Can InBev's Zero-Based Approach Work for Anheuser Staff?

The recent merger of InBev and Anheuser-Busch (AB) has created the 'global leader of beer' with Budweiser as its flagship brand. InBev announced it will find $1.5bn in 'synergies' by 2011 and, according to investment research group Bernstein, by combining their cost-cutting strengths with Anheuser-Busch's cost-cutting plan 'Operation Blue Ocean', which intends to reduce costs by $1bn between 2008 and 2010, the estimate is seen as realistic.

But how will these synergies be created? According to Bernstein, Blue Ocean lacks access to two sources of value: direct synergies (UK, China, purchasing, closure of one corporate HQ) and high debt leverage – this is where these synergies will largely be produced. "The incremental cuts will come at corporate HQ [no need for two CEOs etc] and in the areas of real overlap, for example China and the UK," Bernstein senior analyst Trevor Stirling says, pointing out that $520m could be saved in addition to the costs cut by Blue Ocean (see figure 1).

Previously part of AmBev's Brazilian cost-cutting management team (InBev was formed by the merger of AmBev with Belgian company Interbrew in 2004), CEO Carlos Brito has a strong track record for cost-cutting. Bernstein reports that of the "€140m in cost 'synergies' identified for the AmBev-Interbrew merger, €80m came from applying AmBev 'best practices' to the Belgian brewer."

When zero-based budgeting (ZBB) was introduced into InBev in 2006 (Brito became CEO in 2005) operating expenses decreased in that year by 2.1% (or €97m). According to Bernstein, throughout this most recent bidding process, InBev demonstrated the power of the AmBev / InBev cost-cutting techniques to AB by showing it raised operating margins by nearly 8% over three years in Canada (see figure 2). This figure was largely as a result of the ZBB approach.

Low support for a zero base?

Zero-based budgeting is the consideration of budget requests without an implicit commitment to sustaining past levels of funding.

According to InBev's official spokesperson Marianne Amssoms: "Implementing ZBB helps our business to gain visibility, prioritise spending so that as little money as possible is allocated to activities that do not impact consumers." Analysts say they have little doubt that the ZBB way of life will be introduced to Anheuser-Busch InBev and Brito himself has said, according to Bernstein, that the implementation of the InBev culture is a pre-requisite of any deal.

Some of AB's St Louis employees, where the headquarters of the combined companies will be based, are hence concerned about workforce cuts. Some so much so that 'Save AB' was formed to demonstrate throughout the bidding period. "St Louis knows its coming, it's just a case of exactly where and when," says Eric Shephard, executive editor of Beer Marketer's Insights. "If I were an employee of AB I'd be concerned about my long-term future there, especially if I were in a large department, in a job easily outsourced and/or with a role that could be viewed as duplicative," he adds.

Bernstein has observed how 'efficiencies are likely to come from how the breweries are run rather how many there are' and although Brito has said breweries will not be closed, staff numbers could be reduced.

Bernstein's Stirling says he expects this reduction to be quite significant "primarily in back-office functions and also reductions in brewery staff levels," areas that could have received losses even if the merger did not take place under under AB's own Blue Ocean plan.

ZBB culture

InBev is typically very quiet on the subject of how the ZBB 'way of life' manifests itself but this has not stopped Brito receiving a reputation as, according to Beer Marketer's Insight's Shephard, a 'no-frills, no-thrills severe cost cutter'.

Morningstar equity analyst Ann Gilpin says it is known that at InBev, the CEO, CFO, and chief marketing and sales team sit at the same table and share the same desk. "Needless to say, that doesn't happen at AB."

A report that appeared on website theglobeandmail.com quoted InBev employees as saying: "if electricity costs have to come down, as they do, cafeteria lights are switched off." Another report on Reuters says that cost cuts include: "economy flights, enforcement of double-sided printing and fewer staff with mobile phones, mobile phones taken back and returned only to employees who justified a need for one; new pens given out only in return for used ones; and an elevator at the global headquarters closed for several months."

While InBev's staff may be used to this, AB staff could find the merger as somewhat of a culture shock, according to Shepherd. "It is a culture where nothing is assumed where there's 'no free beer' whereas AB doesn't run like that," says Shephard. Some analysts even think these differences are so great they could jeopardise the ability of the companies to successfully integrate. As Gilpin says: "finding the synergies could create integration problems as the corporate cultures are different.

"InBev is managed by investment bankers who have run the business to the bone, squeezing out the highest possible margins they can get, while Anheuser-Busch has traditionally been much more liberal with its spending on things such as corporate overheads and advertising," Gilpin says.

And then there is the marketing

Another area where cuts are being anticipated is with AB's marketing. Bernstein says it believes that the "merger between the two companies should allow significant reductions in the marketing and overhead organisations of Anheuser-Busch."

InBev's Amssoms said that: "strong cost management allows us to capture 'non-working' money from within our overall cost envelope, and convert it into 'working money' to increase brand support and sales and marketing activities." But, according to Shephard, there is speculation as to how 'non-working money' will be transformed.

"AB usually creates commercials for the Super Bowl and doesn't run all of them. The 'extra' ads have been cited as the kind of cuts InBev might make," says Shephard. This type of cut would fit into the ZBB model.

AB's key brand, Budweiser, is also key to creating synergies and must be sustained as the flagship brand. Bernstein's research confirms that in a recent conference call, "management placed a lot of emphasis on revenue synergies, particularly international expansion of the Budweiser brand, and continues to expect that the synergies will be dominated by the contribution from improved efficiency in Budweiser's US operations." Marketing this product ahead of Stella Artois and Beck's while creating great synergies will be complicated and some think almost impossible.

"They seem to want to have it both ways, building brands and growing top lines as well as cutting costs – the cuts have to come somewhere," says Shephard.

The overall effects of the ZBB approach at Anheuser-Busch InBev remain to be seen. Despite the company's plans to produce synergies, some analysts believe there is not much opportunity for synergies. "InBev is basically taking A-B's Project Blue Ocean, which is a stand-alone plan with no synergies, and slapping some synergies from China on top of that," Gilpin says. In the long term InBev's management would be more interested in, "taking a machete to operating costs," which she thinks is quite possibly, "something the folks at Anheuser-Busch may not be prepared to accept."