to get paid within 30 days; now payment can run 120 days.
"These guys are irrepressible cost-cutters," says Stuart Greenbaum, former dean of Washington University's Olin Business School and now emeritus professor of managerial leadership. "It's a tight-ship mentality."
The cost-cutting not only represents the InBev way of doing business but also reflects changing times in the U.S beer business.
When the industry was growing at a stronger, steadier pace, A-B's penchant for expensive marketing campaigns, generous management salaries and assorted perks for employees could be better absorbed by a high-profit margin business, Konczak says.
But as U.S. growth slowed, brewers have had to make adjustments in strategy and organization. "My sense is that InBev is much more results-oriented and Anheuser-Busch was more process-oriented," he says. "The old A-B culture went by the saying 'Making friends is our business.' Inbev is more task-focused."
PREPARING FOR THE FUTURE
As new management creates a new company in its own image, the next 12 months will focus more on the beer business than all the financial maneuvering related to the takeover. The goals are producing more profits, more beer and more international exposure for the Budweiser brands.
During the second quarter, revenue and profit rose for the company's North American operations even though beer volume fell slightly -- a testimony to the company's cost cutting and price raising. However, some skeptics wonder what happens after all of the acquisition-related costs have been squeezed out.
"It is the best-run brewer in the world by a large margin, but this was a risky strategy," says Ann Gilpin, an analyst for the independent research firm Morningstar. "They overpaid for a no-growth company."
Although Gilpin focuses on hard numbers, she's also concerned about some intangibles, most notably the departure of long-time marketing executives like sports marketing director Tony Ponturo and chief creative officer Bob Lachky as well as how the company approaches future marketing and advertising campaigns. Advertising Age reported earlier this year that the brewer will pay ad agencies by the project rather than on retainer.
THE NEW COMPANY
Although Anheuser-Busch InBev has promised to keep some elements of A-B culture -- philanthropy, the Clydesdales, Super Bowl commercials -- the new management isn't nostalgic for things that don't improve the making of beer profits. That's why the healthy theme parks division is being sold as a "non-core" asset.
In effect, the new Anheuser-Busch InBev is a young company even though its Belgian base goes back to 1366 and its stock ownership features a complex maze of Belgian and Brazilian families. The company has grown quickly via acquisitions since the mid-1990s, including breweries in Canada, Ukraine, Russia, United Kingdom and Germany.
The present-day company began taking shape in 2000 with the merger of Brazilian brewers Brahma and Antarctica to create AmBev and with the 2004 merger of AmBev and Belgium's Interbrew to create InBev.
Anheuser-Busch InBev is managed by a 14-member executive committee, headed by CEO Carlos Brito, 49. Most members, like Brito, are under 50 and are from the Brazilian brewers.
The highest ranking executive from the old A-B, David Peacock, isn't part of this group. His immediate supervisor, Luiz Fernando Edmond, 43, is a member. Peacock, 40, a St. Louis native, joined the old Anheuser-Busch in 1992 and is now president of U.S. operations and manager of the Budweiser and Bud Light brands.
"The risk is in things we can't measure," says Gilpin. "Marketing is a key part of what makes a brand so popular."
Beer-industry observers don't cite any immediate impacts of changes in marketing on beer sales. "Their expertise is in cost-cutting -- not marketing," says Steinman, of Beer Marketer's Insights. "They have left marketing pretty much alone this year."
Gilpin adds that the impact of losing veteran marketers, altering relationships with ad agencies or preparing marketing budgets wouldn't be felt immediately because existing marketing plans and campaigns are still in effect. "It will take a few quarters to see what plays out."
Although Gilpin doubts Anheuser-Busch InBev will duplicate perhaps the biggest U.S. beer bungle, she offers caution about "The Schlitz Mistake."
The Schlitz brewery was the larger U.S. brewer for 1950-1952 and 1955-56, and its brand was second to Budweiser between 1950 and 1976. Then came changes in management, marketing and formulations, which led to a collapse of sales and market share -- and the eventual sale of the company in 1982. "With marketing, you only need to get a few things wrong to get the whole thing wrong," Gilpin says.
Anheuser-Busch InBev will continue to reduce expenses as will its bulked-up competitor, MillerCoors, the U.S. joint venture between Molson Coors and SAB Miller.
Considering that the Anheuser-Busch brands hold about 50 percent of the U.S. market and the Coors and Miller brands have approximately 30 percent, analysts figure the companies can cut costs without cutting prices. Analysts like to call such behavior "rational pricing." In other words, no more price wars.
"Neither side has really made hay at the expensive of the other," says Steinman, commenting on the creation of the joint venture and the Anheuser-Busch takeover. "The cost-cutting has been undeniably impressive."
Gilpin says cost-cutting at the joint venture appears to have gone smoothly. "It's textbook synergy," she says. "It's not in your face. It's not knocking down your office and putting you in a cubicle."
Ask any St. Louisan about what happened when his or her company was acquired -- McDonnell Douglas by Boeing, Pulitzer by Lee Enterprises, TWA by American Airlines, etc. -- and you're bound to get an earful about clashing corporate cultures.
The Anheuser-Busch saga gets a lot of attention because of its colorful history, its iconic product, its prominent civic role in St. Louis -- and because change is painful. "Shareholders want the low-cost company, but employees may not," says Ann Gilpin.
"InBev wants employees to think like they're owners," adds Lee Konczak. "Five years from now, this will be a totally different company."
One Year ago...
The first 12-month chapter in the history of Anheuser-Busch InBev hasn't been about making or selling more beer. It's been about debt management, asset sales, organizational restructuring and the romancing of bondholders and shareholders.
CEO Carlos Brito was criticized for paying too much for Anheuser-Busch, taking on too much debt in this $52 billion purchase and unleashing a takeover that coincided with a worldwide recession.
Many analysts praise the cost-cutting. A Merrill Lynch report says the company produced $250 million in permanent savings during the fourth quarter of 2008 and another $610 million during the first half of 2009 -- about one-third of the company's long-term target.
Although analysts scoffed at Brito's promise to sell $7 billion worth of assets within a year to help pay off the debt, he has made good -- and even exceeded -- his promises.
Brito has orchestrated a group of lenders to provide enough financial support and he has sold -- or made commitments to sell -- about $8.4 billion in assets, including Busch Gardens and SeaWorld parks. Because these deals provide for future payments, Merrill Lynch says the asset shedding could ultimately yield another $1.2 billion.
A-B also has produced what UBS Securities recently called a "very favorable" refinancing of some $5.5 billion in debt, pushing back the maturity dates of some loans.
At least in the near term, astute investors should be pleased. If you had been a long-time A-B shareholder, you got a nice quarterly dividend. But your stock hovered in the $50s before the takeover. All of a sudden, you had a chance to cash out at $70 a share.
"They bought Anheuser-Busch because the existing managers couldn't extract enough value," says Stuart Greenbaum, WU emeritus professor.
After the takeover, the stock was de-listed in the U.S., but it came back in July 2009. If you bought shares in July in the high $30s, your investment had steadily climbed into the low $50s before settling back in the high $40s in early November.