Features

The Plot to Destroy America's Beer


The Plot to Destroy America's Beer

Photograph by Jamie Chung for Bloomberg Businessweek

Brian Rinfret likes imported beer from Germany. He sometimes buys Spaten. He enjoys an occasional Bitburger. When he was 25 years old, he discovered Beck’s, a pilsner brewed in the city of Bremen in accordance with the Reinheitsgebot, the German Purity Law of 1516. It said so right on the label. After that, Rinfret was hooked.

One Friday night in January, Rinfret, who is now 52, stopped on the way home from work at his local liquor store in Monroe, N.J., and purchased a 12-pack of Beck’s. When he got home, he opened a bottle. “I was like, what the hell?” he recalls. “It tasted light. It tasted weak. Just, you know, night and day. Bubbly, real fizzy. To me, it wasn’t German beer. It tasted like a Budweiser with flavoring.”

He examined the label. It said the beer was no longer brewed in Bremen. He looked more closely at the fine print: “Product of the USA.” This was profoundly unsettling for a guy who had been a Beck’s drinker for more than half his life. He was also miffed to have paid the full import price for the 12-pack.

Rinfret left a telephone message with AB InBev (BUD), the owner of Beck’s and many other beers, including Budweiser. Nobody got back to him. He had better luck with e-mail. An AB InBev employee informed him that Beck’s was now being brewed in St. Louis along with Budweiser. But never fear, the rep told Rinfret: AB InBev was using the same recipe as always.

He wasn’t satisfied. In March, he posted a plea on Beck’s official Facebook (FB) page: “Beck’s made in the U.S. not worth drinking. Bring back German Beck’s. Please.” He had plenty of company. “This is a travesty,” a fellow disgruntled Beck’s drinker raged. “I’m pretty bummed,” wrote another. “I’ve been drinking this beer religiously for over 20 years.” Rinfret kept trashing Beck’s on Facebook. Until, he says, AB InBev unfriended him in May. “They banned me from their site. I can’t post anything on there any longer.”

Rinfret was only temporarily silenced. He now complains on a Facebook page called Import Beck’s from Germany. AB InBev may be paying a price for disappointing Beck’s loyalists like him. According to Bump Williams, a beer industry consultant in Stratford, Conn., sales of Beck’s at U.S. food stores were down 14 percent in the four weeks ending Sept. 9 compared with the same period last year. “They are getting their proverbial asses kicked,” Williams says. “Too many customers were turned off when the switch was made.” Sales of Budweiser in the U.S. have fallen recently, too. And yet AB InBev is extraordinarily profitable.

There has never been a beer company like AB InBev. It was created in 2008 when InBev, the Leuven (Belgium)-based owner of Beck’s and Stella Artois, swallowed Anheuser-Busch, the maker of Budweiser, in a $52 billion hostile takeover. Today, AB InBev is the dominant beer company in the U.S., with 48 percent of the market. It controls 69 percent in Brazil; it’s the second-largest brewer in Russia and the third-largest in China. The company owns more than 200 different beers around the world. It would like to buy more.

The man in charge of AB InBev is 52-year-old Carlos Brito. The Brazilian-born chief executive is a millionaire many times over. He speaks English fluently and dresses like the manager of a local hardware store. At the Manhattan headquarters, he wears jeans to work and tucks in his shirts. He keeps his company identification badge clipped to his waist where everybody can see it, even though everyone knows who he is. To the rest of the world, he keeps a low profile. He does not, for example, accept interview requests from Bloomberg Businessweek. That might be his character, and it might be calculated. The Busch family is a legendary American dynasty. Many people in the U.S. aren’t thrilled that a foreign company now owns Budweiser, America’s beer.

This is not to say that Brito lacks American admirers. Many can be found on Wall Street, where investors care less about where beers are brewed than about how profitable they are. This is where Brito shines. After InBev bought Anheuser-Busch, he slashed costs at the combined company by $1.1 billion in a single year. AB InBev’s margins widened substantially, and its share price has nearly quadrupled since the takeover. In 2011, Brito made Fortune magazine’s Fantasy Sports Executive League Dream Team as a designated hitter.

Anthony Bucalo, an analyst for Banco Santander (SAN), speculated in April that Brito’s ultimate plan is to acquire the beverage unit of PepsiCo (PEP). AB InBev already distributes PepsiCo’s soft drinks in Brazil, and it was through a distributor’s arrangement that the company got its claws into Anheuser-Busch. According to Bucalo’s theory, Brito wants to be the king of sparkling beverages in aluminum cans, regardless of their alcohol content or taste.

