A Lunch With Brito, Luiz, and Dave at One Busch Place

FILED JUNE 10, 2010

Dear Client:

As usual per this time of year, St. Louis had a murky sky with the sun occasionally peaking through as we cabbed it from our hotel to One Busch Place for our brief meeting with AB InBev chief Carlos Brito, AB InBev North American Zone chief Luiz Edmond, A-B chief Dave Peacock, vp global comms Marianne Amssoms, and vp comms Terri Vogt. I of course know Dave, and have met Brito once briefly just before their acquisition of A-B, but neither of us had yet met Luiz. It was to be an informal lunch, and quasi on the record.

We were met in the lobby by Terri who escorted us up to an eighth floor conference room, with a nice view of the Mississippi. I note for all of posterity that the great bronze eagle that sits watch in the lobby is still there, his beady eyes suspiciously watching all who enter, un-melted down and sold as scrap for cash like many had speculated. No story there. I also wish I could report that Brito and Luiz showed up in top hats and cravats, smoking pipes or something crazy like that, but of course they were just wearing slacks and open collar shirts. Very informal -- which was good since I was donning my white but dirty Addidas sneakers. Just a few middle aged beer people having a salad. I had to remind myself that I was with some of the most influential beer industry executives in the world.

Just as Brito walked in, a squall arrived outside, dropping buckets of rain. Throughout the lunch I kept looking nervously over Brito's shoulder to spectacular lightning strikes in the distance, the gods no doubt warning me to behave. Brito was less tense and the conversation moved much more freely than the last time we met in New York, just hours before the deal with A-B was struck. He and Luiz seemed relaxed, now that A-B is firmly in their grasp and the hard work of merging cultures is well under way.

First thing's first: Does it make sense to distribute soft drinks on the same trucks as beer (as in A-B and Pepsi)? Brito, Luiz, and Dave all agreed that, in the US at least, probably not. Luiz pointed out that maybe in Latin American countries, where "drops sizes are so small", it makes sense. But when the trucks are "already full" and you have to "deal with the massive complexity" of handling all of those SKUs, it makes it difficult. Plus as Brito pointed out, there are "twice as many soft drink accounts and increasing every day," it doesn't make sense.

I asked Brito what he meant by his "for now" comment, talking about the Chicago branch acquisition. He laughed and said "I should have an interpreter with me during those meetings." He said it was a reflexive term he often uses, but that Chicago is a separate situation where "we have a lower share....it became available.....and we've been a partner in" the distributor in Chicago for many years. "It made sense for us to buy it," he said, noting that there is no master plan to start buying up branches. I looked him in the eye:

Me: "So there's no grand evil plan."
Brito: "There's no grand evil plan."

Brito talked a lot about their culture of accountability, their tool box, and their cascading target system for compensating and managing employees. When I suggested that such a system seems like it would stifle creativity and original thought, he kind of took offense.

"Not at all. It's the opposite actually....We provide the framework, but people are allowed to operate freely within that framework.....but they take ownership of their decisions, it's part of our ownership culture." He added, "you can be as creative as you want, but you have to share your ideas. That's the difference." Also, he said that there has to be some sort of framework, so that you don't have different divisions going off on wild tangents and doing things differently. "It would take away the benefit of being a part of a large company, while all the disadvantages remain"....like back-office and auditing. He cited the NFL deal as an example. "That wasn't a part of our plan....but it came up, and our people used the toolbox to evaluate it and decide how much we could pay.....when it comes up for renewal, there's a way to evaluate the return we got.....why reinvent the wheel?" He said that while Dave and Luiz built "alignment" around the decision, "ultimately it was Dave's decision, not mine. But now he owns it." Dave replied half in jest, "Yeah, I own a lot these days."

Brito stressed that their "Dream People Culture" system of cascading goals down to each person has a built-in system of "checks and balances." As an example, he said that any volume goal is also accompanied by a financial goal, so "people don't make short term decisions." But what about when there are macro-economic winds that render a goal impossible to achieve. "We don't change goals," he said, seriously. "We never change goals. You live with it."

How did AB InBev beat it's synergy goals so quickly? Brito says it's because "a lot of the plans and the people were already here." He said that when get got here, he thought the Blue Ocean plan was just a defensive move by the old A-B. But when he looked into it, it had "well-detailed plans, timetables, bottom up projects......but they just hadn't done it.....so we did it."

Dave added as an example the idea for pre-testing ads. "We always talked about pre-testing ads before you shoot them." After the acquisition, Dave said they found that AB InBev had a system already in place for pre-testing ads. "We just had to plug into it."

I then asked how the Modelo arbitration was going. Brito just laughed and looked around the table as if saying, "who is this guy?" He said, "you know I can't comment on that.....it's just ongoing."

