E-Malt.com News article: Brazil: InBev aims to exceed Anheuser-Busch's 29% profit margin by 2008

The chief executive of InBev, the world's biggest brewer, John F. Brock, has been brushing up on his Brazilian, New York Times communicated on September 26.

"Loosely translated, jinga means effortless flair," he said last week in an interview to the newspaper in his office in Leuven, near Brussels. Holding up a bottle of Brahma, a beer brand that Interbrew acquired a year ago when it bought AmBev, Brazil's biggest brewer, he said he intended to sell Brahma around the world on the strength of its jinga.

John F. Brock, InBev's chief executive, hopes to exceed Anheuser-Busch's 29 percent profit margin by 2008. But AmBev's influence in last year's deal that created InBev is less about the effortless flair of Brazilian dance, style and soccer and more about the unglamorous task of cutting costs.

The old Interbrew prided itself on its marketing savvy and its focus on local markets. It called itself the world's local brewer. AmBev, on the other hand, which still functions under its old name and has its shares listed on the Brazilian stock exchange, is known in the beer industry for being obsessive about efficiency.

"The sales force there all drive gray cars because it is the cheapest color," said Concepción Moreno, an analyst at the Belgian stock broker Petercam who visited AmBev's headquarters in Brazil last week. "The chief executive and the chief financial officer share the same desk, paper and phone calls are rationed. Cost-cutting is a way of life, not a one-off activity."

Although Interbrew has economic and voting control over AmBev, the deal was "almost a merger of equals," Mr. Brock said. A marketing man to the core, he added, "Hopefully we can combine the best of both companies." Some analysts go a step further and describe last year's deal of 9.2 billion euros, or $11.1 billion at the current conversion rate, as a reverse takeover.

InBev is centralizing much of the power that Interbrew handed to local management teams around the world, Mr. Brock said. AmBev managers have been moved into major positions at InBev's headquarters in Leuven, including Felipe Dutra, AmBev's top financial manager, as InBev's chief financial officer, and Juan Vergara, AmBev's head of Latin American operations, as head of purchasing for InBev.

"It's being dubbed the 'AmBevization' of Interbrew," Ms. Moreno said. "When the deal was first announced, I thought the Europeans, with their reputation for being well organized, would teach the Latin Americans, but it is quite the opposite."

Mr. Brock played down the impression that the Brazilians were taking over. The reason there are more AmBev staff at InBev headquarters than Interbrew people moved to Brazil is because of language. "English is the working language here at InBev," Mr. Brock said, adding, "It's easier to move into that environment than into a Portuguese-speaking one." Nevertheless, zero-based budgeting, AmBev's term for ruthless cost-cutting, has already been applied in Canada - where InBev sells Budweiser in a licensing agreement with its maker, Anheuser-Busch, as well as brands including Labatt.

Europe and Russia are next in line, followed by Korea and Ukraine. By the end of 2007 InBev aims to cut costs by 300 million euros, or $361 million, in addition to the 280 million euros, or $337 million, it hopes to save through the takeover.

Like the United States, Europe poses a challenge to brewers because beer consumption here is in decline. Shrinking populations and shifting consumption to other drinks like wine and spirits have forced brewers to think creatively.

Beck's, a quintessentially German beer, has been given two brand extensions in an attempt to reach younger drinkers: Beck's Gold - darker in color, less bitter taste - and Beck's Green, also less bitter with a lemony taste.

Beer purists may frown, but Mr. Brock said he believed such moves were essential. "Look at what is working in the spirits industry: Vodkas with flavors, new packaging. There is a consensus in the drinks industry that consumers are seeking more variety," he said. Mature markets in the developed world represent a third of InBev's activities. Most business takes place in Russia, China, eastern Europe, and now, with AmBev on board, Latin America. Brazil is the fourth-largest beer market in the world, and AmBev controls more than 60 percent of sales there.

Exposure to some of the fastest-growing markets in the world is a mixed blessing, though. Returns on investment are slow in coming and there is greater risk. "Many Belgians who bought InBev stock at the beginning are disappointed because they are not seeing the benefits in the price of their shares yet," Ms. Moreno said.

But foreign investors are looking more closely at the stock, she said. Investors with shares in brewers like Heineken and Anheuser-Busch are taking a closer look at InBev now, because it is not so dependent on sales in these mature markets, she said.

Mr. Brock said he was aiming to achieve the highest profit margin in the business. "We looked at Anheuser-Busch, with their strong record of cost-efficiency in the United States, and calculated that they must have a profit margin of 29 percent, so we set our target at 30 percent by the end of 2007," he said.

The company will still look for acquisition targets in developing markets it already occupies, especially in Russia, where Mr. Brock said brewing capacity was having trouble keeping up with demand.

But InBev is also looking at new markets, he said. The company has no presence in Mexico, Vietnam or Thailand, three of the biggest emerging beer markets. "They are on our list of markets we will enter in time," Mr. Brock said. Perhaps with the help of the super efficient Brazilians, those moves may come sooner rather than later.


27 September, 2005