There’s one hitch. AB InBev’s CEO is a skilled financial engineer, but he has had trouble selling beer. The company’s shipments in the U.S. have declined 8 percent to 98 million barrels from 2008 to 2011, according to Beer Marketer’s Insights. Last year, Coors Light surpassed Budweiser to become America’s No. 2 beer. (Bud Light remains No. 1.) Meanwhile, Brito is alienating lovers of AB InBev’s imports by not importing them. And he’s risking the devotion of American beer lovers by fiddling with the Budweiser recipe in the name of cost-cutting.

On Oct. 3, Brito showed up at the presidential debate at the University of Denver. Uncharacteristically, he wore a suit and tie. He made small talk with reporters but left it to others to make headlines. “There is no way he would say anything newsworthy,” says Harry Schuhmacher, editor of Beer Business Daily, who attended the debate as Brito’s guest. “My nickname for him is La Máquina, which is Portuguese for the machine.”

Schuhmacher knows Brito as well as any journalist. They’ve had lunch; they’ve had beers. Schuhmacher always comes away with a sense of puzzlement. “He’s given me a 15-minute explanation of something,” Schuhmacher says. “Then I’ll transcribe it. It’s verbatim the same explanation he gave to the Wall Street Journal. I’m like, how does he do it? He stays on message. He’s masterful at it.”

Born in 1960, Carlos Alves de Brito studied mechanical engineering at the Federal University of Rio de Janeiro. He wanted to get an MBA from an American school, but he couldn’t afford the tuition. Through a family friend, Brito met Jorge Paulo Lemann, a wealthy Brazilian banker. The two were well matched. According to a Brazilian business magazine, there were two ways that an employee of Lemann’s bank could quickly be shown the door. One was to appear in the Brazilian celebrity magazine Caras. The other was to purchase a foreign car. (Lemann and his partners sold their bank to Credit Suisse (CS) in 1998 for nearly $1 billion.) Lemann thought Brito had potential. He agreed to pay for him to get an MBA at Stanford University.

When Brito graduated in 1989, he went to work at Brahma, a Brazilian brewery where Lemann was a director and controlling investor. Brito became the company’s sales manager, overseeing its army of representatives, many of whom traveled by motorbike. In 1999, Brahma merged with another brewer, Antarctica, to become AmBev (ABV), Brazil’s biggest beer company. In 2004, Brito became CEO, and the chief evangelist for his mentor’s frugal corporate values. That year, AmBev merged with Belgium’s Interbrew, owner of Beck’s and Stella Artois, to create InBev. The deal gave the Brazilians legitimacy in the international beer industry. They were now part of a company with brands that were centuries old. The CEO of the new company was John Brock, an Interbrew holdover. Within a year and a half, Brito and his Brazilian management team were in charge.

InBev was never a sentimental company. Shortly after the merger, it shuttered the 227-year-old brewery in Manchester, U.K., where Boddingtons was produced. It encountered more resistance in 2005 when it closed the brewery in the Belgian village of Hoegaarden, from which the popular white beer of the same name flowed. InBev said it could no longer afford to keep the brewery open. After two years of protests by brewery workers and beer aficionados, it reversed itself. Laura Vallis, an AB InBev spokeswoman, says Hoegaarden exports spiked unexpectedly. “The brand’s growth since is positive news for Hoegaarden and for consumers around the world who enjoy it,” she says.

Yet some Hoegaarden drinkers say the flavor of the beer changed. “I think now it’s not as distinctive tasting,” says Iain Loe, spokesman for the Campaign for Real Ale, an advocacy group for pubs and beer drinkers. “You often see when a local brand is taken over by a global brewer, the production is raised a lot. If you’re trying to produce a lot of beer, you don’t want a beer that some people may object to the taste of it, so you may actually make the taste a little blander.” (Vallis’s response: “The brand’s commitment to quality has never changed.”)

Despite occasional setbacks, Brito’s assiduous focus on the bottom line produced the intended results. InBev’s earnings margin (before taxes and depreciation) rose from 24.7 percent in 2004 to 34.6 percent in 2007. Its stock price nearly tripled. Then he started running out of things to cut. In early 2008, InBev’s results plateaued, and its shares stumbled.

