| John Brock: focus on efficiency |
BRAZIL’S BRAHMA BEER brand went global in 15 countries earlier this year, with its maker trusting that a sense of Brazilian ginga, or effortless flair, would prove to be its selling point. Companhia de Bebidas das Américas (AmBev) marketers expect that spontaneity and a South American sense of the exotic, not to mention a hint of papaya, will guarantee that Brahhma appeals to men and women alike. It is that sense of flair that has made AmBev one of a handful of Latin American companies to have achieved growth through acquisitions in the developed world. The benefits appear to be paying off.
Last August, AmBev merged with Belgium’s Interbrew in an $11.2 billion deal to create InBev, the world’s biggest brewer by volume – a move that will eventually take AmBev’s Brahma brand to 23 countries. It helped catapult AmBev to the top of the beer industry, as InBev produces about 14% of the world’s beer by volume. The deal also involved AmBev acquiring Canada’s Labatt – a smart play, many bankers argue, because it allows AmBev to invest its huge cashflow, driven by strong growth in Brazil, in a North American asset rather than handing it back to shareholders. “Labatt gives AmBev access to a less volatile capital market and protects it from emerging markets’ cost-of-funding cycle,” says Victor Galliano, a beverages analyst for HSBC in London.
But making things work in North America, where more and more beer drinkers are turning to wine and spirits, will hardly be a pushover. The story is not one of growth but of making money from cost-cutting and squeezing out higher revenues. Although volumes rose almost 1% in the first three months of 2005, they fell about 7% in April, prompting severe restructuring. “Labatt Breweries will sell its Toronto plant by the end of November,” says Juan Vergara, AmBev’s director for Hispanic Latin America. “That is a crucial part of the company’s short-term focus, which is ‘right sizing’ and cost reduction.” AmBev has so far cut Labatt’s costs by about A40 million and is also aiming at selective price increases on its beers, as it has done on its discount brand Ontario, as well as championing one key light beer brand, Bud Light, for which Labatt has the Canadian licence, instead of five.
AmBev executives are also making an impact in Belgium. The company’s innovative strategy of zero-based budgeting – setting the year’s budget with no reference to the previous year and accounting for every expense, from a piece of machinery to a box of paper clips – has been so successful in Brazil that InBev is now implementing it in Europe. Such privileges as cars and personal assistants will probably end for many employees as a result of the appointment of AmBev’s Felipe Dutra as InBev’s new finance director at the start of this year, when he began implementing the budgeting strategy in Europe.
“Next year, we expect to see cost savings,” Dutra told investors recently. Under the command of AmBev’s former information technology director, Claudio Garcia, InBev has cut 270 staff jobs in 25 countries and hired sub-contractors instead. The attitude appears to be rubbing off on InBev’s CEO, John Brock, who has said that 100 breweries worldwide is more than the company needs and is now talking of a “relentless focus on becoming the most efficient brewer”. Brock aims to take InBev to an ebitda margin target of 30% by 2007 to match the world’s most profitable brewer, Anheuser Busch of the US. Investors, too, seem to like the Brazilian ginga. InBev’s shares traded above three-year-highs in early September, and south and central America now provide nearly half the group’s earnings.
For that reason alone, AmBev’s growth will come at the emerging-market level, principally in Latin America. Born from the merger of Companhia Cervejaria Brahma and Companhia Antartica Paulista in March 2000, AmBev made its first acquisition that same month, buying a majority share in Uruguay’s number two brewer, Salus, and underlining its willingness to expand internationally. In 2001, AmBev doubled its share of the Uruguayan beer market by buying Cympay to give it 48% of the beer market. Later that year the São Paulo company moved into Paraguay, snapping up Cervecería Internacional. AmBev formed a joint venture with PepsiCo’s Central American Bottling Corporation in 2002 to sell its Antartica, Brahma and Skol beers in central America and the Caribbean, focusing particularly on Guatemala and the Dominican Republic, and then came moves into Argentina, Chile, Ecuador, Peru and Venezuela.
