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How 3G Partners Conquered the World of Beer – Part I

A case study on the creation of AmBev

During the past month I’ve written a few articles on 3G Capital. I’ve been fascinated by the success of the 3G partners, but the most impressive feat has been conquering the world of beer. Today I’ll summarize how the hell three Brazilians bought the legendary American icon Anheuser-Busch as well as the Belgium beer Legend Interbrew.

This case study perhaps can also shed some light on the future of Kraft Heinz (NASDAQ:KHC) as the playbook is similar.

It all started with a Brazilian brewer called Brahma. According to Cristiane Correa, “Brahma was undergoing an experience that was typical of many family owned concerns at the end of 1980s. After decades of growth, it started to slow down and became bogged down in issues related to the controllers rather than the business itself. A number of members of the families worked for the brewer, many in executive positions, and the arrival of new generations only made things more complicated. Although Brahma had a market share of almost 30%, its earnings were worse than those of its Sao Paolo rival, Antarctica. The Brahma owners believed the company was in a state of decline, with no future prospects, and decided to sell it.” Jorge Paulo Lemann saw the opportunity to turn the business around so Garantia bought Brahma.

Lemann’s argument for buying the brewer made great sense: “Tropical country, hot climate, good brand, young population and poor management. OK, that gives us everything we need to transform it into something great. I was looking at Latin America and who was the richest guy in Venezuela? A brewer (the Mendoza family that owns Polar). The richest guy in Colombia? A brewer (the Santo Domingo group, the owner of Bavaria). The richest in Argentina? A brewer (the Bembergs, owners of Quilmes). These guys can’t all be geniuses. It’s the business that must be good.”

Immediately after the acquisition, Lemann put Telles in charge of Brahma. Telles quickly selected the team he would take him with to Brahma, and they went on international trips to learn from the best brewers in the world – just like they did when they acquired Lojas Americanas (BSP:LAME3)(BSP:LAME4)(LOJPF)(LOAMF). Telles spent a few weeks getting to know Anheuser-Busch, especially how it handled the distribution system so that it could deliver Budweiser to practically every bar, restaurant and supermarket in the U.S.

After they learned everything about the business, the next step – again very similar to the Lojas Americanas experience – was to implement cultural change and cut cost. “The walls of the directors’ office were torn down and gave way to a big table they all shared. The number of secretaries shrank and the executives had to get used to sharing them with their colleagues. Reserved parking places for directors were abolished, and those who arrived first got the best spots. The executive restaurants were closed and segregated bathrooms for executives were also scrapped.”

Brahma’s distribution network was a mess – there were more than 1,000 vendors and few distributors made money on Brahma’s brands. Telles squeezed the supply chain by cutting the number of distributors to just a few and standardized the process. Within a short period of time, Brahma designed a new incentive system for the remaining distributors – one that was based on meeting targets. The distributors’ performances were measured more regularly and the best performing distributors would receive awards.

Telles also changed the hiring practice by intentionally seeking the PSDs – Poor, Smart, Deep Desire to Get Rich. Brahma started a management trainee program, which was highly competitive. Brahma also got rid of the bottom 10% of the employees every year – a practice that Telles copied from Jack Welch.

Those cost-cutting and culture-changing initiatives were low-hanging fruits and had immediate results – Brahma’s revenue got back to growth, and earnings skyrocketed within two years. The business’ performance was dramatically improved, but it was still facing a very formidable competitor – Antarctica, which also held about 30% market share in Brazil. Lemann and Telles were determined to beat Antarctica.

Brahma hired the best advertising agent and carried out an advertising campaign. It studied the consumers and came up with slogans that resonated with them. They also created the invitation-only Brahma VIP lounge for the Rio Carnival, and most of the invited were celebrities who had to wear a T-shirt bearing the Brahma logo. Brahma also utilized ambushing marketing campaign in the international friendly games before the 1994 World Cup that resulted in much better brand influence than Antarctica even though Antarctica was the main sponsor for the event.

Former Brahma director Magim Rodrigues recalled that “Jorge Paulo said the only way to kill a competitor is through the cash. The company needs to have the best marketing, best product and best people. All this is great, but if you want to liquidate your rival, you need to go for his cash. When he has no more money left, he’s dead.”

During the second half of the 1990s, Brahma began what would be called “data analytics” in modern terms, even though “big data” was not on the horizon. Brahma spent heavily to understand how much each bar or supermarket sold and its profit margin on Brahma’s beer, for thousands of sales points. The initiative required a 20% to 30% increase in sales and marketing cost but in the end, each salesman knew exactly what the clients needed to buy and the margin he needed to leave for the company. This way the sales team was free to negotiate discounts and payment conditions and still beat the target.

Sales increased as a result of the “data analytics” initiation, but earnings lagged sales growth. As Brahma’s leaders analyzed expenses, they came up with the zero base budget solution – one that has been copied by many public companies these days such as General Mills (NYSE:GIS) and Kellogg (NYSE:K).

Brahma, after all the improvement projects, started to take shares dramatically from Antarctica. Antarctica’s market share went down to 22%, and its profit dropped by two-thirds between 1995 and 1998. Antarctica struggled badly, and there was no sign that things would improve – if anything, Brahma was taking more shares.

On July 1, 1999, Brahma and Antarctica announced a merger that created AmBev (NYSE:ABEV) – the American Beverage Co. AmBev was the world’s fifth-largest beer producer.

Acquiring Antarctica was one hell of an achievement, but Lemann, Telles and Sicupira had bigger ambitions – they want to become the biggest beer brewer in the world. Next up – Interbrew and Anheuser Busch.

Disclaimer: All credit belongs to Cristiane Correa as my 3G partners case studies are based on summary notes I took from Correa’s book, “DREAM BIG: How the Brazilian Trio behind 3G Capital – Jorge Paulo Lemann, Marcel Telles and Beto Sicupira – acquired Anheuser-Busch, Burger King and Heinz.”

About the author:

A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

Rating: 5.0/5 (7 votes)



Johnmayvi - 10 months ago    Report SPAM

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