When Stuck on Bud, It’s Time for a Drink
A mighty brewer ran out of strategic options
When everything seems to be done, what is left? That is the situation of “King of Beers” or Anheuser-Bush InBev (ABI) in the global brewing. In both academic and actual business cases, almost always, management consultants start with situation analysis. The analysis is often done with three aspects: finance, marketing, and human resources. The British newspaper, The Economist, published a short story of ABI on May 11, 2019 with a title of “Bud far from Stella”. The story spent describing the current situation of ABI followed by the challenge it faces for the years to come. The question there is if you were Carlos Brito’s consultant, what would you suggest he does to grow ABI? My answer is, “Nobody knows it”.
The King stands very tall on the general description of outstanding performance. The firm sells almost three Olympic-sized swimming pools of beer an hour, which is more than three rivals such as Heineken, Coors, Carlsberg combined. Selling one in four beers worldwide sets itself more than enough to call itself the crown. In terms of profits, around half the industry’s global profits go to ABI, seeing its gross operating margins 40% in 2018. The number is more than double the average of other listed brewers. It is a mighty beer maker.
For a start of situation analysis, the newspaper describes financial concerns. The structure of investors is based on a Brazilian operation, which acquired other similar firms such as Burger King and Kraft Heinz. The financial arrangement has gone as far as acquiring Brahma, a Brazilian beer firm in 1989, subsequently Interbrew, a Belgian brewer in 2004, and ABI in 2008, and SABMiller in 2016. Brazilian management acquired four of the ten biggest brewers in the world and there is no large rival left to purchase for the group.
The cost-cutting measure is nearing its limit to realize the last of $3.2 bn of annual saving from SAB. Many internal managers began to notice that the cost-cutting might have done harmful effects on business results. The part of doubt can be found in the area of its procurement procedure to describe “misconduct” in three years of business. ABI bid for SABMiller three years ago with a bid for $98 bn and borrowed $100 bn to add the net debt in its balance sheet. For the last three years, the huge debt push down its share price with 38% of consistent decline, projecting relatively cheap value in shares compared with its rivals of Heineken and Carlsberg. The dividend was cut in half to pay for the debt. The firm confirmed that it took a stake of its Asian operations. The estimate of this risk is worth roughly the quarter of $172 bn market value of the group. These are not good signs for the management team.
The second area of consideration is the global marketing for the consumption. Beer often competes with wine and spirits. The image of beer coincidentally matches that of America, the biggest market of sports for young men, namely American football for young men under the age of 40. This is a single market for conquering the market share of beer drinking. Recently the young people in the rich world spend less time on pub, sports bars, or football fields and more at the gym. 57% of ABI’s sales come from the consumption from the poor countries, which push up the growth of its revenues with mere 1% a year, says Ed Mundy at Jefferies, a brokerage. There seems to be a growth limit in physical volume. In value term, the firm saw 4.7% a year increase since 2008 for the last decade. But this was due to its notable labels on the top of the product the customers were willing to pay. Are they willing to pay higher prices for something special about ABI brand? Aren’t people in the sports bar anti-capitalists?
At a final and not the least aspect of strategic options, lies human resources management. A corporate culture and skill-sets may not reach at the level where they gain the market share of Asian market. Last November, Heineken completed a joint venture with China Resources as its share prices went as high as five times with the scale of index from January in 2015.
The events are moving fast on beer making business. Management consultants work on the project which has a starting time and an ending time. Half-way through the course of the projects, they work on situation analysis such as above. In reality, they analyze a lot deeper with a lot of actual data than those above. Sometimes, even management consultants know that the firm got stuck and run out of strategic options. Business professional don’t apparently call for a drink before clients. But the story of the Economist and my compilation with little additional data hold true, it is time to call for a drink with Budwiser.