Bitter Brew: The Rise and Fall of Anheuser-Busch and America's Kings of Beer (38 page)

The Fourth bought the 6,500-square-foot, six-bedroom home from hockey star Brett Hull and turned it into a high-fenced fortress with an elaborate security system that featured surveillance cameras around the house and grounds and ballpark-style banks of outdoor lights that lit up the entire property at night so that no one could approach the house without been seen, recorded, and very likely set upon by his dogs. He created yet another safe haven where he could do what he wanted without fear of interference from any higher authority. All it lacked was a moat.

More than just fodder for the financial media, the relationship between the Fourth and his father was a matter of constant conversation inside the company and the Busch family. Among the latter group, there had long been concern that August III was in denial about the nature and extent of the Fourth's partying. In 1984, Adolphus IV went to August III about rumors of his son's cocaine use. “I need to talk to you because I am hearing that August IV has a serious drug problem,” he said. “I don't have any agenda; I'm not thinking you are going to can his ass and ask me to come down there and go to work. But if people are telling me about it, then it has to be all over the whole city.” August III confronted the Fourth, who said the rumors were not true.

By 2002 August III should have had, at the very least, a strong suspicion that the Fourth had a predilection for overindulgence. And yet, despite all he knew or suspected, August still put his son in charge of the brewing division, which accounted for 77 percent of the company's $12.9 billion in sales and 94 percent of its net income.

What was he thinking? He was not a reckless man. In business at least, he carefully planned and vetted every move. So why then did he risk handing the Fourth more responsibility, more authority, indeed, more temptation? “That's the biggest contradiction in the man,” said Adophus IV. “He held everyone accountable. He held everyone to the line, except when it came to his own son, who would take over the company, even though [August] knew for twenty-seven years the problem his son had.”

The most logical, credible explanation was that even after all the heartache and embarrassment the Fourth had caused, and in spite of the disappointment, frustration, and rage that August felt, he still believed in his son. So he doubled down on the bloodline, betting that his firstborn would finally emerge from his wild oats phase, settle down, get married, and run the hell out of the company the way four generations of Busch males had done before him. And he hedged his bet by staying on as chairman longer than he'd planned. The media speculated it was because he couldn't bring himself to relinquish control, and while that may have been true, it was just as likely that he felt he had no choice.

The five years preceding the Fourth's promotion to president had been good ones for the company. While the industry had grown by an anemic 2 percent, A-B's net income had increased by nearly 12 percent. “We were driving the growth in the industry,” said one executive. “Without us, the industry would have shown a decline.” During a time when the S&P 500 had remained flat, the price of A-B shares had risen 61 percent, and the stock had split two-for-one twice. For the first time, A-B passed the 100 million–barrel mark. Its total of 101.8 million barrels in 2002 bested second-place Miller by more than 63 million barrels and added up to a 49.2 percent share of the U.S. market.

A-B's continued dominance helped move Miller's parent company, Philip Morris, to finally throw in the towel in its thirty-one-year adventure in the beer business. In May, the cigarette maker sold Miller to London-based South African Breweries Ltd in a deal valued at $5.6 billion in stock, cash, and assumed debt. The merged companies would be called SABMiller.

August III no doubt took considerable pride in the fact that A-B had vanquished a competitor as formidable as Philip Morris, and he surely felt a measure of personal satisfaction in
Forbes
magazine ranking him as the best-compensated CEO in the food, drink, and tobacco industry, averaging $13.5 million per year in salary, bonus, and stock benefits. But the creation of SABMiller was a troubling development. It pointed up A-B's main vulnerability.

Prior to the merger, SAB had been the world's fourth-largest brewer, and Miller the sixth. Together they constituted the second-largest brewing operation on the planet, behind Anheuser-Busch. A-B's No.1 ranking was based on the volume of beer it produced, however, not the breadth and scope of its operation, and the company sold 90 percent of its beer inside the United States, making it a powerhouse domestically but a comparative weakling overseas. With U.S. per capita consumption trending downward, brewing industry experts scoffed at August's idea of achieving a 60 percent share of the market, believing that A-B was rapidly approaching saturation level at 50 percent. In order to grow, the company needed to expand in the international marketplace. SABMiller made that more difficult.

