The awakening of the "Big Red Machine."

Modern Brewery Age, July 19, 1999 by Lamont Seckman

A-B's success is due to factors that should be of interest to competitive wholesalers

Talk these days in the beer distribution industry is increasingly turning toward the "Big Red Machine" and how it seems to be clicking on all cylinders. While certainly opinions vary as to why, and every market has unique influences, there are some common themes contributing to Anheuser-Busch's recent success. Such themes should be of particular interest to competitive wholesalers who must react effectively or face continuing losses of the margin pool.

The Distribution System as a Strategic Weapon

It is important to understand the different perspective suppliers have these days toward distribution. Generally, the old way of viewing distribution was simply as a cost of doing business-or, more particularly, a cost of getting product to market. The primary economic concern for suppliers was ensuring proper price points with sufficient margins built in to provide each tier of the supply chain with cost coverage and return on investment. Nowadays, suppliers increasingly view distribution as just one item in an arsenal of strategic weapons to be used to establish and maintain competitive advantage.

At first glance, the distinction between the old and new ways may appear subtle. In fact, it has direct implications on future relations between wholesaler and supplier, and on the competitive landscape of A-B and other distributors.

Re-Deploying Ownership Capital

Nearly two years ago I wrote a column for Modern Brewery Age discussing the new Anheuser-Busch Wholesaler Equity Agreement and its potential value to the brewer as a way of leveraging and controlling its wholesale network. In this column I compared the agreement to the "roll-up" strategy employed in the soft-drink industry by CocaCola through the creation of Coca-Cola Enterprises (CCE). While the beer industry has not been receptive to a CCE-type roll-up due to its regulatory environment and prohibitions against public ownership, Anheuser-Busch has attempted to receive similar benefits by "redeploying" ownership capital in its independently owned distributor network.

Generally, this capital re-deployment takes two forms: increased owner involvement in the business, and increased re-investment in the business.

The ownership provision for equity managers in the new A-B agreement is only the most visible example of supplier emphasis on what may be referred to as "involved" capital. Make no mistake, there is no shortage of financial capital to facilitate the industry consolidation. We get calls practically on a daily basis from capital sources looking to cash in on the next consolidation wave. There is, however, a need for "involved" capital-qualified and capable managers and owners willing to be active in management. Financial investors, for the most part, need not apply.

The A-B Advantage

In addition to increased owner involvement, the A-B agreement impacts service levels and, as a result, distribution costs. A-B executives are not shy in pointing out their ability to change the operating, sales, and merchandising standards set forth in Exhibit 9 of the agreement at any time. This tool allows A-B to continually turn up the heat against local-market, competitive wholesalers by demanding compliance from its network.

If, indeed, suppliers are looking toward distribution as the next strategic battleground, then A-B has several distinct advantages. Critical mass, of course, is the most obvious. Wholesalers in the number one share position can withstand increased spending requirements and shrinking margins for a much longer period. A sampling of our project files indicates the average A-B distributor we have worked with over the last couple of years has an adjusted operating cash flow of 90[cents] per case. While a 20[cents] per-case cost increase (or reinvestment, depending on your perspective) represents a decline of 40% of a wholesaler with 50[cents] of cash flow, it has much less of an impact on many A-B wholesalers. It is apparent who the likely victors will be in a spending war.

Summary

Many things have worked in Anheuser-Busch's favor the past year. Its advertising seems to be resonating compared to the competition, its wholesalers turn inventories at a much higher rate, its sales result from fewer SKUs, and its top market share competitor has suffered from weak upper management. As shipment figures for 1999 are inflated somewhat due to inventory buildups and things change in business so quickly these days, it is a dangerous game to read too much into current trends. With this said, AB's recent success could be viewed in a larger context.

Nobody has ever accused Anheuser-Busch of being asleep - therefore, the title of this column is a misnomer. However, we may be witnessing the beginning of a growth jump for A-B resulting from a combination of factors, not the least of which is a more effective use of one of its most powerful strategic weapons - its wholesale network.