Truth Squad Talks Back on Brito

FILED NOVEMBER 5, 2018

Dear Client:

Man oh man we got many responses -- some heated on both sides -- regarding our Halloween editorial on AB Inbev's Carlos Brito's North American performance [see BBD 10-31-2018].

We got responses from distributors of all flavors and surprisingly many from current and retired A-B execs. While most folks agreed with the assessment in general, a few distributors took issue with the tone. (Emphasis ours).

Florida/Ohio A-B distributor Col. John Saputo USMC (ret.), always one to speak frankly, is one that took issue with the tone. "Harry, I read your last post again and on second reading it dawned on me that I have never before read one of your posts where you so cruelly attack any beer personality, let alone one of with Brito's resume and stature in our industry….. It's a given that your column is usually more fun to read than others, but have you ever attacked anyone like you did Brito?"

[Ed. Note: Col. Saputo is absolutely correct that it is not our usual custom to write critically about specific people in the industry, unless they are at the CEO level or above. Yes it has happened before, and no it is not personal, I happen to personally like Brito.]

SOME SUCCESSES, YES. The Colonel also catalogues the many successes A-B has accomplished under Brito's leadership over the past ten years: Stepping up their game in the craft beer segment with purchases like Goose, Elysian, Karbach, Devils Backbone, Golden Road, Wicked Weed, Blue Point, etc. Their recent successful innovations like Michelob Ultra Pure Gold, Bud Light Orange, Budweiser Reserve series, etc. Stella's success, and Bud and Bud Lights improving trends. "Every wholesaler will tell you that despite the overall industry losing volume we have maintained and grown profits under Brito."

Fair points, all. As I said in the original column, A-B is certainly fairing better than their largest competitor, MillerCoors.

WHOLESALER PANEL SAYS THINGS IMPROVING OF LATE. Wholesaler Panel chairman emeritus and Missouri A-B distributor David Stokes also chimed in, writing that while it's been tough, things have been improving lately. He writes:

"Harry, I believe it is fair to hold Brito and A-B accountable for the share and volume results since their purchase ten years ago but for the most part they have driven strong financial results. As a distributor, however, volume and share is the lifeblood of our organization and our A-B business has been under pressure for the past five years.

"Being on the Panel I have noticed a marked shift in focus in the last 18 months towards a growth orientation. I think the large investment behind the Bud Light Dilly Dilly campaign and the strong introductions of Mich Ultra Pure Gold, Budweiser Freedom Reserve and Bud Light Orange are good examples of that focus.

"To be sure, a few solid innovations are not going to turnaround the situation overnight but we did grow our A-B share over the summer and that is a step in the right direction."

Also fair points. Indeed, I've been hearing good things from the field about new-ish A-B chief Michel Doukeris.

BUT ALSO, MAYBE A MARKETING DISASTER. A recently retired veteran U.S. A-B exec has another take from the inside, saying BBD "hit the nail right on the head" and that U.S. marketing has been a "disaster." This exec says that it got really bad for Bud Light in particular when they attempted to "disrupt" the brand in 2016 with the "disastrous" Seth Rogen and Amy Schumer ads, bringing politics and politically sensitive issues (like gay marriage) to the forefront. "AABIII would have fired someone on the spot for making a suggestion like that. Maybe makes sense to disrupt Natty Light or Busch, but not the largest brand in North America," he tells BBD. (Speaking of, another A-B exec tells BBD that "AABIII is rumored to be coming out of retirement." Wouldn't that be something? We'll see).

IS CHURN AN ISSUE? Another A-B exec says that employee churn is also an issue, because of the way A-B often hires from the outside, usually straight from prestigious colleges, rather than from more experienced folks within. "That obviously doesn't do much to motivate the field sales folks when no hope of making VP someday and some pimple faced kid is put in charge of the region."

Another source tells me the move to NYC was ill-conceived, as they lost experienced folks from St. Louis and even the talented and smart "new hires [were put] right in the middle of a location where they can be snapped up by other companies very easily."

A middle manager also pinged me to say that their review process creates a lot of needless churn. "It's not that some of the people don't deserve it, it's that X% each year needs to be put on a plan to create churn - unless you're in Senior Management. Wonder if bonuses will be affected at the top this year." Yessir, they most certainly will.

BOTTOM LINE. As I said at the top, my editorial is not personal. Brito is a charming guy and we've always enjoyed a convivial relationship. The point of the column is that Brito is brilliant at integrating extremely complex acquisitions, cut costs to the bone, and generate massive cash flow to pay down debt to prepare for the next acquisition. His problem today is twofold:

There aren't any large acquisitions in the beer space left, and
Even if there were, ABI's $110B+ debt load after the SABMiller acquisition, which had fewer overlapping cost cutting opportunities, leaves ABI's balance sheet in a state that they have to slash dividends to pay down debt; and cash flow now relies increasingly on organic growth from marketing and brand building, skill sets Brito has yet to prove he is adept at executing, as a banker at heart.

AN INTERESTING WALL STREET THEORY. An analyst told me that ABI is operating these days in a more decentralized fashion, a la SABMiller, with country chiefs having more P&L responsibilities and more focus on generating organic growth. The thinking in Wall Street circles is this is a sort of test to see who can deliver on organic growth, and that person may get elevated to ABI CEO as Brito retires and joins the board. Just a theory on Wall Street.

And finally, I'll leave you with this note from a blue-silver distributor:

"Nice job framing up the performance of ABI under Brito, I enjoyed the article. I would think your readers would like to see the same thing about the only company doing worse! [MillerCoors]"

Stay tuned...