What about Budweiser? Do they really think they can stabilize the brand? Brito said, "sometimes it takes coming at it with a fresh set of eyes." He said that they turned around Stella Artois in the UK by using ideas from their marketers throughout the world. Sharing ideas and benchmarking played heavily in our conversation. It's clearly a big deal for them. If a brewery in China is saving 15% on water, their brewers in Brazil can dial them up and ask them how they did it. Likewise with Budweiser, he said they are working on taking the best ideas for Budweiser around the world and bringing them home, noting that Bud in Canada has been growing for years. Luiz acknowledged that all beer marketing is local, but trying ideas until you find one that works in the local market usually can work.

Later Terri showed us around the office, with its open office "newsroom" design. Indeed, it was strange seeing vp sales Evan Athanas sitting in a cube working on chain presentations next to somebody else working on spreadsheets, and then to see Brito pull up to a cubicle and open his laptop. He's the CEO of a company with a market cap of 60 billion euro, and he's sitting next to a market analyst. You don't see that very often.

HAVE YOU BEEN "BRO-ICED" YET?

Apparently there is a new "game" that is all the rage around the country concerning Smirnoff Ice called "getting Bro-Iced". The premise: If you can hand a friend a bottle of Smirnoff Ice without him already having one on him, he has to get on one knee and drink it on the spot, "regardless of how inappropriate of a place it may be," says one paper, Knight News. If the target is already carrying a Smirnoff Ice (some people put one in their back pocket), then the attacker has to drink both bottles. The paper claims the game started at the College of Charleston and spread throughout the South. Now it's moving to the Northeast and the West Coast, even spreading to professionals at Goldman Sachs and Raymond James. There's even a website devoted to the viral game, BrosIcingBros.com, and CNN and the New York Times has picked up on it. Diageo, no stranger to viral marketing (remember their popular and hilarious viral preppy rap video, Tea Partay, for Smirnoff Raw Tea?), has distanced itself from the game. It tells the paper, "Icing is consumer generated. And it's not generated by Diageo. It's not a marketing campaign." The company also discourages "underage icing."

Regardless of origin, sales are responding, despite the ironic undertones of the game that the drink is a "chore" to drink for men. The NY Times says that sales of Smirnoff Ice have taken off in southern college towns like Sewanee, TN and Charleston, SC. It hasn't shown up in scan data yet (latest IRI scans show Smirnoff Ice down 8%). Still, it's one of those strange phenoms. As one distributor put it, "only in the beer business."

ANOTHER RULING IN NEW JERSEY TERMINATION CASE

In the long-running litigation between New Jersey distributors (Warren, Peerless, and Shore Point) against AB InBev over termination fair market values, another opinion was handed down from the US District Court in New Jersey. ABI (technically A-B and InBev USA, but for simplicity we'll call it ABI) had sought a summary judgment. The court granted their wish on some counts, but not on others. The judge ruled in favor of the distributors with respect to ABI's claim that the distributors breached their distributor contract and terminated "with good cause" and that it offered to pay fair market value. Judge denies ABI's motion for summary judgment on those counts, so they'll be heard later in trial. But in the matter of whether InBev USA was really a successor brewer, the court ruled in favor of ABI, saying that they would not "pierce the corporate veil" of InBev and "determine that InBev USA was really just InBev nv/sa" and besides, the Court believes that "AB and InBev USA were not under common control" at the time.

However, regarding the distributors' claim that they sufferd harm and financial loss from ABI's actions, the court disagrees and grants a summary judgment on that count. The Court says that just because ABI may or may not have paid fair market value, they didn't cause harm due to breach of contract or a lack of goodwill because they did pay what they thought was FMV at the time.

As to the charge of conspiracy by ABI, (AB and InBev USA's alleged conspiring to terminate them, the sharing of proprietary information, and inventory buildup), ABI says the distributors "have not shown damages from the alleged conspiracy." The Court agrees, and grants ABI the summary judgment on that count.

And finally, as to the distributors request for punitive damages, the Court also disagrees, saying that they found no malice in ABI's actions, considering they paid the distributors $25 million for the termination.

The Court denied ABI's request for a summary judgment that the $25 mil it paid was FMV, because "a reasonable juror could find for Plaintiffs [distributors] and determine that $65 million was the FMV."

As for tortious interference, the Court sides with ABI, saying that even if there was tortious interference, "there is no evidence of damages resulting from the interference."

ABI had made a counter-claim against Peerless, claiming that the distributor took A-B's FMV payment and then proceeded to take tap handles from A-B. The Court says that nothing in New Jersey's malt beverage law "infers that a wholesaler, once bought out, should refuse to attempt to regain some of the marketplace for its remaining brands, i.e. that it should cease to compete." Court rules for Peerless.

And then there is the claim by ABI that the distributors continued selling inventory after being terminated. The distributors had claimed that these were "the rules of the game" and that they were "merely competing." The court disagrees, saying "these arguments fail" because "there is some evidence that they knew that their competition with AB's licensed distributors was something more than run-of-the-mill business competition."

Until tomorrow, Harry

"Older people shouldn't eat health food, they need all the preservatives they can get."
-Robert Orben

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