Investors hungered for another deal. Brito complied with the takeover of Anheuser-Busch. He had intimate knowledge of his target: America’s largest brewer had distributed InBev’s beers in the U.S. since 2005. Anheuser-Busch’s CEO, August Busch IV, the fifth Busch family member to run the company, was no match for La Máquina and his mentor, Lemann, who was now an InBev director. Anheuser-Busch’s board of directors accepted InBev’s bid of $70 a share on July 14, 2008.

A triumphant Brito promised that AB InBev would be a global brewer with three worldwide brands—Stella Artois, Beck’s, and Budweiser. “We respect Anheuser-Busch, its brand, what it did for the business, the people of AB,” Brito said in a video interview with Belgium’s De Standaard. “We think it just feels great to be here now and look at this combined company. There are so many things we can do.”

For a number-crunching manager like Brito, an old, family-run company like Anheuser-Busch provided plenty of opportunities for cuts. He laid off approximately 1,400 people, about 6 percent of the U.S. workforce. He sold $9.4 billion in assets, including Busch Gardens and SeaWorld. AB InBev also tried to save money on materials. It used smaller labels and thinner glass for its bottles. It tried weaker cardboard for its 12-packs and cases. The old Anheuser-Busch insisted on using whole grains of rice in its beer. AB InBev was fine with the broken kind. “Our purchasing of rice has to do with how fresh the rice is, not whether it is whole or broken,” says Vallis.

The company played hardball with vendors. Anheuser-Busch has long boasted that “beechwood aging” enhanced Budweiser’s flavor. One of its two suppliers was Tom Urani, owner of Beechwood Corp. in Millington, Tenn. “In November 2008, we were featured in a nationwide ad,” Urani recalls. “It showed an aerial shot of our factory and said Anheuser-Busch is all about people, places, and quality.”

After the merger, AB InBev informed Urani that it would use only one beechwood provider. Urani was the losing bidder. He says this was the end of Beechwood Corp. Who else bought large amounts of beechwood chips but the makers of Budweiser? Urani threw a party on the final day. He invited Brito, who didn’t show up. That day, Urani drank his last Budweiser for the television cameras. “I’ve now become a bourbon guy,” he says. “I’ve lost weight.” AB InBev says it appreciates Urani’s years of service.

Brito was just as ruthless when it came to the perks to which Anheuser-Busch employees had grown accustomed. He cut the number of BlackBerrys in half. Executives who once traveled in corporate jets now flew commercial. He removed the interior walls at One Busch Place in St. Louis and turned the office into an open-plan space. Everyone would work under the same Spartan conditions that Brito embraced. (In New York, Brito shares a large table with his head of sales and his finance chief.) “We always say the leaner the business, the more money we will have at the end of the year to share,” he said in a speech at Stanford in 2008. “I don’t have a company car. I don’t care. I can buy my own car. I don’t need the company to give me beer. I can buy my own beer.”

“Brito is a very candid and transparent guy,” says Keith Levy, a former Anheuser-Busch executive who was vice president of U.S. marketing after the merger before leaving the company in 2011. “It was easy to figure out where he was coming from, which wasn’t always the case with the Busch family. Don’t get me wrong, August III and August IV were both very dynamic and visionary leaders. There was just always a lot of theater and drama involved.”

No matter how much you industrialize it, every can of beer starts as a living thing. It’s not like making soda. It’s more like bread, an agricultural product requiring cooking and fermentation with live yeast. That means a brewer spends a lot of time dealing with farmers. In this regard, Brito’s cuts were felt around the world.

In the Hallertau region of Germany, small farmers had long made a living growing high-quality hops like Hallertauer Mittelfrüh, an integral component in Budweiser. Budweiser, after all, was originally a Bohemian-style beer, brewed with European ingredients. Hops, a bitter kind of flower, provide the dry smack that rides atop the sugars in a beer. After the 2008 takeover, however, AB InBev said it was cutting its purchases of the Hallertauer hops. “They announced they were no longer going to use the Hallertauer Mittelfrüh variety,” says Johann Pichlmaier, president of the Association of German Hops Growers. “We’ve had to reduce the acreage in the past few years.”

