There is a running theme in my articles about Beer Blast, Philip Van Munching's history of the beer industry in the late 20th Century. That theme is that change is often bad for companies.
In my first article about the book, I described how companies' introduction of new products often only damaged their brands. In my second, I showed how trying to change a beer brand's qualities to save money or to make it more modern also damaged their brands. In both of these articles, change was bad for beer companies even when it was desired.
Growth is probably the type of change that companies desire most. Growth, after all, is what drives stock prices up. When a company is growing, it can hire new employees and promote old ones. And, of course, leading a growing company brings benefits for management. Managers, like most people, enjoy seeing their areas of responsibility expand. Such expansion comes with bigger salaries and higher status in their industries. No wonder corporate executives are always trying to grow their companies.
However, Beer Blast shows that even growth, the most desirable form of change, can be more problematic than anyone can imagine. In his book, Van Munching tells the story of G. Heileman, a brewer who used "value investing" techniques to grow quickly and cheaply through acquisition. This growth led to the company's demise. Van Munching also relates how Heineken (OTCQX:HEINY) (OTCQX:HINKF) grew by taking over Van Munching & Co., his family's company and the distributor of Heineken in the United States. His story of the acquisition warns how even the most seemingly obvious acquisitions can be fraught with drama. Finally, Van Munching shows that organic growth can also be surprisingly difficult by describing the nationwide roll-out of Corona beer, and the challenges of growing that beer's national footprint.
G. Heileman: Value Investing Runs Into Trouble
To me, the story of G. Heileman Brewing is one of the most interesting in Beer Blast. That is because I am a value investor, and the company's tactics as described in Philip Van Munching's book seem to be a perfect application of value investing principles. A he puts it, the company "made its fortunes as a carpetbagger":
When the national brands forced regionals into bankruptcy, Heileman often stepped in, buying the regional for a song and appropriating its labels into Heileman's large brand portfolio.
…by buying regional breweries on the edge of financial collapse, Heileman could land additional brewing capacity…at fire sale prices.
…in 1973, Heileman was paying $3 to $4 a barrel for increased capacity, where Anheuser-Busch was paying $35 to $38 a barrel…
In my mind, this is a perfect example of value investing - buying assets on the cheap when their prices are depressed by outside factors. The company even expanded its margin of safety by selling excess assets, lowering its effective purchase price of the assets it did want even more.
And yet, Heileman's strategy of cheap acquisitions would eventually lead to the company's failure. The company was blocked from further acquisitions in the 1970s and 1980s by the Justice Department, which cited antitrust concerns. The company had also run out of small, failing regional breweries to buy.
Once this happened, Heileman was in trouble. As Beer Blast puts it, the company found itself owning "a jerry-built company of fair-to-middling brands that had withered for lack of attention" during the company's acquisition streak. Because the company had not paid attention to the need to support its brands through marketing and advertising in addition to buying them, demand for those brands had crumbled. Heileman's major problem now wasn't buying new brewing capacity - it was finding the demand to use the brewing capacity it had.
Suddenly, the company's strength - the large network of breweries it had purchased on the cheap - became a weakness. The company couldn't close breweries and consolidate because of the economics of beer: "…closing some breweries would mean brewing brands meant for one part of the country in some other part and then going to the extra expense of shipping them." Those shipping costs were prohibitive for non-premium brands like those Heileman sold.
Instead, the company tried to boost volumes through line extensions and discounting. In my first article about Beer Blast, I described the issue with line extensions, or using existing brands to sell new types of beer. Line extensions often encourage drinkers to look for new varieties rather than sticking with existing brands. This dilutes the value of those existing brands. Unsurprisingly, line extensions did not save Heileman.
Neither did discounting. In my second Beer Blast article, I described how a premium price can be valuable to a beer company. In that article, I argued that beer is an affordable luxury good. As Van Munching puts it, it is "the reward you [give] yourself at the end of the day." Because of this, people are willing to pay up a little for beer. They do so as long as it gives them the intangible benefits of a luxury good. A premium price offers such benefits, such as the opportunity to feel classy and indulgent for a moment.
Because of this, discounting can "cheapen…brands image-wise, not just cost-wise." After all, by discounting a beer brand's price, you risk telling drinkers the brand is cheap. In other words, you risk telling them it's not a classy indulgence. If you do that, you strike at the fundamental reason why many people drink.
As Van Munching puts it:
There is almost no coming back from price discounting in the eyes of the public, as anyone who's ever sold anything well tell you…
…Once someone gets used to paying less, why should they ever pay more? You've convinced them your brand isn't worth it.
Unsurprisingly, G. Heileman's discounting strategy was unsuccessful. It was particularly unsuccessful because of the beer industry's inherent qualities:
In the beer business, the problem [with discounting] is exacerbated by the levels of distribution: the brewer sells to the wholesaler, who sells to the bar/restaurant/liquor store/grocery store, who sells to John and Jane Q. Public. The two middle levels build their margins in and are loath to cut them. This is especially true in bars and restaurants, where there's often space to carry only a limited number of brands. Why should the bar manager carry your discount brand when he can charge far more for a premium-price brand? He shouldn't, and he won't.
