DiWORSification: Anheuser-Busch's Plan to Sell Liquor is Already Giving Us a Hangover (BUD)

Eddy Elfenbein submits: This headline in the Chicago-Tribune (free reg. req.) about a new Anheuser-Busch (BUD) plan caught our attention in a bad way.

Me running in slow motion.

With beer sales flat,

Waving my arms....

Busch ponders

"Noooo...."

taking shot at

"oooooooooo...."

liquor.

Why oh why do companies do this? Someone please tell me. Has this strategy ever worked? If people aren’t buying your crappy beer, what makes you think they’ll buy your crappy vodka? I really want to know who exactly is the target market for Budweiser Scotch? I don’t care if it’s just one guy, he needs to be severely beaten.

Let’s look at Anheuser-Busch’s (BUD) situation. Earnings are down and the stock hasn’t budged in a bull market. Even for a defensive stock, shares of BUD have been slackers.

BUD 2-yr chart:

The fact is that beer sales are flat. They’ve been flat for years. Brewers don’t sell more beer, they only steal market share. That’s why the advertising and branding is so intense (and moronic). In fact, a better way to think of Anheuser-Busch is not as a brew stock, but as a marketing and distributing company. That’s what they really do.

(On a side note, every year in Silicon Valley, some really smart engineers get together with some really smart ideas. They meet some other really smart people who give them really smart start-up capital. But being a really smart engineer doesn’t make you a really smart businessperson. The start-ups bomb and the troubles are often due to marketing and distribution. Engineers don’t think that way. It’s amazing how dumb really smart people can be.)

Selling the hard stuff won’t help any of Anheuser-Busch’s problems. It’ll probably make them worse. About 20 years ago, all the American car companies bought European luxury car companies. There was absolutely no reason for this. Within a few years, all three dumped them. Chrysler was eventually bought by a European car company.

I’ll give you a great example of a company knowing how to use its brand—Harley-Davidson (HDI). Harley only makes the big bikes. They have nothing to do with the rest of the motorcycle market. Every few years someone suggests that Harley should “LEVERAGE” its “BRAND NAME,” and move into the smaller-weight market. There are lots of smart folks at Harley, and this idea has crossed their mind, but still, they never do it. Why? Because it’s not their market. They could do it. They’d probably even make some money at it. But Harley’s attitude is that they aren’t like everybody else. They don’t make bikes--they make Harley’s. Bear in mind that a surprisingly large percentage of their revenue comes from clothing. Harley isn't about to start diluting that brand.

Harley knows exactly what business it’s in, and so do its customers. I have nothing against diversifying into good businesses. I’ll even look the other way at a brewer owning theme parks (that’s just marketing). But don’t fool anyone by thinking that you can brand your way out of troubles. Especially, don’t fool yourself.

HDI 1-yr chart:

Comments

[NO DooDahs:]

Alcoholics are the target market for Budweiser Scotch. People who drink scotch in a non-alcoholic manner will buy on the basis of brand prestige or taste. However, alcoholics who want to switch from beer to scotch to see if that helps limit their drinking might welcome having a scotch to try that is mid-brand between rot-gut and Glenlivet. After all, the purpose of drinking is getting drunk, but you might as well have something that tastes halfway decent – and you have to balance that against price. Non-alcoholics, when faced with which scotch to buy, will think of scotch as a "treat" or "luxury" and gravitate towards the most expensive brands. Alcoholics will see that their choices now include an affordable scotch of better-than-rot-gut quality and may give it a try.

I happen to think that advertising in the beer industry is genius! They have keen insight into the alcoholic mind and target their ads appropriately. However, I don't really think their target market cares two hoots about brand.

Keep this in mind – it's not how many people are in the group that buys a product, it's how much of the product that people in each group buy! The primary consumers of alcohol (not by numbers of consumers but by amount of consumption) are college-age youths on binge-drinking episodes and alcoholics. THESE ARE NOT BRAND-LOYAL CUSTOMERS. Taste of the product and brand are constantly being balanced against the cost-to-drunkenness ratio. This cost ratio is one reason why Budweiser Scotch might actually work.

Big picture, I don't think BUD is trying to improve their brand, but rather trying to prevent the type of cyclicality of earnings they've had as trends in the U.S. move from liquor to beer and back again. By offering a knock-off of a luxury product (scotch), they might actually be able to create a niche market that they can own.

I'm still a BUD bear.

2006 Jun 23 11:16 AM