Industry giants are threatening to swallow up America's carefully regulated alcohol industry, and remake America in the image of booze-soaked Britain.
All that changed quickly after Anheuser-Busch lost its independence. The executives from InBev who took over the company did things quite differently. During the negotiations to buy Anheuser-Busch, InBev made it clear that the Busch family would have to go, and at the old headquarters in St. Louis other changes soon followed. Executive offices were literally torn out and replaced by an open floor with matching desks. The private-jet fleet was put on the block. Company cars disappeared. So did 1,400 jobs, retiree life insurance, and contributions to the employee pension plan. Managerial pay was reduced to equal or less than the average for similar jobs in other industries, with bonuses tied strictly to performance. Salaried workers lost little perks like free beer every month, and hundreds of staff BlackBerrys were recalled. Cost cutting was the new imperative.
Then, after eliminating everything it could at home, the new regime turned to squeezing more out of its increasingly nervous partners, the wholesalers. And, today, with only one remaining real competitor, MillerCoors, the pressure it can put on its wholesalers is extraordinary. A wholesaler who loses its account with either company loses one of its two largest customers, and cannot offer his retail clients the name-brand beers that form the backbone of the market. The Big Two in effect have a captive system by which to bring their goods to market.
Here’s how it works in practice. In 2011, Anheuser-Busch InBev (“A-B”) sent out a Wholesaler Family Consolidation Guide to each of its contractors. The language is blunt:
Do you share the same vision as A-B on issues of importance to the industry, including support on legislation that can affect our competitive position?
Are you selling competitive products in a fellow A-B wholesaler’s territory?
The introduction to the guide begins:
We ask all wholesalers to use the guide’s self assessment tool to objectively consider their capabilities and goals. Wholesalers who aspire to be an Anchor Wholesaler can identify any gaps they have in these qualities and build a plan to address them. Some wholesalers might remain committed to their current market, but realize further acquisitions are not right for their business. Others might decide now is the best time to consider whether a sale is in their best interest.
There are many aspects of an aligned wholesaler, and an explicit focus on our portfolio of brands is paramount. Those who are aligned with us only acquire brands that compete in segments underserved by our current portfolio and that bring incremental sales, not brands that have a negative impact on the A-B portfolio.
The guide emphasizes the last point: an aligned wholesaler is one who “shares the company’s long-term vision for how to operate successfully and grow business in conjunction with Anheuser-Busch InBev’s strategy.” So distributors are caught in an impossible bind: they either do the brewer’s bidding, including selling their businesses to favored “Anchor Wholesalers,” or they lose Anheuser-Busch InBev as a client.
And if the wholesalers try to push back? Anheuser-Busch InBev will get rough. In Arkansas, to take a prime example, a state inquiry revealed that the company was charging as much as $5 more per case (a huge margin against the average price of around $15) to some wholesalers, an obvious effort to run them out of business. In addition, through a second practice called reachback pricing, the company retroactively reset the value of its wholesale contracts once its wholesaler’s retail terms were known. The technique allowed it to reduce wholesalers’ profit margins. And when the state legislature took up a bill to make these practices illegal, Anheuser-Busch InBev filed a letter of protest “on behalf” of its wholesalers, in effect forcing those who disagreed with its practices to identify themselves if they chose to give the motion their public support.
Anheuser-Busch InBev’s efforts failed in this instance; the bill passed. But the door is open for similar behavior in other states. All that’s required is to get their legislatures to fall for familiar Chamber of Commerce arguments about regulation “hurting” businesses and consumers. Moreover, in some big states (notably California and New York, home to almost one in five Americans) brewers have already succeeded in finding loopholes that allow them to own wholesalers directly, giving them the chance to make vertical integration cut-and-dried rather than just a matter of strong-arm business practices. And given other trends toward consolidation at the retail level of American economy, there is, as we’ll see, every indication they will do just that.
For a long time, brewers weren’t interested in distribution, because distribution was a challenging, tight-margin enterprise. Those who did it had to manage hundreds or thousands of accounts, maintain a fleet of delivery trucks, store products in expensively refrigerated warehouses, get new stock onto shelves and remove the expired stuff daily (usually eating the cost as they did so), and, in some cases, maintain the taps at their contracted bars and restaurants. In short, they ran a very complex show. But with the emergence of national chain retail stores, much of the complexity and cost of distribution has been eliminated.
Just as England’s four major supermarkets now dominate alcohol sales there, so major all-in-one box stores, like Walmart and Costco, now dominate beer sales in the U.S. And these stores typically manage their own logistics, gathering inventory at centralized distribution centers and stocking all their shelves in a region from there. So it would be no big task for Anheuser-Busch InBev to run a fleet of trucks from its breweries to the big-box distribution centers—and that is precisely the plan. Anheuser-Busch InBev’s CEO Carlos Brito openly declared it to investment analysts from UBS in 2009, saying that the company was aiming at making 50 percent of its sales directly to retailers. (Aware that at least some people believe that this would or should be illegal under federal law, spokespeople quickly claimed that his statement was being misinterpreted.)
But to Anheuser-Busch InBev, as well as to MillerCoors, achieving de facto if not actual vertical integration is too tempting a goal to give up. Such control allows for the elimination, in literal, physical terms, of almost all competing brands on store shelves. And if eliminating middlemen leads to greater “efficiencies” and therefore lower costs, both companies can build the market for alcoholic beverages by manipulating prices and more aggressively marketing to consumers—which is exactly what happened, with obviously disastrous effects, in the UK.
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