In my most recent article, I discussed the beer industry's quest for new products as seen in Beer Blast, Philip Van Munching's history of the industry in the late 20th Century. Van Munching argues that the industry's constant introduction of new beer varieties has diluted the value of existing brands, hurting beer companies' brand image.
However, Beer Blast does not only discuss brand image in the context of new products. Van Munching was the advertising director at Van Munching & Co., the former US importer of Heineken (OTCQX:HEINY) (OTCQX:HINKF). As a result, his book goes into great detail about the image strategies of several major American beer brands, offering insights about both their successes and failures.
Though Van Munching's book was written in 1997, I feel such insights remain valuable for investors. For example, Beer Blast shows that beer companies are similar to luxury goods companies. Customers often use the brand of beer they drink to define their self image and the image they project to others. In this, they treat beer the way they treat luxury goods such as fashion items, which are similarly used to craft one's personal image.
This may seem obvious, but I think this is interesting because it sets beer companies apart from many other "defensive" industries. After all, people usually don't build their personal image on the utility they buy their electricity from, or on the company they buy aspirin from. However, they do on what brand of beer they drink. Because of this, I feel Van Munching's book does not only offer valuable lessons to alcohol industry investors, it also offers lessons to investors in any company whose products are used by customers to define their personal image.
Beer Blast uses several examples to offer these lessons. It includes the story of Schlitz, once the second largest brewer in the US, which destroyed its brand image through excessive cost cutting. In contrast, it also shows how the ascendency of craft beer in the past three decades, probably the most prominent trend in the industry, has been based on careful image management. Finally, Philip Van Munching relates his personal experience of how difficult it can be for a beer company to maintain and develop its image through stories about his time at Van Munching & Co.
Schlitz: How Cost Cutting Can Sabotage Brand Image
In my opinion, the lesson of how Schlitz destroyed its brand image is a particularly valuable one for investors. The managers of the Joseph Schlitz Brewing Company had the type of goals that investors usually love to see in a company. They wanted to drive growth, cut costs, and boost cash flow. And yet, by trying to accomplish these shareholder-friendly goals, Schlitz's management destroyed the company's brand image, driving the company into decline.
Schlitz's decline began in 1976, when the company was the second largest brewer in the US. Schlitz's management felt they were within striking distance to overtake number one brewer Anheuser-Busch (NYSE:BUD), and thus tried to add the brewing capacity to do so. As Van Munching puts it:
There are two ways to increase capacity in the brewing business. The first is to build more of it by expanding existing breweries or investing in new ones…[the] second is to reduce the brewing cycle and get more beer from the same brewery in less time.
Unfortunately, Bob Uihlein, the head of Schlitz, chose the second option. The company cut the length of its brewing cycle, even though, in the words of Beer Blast, "[for] lager beer, age is everything. The aging (or lagering) process not only improves the flavor of the beer, it naturally…purges substances that cause beer to spoil more quickly."
Without the benefit of aging, Schlitz's beer encountered an unseemly quality problem - the formation of solid matter, or "haze" at the bottom of beer bottles. Though this wasn't dangerous to drinkers, it was terrible from a brand image perspective. The haze was a highly visible sign of reduced brewing quality that, even worse, "[looked] disconcertingly like mucus." Because of the harm done to the company's brand image by quality control problems like this one, the company's sales began to fall, so that 1976 was the high water mark for Schlitz.
What's interesting to me is that the shortened brewing cycle lasted only for about a year - "by 1977 [Schlitz]'d finally admitted their folly [and] returned to quality brewing methods. " Despite that, Van Munching indicates that this perception of low quality would taint all of Schlitz's subsequent efforts. For example, the company was the first to launch a light beer to compete with the wildly successful Miller Lite. However, Van Munching implies "the horrid flavor of the cheapened Schlitz flagship" undercut the fact that "Schlitz Light was positioned in its advertising as a much better-tasting alternative to Lite."
Because of this, only a few years after Schlitz came within striking distance of toppling Anheuser-Busch as the largest American brewer, August Busch III announced that "This business…is now a two-horse race" - and the second horse was Miller Brewing Company (OTCPK:SBMRY) (OTCPK:SBMRF), not Schlitz.
I feel one reason why Schlitz's quality problems permanently affected the company's brand image is because customers treat beer like a luxury good rather than an everyday consumer good. The way I see it, people don't buy luxury goods for their usefulness. After all, a $2000 handbag is probably not much more useful at carrying things than a $20 handbag. Instead, they do so for intangible psychological factors - the expensive handbag makes the buyer feel unique, or is the way that the buyer treats him or herself. Similarly, as Beer Blast puts it, for many drinkers, beer is "the reward you [give] yourself at the end of the day."
Schlitz's quality problems, I believe, ruined this sense of rewarding oneself by drinking a bottle of their beer. After all, who wants to reward themselves with a bottle of mucus? Indeed, Beer Blast offers another example of how damaging the intangible psychological benefits offered by a beer brand can crush a company's sales. During Schlitz's hazy beer period, the company "[took] a successful if completely misleading swipe at Budweiser's quality." In Van Munching's words:
…[Schlitz CEO Robert] Uihlein had taken out an option on a parcel of land just up the Merrimack River from a new Budweiser brewery. But rather than just dropping the plans and letting the option lapse, Uihlein couldn't resist a little staged drama. Schlitz called a press conference to announce that…it had found the waters on the Merrimack too polluted to meet its quality requirements…the message was clear: Schlitz cares about the water you drink, Anheuser-Busch doesn't.
