I predict that InBev will eventually become disappointed with this deal, and will likely lose money on it. A reason for this is simple: A-B was long considered a desirable company to own, although its stock price was considered to be high, and even though its price was rather flat for many years. The difference between a stock's price and its accounting book value is termed 'goodwill', and Anheuser-Busch had plenty of it, although less in recent years. When the new corporate masters attempt to cut costs, are they cutting accounting value or are they cutting goodwill?
Goodwill is hard earned, and as accountants know, it is not monetary. Anheuser-Busch had an old slogan "Making friends is our business", and although the company was hardly a perfect paragon of virtue, it still had many business practices that seemed rather old-fashioned compared to New Age 'enlightened', cutting-edge companies. Please consider that friendship was considered by the ancient pre-Christian philosophers as being the highest form of love, and could be symbolized by two individuals standing side-by-side, both looking forward together. Also consider the kind of business practices that would result from an attitude of friendship instead of an attitude of competition.
A contemporary cutting-edge company will subcontract its work out to the global, Internet-connected marketplace, getting the lowest costs available at each moment, whereas A-B would typically have long-term relationships with strategic suppliers. Now this does not mean that A-B would not be tough with its suppliers, for it often was — but it would, except under remarkable circumstances, attempt to keep the supplier relationships going. If you are a subcontractor, what would lead to the most goodwill: knowledge that you are the cheapest supplier at the particular moment, or knowing that you are just about guaranteed work for the foreseeable future?
A-B had the reputation of being a good place to work for your entire career, and until recent years, firings and layoffs were uncommon. Again, contrast this with a modern company that hires mainly contractors, who are hired for only short-term periods. Which generates the most goodwill?
A Darwinian, self-interested company will devour its competitors, ruining them with low prices in the marketplace. A-B, astoundingly, provided free consulting and business support to small brewers! A company can only flourish in a healthy industry, and a healthy industry does not compete merely on low price, but on quality. The new microbrewery industry partners produced beer of high quality and high price, helping the entire industry, and A-B. Then-president August Busch III once gave a talk on fatal mistakes made by other beer companies, all these were misguided attempts at cutting costs, and those companies soon collapsed; he told us this to illustrate that viable companies ought to simultaneously raise quality and keep prices at good levels.
Quality is not a perception, but is based in actual fact; the perception of quality is transitory if not backed up by actual practice. A-B not only had a reputation of quality, but it put a lot of money into quality. Word gets out, and this quality in fact became well known among suppliers and business partners, which adds to general respect and increased goodwill.
Anheuser-Busch was risk-adverse. Whereas contemporary industry favors risk-taking and radical innovation, please consider that a typical venture capital firm is willing to accept one successful company in its portfolio out of twenty failures. Needless to say, "vulture capital" has little goodwill, especially among the other investors and workers of the failed companies. Being risk-adverse, A-B had a significantly high 'hurdle rate' for new investments, much higher than was typical for American business. Again, this was consistent with a long-term view of business. Going back to the venture capital business model, please consider the good possibility that the one successful company out of twenty may owe its success merely to a lucky, unrepeatable circumstance; simultaneously consider how unlikely the former success of A-B could be assigned to mere luck. This is another factor in goodwill.
Traditionally, A-B supported its products with high-quality advertising, although that has declined in recent years. I recall how Miller Beer, many years ago, started a new advertising campaign which was edgy, quirky, and filled with sexual themes of a deviant nature, and media critics loved it; listening to these critics, Miller continued this campaign even though it was a marketing failure and sales plummeted. Miller soon lost its goodwill and was taken over by South African Breweries. Senior A-B marketing people were greatly distressed by this huge mistake by Miller, and were even more distressed when A-B's own media partners were pushing them to do the same. A-B did eventually lower its standards, and it did lose goodwill.
A-B sold beer, yet was also friendly to the wine industry, supporting it through its distributors and through some investments and marketing. The company was hostile to hard liquor, which is sold to men who want to get drunk fast, and which ought to be contrasted to the company's long-term effort to associate beer drinking with food; ideally, it was a beverage that would be consumed with meals. Beer tends to be more self-limiting as compared to liquor, although the risk of alcoholism is always present and remains a problem. With the decline of A-B's marketing in recent years came the rise of the vodka culture, as well as A-B's capitulation to the liquor industry.
Modern thinking tends to reductionism and essentialism, and so alcohol is seen as the essential component of beer, leading eventually to hard liquor and especially vodka, which is essentially just alcohol. As modern religion attempts to strip away all supposedly inessential elements, such as elaborate churches and liturgy, incense, chant, and veneration of the Saints, so modern companies attempt to reduce their products and business to 'essentials' or 'core competencies'. This is deadly to both religion and to business and products. Beer is more than just a delivery medium for ethanol, and a beer company is more than a marketing organization for that product. Ethanol is a commodity, but commodity businesses have no goodwill. Some clever companies make strategic 'synergistic' investments, while failing to realize that synergy must exist in all levels of the company and in all relationships; it has to be a way of life, and is implemented by the policy of making and keeping friends everywhere.
One mistake made by A-B was the reformulation of Michelob beer to make it more similar to Budweiser (and most critically, that it be made with the same equipment): the quality difference was noticeable, and that product no longer could be sold at a significantly higher price. The brewery's current process for brewing beer is still elaborate, and this could be a target for cost-cutting. Suppose InBev gets rid of 'genuine Beechwood aging', would anyone notice? Maybe not, but that is another link in Budweiser's goodwill. We ought to consider that a consumer's perception of value must be backed up by actual value.
Anheuser-Busch employees historically had a great deal of respect for the company, would only purchase the company's products, and would influence their own family and friends to do the same. Likewise, many Saint Louisans would purchase the company's products out of local loyalty. That goodwill is now lost. As I feel no need to purchase their products, I don't.
InBev has made a bad investment. According to a news report published today, lenders are now selling off AB InBev debt at a loss for 91 cents to the dollar.
Goodwill is based on friendship, not money. It is sad to see a good company destroyed because this fact is ignored.