Mar 122019

Last week the Wall Street Journal reported that the chairman of AB InBev, Olivier Goudet, resigned to allow more focus on his role at JAB Holding Co.  This resignation creates a vacancy at the top of the world’s biggest brewer, a brewer with heavy debt load and falling beer volumes, especially in the U.S.

Goudet had served on the ABI Board of Directors for eight years and as the chairman for the last four.  The usual reasons for his resignation were outlined in the press releases including the announcement that Gourdet’s replacement has been identified and will be announced next month.

A great deal has been written about the problems Kraft Heinz has experienced since their merger in 2015, including the 25% decrease in stock values.  Poor cash flow along with a change in accounting rules has resulted in Kraft Heinz altering the first reported operating earnings of $24 billion down to $6 billion.  Kraft Heinz has been following a Zero Based Budget (ZBB) program since the merger, a budgeting process which is similar to ABI’s.

ABI, and now KHC, understand that ZBB can only take a corporation so far.  These companies are acknowledging that brand-building, not cost-cutting, is the key to long-term viability and ROI.  As previously reported on numerous occasions, ABI has lost millions of barrels in sales since InBev bought them in 2008.

Carlos Brito, the CEO of ABI, has followed the InBev cost-cutting model effectively since acquiring SABMiller.  One can only cut so much. Sooner or later something has to be sold to ensure the bottom line is being met.

Brito was not the first to apply these cost-cutting principles to the beer industry.  In fact, one might say that Paul Kalmanovitz was the original cost-cutter in the beer industry.  Long before Brito showed up, Kalmanovitz viewed the acquisition of breweries and brands as a great cash flow vehicle which could be enhanced by massive slashes in marketing, sales, administration, and other cut-backs.

Paul acquired Pabst, Schlitz, Falstaff, Lone Star, Pearl, Jax, Old Style, and other outstanding brands.   He established the companies’ structures with minimal sales and marketing organization and very little field support.  Simply put, he squeezed out all he could.  In Kalmanovitz’s model, the bottom line was the real estate he acquired when he bought the breweries. He seemed to view the brands as disposable, but the real estate, however, would continue to increase in value with little to no downside.

Both Paul and Carlos focused primarily on acquiring breweries that struggled to maintain growth and ROI for their investors.  Both have been very successful.  Although Carlos’s final evaluation is not yet in and based on the last 10 years, something must give.

ABI has attempted to market new and exciting products, and while many of those new products may have legs, the current and past cost-cutting models have devastated AB’s volume.  Next month’s announcement on the new chairman of AB InBev will tell the industry if there are any changes in the future or if ZBB will continue.

Right now I am having amnesia and deja vu at the same time.  I think I have forgotten this before.


 Posted by at 6:00 am

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