A Failed Experiment, But?

Dear Client:

“What happens when there’s nobody left to fire and the best and brightest don’t wish to fly coach? You write down brands by $15 bil.”
– @beerbizdaily tweet on Saturday

That’s the bottom line message from Friday’s WSJ’s front page piece on 3G’s aggressive cost cutting method, zero based budgeting (ZBB), where each line item exhaustively starts at zero every year.

The conclusion: Turns out actual humans don’t cotton to ZBB, and it’s out as a tactic. Turns out building brands the old fashioned way — (hint: making friends) — is back in.

“I don’t think ZBB necessarily delivered the goods on that virtuous cycle of ever-increasing cost savings fueling growth,” said consumer industry expert David Garfield of AlixPartners. Ya think?

[Editor’s note: This Halloween piece last year caused heart attacks on Wall Street and in London, and general condemnation. But it’s why the smart money reads me, nearly every day: [BBD 10-31-2018]

The article starts with a bombshell: “The Kraft Heinz KHC [stock down -25% Friday] experiment in radical cost-cutting has failed. For the broader food industry, investments in innovation and brand-building are coming back into style. Investors and companies must now adjust accordingly.” (Emphasis mine).

The WSJ has said (three years later than we did) that ZBB and the old days of buying dominate CPG brands and milking them are dead, But it seems the folks at A-B have gotten the message even before their brothers at Kraft: It’s now about organic growth.

To A-B’s credit, they are trying. U.S. A-B discovered this three or four years ago with Michael Taylor running herd on acquisitions (he now runs Green Flash). They are still making moves (Cutwater last week) while it seems to me like MillerCoors is standing still — doing nothing but introducing a few FMBs while under-reporting their income by $400 million. (More on that later). But it’s still peanuts.

Indeed, Anheuser-Busch marketing chief Marcel Marcondes said in a memo to distributors Friday, obtained by BBD through dark nefarious back-channels, that the beer industry “hasn’t been growing. And we all know the reason: consumers have more choices than ever before. This disruption means we all need to reflect on what we’ve been doing and how to fix it.”

Yes indeed. So is A-B finally ready to build brands rather than just milk them? In a word, yes. Let’s take a look:

“As the nation’s leading brewer, one might think Anheuser-Busch would be the first to resist change. But as the leading brewer, that’s not our role. We cannot ignore what’s right in front of us, like so many other industries that failed to adapt to evolving consumer needs. We are here to help future-proof the beer industry for the next 100 years. Bud Light’s effort around transparency is just one of the moves we’ve made. According to a recent Nielsen report, 39% of U.S. consumers say they would switch from the brands they currently buy to others that provide clearer, more accurate product information. And it makes sense. Look around any local supermarket or convenience store, and it’s easy to see that the food and beverage industry has quickly embraced this concept. With pretty much just one exception: alcohol, This is why Bud Light recently became the first beer in the U.S. to put an ingredients label on its packaging.”

Of course, it’s been pointed out that A-B has not made ingredients transparent on all their beers, not even all Bud Light line extensions (looking at you Bud Light Lime and Orange). The WSJ even fronted a story on #cornconflate over the weekend, pointing out that high fructose corn syrup is not the same as a plain old fermentable corn syrup, which is the confusion A-B clearly wished to create, and maybe have.

What they have def done is derailed an effort to create a Pro Beer campaign, coordinated by the NBWA and included folks from BI, ABI, MillerCoors, Constellation and Heineken USA, etc.

But now it’s not to be. MillerCoors has pulled out amid the A-B ads on corn syrup. But it ain’t over. Stay tuned.

(A SIDE NOTE: ABI’s investors at 3G have caused Mondelez’s former CEO to stop flying first class. Can you imagine a more insignificant incremental cost for such a large company? For the record, I have nine employees. If any of then wish to fly first class to cover an important event for you, then they are damned well entitled to fly first class).

If you wish to read my personal views on ZBB, reach back to my Friday the 13th piece in 2016. [BBD 10-13-2016]

BOTTOM LINE: Having said all that, nobody is doing more to innovate and test in beer than Anheuser-Busch in the U.S. today. They have the resources and young talent to get it done. But I don’t envy them. Even a huge success in a company that sells Bud Light is always going to be a little tiny success. Look, guys and gals, keep at it. You’re at the biggest beer-co out there.

BRANCHING OUT? And in the interest of selling non-growth assets to free up the balance sheet to acquire growth, A-B’s sale of its stake in a New Jersey distributorship in the same week as it’s purchase for Cutwater is a view into the future.

Until tomorrow,

Harry, Jenn, and Jordan

“Whenever people agree with me I always feel I must be wrong.”
– Oscar Wilde

———- Sell Day Calendar ———-
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Sell days this month: 20
Sell days this month last year: 20
This month ends on a: Thurs.
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YTD sell days Over/Under: +1