Unsurprisingly, discounting could not save Heileman from the hole it had dug for itself. The company was acquired in 1987 by Australian conglomerate Bond Holdings Ltd. G. Heileman went into bankruptcy in 1990. Bond Holdings joined it the next year. One account of Bond Holdings strongly implies that G. Heileman's decline helped push the Australian conglomerate into insolvency.
I feel G. Heileman Brewing's story, as told in Beer Blast, offers important lessons for value investors like me. Value investors love companies that buy assets on the cheap. For example, a perennial value investing favorite is the conglomerate Loews (NYSE:L). In the 1980s, Loews famously bought the rigs that are now part of Diamond Offshore (NYSE:DO) for pennies on the dollar because they were about to be scrapped. Value investors not only love to buy shares in such companies; they also love to copy their managers by buying assets with depressed prices for their own portfolios.
G. Heileman's example shows the problem with this: you may end up with a collection of mediocre assets. This is true for individual investors, who can find they own a random collection of companies with low returns on invested capital and poor competitive prospects. Those companies may have sold at low price-to-book and price-to-earnings ratios, but they often lack the ability to compound investors' wealth.
Investors can at least sell such stocks, often at a premium when the market is in one of its exuberant moods. However, G. Heileman's story shows how this issue is even more problematic for companies. Companies saddled with a collection of problem assets purchased on the cheap often use up years fixing them. Loews is a company whose behavior I seek to emulate, but it is clear that it has had this issue too. The company's majority-owned insurer, CNA Financial (NYSE:CNA), has suffered years of underwriting losses. Loews may have bought the company on the cheap back in 1974, when it approached insolvency, but the Loews' management has been dealing with its problems ever since.
I think G. Heileman's example also shows how value investing's strategy of buying assets on the cheap is particularly problematic in dealing with luxury goods companies like brewers. Value investors often end up buying "a fair company at a wonderful price" rather than a "wonderful company at a fair price" as Warren Buffett puts it.
This is a problem when investing in the luxury industry. That industry is built on its products' psychological impact on customers. The fair company's brands usually lack the same impact as the wonderful company's brands. That means that the fair company has to do other things to compete, such as selling to a niche market or discounting.
This is not only difficult, but also sometimes damages the company's brands. At the very least, it means that the fair company can't earn the same returns as the wonderful company. That means that the wonderful company will often deliver better results to investors than the fair company even if the wonderful company was purchased for a higher price.
Now, of course, that doesn't mean that investors should be willing to pay any price for high-quality companies. It is true in theory that companies with higher returns on investment should eventually perform better than companies with weaker returns. However, if you pay a high enough multiple for those wonderful companies, it could take decades for them to outpace their fair rivals - and who knows what might happen to those wonderful companies in the meantime?
Instead, I simply feel that G. Heileman's story is a warning to investors not to fall into a common trap associated with value investing. A cheap price may be the most important part of a good investment. After all, a cheap price gives a margin of safety, which is one of value investing's most important concepts. However, investors chasing cheap prices should be careful that they don't end up buying cheap, low-quality assets. In investing, you want to avoid the principle that "you get what you pay for."
Heineken USA: An Acquisition Runs Into Trouble
The story of G. Heileman shows the risks of buying low-quality assets, even at rock-bottom prices. However, even buying high-quality assets led by capable managers can be surprisingly problematic. This can be seen in Philip Van Munching's story about the acquisition of Van Munching & Co., his family's company and the US distributor of Heineken.
A persistent theme of Beer Blast is how Van Munching & Co.'s leadership constantly promoted Heineken's brand image in the United States. One way it did so by creating a company culture where "the belief…was that: [everything it did] must reflect the quality and stature of the brands [it sold]."
Van Munching's description of this culture is no doubt biased. He was, after all, the company's head of advertising. Much of the culture he describes came from his own father, the company's longtime CEO. Moreover, since his tenure at the company ended badly, Van Munching has a reason to idealize its pre-acquisition days. However, Philip Van Munching offers enough details that his description is believable. For example, this is how he says the company's employees interacted with restaurants that carried Heineken:
We were trained to "trade with those who trade with us" and eat business lunches in restaurants that carried our brands. We learned to ask to see managers, so that we could thank them for their business, and ask them how things were going and if there was anything we could do for them. Because of that, we were treated like royalty; we didn't wait for tables, desserts would come on the house.
It seems unlikely that an anecdote like this illustrating the Van Munching & Co. culture could be entirely invented. If it is real, it shows how employees were taught to constantly check up on customers, who appreciated this concern.
Beer Blast describes how this emphasis on constant customer interaction went beyond a few business lunches. For example, he mentions the company's internal sales force several times in the book, describing it as "[the] secret to Heineken's success." As he puts it:
Unlike any other importer at the time, and unlike most domestic brewers even today, Van Munching & Company built a national sales force independent of wholesaler personnel. Not just regional managers, but street guys who pounded the pavement every day, taking orders to be filled by local wholesalers and solving problems. Sure, it often amounted to checking up on the wholesalers, but it also provided them with extra manpower (which they didn't have to pay for) and, more important, extra order pads. The complaints were minimal.
