The once-fragmented beer industry has seen a huge amount of dealmaking over the past decade, to the point where the world's top five brewers now control nearly 50% of the global market. The biggest of these giants is Leuven, Belgium-based InBev SA. Formerly known as Interbrew SA, InBev is now the world leader by volume and sales, with a huge brand portfolio that includes Beck's, Stella Artois and Brahma. The man who executed many of the deals that put InBev in this position is Gauthier de Biolley, the company's senior vice president for external growth from 2000 to 2006. Now running his own consultancy, Brussels-based Eiger Ventures, de Biolley advises family-owned firms on external growth strategies and investment opportunities while keeping a hand in the beer industry by serving on the supervisory board of the Netherlands-based Efes Breweries International NV, part of Turkey's Efes Beverage Group. He spoke to The Deal's Renee Cordes about brewing's changing landscape. Excerpts:
Corporate Dealmaker: Your first deal for Interbrew was Beck's. What was the rationale there?
Gauthier de Biolley: It came after we did some work trying to understand strategically whether it would make sense to move into Germany in the first place. At the end of 2000, Interbrew was thrilled about the expected success of its Bass acquisition and about the prospect of going public. Some people said Germany is unprofitable and prices are low, but my argument was that it's close, it's a land of beer drinkers and it's a market with huge potential for consolidation. Then-CEO Hugo Powell agreed to look into it, so we set up a team and started searching.
Did the Beck's deal pave the way for further deals there?
If Beck's had not been the first deal, we would have had alternative transactions to work on. We identified pockets of profitability in that market, identified the brands and companies that would fit our criteria and came up with a strategic list of A, B and C targets. The Beck's, Spaten and Gilde acquisitions all were consistent with the original strategic work.
What's the main driver of consolidation in brewing?
Ten years ago, only about 20% or so of the industry was in the hands of the top five players. There were also a few hungry companies with narrow markets that wanted to expand. In my opinion, the man who shaped the rules governing today's beer industry has been Freddy Heineken, who started in the 1960s and 1970s with a lot of licensing agreements and minority stakes with the Heineken brand in mind. There were also a number of events that triggered major changes. In some markets, like Germany and China, you had a very fragmented industry; in Mexico the peso crisis in 1994-'95 prompted the search by the brewers for strategic partners; in Canada, the Labatt transaction was triggered by some financial mishaps at the holding-company level; and then you had the opening up of Central and Eastern Europe, the playground for all Western European brewers for a good 10 years.
Has the first player to enter an emerging market usually done the best?
I don't think you can take it as a given. The fundamental point is whether you get the right brand and the right route-to-market assets, whether as a first mover or as a later mover. If you get the wrong brand, then your first-mover advantage gets completely diluted. But if you get into a new market with consolidation potential with the right brand, you put yourself in a position to outperform the competition. That's what we did in Germany with Beck's. Conversely, in China, those who moved first in the 1990s actually didn't manage to get the right brand or the right assets. They went in with new factories, new breweries, aggressively pushing international brands, and completely misread the pricing environment. The result was that in the late '90s a lot of these guys packed their bags. In 2001 there was a lot of discussion about whether Interbrew should stick to what we had in China, at the time a small brewery in Nanjing, or whether we too should leave. Thank God, the decision we put to the board was accepted, which was hang in there, learn from the past, get management right, get products right, don't count on international brands and accept that it will take time.
In China InBev focuses on the wealthier, southern provinces. Why?
Becoming a national player was not within our reach, but there were a number of provinces in the south where we felt leadership could be targeted. As with Germany, we identified a list of targets and started working on those. Today InBev in that part of China enjoys a market share north of 40%, a good position to defend.
Looking at Latin America, how long had Interbrew been eyeing AmBev before signing a deal in 2004?
The entire industry had its eye on AmBev. I can't speak for the others, but in my opinion, what made a difference in our case was the willingness of controlling shareholders on both sides to carve out a deal whereby they would share power, rather than force one group to exit. Hence the transaction was practically a combination of the two companies. The deal was extremely complex to pull off. However, the key in creating value has been our ability to organize the post-transaction integration in a very systematic way.
How important is scale?
There are the obvious benefits, like being able to enjoy larger brewing facilities, use capacity more efficiently and add to purchasing scale as you deal with large suppliers. Then there are the benefits of being able to drive your commercial strategies more efficiently, be it by enjoying the advantages of a portfolio of brands covering various price points and consumer needs, or in terms of being able to focus one's marketing activities. Finally, it allows you to assemble larger sales forces and bring better service to the point of connection and to the consumer. Think of what Anheuser-Busch Cos. has been doing in the U.S. for the past 30 years: building a strategy of national presence, selecting and nurturing top-level wholesalers and pushing their brands with aggressive marketing and communication strategies. Today they're the uncontested market leader, which was far from certain 30 years ago.
How does InBev's approach to brands differ from that of its rivals?
We were the first one to see the power of local brands, or at least to articulate it explicitly -- in contrast to Heineken's apparent strategy in those days, namely, focus on pushing the international Heineken brand. At Interbrew, we said, "We are 'the world's local brewer,' so we are going to make your brand the hero, Mr. Brewer in Hungary or China."
What did InBev bring to the companies it acquired?
It was good at managing the portfolio of brands, the cultural diversity of people and had very strong expertise handling the technical aspects of brewing. The other key skill was the M&A part -- covering the entire spectrum including strategy, transaction execution and post-merger integration planning. At InBev I led a team of 10 professionals, plus a support staff of half a dozen. Additionally, over 30 people from all other functions would work alongside the core M&A group to perform due diligence, business plans, contract negotiation, closing work and post-merger integration. We had a variety of nationalities, genders, ages and backgrounds, and from 2003 to 2005 we were one of the largest M&A teams in the industry, if not the largest, one of the most diverse and arguably the most productive -- all deals since 2001 have created shareholder value.
What's the outlook for future M&A?
Fragmented markets are now few and far between -- Germany would still count, and China to an extent. There are also still a few scattered family-owned or government-owned companies, which will one day or other be put up for sale. The next phase of consolidation will be at a continental level, most likely Europe or Asia. It's a matter of when rather than if, and of who amongst today's leaders will pull the trigger first. CD
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