February 4, 2005

Beer talk with InBev CEO John Brock

John F. Brock, CEO InBev (photo: InBev)
John F. Brock: "The challenge is to be the best with the highest ebitda margin" (photo: InBev)
John F. Brock, the American CEO of Belgian brewery giant InBev S.A., is never happier than when talking figures. More than just bits and bytes flow through the man's blood, however. He's also a surprisingly good sport. Merely to oblige our photographer, he climbed with astonishing agility up a fire ladder onto the corporate roof in the snow and ice of a Belgian February.
Our newspaper went to corporate HQ in beautiful Louvain (Leuwen) in order learn more about Brock's global strategic priorities after the recent jumbo-marriage of Interbrew and AmBev.

The tankard-sized brewer is such a prolific deal-maker that its name grows longer and longer as the years go by. We therefore wanted to know from sprightly John Brock whether the challenges arising from all this relentless merger activity are merely orthographical...

"The challenge is to be the best" 

Mr. Brock, how does it feel to be the world's largest brewer in terms of volume?!

It's exciting, but the challenge is to be the best by achieving the highest ebitda margin.

Consumers don't care whether you are the biggest or the most profitable brewer in the world. What do your brands offer them in terms of emotion?
Obviously every one of our brands is different, but in general terms they provide moments of pleasure and refreshment. It's the feeling consumers get being with friends and sharing convivial experiences.

You sell 200 local brands in 140 countries, but also market three global flagship brands. How do you balance local and global brands?
80 per cent of beer world-wide comes from local and regional brands. Although "Stella Artois", "Beck's" and "Brahma" make up 15 per cent of our total global volume and 25 per cent of our ebitda, 80 per cent of our volume comes from local brands.

Therefore, it's very important that we retain such local brands as "Jupiter" in Belgium or "Skol" in Brazil which underpin our entire business.

So Stella Artois, Beck's and Brahma are your margin enhancers?
It's not only those three. Our multi-country brands such as "Bass" from the UK or "Staropramen" from the Czech Republic, or our global specialty brands "Leffe" and "Hoegaarden" from Belgium are also very high-margin export brands.

Do you see big export potential for "Spaten" and "Löwenbräu" as regional speciality brands?
Franziskaner Weißbier is higher on my list at this point in time because Weißbier is expanding generally as a category in Germany, and Franziskaner is growing as an export brand in Europe, the US and Canada.

What is the ownership structure at InBev subsequent to the mega-merger between Interbrew and AmBev earlier last year?
InBev is now 60-65 per cent controlled by six families — three Belgian and three Brazilian. InBev is publicly traded on Euronext and also has controlling interest in AmBev which is traded on the São Paulo and New York stock exchanges.

The Board has 14 members: four from the Belgian families, four from the Brazilian families, and six independent ones.

All major strategic initiatives such as mergers, acquisitions or divestitures are submitted by management to the Board. The families are therefore very involved in the business strategies because they are fully represented on the Board.

Don't eight family members on a Board complicate management decisions?
Not at all. I am also on the Board of the Anglo-Dutch publishing company Reed Elsevier, and I was also on the Board of Cadbury Schweppes. The shares of both those companies are totally in the public domain so I am in a position to compare.

In fact, I would say that major decision-making is easier at InBev because the Board is more streamlined and represents all shareholders' interests properly.

What is your Weighted Average Cost of Capital (WACC) rate subsequent to the merger between Interbrew and AmBev?
Interbrew had a WACC rate of about 7, and InBev has a WACC rate of close to 8.5.

Your predecessor, Hugo Powell, helped transform Interbrew from a provincial Belgian brewer into a global powerhouse by swallowing more than 30 brands, but was criticised for the prices he paid. Would you agree that you inherited a string of expensive purchases and a weak cash flow?
No, I wouldn't agree with that at all. Hugo and his team did an excellent job building the company, but there have been five CEOs over the last decade.

Some 10 to 12 years ago the Belgian owner-families of Interbrew decided on a strategy of buying undervalued assets around the world and then employing the company's expertise in brewing technology and marketing in order to realise their full potential.

They implemented this strategy effectively, greatly increased shareholder value and duly made Interbrew into "The World's Local Brewer".

However, a few years ago the rest of the international brewing community woke up and adopted the same strategy, so that you now often have four or five major competitors bidding for such undervalued companies.

Which has increased the cost of your acquisitions dramatically?
In particular during the last couple of years before I joined there were some highly-priced acquisitions, but the state of the market was: "If you want to play, you've got to pay".

Viewed retrospectively, I don't think Interbrew paid any more relatively than the competition did over time.

Do you think you overpaid for Beck's?
It was a good strategic move, particularly when you add it to Gilde, Diebels and Spaten. If you put all these acquisitions together and look at the blended p/e multiple, it works just fine.

If you look at the individual p/e multiple for Beck's alone, at 13 it looks a bit pricey, but, frankly, Beck's is the engine driving both our business in Germany and our export business from Germany today.

We've put through three price increases on Beck's since, and it is now a super-premium brand in Germany. It's also making a comeback in the US.

How did you achieve three price rises for Beck's on such a price-dominated market as Germany?!
If you've got the right linkage with consumers and have them demanding your product, one has the pull factor behind the brand. You can't push a brand like Beck's through the retail system; instead you have to motivate the consumer in order to create a pull effect.

One can implement price increases with the right kind of advertising and line extensions such as Beck's Gold. Although German retailers are generally not excited about price hikes, they quickly come to appreciate the idea when they see volumes increase in a generally declining market.