MILLERCOORS NAMES NEW CHIEF STRATEGY OFFICER

Just before the weekend hit, MillerCoors chief Gavin Hattersley sent out word that current chief strategy officer, Greg Butler, will soon part ways with the company for another gig outside the beer industry.

Recall that Greg, who had previously served as VP of the Miller brand family, was promoted to lead strategy for MillerCoors back in March of this year.

Filling in the vacancy left behind by Greg will be Brad Schwartz, effective today.

Brad came to MillerCoors in 2004 from Accenture, and has held numerous roles for the brewer, including VP of emerging accounts, regional VP for the Northeast, and most recently serving as chief commercial solutions officer, leading the Commercial Center of Excellence (CCOE) for the company.

As MillerCoors' new chief strategy officer, Brad will "lead the strategy and analytics team in driving our overall long-range strategy development, planning and execution while ensuring our enterprise plans and goals are in sync with our global strategy," said Gavin.

"With in-depth experience in driving the strategic direction of our commercial plans through progressively broadened leadership roles, Brad is extremely well equipped and the ideal leader for this role," according to Gavin.

YEAR-TO-DATE IMPORT TRENDS NEARLY TWICE THE GROWTH RATE SEEN THROUGH THE FIRST NINE MONTHS IN 2017

Imports, or should I say Mexican imports, are accelerating. After a tough August, down 0.6%, imports roared back in September, up 9.3%, per latest figures from Beer Institute. That's a near 240,000-barrel improvement over the reported imported volume for September 2017.

[Greenhorn alert: Monthly import shipments are largely dependent on available shipping lanes and trade inventory rather than actual consumer demand, so it's not surprising there was some make-up after a slow month].

Recall that only two of the top ten source countries" Mexico and Poland" saw an increase in shipments in August, our last update of import numbers from the BI.

But in September, we saw six of the top ten grow shipments, and four of them actually grew double digits: Mexico, the largest source of U.S. imports, was up 17% (marking its tenth straight month of growth, thanks in big part to Modelo Especial); the second largest source country, Netherlands, hit double digits as well, up 11.7% (thanks Heineken).

Italy at #7 (thanks Peroni) and Poland (#9) both shot past the double-digit mark, up 35.8% and 42.5%, respectively.

After the solid showing in September, the YTD import trend now stands at +5.1%, which is nearly "twice its growth rate at the same point last year," BI chief economist Michael Uhrich told BBD.

BEER BRIEFS:

LANCE HASTINGS SCORES NEW GIG. MillerCoors guv affairs veteran Lance Hastings, is now the new president of The California Manufacturers & Technology Association (CMTA), an industry group that seeks to improve the business climate for the state's manufacturing, processing and technology based companies. As you know, Lance has held several leadership roles at MillerCoors and SABMiller over the past 15 years and worked at the California Grocers Association prior to that. "I am so pleased I will be leaving CMTA in good hands," said outgoing CMTA president, Dorothy Rothrock. "Lance is an outstanding selection, with a long record of success on the manufacturing operations side with MillerCoors and on the advocacy side as a trade association lobbyist." Godspeed, amigo.

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CRAFT IS DEAD? TELL THAT TO FOUNDERS

Everybody is talking about how craft went from up double digits to flatter than a warm Dr Pepper on a hot Dallas afternoon.

Banker Jeffries conducted a recent industry survey which "suggests rational beer pricing, modest volume falls, and bifurcation of the high and low end."

Nobody had perfected the value-to-price ratio more than Founders. Whenever there's a runaway success in a category, I learned long ago that the first place you look is at pricing relative to peers in the category.

Founders was up about 33% through the end of summer, a big anomaly for big craft. And their runaway session IPA hit, All Day IPA, is still growing double digits -- and more than $10 cheaper per case than your average IPA (about $29 vs. $40).

That don't mean they ain't profitable.

"I think bottom line is, we've found a lane," c0-founder Mike Stevens told us in July. "Ultimately, we entered the space at a time when people in craft wanted a full-flavored IPA, but rejoiced in something that was 4.7%. ... Once we put that into a 15-pack and priced it at a sweet spot, we hit a perfect storm."

What about revs per barrel?

"Things like EBITDA per barrel and margin, that's the health of the brand," he says. "I can tell you we grow our EBITDA every year and grow it very healthily." That's the beauty of efficiency.

As luck would have it, we somehow got Mike to speak at our Beer Summit in late January next year, and we'll get the skinny on his remarkable success.

Call Jessica at 210-805-8006 (and tell her Harry says "you're the best"). Or go to beernet.com to register.

Until tomorrow,

Harry, Jenn, and Jordan

"About the time we think we can make ends meet, somebody moves the ends." - Herbert Hoover

P.S. A "Greenhorn Alert" is dedicated to those who have recently entered the beer business and may not be familiar with our lingo.

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BEER SUMMIT 2019 REGISTRATION OPEN. Join us for the 16th Annual Beer Industry Summit, January 27 - 28, 2019 at The Hotel del Coronado in San Diego, CA. Speakers TBA.

Register here: https://www.beernet.com/beer_summit.php

Or give Jessica a ring at 210-805-8006. Looking forward to seeing you there.

---------- Sell Day Calendar ----------

Today's Sell Day: 4

Sell days this month: 22

Sell days this month last year: 22

This month ends on a: Fri.

This month last year ended on a: Thurs.

YTD sell days Over/Under: +1

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