Martin Bauer, a sixth-generation hops farmer in Hüll, isn’t so busy these days. He putters around his barn in a flannel shirt and overalls. He keeps his farm going more to stay busy than for the money, which isn’t what it used to be. Bauer remembers meeting August Busch III, who came to the area once a year with a Mercedes-driving entourage. He fondly recalls how the former Anheuser-Busch CEO paid a high price for Hallertauer Mittelfrüh. He has nothing good to say about AB InBev, which, he laments, is brewing its beer with cheaper, less flavorful hops. “As long as people buy the beer they brew, they won’t go back,” Bauer says. “The Chinese and the South Americans prefer lighter beer anyway.”

Erna Stanglmayr is even more doleful. She says AB InBev is killing small hops farms like the one she’s run with her husband for 35 years. She predicts AB InBev will pay for its penny-pinching. “When you try to save money on hops, your beers will have less taste,” warns Stanglmayr. “Eventually, they will realize customers want quality beer.”

In a telephone interview from Munich, Willy Buholzer, AB InBev’s director of global hops procurement, cheerfully insists that the company still brews the traditional way with Hallertauer Mittelfrüh. He says the reason that AB InBev stopped buying it was that it has a surplus. “We just have too much right now,” Buholzer says. “We need a break for a couple of years.”

A former top AB InBev executive, who declined to be identified because he didn’t want to get in trouble with his old employer, tells a different story. He says the company saved about $55 million a year substituting cheaper hops in Budweiser and other U.S. beers for more expensive ones like Hallertauer Mittelfrüh. It is hard to say whether the average Bud drinker has noticed. But then, the average Bud drinker is not drinking as much beer.

As far as investors are concerned, Brito’s performance has been masterful. So much cash flowed in that by 2011 the company was able to pay down early a significant portion of the $54 billion it had borrowed to finance the Anheuser-Busch takeover. This triggered $1.3 billion in stock-option bonuses for Brito and 39 other executives that year.

Often when a company has a year like that, executives take a victory lap. Their public-relations teams arrange for them to appear on the covers of business magazines and tell the inside story of how they achieved their success. Brito kept his head down. He had little to gain by discussing his boyhood in Brazil. That wouldn’t sell many Budweisers in America. And it wasn’t the AB InBev way.

There was another reason for Brito to be reticent. He’s been running AB InBev’s business in the U.S. like a private equity investor. He has increased revenue and profit, but he has done so almost entirely by raising prices and cutting the cost of making the product. This has done wonders for AB InBev’s balance sheet. “If you look at what AB InBev has done since it took over Anheuser-Busch, it has made it enormously more profitable,” says Trevor Stirling, a beer industry analyst at Bernstein Research (AB), who detects more than a little xenophobia in the criticism of the company. “Is that un-American? Is it unconstitutional to increase the profitability of a business?”

But the price increases have also weakened thirst for Budweiser and Bud Light in their country of origin. Bud Light shipments in the U.S. declined 3 percent to 39 million barrels from 2009 to 2011, according to Beer Marketer’s Insights. Bud slipped 13 percent. Anheuser-Busch’s shipments were rising before the InBev takeover, according to Beer Marketer’s Insights.

Benj Steinman, president of Beer Marketer’s Insights, says the trade-off of higher profits for lower volume is an acceptable one for AB InBev. “I think they are happy with their pricing strategy,” he says. “By and large, it’s done exactly what the company has wanted it to do.” Paul Chibe, AB InBev’s head of U.S. marketing, says Budweiser is “on fire” overseas. He also says that in 2011, 44 percent of Bud sales were outside the U.S., compared with 28 percent three years ago, and that the company is working hard to revive sales in the U.S. “People have an expectation of an instant turnaround,” Chibe complains. “That’s not a realistic expectation. It’s going to take years.”

Brito’s attempts to wring dollars from other strong brands, such as deciding to brew Beck’s and Bass in the U.S., have also met disapproval. Beck’s isn’t doing well. And, according to Bump Williams Consulting, sales of Bass in food stores fell 17 percent in the four weeks ended Sept. 9, 2012, compared with the same period in 2011. “They are hurting these brands,” says Gerard Rijk, a beverage analyst at ING (ING). “The authenticity of Beck’s is that it is a German brand with German water, with German malt, with German hops. This isn’t about brand building. It’s about costs. Full stop. Heineken (HEIA:NA) would never do such a thing.”