So retailers are learning that when we take our prices up, they may have to raise their own prices, but their margins increase as well.

So we've got a win-win situation with Beck's where both parties are making more money at the higher price levels and consumers are buying more. After the first price hike proved successful, the second was easier to implement, and the third was even easier still.

Does that mean a fourth price hike is in the offing?
We have to be very careful now because we have Beck's about where it should be in terms of price positioning. So there are no further price hikes in the pipeline.

Isn't also offering own label to Lidl mixing up your price message?
Our own label production capacity came with another acquisition, and one has to play with the cards one has been dealt.

We think there is a place for private label, but in general it's not a business we particularly want to be in, and we don't actively pursue it in many places around the world.

So you might be selling your own label business in Germany longer term?
We'll stick with it for the time-being and evaluate options as we go forward. Is it strategic? No. Is it tactically important? Yes.

You say the acquisition blend works fine in Germany, but local brands "Hasseröder" and "Diebels" look tired with a double-digit decline in revenues, and "Spaten", "Franziskaner" and "Löwenbräu" need further investment in sites.
We have never admitted to having absolutely the right and perfect set of brands in Germany. However, we have invested a lot of money there and did so both carefully and selectively.

Why didn't you bid for Holsten, and why won't you bid for Brau und Brunnen?
Neither of them would fit. Particularly, we thought the brands were weak.

How do you view the German market in general terms?
It is a huge market with low margins by European standards, but we are convinced that they will increase over time. There are far too many brewers and brands in Germany, but their number will decline over time as we and others consolidate the market.

When do you think that profitability on the German beer market will reach average European levels?
We're making money, but our German business is not as profitable as we'd like it to be. Profit margins are half our European average on a per hectolitre basis. Margins have risen now that the Deposit Law has come into effect and largely phased out non-returnables, and particularly cans.

As we have a higher proportion of returnable packaging than our competitors, our profit margin actually benefited from the new law. We anticipate that our profits will increase in 2005, but I wouldn't want to guess when European levels will be achieved.

When will your ROIC equal your WACC rate in Germany?
I can't give a specific date, but we are convinced that it will be within a reasonable period of time. As a general rule of thumb we want ROIC to exceed WACC within three years.

What do you still need to do in Germany in order to achieve these levels?
It will require more consolidation, brand building and focus on developing brands that span the whole country.

We've been very successful doing this with "Beck's", but have been less so with our other brands. However, we think that "Spaten" and "Franziskaner" have the legs to travel throughout Germany.

We've also got to get prices up and costs down. For instance, one could question whether we have the right brewery footprint regarding production sites.

So further closures are on the cards?
That's a continuous process. Since the merger with AmBev we have nearly 100 breweries and don't need that many.

Only two months ago, we announced the closure of three breweries in Manchester, Northern Ireland and Canada. Obviously, there will be more to come as increasing efficiency is one of our strategic goals.

Where would you see the optimum number of breweries for InBev?
Ideally, it would be a lot less than 100. If you look at Anheuser-Busch in the US, it produces more volume than we did at the old Interbrew, but with 12 rather than 75 breweries. On the other hand, we have to play with the cards we've been dealt.

That said, increasing efficiency is not just about closing breweries, we must also consolidate on a supra-regional basis regarding our financial and HR services as well as the number of advertising agencies we retain for consumer advertising.

Where do you see major emerging market growth world-wide?
About 18 months ago, Goldman Sachs published a report on the four big global growth markets, i.e., Brazil, Russia, India and China. Of those four, three are very important from a beer standpoint, and one is not. India is growing rapidly, but from an incredibly small base.

Currently, per capita consumption at around half a litre per year is among the lowest in the world. I am delighted to say that we are big in the three critical markets.

We are by far and away the no.1 player in Brazil with a 67 per cent market share; the no. 2 in Russia with 16.5 per cent, and growing faster than anybody else; and we are the no. 3 in China with 10 per cent.

Volumes in China are huge, but aren't margins paper-thin?
In China it takes longer for ROIC to exceed the WACC rate, and if you do so in 5 years, then you are doing pretty well. China has a return per hectolitre measurably lower than Germany, but is the world's largest beer market and growing fast.

If you look at the profit pool which is going to be created in the beer world over the next ten-odd years, up to 40 per cent could be in China alone.

With that kind of potential, we and others are making very strategic moves in China, but recognise that we are probably not going to get our money back quite as quickly as elsewhere. However, if you want to be a global player, you have to go where the growth is.

Why have you never made a strategic move into the alcopops segment?
The business reason is that we didn't get there first. Other guys, and in particular the distilled spirits makers, did so and created a whole new category. It's always challenging to get into a category late.

We are in it in a tactical way in a couple of countries around the world, but we don't do it strategically, and think that beer is a far better place to be in.

What other opportunities do you see for expanding your beer sales?
We are looking at other sales channels and consumption opportunities, for example, the sale of beer in more theatres, cinemas, hardware stores, video stores etc.

Building on the old Coca-Cola statement many years ago, I should like our brands always to be only within an arm's length of desire. So, while remaining socially responsible, we need to get our beer into all the places where consumers could want to drink it.

Lebensmittel Zeitung with its online sisters (photo: LZ)
Lebensmittel Zeitung with its online sisters
Read in German: 'Mitspielen und blechen' by international editor Mike Dawson on page 42 of Lebensmittel Zeitung, no. 5, 04.02.2005

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