Schlitz's press conference was misleading…the waters of the Merrimack never found their way into a Bud bottle; Anheuser-Busch used crystal-clear well water, as Schlitz well knew.
Despite the blatant untruth of Schlitz's claims, Van Munching notes that "Budweiser sales dropped 90 percent in nearby Boston."
Fortunately, for Anheuser-Busch, the company quickly showed drinkers the truth. However, I think this anecdote shows how powerful even the smallest image problem can be in damaging business for a luxury goods company. As Van Munching notes, Uihlein's "quality concerns couldn't have been more laughable at the time, as thousands of drinkers who found stuff floating in their bottle of Schlitz could attest." And yet, the accusation had a huge impact on Budweiser sales, at least locally.
I feel this sort of reaction stems from the way people treat a luxury good differently from one which is consumed for its tangible benefits. If people buy something primarily for practical reasons - price, convenience, usability - they might be willing to tolerate mild quality issues that don't affect those practical goals. In contrast, because what's important to a beer drinker is the intangible feeling of psychological well being, anything about a brand that affects this feeling - such as quality concerns - ruins the entire experience and will cause a beer drinker to switch to an alternative brand.
This may seem to be an obvious point, and yet I feel that Schlitz's example illustrates the risks of one common mentality among investors. Investors often have a deep suspicion that corporate management is wasting their money. Because of this, some shareholders see almost every cost cutting effort as a positive.
Indeed, Josh Brown of the Reformed Broker blog once mocked this mentality in a blog post titled "Ten Insane Things We Believe On Wall Street." The second of those "insane things" was the idea that "Layoffs are great news, the more the better." As Brown implies, many investors seem to think that any effort to reduce costs is a good one, no matter the impact on a company's human capital or product quality. Such shareholders, I feel, are often drawn to managers like Robert Uihein, who "boasted openly about the cost-saving measures Schlitz would take…[while insisting] that Schlitz's quality was never in danger."
The truth is, of course, that such cost-saving measures often harm the companies that undergo them. The downfall of Schlitz shows how the "reduce costs at any price" mentality of many investors can cause catastrophic damage to product quality and, by extension, brand image. Certainly, this is a lesson that has been reinforced many times since Van Munching wrote his book. In recent years, companies as diverse as Toyota (NYSE:TM), Darden Restaurants (NYSE:DRI), and Johnson & Johnson (NYSE:JNJ) have been burned by excessive cost cutting. The impact of these measures has ranged from poor customer service to recalls to even multi-billion dollar lawsuits.
Of course, one could say that it's unfair to use Schlitz's example to criticize investors' enthusiasm for cost cutting. After all, I doubt any investor would urge a company to cut costs so much that snot-like haze forms in their products. However, Van Munching notes that such problems did not happen at Schlitz overnight. Rather, he quotes another brewing executive who "speculated convincingly that the thinking behind it went like this:"
Small differences in ingredients and the brewing process are undetectable to the average drinker. The shift from A to B is barely distinguishable tastewise, but quite meaningful profitwise. From B to From B to C it's the same, and so on. Unfortunately, the eventual difference-the one between A and M-is huge…"
Even if no investor would urge a company to leap straight from A to M, it certainly seems plausible that investor pressure could also push a company to take those incremental steps from A to B to C all the way to disaster. This is especially true given the stated rationale for those costs. Beer Blast relates how though "[Uihlein's] brewers begged him to stop pushing for more cost-saving measures, he became too enamored of the extra cash."
I am a strong believer in the value of the cash flow statement, and of free cash flow in general, as a tool for evaluating companies. However, I can also certainly see how this focus on cash flow can hamstring a company. After all, one of the easiest ways to boost cash flow is to cut capital expenditures. Van Munching notes the temptation of managers to avoid capital expenditures by noting that "capital expenditure…is risky because it involves projecting volume needs well into the future…"
In that context, it is appealing to boost free cash flow and reduce risk by cutting capital expenditures. This may produce happy shareholders in the short run, but can also lead to disaster in the long run.
One possible example of the temptation to boost cash flow at any cost is Teledyne. Teledyne was a conglomerate led by Henry Singleton, whom Warren Buffett once described as "having] the best operating and capital deployment record in American business." Greg Speicher quotes from a 1979 Forbes article about the company, which describes how "Singleton's] conclusion was that the key was cash flow. Investors should not focus on accounting profits but free cash flow…" In order to boost cash flow, the company cut overheads and tied management compensation to profits. Though these cash-flow oriented actions boosted shareholder returns, they eventually led to problems for the company. Teledyne faced many lawsuits over unethical behavior in its later years, and a commonly cited reason for them is that too much focus on cash flow led to a lack of supervision.
