It’s More Than Buy, Squeeze & Repeat With 3G Capital

In Intelligent Fanatic, Presentation by Sean Iddings0 Comments

Today, Anheuser-Busch InBev (AB-InBev Ticker: BUD) is the world’s largest brewer with nearly 30% market share. It all started back in 1989 when the 3G partners took control of Brahma, Brazil’s number two brewer.

More people are starting to talk about 3G Capital and their owned companies. Unfortunately, the press misses a few important parts of their system. There is more to their recipe than acquisitions and squeezing out bloated cost structures.

I’ll refute a few details made in an otherwise well written and researched article by Fortune. I’ll use data and resources utilized while researching the 3G partner case study for the Intelligent Fanatics Project book. Specifically, there is one talk 3G partner Marcel Telles did that provided many good insights, which I’ll quote throughout and provide the translated video at the end.

They’re Not Great Innovators

The pattern is buy, squeeze, repeat. The 3G managers developed extraordinary operating skills and greatly increased the value of every company they bought, but they were not great innovators. They achieved growth through acquisitions—not organically.

To say 3G managed companies are not great innovators, or haven’t grown organically, is to say learning doesn’t happen in libraries because there are no teachers.

Let’s start with innovation. You don’t have to be a tech company and develop revolutionary tech widgets to be considered a “great” innovator in a branded, consumer business. Don Keough and Robert Goizueta learned the hard way what happens when you tamper too extensively with an established brand. When New Coke arrived in 1985, over 40,000 customers mailed or called the company voicing their displeasure with the change.

Throughout the history of AB-InBev, the company has made a significant number of innovations for a brewery, both incremental and new products.

Take for instance AB-InBev’s original brand Brahma. Starting in 1989, there have been multiple label designs, many special editions. Such promotional innovations geared towards sports, other events and cross promotions with brands. No such promotions or marketing were common in the beer industry prior to 3G’s involvement.

Brahma Innovations

AB-InBev has also experimented with new innovations in addition to marketing. Brahma Copaço [pictured middle above] is an innovative new can design to marry the experience of drinking a glass to the can. Brazilian customers were quite surprised and pleased with the novel design when it was launched in 2011. AB-InBev also designed a unique cooler/snack system for parties.

Once Anheuser-Busch was acquired by InBev in 2008, the culture of innovation changed with the Budweiser and Bud Light brands. Gone were the days of sticking to the tried, true methods and not deviating from them. The number of marketing label designs started to increase significantly. The goal was to reinvigorate the brand from old and stodgy to modern to hit the Millennial demographic.

AB-InBev went as far as rebranding Budweiser to “America” in 2016 before the summer season. The change provided significant free press for the company.

Bud Light and Budweiser Innovations

AB-InBev also experimented with the bow-tie can design for Budweiser in 2013 [pictured above to the right].

Incremental “renovations” have also been accompanied by new lines created. Budweiser’s Black Crown brand was created with the help of a contest with brewmasters and consumer taste testers.

Not all of these bets have worked for AB-InBev, however. Marcel Telles described the 3G philosophy to innovation as being akin to private equity [39:05]:

Any idea or innovation needs to be prototyped… Most innovations you can prototype in a very basic and simple way to understand the first feeling of the product for a company or a group of consumers. After going through this first stage it looks a lot like venture capital. ‘Oh yeah, okay, here is $50,000 for you, in three months show me a little more.’ Three months from now there are ten guys showing off their work, two are going to be good, you have to be merciless in cutting those that do not deliver what you want.

The system generates a large flow of ideas and allows the company, regardless of how large it gets, to keep the company fresh and ahead of competition.

AB-InBev has always looked in odd places for unique insights in innovation and operation. All 3G companies benchmark against leaders in every imaginable category. In the video below, Telles mentioned AB-InBev took ideas from Apple in benchmarking prototyping and Patrick O’Riordan – global director of AB-InBev innovation – talked about how the company looked at Apple’s development of the iPod platform to develop their own beverage platforms.

More difficult to analyze is a company’s internal innovations to improve efficiency. When Marcel Telles ran Brahma from 1989 to 1999 the company improved productivity per employee seven times to 8,700 hectolitres. Innovations in brewing were necessary to provide such a spike in productivity.

Moreover, AB-InBev developed a strain of barley that could maintain yield with 40% less water. Not to mention that the company also holds the title as the world’s most water-efficient brewer.

Innovations, AB-InBev’s fanatical culture and some improved scale led to significant organic growth after each acquisition:

  • Brahma grew revenues from R$1.2 billion to R$3.25 billion from 1989 to 1999. A 10% annual growth rate.
  • AmBev grew revenues from R$5.6 billion to R$8.5 billion from 2000 to 2004. An 11% annual growth rate.
  • InBev grew revenues from $14.5 billion to $23 billion from 2005 to 2008. A 12.8% annual growth rate.
  • AB-InBev grew revenues from $39.1 billion to $43.6 billion from 2008 to 2015. A 1.5% annual growth rate.

It Builds Value Only By Buying More Companies

And there’s the rub: A central feature of this model is that it can’t work forever. It builds value only by buying more companies. “It’s like the shark that can’t stop swimming,” says a director of another major foodmaker. But AB InBev can’t apply the model further because it’s so big that antitrust authorities would never let it buy another significant brewer.

Sure as AB-InBev and other 3G owned companies have grown, they have acquired larger and larger competitors. Acquisitions have been a means to an end. That is for managers and their employees to dream big and continue to provide opportunities for young fanatics to move up. It just might be in a different industry.

The 3G partners went from building the best brokerage firm, then the best investment bank, then the best brewer in Brazil to the world’s best brewer. They accomplished all tasks because of their employees and for their employees.

So, the true value that 3G companies create are through their people and culture, not acquisitions. If it were only acquisitions that they were after, the number of acquisitions would be significantly higher. Their success rate would be similar to the average, which is horribly poor. As Warren Buffett has said many times turnarounds rarely turn. 3G is the exception to the rule because they understand that culture is the most important part of a turnaround. The 3G partners have been able to turn around bigger and bigger companies successfully by immediately installing their culture and their talent.

But evidence also suggests that the 3G playbook, which has worked spectacularly well over the past 30 years, may not prove so effective this time.

Jim Collins might have said it best: “When fanatics come together with other fanatics, the multiplicative effect is unstoppable.” Young highly talented, entrepreneurial individuals have a fairly easy decision to make: either work for a lethargic, large corporation that does not care to change, are full of B & C players, are slow to promote talent, etc., or work for a total meritocracy where they can thrive.

So long as the cultures of 3G owned companies sustain, they’ll be able to attract the best talent and continue to devour other companies in other industries’s well known brands rife with bureaucracy, inefficiencies and no innovation.

Read More Here:

Don Keough Speech Classic Coke

Innovation Boosts AB-InBev

AB-InBev: How a Global Brewer Is Setting the Bar for Innovation in Local Water Conservation

Innovating Beer Through Crowd Sourcing

Brahma 1999 Annual Report

*Credit= Thanks to Zoki Design for the beer can design template in the header*

About the Author

Sean Iddings

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Sean is the founder of Unconventional Capital Wisdom, a registered investment advisor in New York State seeking to invest in high quality microcap companies led by intelligent fanatics. He is a member of MicroCapClub and writes about investments, entrepreneurship, and leadership on a number of blogs and publications. Sean is also a long distance runner having completed five marathons across the globe and a jazz/rock guitarist. He lives outside Ithaca, NY with his wife and daughter.

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