AB-InBev has closed their $104B mega-acquisition of SABMiller. As part of this, they agreed to sell SAB’s 49% stake in Snow beer . This was a preemptive move to get Chinese regulatory approval. As a result, quasi-SOE CR Snow will now become 100% state-owned (by China Resources Enterprise).
This is a real shame.
Because lost in the media coverage of this huge beer deal is the fact that we almost had AB-InBev running CR Snow. We almost had the world’s most aggressive management meritocracy taking charge of a big Chinese SOE (mostly). This would have been Chinese SOE reform like nobody has ever seen before.
Here’s my take on what I think would have happened (and I’m hoping still might one day).
Step 1: The Brazilians that run AB-InBev (and 3G Capital) descend on CR Snow like the Spartans in the movie 300.
The movie 300 is a good analogy for the management philosophy of this hyper-aggressive group of mostly Brazilians. For those who haven’t seen the movie, it’s the violent and frequently slow motion story of 300 mostly naked Spartan warriors taking on the entire Persian army. The Spartans were famous for having been trained to fight since birth and for their extreme aggression. They were the uber-warriors of ancient Greece.
That’s a good way to think about the management-style pioneered by 3G’s founders (Jorge Lemann, Carlos Sicupira, and Marcel Telles). They are the Spartans of management. They are famous for taking over companies in Brazil, Europe and the US – and then turning them into hyper-competitive meritocracies.
For example, in 2004 they merged their Brazilian company Ambev with Belgian Interbrew. They basically combined the world’s 3rd and 5th largest beer companies. Post-deal, their Brazilian managers descended on the traditional culture at the Belgian headquarter like the Spartans. Within two years, profits had jumped from $0.9B to $2.2B.
In 2008, they bought the world’s largest beer maker Anheuser-Busch for $52B, using a lot of debt. They quickly cut over $1B in costs, fired or encouraged 1,400 employees to leave and got rid of $9B of assets. Profits jumped.
But their primary strategy is not cost cutting. It is cultural transformation. They take-over and turn the management into crazy Spartans like themselves. And they openly want “crazy” people. According to Sicupira, “It’s easier to rein in a guy who’s crazy than push someone who is slow.”
Step 2: They would implement a new type of Chinese SOE reform.
The 3G playbook is now fairly well known, especially for beer companies. We would likely see three major initiatives at CR Snow:
#1 – Introduction of meritocracy plus partnership
They change management compensation so it has low salaries and huge performance bonuses. And performance is then strictly measured. This creates a meritocracy where you rise and fall based on performance alone. Seniority doesn’t matter. Background doesn’t matter. Only performance. In fact, the founders don’t allow any of their +10 children (and increasing number of grandchildren) to work at any of their companies – as this would undermine the culture of meritocracy.
They then pair meritocracy with partnership (i.e,. ownership). At Anheuser-Busch, they gave 39 senior executives a package of 28M share options. These were given as an all-or-nothing reward based on reducing the company’s debt by half in about 5 years. If the team had failed in this, they would have gotten nothing. But they succeeded two years early and they received $1B in bonuses (yes, $1 billion to 39 people). You can see why this sort of pay structure would attract Spartan-like personalities.
#2 – Righteous and ongoing cost-cutting.
This is what gets 3G in the news regularly. They are famous for their extreme cost cutting and for implementing zero-based budgeting (the yearly budget starts out a zero and each cost must be argued up from zero. This breaks spending by tradition). It is routine for them to immediately take away all the private offices, the company cars, the secretaries, the jets and business class air tickets, etc. They cut everything they can and the cutting never stops.
For example, at Anheuser-Busch, they sold the fleet of planes and everyone now flies coach. They ended free distribution of beer and free tickets to St. Louis Cardinals games. As mentioned, they decreased the workforce by 1,400. They even dropped the number of blackberries used by staff from 1,200 to 720.
#3 – Cultural change
Ultimately their biggest tool is cultural change. They are the Spartans. They transform the culture by bringing in their own people and by driving out those who won’t adapt to their style.
The most famous example of this was during an early Brazilian takeover (recounted in the book Dream Big). The story goes that approximately 35 executives of a recently taken-over company met with Sicupira to complain about the new compensation system. They then went to lunch. While they were out eating, he had them fired and locked out.
Ultimately, their Spartan management system is based on creating a team of fanatics and giving them a way to get rich through longer-term profit performance.
Step 3: They would guide CR Snow to increasing scale and dominance in China.
There is enough history of 3G’s approach to conclude it would probably work at a Chinese SOE. They pioneered this in Brazil in the 1990’s, when many companies were bureaucratic and state protected. Their strategy, both by take-over and PE, was to invest in undervalued companies and give them the Spartan shock treatment.
However, it wasn’t clear back then whether this shock therapy would work on European or American companies. That question has now been answered. See the financial performance of Interbrew, Anheuser-Busch, Heinz, and Burger King since they took over. It turns out cash rich Western companies, especially when run by the founders’ heirs, can grow lazy and bloated over time.
CR Snow is now the largest brewer in China. But at 30% marketshare they are not truly dominant yet. I think 3G could have rapidly grown CR Snow to dominance in China – and maybe Asia.
A couple of final comments on this. I teach 3G’s strategy at Peking University. My take is that it can be incredibly effective in specific situations. Such as:
- When it is a big company with lots of bloat to cut. It’s harder on smaller companies, with less to cut. This type of bloat frequently accumulates in big successful companies over time.
- When there are multiple internal operating entities that can be made to compete and share best practices. 3G did this with restaurant franchises at Burger King, with manufacturing facilities at Heinz (and others) and with breweries at multiple beer companies. Cost cutting gets you benefits but it is the long-term productivity gains that matter most.
- When the business is one where you can cut costs aggressively without impacting quality significantly. Cutting costs aggressively in beer is likely not going to impact beer quality. But cutting costs this way in hospitals can impact quality very easily. Simpler consumer products work better for this approach.
- The business can grow just by doing more of the same. 3G hasn’t really done innovation, technology or product development. They typically focus on doing more of what they are already doing – like by selling more beer or ketchup. Although they now appear to be doing new product development at some companies.
Overall, the 3G approach works best on companies that don’t require much innovation, product development or advanced brainpower. They want businesses with proven branded products or services where you can cut costs, drive productivity and expand existing sales.
A final comment.
SOE reform is arguably one of the biggest future drivers of real GDP growth in China. It has had a huge impact thus far and is an important area going forward. 3G taking over CR Snow would have been a real sight to see.
Cheers from Beijing, Jeff
I write and speak about “how rising Chinese consumers are disrupting global markets – with a special focus on digital China”