In describing Philip Van Munching's tale of how cost cutting led to the fall of Schlitz, my argument is not that cost cutting is a bad thing. Rather, my point is that investors' enthusiasm for cost cutting often needs moderation. Even a superlative manager such as Henry Singleton can make an organization so lean that it can be criticized for cutting costs too much. Most companies are not run by leaders of Singleton's caliber. Thus, investors in such companies need to be sure that cost cuts are not excessive, lest they lead to the road of Schlitz and its haze-filled beer.
Boston Beer Co.: Brand Image and the Rise of a Craft Brewer
In contrast to Schlitz, which destroyed its brand image through excessive cost cuts that affected product quality, Boston Beer Co. (NYSE:SAM) and the craft brewing industry as a whole have built their reputation on the perception of high quality. Van Munching describes this process in Beer Blast, and in doing so, shows how all-important brand image can be in a luxury business such as beer.
In reading Beer Blast, one gets the impression that Philip Van Munching has mixed feelings towards the craft brewing industry, particularly towards Boston Beer Co., the largest craft brewer, and its CEO Jim Koch. On the one hand, he cites craft beer companies as having everything that the major beer companies should aspire to in both beer quality and advertising. As he puts it, "[brands] like [Boston Beer Co.'s flagship product] Samuel Adams…have enjoyed a good run…[because]…the big boys lost the romance of the product." As I noted in my last article, Van Munching argues that the major beer companies have lost their focus on "established core values (italics in original)," instead choosing to focus on gimmickry. Beer Blast even compares the major beer companies to the Wizard of Oz, so that:
Toto is pulling back the curtain and revealing the Wizard as the foolish old man in the topcoat that he really is. (In this evening's performance, the role of Toto has been played by [Boston Beer Co. CEO] Jim Koch.)
In contrast, Van Munching argues that craft brewing retains an emphasis on high quality products and consistent brand imagery. In his words, Koch "made a terrific beer." Similarly, the other microbrewers "were making beer with honest-to-God character: full-bodied, rich, and every other adjective they could reclaim from the tired advertising of the comparatively bland domestics." Moreover Van Munching describes Koch as "the man who most understands the importance of clearly defined brand attributes" in advertising in the brewing industry.
On the other hand, Van Munching also mocks Koch for his desire to portray himself and his company as providing authenticity and a higher quality experience. Though Koch is the only craft brewer whom he extensively criticizes by name, a number of his criticisms can be applied to the craft brewing industry as a whole. After all, the entire craft brewing industry has been built on the perception of higher quality and authenticity. It is far beyond my expertise to evaluate such criticisms on their merits. However, what is interesting to me are the lessons Van Munching's comments offer about the importance of brand image to the beer industry, and by extension, luxury industries, in general.
First of all, though, it is perhaps unsurprising that Van Munching expresses irritation with the craft brewing industry in Beer Blast. Before the rise of the craft brewers, there were two beer segments in the US - lower margin domestic beers and higher margin imported brands. The import brands traded on their reputation for exclusivity. As Van Munching put it, "Imported beer is a badge, a status symbol. And it is an affordable one."
As the advertising head for the distributor of then largest imported brand, Van Munching could take advantage of the economies of scale that a comparatively large company could offer. However, he could also portray his company as the high quality David in a David against Goliath fight against the domestic beer giants, such as Anheuser-Busch and Miller, which after all sold much more beer than Heineken in the US.
Unfortunately, for Van Munching, the rise of craft brewing began eroding the competitive advantages of imported beer brands. Suddenly, there was a new competitor intended to appeal to drinkers seeking a more exclusive beer experience. As Beer Blast puts it, in the past, "the word 'import' meant class and sophistication." However, by "asking…if the traits that made foreign beers sell couldn't be replicated here in the States…[craft brewers] redefined the beer business. No longer was the equation domestic/imported; now it would be mainstream/sophisticated. However they defined it, it would be direct competition for the imports" - in other words, direct competition for Van Munching.
Moreover, the new craft brewers even appropriated the David vs. Goliath imagery that Heineken had been using. The most prominent figure to do so was Boston Beer Company founder Jim Koch. As Van Munching puts it, "[in] a self-created analogy that would come up again and again, [Koch] was David. The Goliath he would direct his marketing efforts against was imported beer." Whereas in the past Heineken had used the tagline "Budweiser spills in a week what we sell in a year," now Koch was using the tagline "I brew in a year what the largest selling import makes in just three hours, because I take the time to brew Samuel Adams right." The threat to Heineken was obvious, and with a certain element of bitterness, Van Munching notes that "[the] irony was that with scarcely 1.3 percent of the American beer market, Heineken somehow found itself in the Goliath role."
Samuel Adams had other brand image advantages over Heineken. As Van Munching puts it, "Samuel Adams Boston Lager…which featured a portrait of Samuel Adams in roughly the same size and shape as the portrait of George Washington on the dollar bill, oozed patriotic nobility." He continues by noting somewhat tetchily that "[underneath] the portrait were the words 'Brewer' and 'Patriot.' It was a label only a Communist could hate."
Perhaps unsurprisingly, Van Munching is not particularly complimentary of this use of patriotic imagery to sell beer. In his words, "[to] those in the industry…Koch's product imagery seemed so contrived that spending time with his packaging for Sam Adams was not unlike a visit to Disney World…you couldn't shake the feeling of hollowness under the surface."