August had begun moving cautiously into foreign markets in the late 1980s, usually by entering into equity-based partnerships with leading breweries that gave A-B a controlling interest in a joint venture to brew and distribute Budweiser in their country and a minority stake in the brewery itself. It was a conservative strategy that allowed A-B to control the quality of its product while avoiding the debt that would result from buying the breweries outright. In this way, A-B gained a foothold in the 1990s in three of the world's highest potential markets, acquiring a 10 percent stake in Tsingtao, the largest brewery in China, a 37 percent interest in Grupo Modelo, the largest brewery in Mexico, and a 10 percent interest in Antarctica, the second-largest brewery in Brazil.

At the same time, however, August had passed up a chance to buy South African Breweries before it began gobbling up smaller breweries in Central Europe—including Pilsner Urquell—on its way to becoming a global player capable of mounting a multibillion-dollar purchase of Miller. He could have gone after Guinness before it was acquired by the British food and beverage giant Grad Metropolitan, but he didn't. Nor did he make a play for Canada's No. 1 brewer and A-B's longtime Canadian distribution partner, Labatt, when it became the target of a hostile takeover attempt in 1995 and ultimately agreed to be bought by the Belgian powerhouse Interbrew SA for $2 billion.

August's unwillingness to risk more of A-B's enormous wealth to acquire controlling interests in foreign breweries frustrated and sometimes infuriated some members of his strategy committee who worried that he was being penny wise but pound foolish at a time when the industry was consolidating globally. After buying Labatt, for example, Interbrew scooped up two of England's biggest brewers, Whitbread (for $600 million) and Bass ($3.47 billion), along with Germany's Beck's ($1.58 billion). SABMiller acquired a controlling interest in Italy's Peroni ($256 million) and Holland's Grolsch ($1.2 billion). Closer to home, SAB Miller acquired Grupo Bavaria, Colombia's largest brewery (and the second largest in South America) for $7.8 billion in 2005, the same year that Adolph Coors Co., America's third largest brewer, merged with Canada's largest, Molson, in a stock swap deal worth $6 billion. Prior to the merger, Molson and Coors were controlled by the families that founded them (in 1786 and 1873, respectively).

And yet, amid all the rapid consolidation, August III seemed to be channeling his father toward the end of the old man's reign, trying to avoid spending money by scuttling deals that members of the strategy committee brought to the table.

As one former committee member recalled, “At the last minute, twenty-four hours before the deal was to be signed, he would say, ‘We are not going with that price; we are going with this price.' We'd say, ‘But then you are going to crater the deal,' and he would say, ‘Fine, we will crater the deal, but I am not going to pay that price.'”

Even August's corporate planning mentor and longtime consultant Robert Weinberg agreed that, in hindsight, his foreign expansion strategy was too cautious.

“August is a damned smart man, one of the few people in the business who was significantly smarter than he thought he was,” the eighty-four-year-old Weinberg said recently. “And he could move mountains if someone could convince him the mountains could be moved and this is the way to move them. But I don't think he was willing to take big enough chances. When push came to shove, he was too conservative. And when you are too conservative, you are throwing away opportunity.”

August's Brazilian adventure in the 1990s is a case in point. A-B was the first American brewer to invest in Brazil, which was then the world's fastest-growing beer market, increasing at a rate of 15 percent a year. August first attempted to strike a deal with Brazil's biggest brewery, Brahma, which was owned by a trio of investment bankers—Marcel Telles, Carlos Sicupira, and Jorge Lemann. With a combined personal net worth of $10.6 billion, the three men also controlled the retail giant Lojas Americanas, known as “the Wal-Mart of Brazil.” August hosted Telles and Lemann at A-B's theme park resort in Williamsburg, Virginia, and gave them a personal tour of the brewery there. In the end, however, he invested $105 million in Antarctica instead because, typically, he thought Brahma's price was too high.