Fizz in the bottle
Indeed, as AmBev well knows, Latin America, not the mature markets of Europe and North America, is where the fizz in the beer business is. Annual beer consumption in Brazil, Mexico and Colombia, the region’s three most populous countries, is around 50 litres a head, three times China’s but still only a third of Ireland’s and the Czech Republic’s, leaving plenty of room for expansion. Although InBev’s beer volumes fell 3.7% in western Europe and 2.3% in north America in the first half of this year as customers turned to wines and spirits, beer volumes rose more than 14% in Brazil.
“The Latin American countries have enormous growth potential and it is no secret that AmBev is looking for good [takeover] opportunities in the region,” says Vergara, who has overseen expansion. “Since the company’s inception we stated that international expansion was one of our main objectives. At first, the company focused on extracting all the synergies from the 2000 merger, so strengthening its leadership in Brazil and paving the way for cross-border expansion.” The growth plan has clearly worked so far. Analysts see AmBev’s ebitda rising 40% this year compared with 2004, and net profit could be even higher, commentators say.
Such has been AmBev’s appetite for growth and Latin America’s developing beer culture, many industry players are wondering what its next move will be. AmBev is coy, albeit upbeat, about its plans. “We are, more than ever, very confident in our future growth potential,” says Vergara. “We have a commitment to organic growth in existing or new operations throughout Latin America.” However, he is not prepared to be more specific about where the company might look next. One of AmBev’s limitations is its 70% market share in Brazil, which means that regulators are unlikely to allow it to expand further there via acquisitions. The potential for volume growth among young, thirsty Brazilians is high, however. AmBev’s beer sales rose by a third in the first three months of 2005, with only a 2% increase in marketing spending, as competition from Kaiser and Schincariol appeared weak. The company’s soft drinks sales achieved a more modest 2.6% increase in the same period, given the strong challenge from local Coca-Cola bottlers.
“After SABMiller bought Bavaria in July, there’s very little in the way of obvious acquisitions for AmBev,” says HSBC’s Galliano. “Could AmBev turn around and buy [Mexico’s] Femsa Cerveza? I suppose it could be done, but I think it’s unlikely because it would probably create conflicts in terms of the product portfolios they have in North America.” Some see Polar in Venezuela, where AmBev has a 14.5% market share, as the largest remaining target for acquisition in Latin America. Tania Sztamfater, an analyst at Unibanco in São Paolo, says central America might be an interesting hunting ground, but asserts that AmBev’s future lies more in selling its beers abroad. “The company uses its high quality of operations and brand positioning as leverage in each country they enter to gain some market share and weaken the competitors,” Sztamfater says. “That was their strategy in Argentina before they acquired Quinsa and it worked very well.”
That is certainly AmBev’s plan in Peru, where it began selling Brahma earlier this year after building an $80 million plant in the capital, Lima. Peru has long been dominated by local brewer Backus y Johnston, a subsidiary of Colombia’s family-owned Bavaria, but Brahma has been shaking up Backus’s monopoly on the market and has begun capturing market share with innovative advertising and plans to launch other beers in 2005. But the going is likely to be tough given Latin American’s loyalty to traditional brands, underscoring the fight AmBev has on its hands with Bavaria in the Andean region. Bavaria’s brands, Aguila, Cristal and Pilsner, dominate in Colombia, Ecuador, Panama and Peru. “We don’t and we won’t sell Brahma here,” says a shop owner in Lima. “Cristal is our drink and that’s the way it will stay.” Furthermore, distribution networks are hard to replicate across Latin American’s varied nations, especially in Andean nations with poor communication links and remote mountain and jungle towns. AmBev can claim some success in Ecuador, however. It has a 10% share of the beer market and Bavaria’s own sales declined 7% in Colombian peso terms in the first quarter of 2005, year on year, while in Venezuela, first-quarter growth for AmBev was 33.6%, as the company concentrates its efforts in and around the capital, Caracas.