I am also not qualified to speak to the truth of such descriptions of a company's advertising strategy. However, what fascinates me is that when Van Munching describes the strategies that propelled Boston Beer Co. to its ascendency as the best selling craft beer brand, again and again the strategies are ones that emphasize the company's brand image. As Van Munching puts it:
…the lure of [craft brews] wasn't just a rah-rah America thing. It was also about the aesthetic pleasures of equipment. Cool looking brewing equipment. The big domestics had long been unable to show their kettles and tanks with straight faces…their breweries resemble petrochemical plants more than anything else…
…[In contrast, craft brewers] like Koch…fell all over themselves to have newspapers photograph them peering out from the inside of shiny copper brewing kettles. You could just about smell the hops in their public relations, and if you had an hour for the tour, you could smell the hops for real.
In the face of such efforts, Van Munching did his best to counterattack. One notable issue with Koch's imagery as a brewer was that "he had brewed his 'Boston' lager in Pittsburgh, PA, right from the start, under contract with the Pittsburg Brewing Company." In other words, it could be argued that Koch wasn't even a brewer because he didn't brew his own beer.
Van Munching eventually learned how "hated Koch was among those microbrewers who actually ran their own breweries." Such microbrewers themselves felt Koch to be the giant of their industry, accusing him of being inauthentic in the same language that he used against the imports. Beer Blast notes that "[craft brewers] loved to point out that for all his talk of product integrity and especially 'freshness' (and how the imports didn't have it), Koch was heat pasteurizing his beer, something considered a no-no by hard-core brewing snobs."
As the criticisms of Koch began to heat up, Van Munching noticed something else: "Proactively, the guy was brilliant…Reactively, he was a bit truculent. (italics in original)" This allowed him to "finally settle on a strategy for dealing with Koch's misleading ads," as he puts it. Van Munching began to attack Koch's image of authenticity, explaining how both Heineken and Samuel Adams were heat pasteurized - thus denying any implication that one was fresher than the other. He also "[pointed] out Sam Adams's Pittsburgh roots whenever possible (explaining in loving detail the difference between a contract brewer and an authentic microbrewer)." Finally, he brought up the fact that the historical Samuel Adams wasn't actually a brewer (but rather a maltster), and the accusation of many craft brewers that Jim Koch had won the title of Best Beer in America by packing the Great American Beer Festival with his supporters. In other words, Van Munching felt that the best way to try and slow the growth of Boston Beer Co. was to attack the company's primary strength - its brand image as a more authentic, superior brewer.
In addition to these direct attempts to disrupt Boston Beer Co.'s brand image, Van Munching also used his superior resources to try to slow down the company's advertising. As he puts it:
We would contact any station carrying both Sam Adams and Heineken advertising and request that they not run any spot that disparaged Heineken unfairly. If they refused, we told them it wouldn't be possible for us to buy their station during any Sam Adams flights. (A flight means an uninterrupted period of time during which your ad is in rotation…)
…this became somewhat of an ultimatum, though we didn't couch it that way.
As Van Munching notes drily, "[being] Goliath sometimes had its advantages."
Such efforts had some success: "Koch started to lay off his more direct attacks on Heineken's ingredients…he wasn't even mentioning [Heineken] by name anymore." Despite that, as Van Munching puts it, "at best [they] muted the damage he did with his initial attacks against [them]."
In reading about this conflict, what's interesting to me is how much Boston Beer Co.'s success was driven by the company's brand image. Of course, as Van Munching puts it, "there was no getting around the fact that Koch and his fellow upstarts-like Pete Slosberg, the creator of Pete's Wicked Ale-just plain made great beer." However, this can hardly be the entire explanation of Koch's success. After all, Pete's Brewing Company, the maker of Pete's Wicked Ale, actually went out of business in 2011 for lack of sales. In contrast, Samuel Adams grew from "less than 500,000 cases" in sales in 1987 to nearly 10.5 million in 2013, an annualized growth rate of over 11%. It's worth noting that in that same time period, sales of Heineken have shrunk from "33.2 million cases" to a little over 22 million, a rate of decline of a little over 1% a year. Clearly, there was something about Boston Beer Co. that drove its success.
Beer Blast implies that what drove the company's success was effective management of its brand image. The company understood what drives people to buy a luxury good like beer, and capitalized upon it. As Van Munching puts it:
Koch went bar to bar selling a little nostalgia. He knew the most important ingredient in beer is romance (italics in original)-that affinity beer drinkers feel for their brand based not just on its taste, but on imagery and heritage as well. Beer, whether it's used as a reward, a relaxant, or a refresher, is a gift people give themselves, and as such, it should be nicely wrapped…and not only in pretty packaging, but also good mental associations, like craft brewing and patriotism.
…the selling of beer should be a sort of seduction, not just of the consumer, but of the bar manager, the store clerk; anyone who had a say in ordering beer.
As the book shows, the company executed this seduction in a number of ways. I have already touched on the patriotic branding and implication of brewing quality. However, the emphasis on superiority, of making the customer want the beer, pervades Van Munching's description of the company's actions. This included pricing - "Samuel Adams's premium pricing, often even 15 percent above Heineken, was meant as proof of quality: you have to pay more, it must be better."