AB InBev doesn’t see what the fuss is about. Chibe says the company hasn’t altered the ingredients of either beer. So why are customers rebelling? “You know, it could be that they are getting fresher beer, and they’re getting used to that,” he offers. “We are very, very disciplined as brewers. We’re committed to quality.”

AB InBev continues to make changes to hallowed brands and try the patience of traditionalists with inventions like Michelob Ultra Dragon Fruit Peach. Earlier this year, it inspired tabloid newspaper outrage in England when it reduced the alcohol content of Stella Artois, Budweiser, and Beck’s from 5 percent to 4.8 percent. “Brits historically have drunk relatively low-alcohol beer by American standards,” says Bernstein Research analyst Stirling. He applauds the AB InBev decision, noting that the version with lower alcohol saves the company money because taxes in Britain are levied by alcohol content. For its part, the company claims the move was “another example of our commitment to customer focus.”

AB InBev is taking a similar approach to Goose Island, a small but respected Chicago brewery it bought in 2011 to combat the growing craft beer threat. Three months after the deal, AB InBev started brewing Goose Island signature 312 Imperial Pale Ale—named after a Chicago area code—in Baldwinsville, N.Y., where the area code is 315. Graham Haverfield, beer director at the Wine Library in Springfield Township, N.J., says he’s received an IPA made in Portsmouth, N.H.; a harvest ale made in upstate New York; and Belgian-style beers from Goose Island’s Chicago brewery.

This creates problems for Haverfield. “If I’m asked upfront by a customer, ‘Have you had this?’ Well, I don’t know,” he sighs. “The last time I had it, it was brewed in a different place.” He’s still a Goose Island fan, but he doesn’t know what AB InBev is doing with it. “I have a problem with a craft beer like Goose Island being treated like a mass-produced brand,” Haverfield says. “It’s a slippery slope.” Vallis disagrees: “We want Goose Island to grow in a way that’s right for the brewery and the brands.”

Brito is fond of saying he has delivered on his promises to cut costs and pay down debt. Sometimes, he overdelivered. But this has put him in a bind. Once he was done with his latest round of merging and acquiring, shareholders started paying more attention to AB InBev’s declining market share in the U.S. The company’s shares swooned during much of 2011.

In January, AB InBev released Bud Light Platinum, its first major new beer in the U.S. since the takeover. It comes in a sleek blue bottle and has nearly 2 percent more alcohol than its mother brand. It’s also more expensive. AB InBev celebrated the beer’s launch with a happy hour on the floor of the New York Stock Exchange (NYX). Brito’s message to Wall Street was clear: We’re addressing our deteriorating U.S. position.

AB InBev followed up in April with the rollout of Bud Light Lime-A-Rita, targeted at young women who prefer hard liquor. Never mind that it killed a similar product three years ago called Tequiza. “It failed miserably,” says Mike Mazzoni, a beer industry consultant. “It just didn’t taste good.” AB InBev says it learned a lot from the Tequiza experience.

Soon, Brito had something that investors craved more: another deal. When AB InBev bought Anheuser-Busch, it acquired about 50 percent of Grupo Modelo, Mexico’s largest brewer and the maker of Corona, America’s No. 1 import. In June, Brito announced that AB InBev would purchase the rest of the company for $20 billion. He said Budweiser and Corona would now be the company’s flagships. He didn’t mention Beck’s this time. “Beck’s is not high on the list anymore at the company,” says ING’s Rijk. “It’s much more about Budweiser. It’s much more about Stella Artois. And it’s much more about Corona in the future.” AB InBev’s shares spiked. The merger is now awaiting approval from the U.S. Department of Justice.

What will Brito buy after this? There’s not much left. There is Pepsi, of course. Analysts speculate that it will acquire SABMiller (SAB:LN), the world’s second-largest brewer. (AB InBev isn’t saying.) That would be something, adding beers like Coors Light and Foster’s to AB InBev’s lineup. It might be bittersweet for him. After one last carnival of cost-cutting, he’d have no more easy ways to juice his company’s stock. There would be nothing left for Brito to do but sell beer.

With Clementine Fletcher, Oliver Seuss, and Michael Weiss
Ghost_image
Leonard is a staff writer for Bloomberg Businessweek in New York.

Ebola Rising
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • BUD
    (Anheuser-Busch InBev NV)
    • $110.85 USD
    • 0.16
    • 0.14%
  • FB
    (Facebook Inc)
    • $79.04 USD
    • 0.04
    • 0.05%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus