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The global economy can do a lot of things to a man…but if you threaten to mess with his job AND his beer, that may just be the last straw. By many of the reactions - from TV and barstool talking heads to the 31,000 member Facebook Group protesting the deal - the InBev purchase of Anheuser-Busch is an unacceptable encroachment on American life, liberty and the pursuit of happiness. The reaction is not only emotional, it also stems from an underlying fear that the projected $1.5 billion in annual “synergies” saved by the acquisition is a euphemism for job cuts.
It is sad to lose the sense of pride and tradition that US ownership of Budweiser - a beer that’s as American as apple pie - brings. But there are some aspects of the deal that make the pint glass half full rather than half empty.
For starters, there is little overlap in the location of breweries. And in an era when labor costs, exchange rates and fuel prices have led to a resurgence of ‘nearsourcing‘, we’re certainly not on the verge of seeing a somewhat perishable, expensive to ship product moving to a highly centralized production model.
Instead, early reports are that they’ll leverage their marketing operations for reaching new markets - a great move for AB - whose domestic sales have slowly been chipped away by micro-brews, wine and other beverages.
Just as important to the bottom line is the new world’s #1 brewery’s power to leverage their massive purchasing power. Brewers have been feeling the rise in wheat, barley, hops, water, aluminum and distribution costs. So consolidating their sourcing and procurement operations in order to negotiate better contracts up and down their supply chain is a huge competitive advantage.
It’s extremely likely that we’ll see the new company implement a global spend management process that utilizes a mix of category expertise and technology to negotiate better contracts with vendors and drive “synergistic” savings to the bottom line. In fact, I wouldn’t be surprised to see something along the lines of Telefonica’s procurement model. After all, they’ve proven that procurement (even in a company that’s grown by acquisition) can drive meet the needs of its internal customers across multiple time-zones, languages and borders.
The bottom line is, while there will be cost cutting measures, InBev has a growth-by-acquisition track record that proves they ‘get it’ when it comes to adapting to a new world economy - where dynamic supply chains are key to keeping costs down and effective marketing (which in the case of beer often plays on regional emotions and tradition) is imperative.
Maggie Sikora Frey is a Manager in Ariba’s Spend Management Services group.
2 responses so far ↓
1 Purchasing Practice // Jul 24, 2008 at 9:31 pm
The integration of Inbev and Anheuser Busch once again brings the importance of supply managements business contribution into the spotlight. The merger will integrate two strong companies with little overlap in their markets, which when combined represents 40% of the global beer market. In its search for “efficiencies” Inbev , renowned for its efficiency has slated $1.5 billion annually from cost savings in the combined venture. Most of these savings are said to be derived from the supply chain.
A-B has already provided insight into where these efficiencies may come from through its own plans to save $700 million from “production expenses”, which include energy, raw materials, supply chain and overheads. Additionally, about $300 million will come from labour and administrative costs. Based on InBev’s history these planned efficiencies are likely to extend further and include a combination of cost-cutting, asset sales, further M&A deals or all of these.
Market Dynamics:
On the demand side, the flat markets of Western Europe and the US are in stark contrast to the growth and profit potential in Eastern Europe and Asia. On the supply side, higher raw materials costs are placing increased pressure on the industry to seek efficiencies to offset these cost increases.
In the US, A-B and InBev have a combined market share of nearly 50%. In addition, the Justice Department has just given approval to the combination of the US’s second- and third-largest brewers, Miller Brewing and Coors Brewing, which will create the No. 2 player, with about 30% market share. These consolidations will produce the kind of economies of scale required to supply these emerging markets and will have far reaching effects throughout the supply chain. The stage is now set for a new battle in the US beer market, this time between two overseas players: the newly merged Anheuser-Busch InBev and its London-based rival SABMiller, and this time gaining market share is not likely to be as critical as controlling costs.
Increased Buying Power:
The global escalation of raw material cost such as barley, hops, aluminum and glass puts added pressure on brewers to negotiate better deals with suppliers – and now both companies become much more import to suppliers, technology developers, and raw material producers etc. Some prime areas for efficiencies are likely to include:
Distribution: InBev has a record of tough dealings with distributors in Brazil, one of its main markets. InBev executives could shake up A-B’s network of more than 600 beer distributors in the U.S, the middlemen who link breweries with grocery stores, gas stations and bars. Many of those distributors have agreed to carry only A-B products and are rewarded with deals said to be plush — including paint jobs for trucks, cash payments and easier credit terms. InBev may see those distributors as ripe for cost-cutting, some analysts have said.
Marketing: According to Advertising Age, a large part of the slated cost savings will come from A-B’s $1.3m marketing budget with a handful of suppliers. However, InBev has publicly stated its interest in A-B’s marketing skills and its plans to capitalize on these, so InBev’s approach may be to ask wholesalers to pick up more of the tab for marketing expenses rather than cutting them.
Wholesalers: InBev may start to aggressively push wholesalers to combine to become more efficient. A-B has been more reluctant to take that step, than its competitors Miller and Coors.
Production Cost: A-B’s in house packaging businesses should give them a strategic insight into production cost which will prove to be a valuable weapon in early negotiations and later strategic sourcing exercises with suppliers. This will be a nervous time for suppliers as InBevs procurement team opens up the books on A-B’s deals.
Asset sales: These could include the sale of none core businesses such as A-B’s theme parks and packaging divisions. The sale of the Packaging division is likely to have a major impact on container suppliers. A-B’s Metal Container Corp. supplies more than 60 percent of Anheuser-Busch’s U.S. beer cans and 75 percent of its domestic lids, also produces cans and lids for major U.S. soft drink companies including PepsiCo, Coca-Cola and Hansen Natural Corp.
Major suppliers such as Rexam, Ball and Crown are likely to be watching developments very carefully.
Conclusion
The critical impact of the supply chain becomes clear when looking at a real life example of bringing the benefits of company integration to life. Supply chain professionals must secure themselves a seat at the table as early as possible to maximize their contribution to this process. Excellence in delivering these benefits can make or break the success of the deal and provide a platform for supply management to redefine its role.
In Purchasing Practice’s experience organizations that have invested in best procurement practices and taken a strategic view of procurement always outshine those who have not, and typically go on to play the dominant role in the relationship. For more on this subject see “Finding the post integration savings” by visiting http://purchasingpractice.com/finding-the-post-integration-savings/ and “Procurements role in a Merger, Acquisition, or Business Integration”, by reading the May edition of “Transform” at http://purchasingpractice.com/information
2 Christian Verstraete // Aug 5, 2008 at 8:44 am
Being Belgian, I am really surprised by the reactions around the B-B/InBev deal. Indeed, many of our companies have been acquired by American companies, jobs have been lost, factories delocalized etc. But I have never seen such an adverse reaction in our country. We all are in a global marketplace. Didn’t our governments sign the GATT agreements? There is pro’s in it and con’s. I am absolutely not sure people realize the benefits, they just see the negatives. It’s maybe up to people like us to educate our readers.
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