It also included the image it promoted among drinkers: "Koch knew the reason Heineken has always sold better in bottles than on draft, no matter how much better draft beer may taste…[no] one can tell how much you paid for your beer when it's in a glass-you're counting on that bottle on the bar in front of you to show you've got taste…and maybe to show that you've got bucks as well."
Finally, as I've noted, the company's attacks were designed to solidify the image of eliteness. As Beer Blast relates, "Koch once told an interviewer that Heineken was 'the Schlitz of Europe; a beer you buy at a gas station.'" In Van Munching's words, this "neatly punctured the notion that Heineken must be good because it was so popular in Europe (where they know their beer)." In other words, Koch targeted the core of Heineken's brand image, the sense of eliteness, while setting himself up as its replacement.
Or, as Beer Blast puts it, "Koch wanted what [Heineken] had cornered the market on for half a century: mainstream prestige," and he was willing to use whatever tools were necessary to develop a brand image that would give him that prestige. Given the trajectory of Samuel Adams since that quote, it seems clear that he was successful.
This success, I feel, offers a number of lessons to investors. First and most obviously, it shows brand image is extremely powerful. Philip Van Munching implies that Boston Beer Co. became the nation's largest craft brewer not necessarily because it brewed the best beer. Nor was it because the company was the most authentic craft brewer - indeed, Van Munching is only one of any number of commentators who have noted that Boston Beer is not the most ideally authentic craft brewer by craft brewing standards. Rather, the company's success came from the way it shaped its brand image.
Beer Blast also shows how hard it can be to harm that image once it is established. This is, in some ways, a paradox given that the previous section of my article noted how easy it can be to harm a beer company's brand image. And yet, it is possible to see a difference between the kinds of issues that I've noted can sink a brand almost instantaneously, versus those that consumers ignore. The issues I mentioned previously - accusations of dirty water, hazy beer - were visceral and, in some cases, obvious. After all, everyone knows what dirty water is and finds mucus in their beer distasteful. In contrast, the issues Van Munching accuses Koch of having, such as being a contract brewer, are far more nuanced. As a result, they lack the sort of impact that Schlitz and Anheuser-Busch's quality accusations had. Instead, consumers see the obvious aspects of Boston Beer Co.'s products that signal exclusivity and quality, such as its price and branding, and ignore the nuances. Beer Blast shows how difficult it can be to assail a brand image built on such aspects as long as those aspects are well defended, even if there are problems with the nuances.
This lesson, I feel, can be generalized beyond the Boston Beer Co. As I've noted, the entire craft brewing industry is built upon the same brand image of authenticity and eliteness that have propelled Boston Beer Co. to success. Though this image does not guarantee good results - note the aforementioned example of Pete's Brewing Company - it does offer a powerful competitive advantage.
Moreover, this lesson can be generalized to any industry with companies that have strongly developed positive brand imagery. Beer Blast shows that such imagery can be almost impossible for competitors to dent, no matter how hard they try.
Managing Brand Image At Heineken, Or The Importance of Image to Import Brands
Up to this point, the comments I have made about how brand image helps or harms a beer brand probably seem fairly obvious. I think most people know that beer companies sell beer based on intangible psychological benefits, such as the feeling of rewarding oneself after a hard day's work. Though beer is not commonly seen as a luxury good like, say, Chanel No. 5, I think it's well known that many people buy beer for the same intangible feelings that they get from buying luxury goods. As a result, beer companies often draw upon the same ideas as luxury goods companies, such as the ideal of exclusivity promoted by both high fashion companies and craft brewers.
Similarly, the fact that beer companies draw upon associations with positive imagery, such as patriotism or high quality, is obvious to anyone who has seen a beer commercial. A particularly strong example of this tactic is telling customers that a brand of beer is associated with a certain self image. In my previous article, I noted how after Philip Morris (NYSE:MO) bought Miller, the company "used spokesmen who "reeked of masculinity" to reposition Miller's brand from its initially 'slightly effete, largely snobby image.'" Once the company could tell Miller drinkers that drinking Miller made you manly, it was easy to sell lots of beer to everyone who wanted to feel manly, which was much of the company's customer base. In contrast, because Boston Beer Co. was selling to a more limited clientele, it could tell them that they could think of themselves as elite for drinking Samuel Adams, which was also a successful strategy.
That said, though such principles are obvious, Beer Blast shows investors how hard they can be to implement in practice. In the book, corporate managers are often willing to do things that destroy their own brand images, even though they should know better. We have already seen how the quest to cut costs did this at Schlitz. However, Van Munching's book also shows that this also happens for far more idiosyncratic reasons.
Indeed, Beer Blast reinforces something that a number of my favorite investment writers have noted - that the problems, which bedevil a company are often more complicated than anyone on the outside can imagine. As one of my favorite investing bloggers, Nate Tobik of the Oddball Stocks blog, puts it:
As outside investors we can't know everything about what's happening at a company. If we think we do we're deluding ourselves. I worked at a startup out of college that was in many ways run on a shoestring and a lot of hope. We had outside investors who were blissfully unaware of what was actually taking place day to day. At one point we had a massive system crash that destroyed all of the company's data, intellectual property and software…[thankfully] a coworker was able to engineer a solution…but investors receiving quarterly statements they never knew they were hours away from losing everything. Unfortunately many companies are run in the same haphazard way, and we as investors never have any idea.
Beer Blast shows these haphazard issues through Van Munching's stories of what happened after his family company, the US importer of Heineken, was acquired in the early 1990s. Though his stories are no doubt biased by the way his tenure at Van Munching & Co. ended, I think there are still valuable lessons for investors.
Throughout his book, Philip Van Munching emphasizes how everything his family's company did was designed to reinforce the position of Heineken as an upscale beer brand. As he puts it, "class was [Heineken's] unique selling proposition." What this means was that "class meant aspiration," and as a result, "[they] had to portray Heineken and [Heineken's light beer brand] Amstel Light as the highest quality brands in their respective categories." The reason for this is unsurprising. As I've noted, the selling point of import beer was this idea of "classiness" and exclusivity. However, it's interesting how this concept of class infused everything at Van Munching & Company. As Philip Van Munching describes it, the belief at the company was that:
Everything we do must reflect the quality and stature of the brands we sell…[as] the industry leader, we will maintain our office in a certain way, we will pay our bills as soon as they come in, we will behave in meetings with outsiders or when we're out in the trade with a certain level of class.
The value of such cultural aspirations is obvious. The idea of classiness was the essential selling proposition for Heineken consumers. Thus, by teaching employees to defend this ideal in their behavior, the company was also teaching them to defend the company's competitive advantage in their business decisions. Because of this, Philip Van Munching repeatedly describes how his father Leo Jr., the head of Van Munching & Company, was ferocious in protecting this ideal.
Even though this ideal was the key to Heineken's success in the US, once Van Munching & Company was sold to Heineken, thus becoming a part of a larger company rather than an independent distributor, new management showed itself willing to destroy this competitive advantage. The first example of this was a new assistant national sales manager sent by Heineken's headquarters to join Van Munching & Company. The new manager immediately started making "lofty pronouncements about what he would do if it were his company." Most notably, one of this new manager's goals was the introduction of Heineken Light as a line extension to Heineken.
As Van Munching notes elsewhere in Beer Blast, Van Munching & Company had chosen to not introduce a light version of Heineken for several reasons in the 1970s. First, Heineken Light would cannibalize customers of Heineken. As I've noted, many drinkers of imported beer do so because of the sense of exclusivity offered by import brands. Heineken Light would offer the same sense of exclusivity as Heineken, meaning that it would not attract many new customers but it would steal existing ones. Also, as Van Munching notes, "[if] an imported light turned out to be a disaster," it might "[tarnish] the franchise by being so closely tied in." Finally, as Beer Blast puts it, "light beer may have been accepted, but it wasn't exactly seen as high-class by consumers...Leo Jr. was convinced that a beer like Heineken, a beer pitched to customers as uncompromising in its quality, would invite a mountain of cynicism upon itself by being the next 'me too' light beer producer." Because of this, rather than creating a simple line extension like Heineken Light, the company unveiled Amstel Light as its American light beer.
Despite this obvious rationale, which applied in the 90s just as much as it did in the 70s, Philip Van Munching still had difficulty convincing that new manager that Heineken Light was a bad idea. Fortunately, market research also confirmed the threat of cannibalization, preventing additional efforts to introduce Heineken Light. However, this was only the first of many instances in which Van Munching & Co. would be subject to managers with schemes that could damage Heineken's brand image in the US.
Beer Blast describes how such schemes became particularly prevalent after Leo Van Munching Jr. departed as head of Van Munching & Co. This created new challenges in the form of a new head of the company. That new head decentralized the sales department, creating four regional heads of sales rather than leaving such things as pricing and advertising under the control of the national office. This risked damaging the company's image. As Beer Blast notes, "in an image-based category [like beer]…regional management increases your risk of trouble by increasing the number of caretakers of your image. It's hard enough for one centralized team to agree on something as subjective as imagery; it is impossible to imagine any consistency of message when four teams are made responsible."
Beyond creating risks to the company's brand image by decentralizing control of it, the new managers of Heineken's US distributor threatened the brand's image in other ways. As Van Munching relates, "In 1994…the [company's advertising] work had 'a clear, on-target message: Superiority-Heineken is the best beer.' [Research] concluded that the latest advertising had an 'excellent fit with [the] brand image; exactly the approach the leading brand should take…"
Despite that, the new head of Van Munching & Co. kept advocating that Heineken switch to ads more similar to those of its competitors, even though, in Van Munching's words, "what he'd shown me looked like any one of a dozen candy bar commercials currently airing on TV." Van Munching also notes that he felt that such an advertising change would threaten the company's image, given that "every other importer who'd adopted hip, flashy advertising…was in serious decline." As he puts it with clear irritation, maybe he should have "[pointed] out that with sales growing at between 6 and 10 percent annually, maybe customers were responding pretty well to the approach [they] were taking."
Van Munching encountered similar problems with the company's new marketing director, who had also been sent from corporate headquarters in Holland. This director, as Van Munching puts it, "started indicating an affection for all things foreign," which meant that he advocated a "global advertising program."
Beer Blast is clear on what Van Munching saw as the problems with such a strategy. Such a campaign "[meant] that the consumer in Holland, who viewed Heineken in much the same way we view Budweiser (from the standpoints of market share and price) might soon be seeing the same ad as an American, who was being asked to pay a premium for it." As Van Munching notes, this "presupposed enough cultural similarities that one message would carry appropriate meaning in every nation…[and] guaranteed a watering down of the brand's attributes to appeal to the widest range of people, probably to the point of meaninglessness." Moreover, there was the obvious risk of damaging Heineken's position as an upscale brand by using a message intended for a mass-market brand to advertise it.
Fortunately, in Van Munching's eyes, this idea, like the idea of Heineken Light, was eventually shot down by research. However, not every potentially damaging action was similarly prevented. One initiative was to use a filled in version of Heineken's red star outline as a defining logo, like Nike's swoosh, and to use it alone in an ad. Van Munching argues that the problems with such an approach were obvious. First of all, as he puts it, "it never occurred to anyone…that Nike spent many years and hundreds of millions pushing their distinctive swoosh before ever allowing it to appear alone in an ad." More importantly, "the red star was already equated with other things…: Macy's, Pellegrino…and Communism." Perhaps unsurprisingly, the red star advertising initiative was a failure.
Another failure for Heineken's new managers in the US was its attempt to launch a Bavarian style bock beer: Heineken Tarwebok. This new beer was intended "as a potential credibility builder for Heineken…[to] combat the Jim Koch-inspired notion that Heineken's size as a brand rendered it somehow less sophisticated than a so-called microbrew." The only problem with this was that Heineken Tarwebok did not taste like actual bock beer, but was instead sweeter and milder. In other words, as Van Munching puts it, "[the company] failed before [it]'d started, because the heavy microbrew drinkers…weren't impressed by the taste of Tarwebok," at least in part because it didn't taste like actual bock beer. Despite having much of Heineken USA's limited advertising budget devoted it, this new product launch was a failure.
Indeed, Beer Blast describes how the new management of Heineken's American distributor harmed the company's image of authenticity in more ways than just the botched launch of Heineken Tarwebok. My use of the name "Heineken USA" in the last paragraph is indicative: In the mid-90s, the name of Heineken's US distributor was changed to that from "Van Munching & Co." Philip Van Munching argues this should not have happened because it was imperative that the company not be called "Heineken North America, or Heineken USA" because "you might convince people that you're now brewing domestically…so why should they pay more?" Unfortunately, he wasn't consulted on the name change.
The fact that, as he puts it, none of the new managers "had bothered to tell [him] that after sixty years, [his] family's name was coming off the door" was, in his words, "a measure of how far [he'd] fallen in their eyes." Perhaps unsurprisingly, Philip Van Munching departed Heineken USA soon after. However, before doing so, he saw the company continue to do potentially damaging things to the brand's image.
Specifically, the company switched to a new advertising agency, which "held 'Heineken Nights' at bars across the country and, in return providing the beer, got consumers to agree to have their conversations taped. From the transcripts, the agency fashioned a number of thirty-second ad scripts."
The problem with this approach, he argues, was that "[the] conversations themselves…were not particularly classy." One advertising critic called it "mind boggling…that Heineken would identify itself with these unhappy, inarticulate, semiliterate, unemployed, sexually frustrated, and generally embarrassing characters."
This was not the only example of an initiative in which Heineken USA gave up the company's classy selling proposition in favor of a more lowbrow approach. The company also sought to make the company's light beer brand, Amstel Light, "more approachable and fun." As Van Munching puts it, "[this] was exactly what Amstel Light should not be…[because] Amstel Light was created to be an aspirational version of what is traditionally already seen as an accessible category. (italics in original)" After this initiative was launched, Amstel Light's sales growth not only failed to increase, but actually fell.
Philip Van Munching's criticisms of Heineken USA's new management is no doubt influenced by his bitterness towards the way he left the company. As he portrays it in Beer Blast, the company brought in new management that didn't know anything about the business of selling Heineken in the US. In his mind, this new management then forced him and the other members of his family out when they sought to raise objections to initiatives that would damage the company's brand. Because of Van Munching's perspective, it is obviously necessary to take his comments with a grain of salt.
And yet, his criticisms do have a degree of internal consistency to them. His logic about why certain initiatives risked Heineken's brand image seems reasonable. For example, his criticisms of the name change to Heineken USA are reasonable given how earlier in Beer Blast, he described how Guinness ran into difficulties when it tried to brew its beer in New York. As he puts it, "no one cared much about an 'Irish' stout brewed near the East River." It makes sense that any name choice, which would imply such a local origin for Heineken's beer, should be avoided.
Moreover, at least from my perspective, Van Munching's other criticisms also make perfect sense - an aspirational brand does harm its brand image if it starts acting exactly the same as all of the other brands. As a January 2015 CNBC article notes, this is exactly the problem, which Coach (NYSE:COH) now faces "as a result of…overdistribution and damaged brand equity from its high presence at outlet malls." In other words, Coach is being accused of having made itself too common and of competing with mass-market brands rather than preserving its air of exclusivity, the same thing Van Munching accuses Heineken USA of doing.