Several years later, Telles, Lemann, and Sicupria approached August with an audacious proposal to merge Anheuser-Busch, Brahma, and Antarctica into a western hemisphere behemoth that they characterized “the Coca-Cola of beer.” August said no to the idea, and two years later, in 1999, the brash Brazilians bought Antarctica out from under him and merged it with Brahma to form AmBev, becoming the world's third-largest brewer. August still could have joined the merger because A-B's deal with Antarctica gave it the option to increase its stake to 30 percent and place a representative on the board. Once again, however, August thought the price was too high, and he opted to sell back A-B's minority stake in Antarctica.

“The evaluation he got from his corporate planning analysts and consultants convinced him that if he bought into AmBev, the impact on the stock would be a 10 to 20 percent decline in the short term,” a former executive said. “It would have a negative impact on corporate earnings, so stock analysts would hammer them.”

Passing up the opportunity to be a partner in AmBev is regarded as one of August III's two great professional mistakes. Five years later, the Brazilians merged AmBev with Belgium-based InterBrew to form InBev, which knocked A-B out of its long-held spot as the world's largest brewer (by volume)—“The New King of Beers,”
Money
magazine proclaimed—and set the table for its eventual takeover. Had August been willing to pay the price in 1999—a mere $210 million—he might have been able to head off the takeover.

His other great mistake, of course, was continuing to promote his son.

When August IV was named president in 2002, the company's fortunes had begun to turn. All the award-winning TV commercials had managed to halt the decline in Budweiser sales, but not increase them. For the first time in nearly fifty years, Gussie's beloved Budweiser had fallen to second place, overtaken by Bud Light, the upstart offspring that no one in the family had wanted in the beginning. A-B could still boast the two top-selling brands, but the switch in places was worrisome because Budweiser, not Bud Light, was the spearhead in the company's foreign expansion plan. As the Fourth said when he was promoted to vice president of marketing, “The question isn't ‘Can Budweiser grow again?' We must grow Budweiser again. Budweiser is our ticket to go international. Budweiser is our Coca-Cola.”

In the first year of the Fourth's presidency, however, A-B's sales and stock price flattened as Budweiser began to sink again. He responded by pouring money into image marketing, ad campaigns, and new product development. With wine and spirit sales on the rise and cutting into beer sales industry-wide, he approved a $60 million promotional budget for a new product called Bacardi Silver, a clear malt-based, rum-and-citrus-flavored beverage developed in partnership with the world's leading rum distiller. With the Fourth overseeing the rollout, the budget naturally covered the cost of a garishly branded Bacardi Silver high-speed powerboat and racing team.

Beverage industry analysts noted that A-B was a little late to the races with Bacardi Silver; sales of so-called malternative or alcopop beverages—Smirnoff Ice, Captain Morgan Gold, Sauza Diablo, Skyy Blue—peaked just as Bacardi Silver hit the market. The
New York Times
said the new beverage category was “starting to show signs it is a fad rather than a trend.”

A-B sales managers grumbled that pushing a product so strongly identified with a distilled spirit seemed counterproductive. Hadn't America's brewers been battling with distillers over the alcohol consumer's buck since back before prohibition? But now they were encouraging people to pick up a bottle that said Bacardi rather than Budweiser or Bud Light? It seemed like bad business.

The Fourth apparently disagreed. In September 2005, A-B established a wholly owned subsidiary specifically tasked with developing and marketing distilled spirits. The subsidiary was called Long Tail Libations, Inc. after the best-selling book
The Long Tail: The New Economics of Culture and Commerce
, which referred to “the long tail of the fast-falling demand curve in economics,” and posited the theory that in the new economics of viral marketing and Internet sales, an offering of numerous smaller-selling products could equal or exceed the value of a blockbuster.

“A challenging time calls for looking at things differently,” the Fourth told
Fortune
magazine.