If Van Munching's criticisms are accurate, Beer Blast shows how executives who should know better are often willing to destroy their companies' competitive advantages for idiosyncratic reasons. Van Munching argues that the reason why marketers make pointless, even destructive changes such as the ones he describes is because they need to be seen as doing something. For example, the public relations person at Heineken USA once explained a change in Amstel Light's packaging to him by simply saying "You know how people like to look busy."
As Van Munching puts it, he "[suspects] that the marketer of today is afraid to go to an interview for the next job and say 'Well, I've spent the last few years as a caretaker for a brand image created before I arrived on the scene.'" This is a particular problem, I feel, for brands like Heineken, given that Van Munching notes that "keeping Heineken viable as a brand…was not brain surgery." In other words, it did not require any particularly heroic changes and any attempts at such changes could only damage the brand.
Indeed, Beer Blast directly addresses this point by quoting Al Ries, a marketer who noted:
Marketing ought to be like flying…once it reaches an optimum market share, a company should throttle back the marketing program and make minor corrections only.
If many marketers were at the jet's controls, though, they would first try 35,000 feet, then 25,000 feet. They would speed up, then slow down the engines, and maybe try a few banking maneuvers. All the while, they would interview passengers for their input.
If Van Munching's argument is true, such a lesson is valuable to investors in every industry, and particularly the luxury goods industry. That industry is built entirely around the intangible psychological benefits customers get from buying its goods. Moreover, such benefits often come from the air of classiness that comes with many luxury brands, an air that has been built on decades of history and brand associations. Despite that, Beer Blast shows through the story of Philip Van Munching's last years at Heineken USA how executives are often all too willing to destroy such advantages for idiosyncratic, often personal reasons.
Moreover, such personal reasons can inspire unnecessary changes on the part of non-marketing executives and those in other industries as well. After all, the desire for a new manager "to look busy" is hardly limited to marketers or luxury industry managers. Indeed, I think a common fallacy on the part of many investors is that new management can come sweeping into a company to drive the company to new heights by making changes. Philip Van Munching's story in Beer Blast about what new management actually did at Heineken's US distributor, I feel, shows the weaknesses of that belief.
Though Philips Van Munching's book Beer Blast particularly targets marketers in its analysis of brand image, I feel that its lessons are valuable for investors in considering all of a company's executives. As we have seen, a management excessively focused on changing a company through cost cutting can gut the company's brand image, resulting in long-term disaster. Similarly, managers who should know better are often willing to make decisions that harm a company's brand image for such personal reasons as the desire to be seen as making a difference.
In contrast, through the story of Jim Koch and Boston Beer Co., Beer Blast also shows how valuable a strong brand image can be. As a recent Boston magazine article notes, "Koch…[has] expertly [cast] himself as an eternal underdog" in promoting his beer, such that even a bartender who refuses to serve Samuel Adams Boston Lager acknowledges that "he is smarter at marketing and developing a brand and recognizing what the consumer and average American wants to drink. He's the best at it there ever has been." Indeed, both the article and Beer Blast imply that the success of Boston Beer Co. hasn't necessarily been because the company's beer is so much better than that of other craft brewers - though both note that it is still quite good. Rather, they seem to argue that what has put Koch above other craft brewers has been his success in managing the company's brand image.
Koch's example is, I feel, useful to investors in any industry. Value investors such as myself often underestimate the value of brands, instead focusing on tangible, quantitative measures of a company's attractiveness as an investment. In his recent retrospective on the past 50 years of Berkshire Hathaway, Warren Buffett notes that he had difficulty paying "three times tangible net assets" for See's Candy despite the company's "broad and durable competitive advantage that gave it significant pricing power."
This advantage was, of course, the company's brand image, which was strong enough for Buffett to joke that "In California the girls…kiss you when you bring See's [on a date]." I feel that the story of Boston Beer Co. told in Beer Blast is a similarly evocative description of the power of a strong brand image. The difference is that in the case of Boston Beer, that illustration comes with the example of Jim Koch, who shows how a strong owner-operator can make that brand image into a national phenomenon.
Finally, by showing these examples of failure and success in brand image management, I feel Beer Blast continues to emphasize a theme which I noted in my previous article - that change for the sake of change can be ruinous. Van Munching's criticisms of management at Schlitz and Heineken USA focuses almost entirely on unnecessary changes that damaged their brand images. In contrast, he consistently praises Jim Koch and other craft brewers for sticking to a consistent brand image.
As I noted in my previous article, Van Munching's observations on change are valuable to investors so that they can be on the lookout for such unnecessary and dangerous changes in the companies whose shares they own. Moreover, they are also valuable to investors so that they can understand and avoid the temptation of excessive change in their own portfolios. If such a lesson were the only lesson offered by Beer Blast, I feel it would still be a valuable read for every investor. Instead, it is only one of many valuable lessons for investors offered by Van Munching's book.
The risks of corporate change will come up again in the third and final installment of my series on Philip Van Munching's book Beer Blast. In that installment, titled "Examining The Beer Industry Through Philip Van Munching's 'Beer Blast': The Risks of Growth," I will describe how Beer Blast discusses a type of change that most investors like, namely growth. Van Munching's book offers surprisingly negative examples of growth and shows how growth initiatives in the beer industry, particularly growth by acquisition, have been far more problematic than one would imagine.
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