And the rewards were maximal.
Though Van Munching never explicitly outlines those rewards, the implication is obvious. Such a sales force would cause wholesalers to work harder - the "checking up" Van Munching alludes to. It would also let Van Munching & Co. respond to customers' needs more quickly. It is worth noting that when Van Munching describes Jim Koch, the head of Boston Beer Co. (NYSE:SAM), as a "marketing genius," he cites Koch's willingness to "[spend] his days on barstools, convincing Boston's pubs and restaurants to take his product." This was the sort of thing Van Munching & Co.'s own sales staff did. Van Munching also emphasizes high-quality sales tactics' importance to his company's success by noting that "Van Munching & Company was first and foremost a selling organization."
In this context, Heineken's 1991 acquisition of Van Munching & Co. should have been easy. Van Munching & Co. had a strong corporate culture focused around protecting its product's main selling proposition - imported beer's image of superiority. The company also had a natural competitive advantage in its entrenched sales organization, which few other brewers had. Finally, the acquirer was intimately knowledgeable about the acquired company, having worked with it extensively.
Moreover, Heineken was growing well in the United States, averaging sales increases of 5-10% a year. After stiff competition against new rivals such as Corona in the 1980s, "Heineken started the nineties in much the same way it had started the eighties: outselling the nearest competitor by a margin greater than two to one." Thus, new management had time to settle in without having to deal with any immediate emergencies, making possible a smooth transition.
That transition should have been even easier because Leo Van Munching Jr., Philip Van Munching's father, was planning to stay for at least three more years as the company's head. Given that Leo Jr. had built much of the culture that had made the company successful, this seems as if it should have ensured a smooth changeover. This is especially true given that his sons Philip and Christopher would also stay to help guard the company's culture.
And yet, as Philip Van Munching describes in Beer Blast, trouble appeared almost immediately. I have detailed many of the actions of Van Munching & Co.'s new management in my previous Beer Blast article. It is not necessary to repeat them here. However, as I noted in that article, Van Munching argues persuasively that the new management proved itself willing to damage Heineken's brand image in the United States for various reasons. This was only one of the issues that bedeviled Van Munching & Co.'s acquisition.
I feel Beer Blast's description of the issues that plagued Van Munching & Co.'s acquisition is important to investors. That is because they are issues that probably affect every corporate acquisition. At least from my perspective, the issues related in the book touch on fundamental difficulties in integrating two companies, particularly when new management is involved.
Probably the most important issue was the new management's desire to make changes, even when they were unnecessary. Van Munching describes an incident in which it criticized him for implying that no major changes were needed because the company had been doing well before its acquisition. As he puts it, it said he was "too kind to [his] father" in an interview where he was "asked how the company had become so successful." Van Munching cites his superior, the company's marketing director, as later explaining that "he'd been under orders to send the [criticizing] fax." According to him, "[Van Munching's] mistake had been in challenging the view that the company had been floundering before the new management came to the rescue."
Of course, the only evidence for this exchange is Van Munching's recollection. However, it is true that a reason often given for acquisitions is that the acquirer can make beneficial changes. In that context, it is certainly plausible that when no such changes are needed, management might pretend such changes were required to justify its own paychecks. Warren Buffett mocks how this attitude is sometimes applied to family-run companies like Van Munching & Co. by comparing such companies to a painting. As he puts it, most buyers are like "a porn shop operator…[who]'ll take the painting and make the boobs a little bigger."
Now, obviously, Buffett's description is self-serving. After all, the buyers he criticizes are his rivals in acquiring companies, and with fewer rivals, he will be able to pay less. Moreover, the rivals he criticizes are private equity firms, who have different goals than a strategic acquirer such as Heineken. That said, I feel it is a valid argument that acquirers sometimes make unnecessary changes.
I particularly think this is a valid argument in the context of one particular change that Van Munching & Co.'s new managers made. That change was to lay off much of the company's sales force in favor of newer employees. As Van Munching puts it, the company's new head argued that the company's organizational problems included "an 'aging' workforce [and] 'no labor turnover." As he notes bitterly, this was "accountant-speak for 'Hey, we could boost profit if only we could pay starting salaries, instead of having to pay all these people who've made a career here.' Suddenly the experience of the salesmen in the trade - something that had long set the company apart from its competition - was deemed an extravagance by the new guy."
Again, it is hard to tell how much of this bitterness is warranted and how much is colored by Van Munching's personal perspective. However, this criticism is consistent with the impulse I just described. It would make sense that the company's managers wanted to justify their own usefulness by making changes in the form of cost cuts. After all, cost savings are an often stated reason for acquisitions. If no such savings are possible, it is not implausible that some managers would try to find them anyway.
Moreover, as a general rule, I find Van Munching's criticisms persuasive because of their internal consistency. As I've noted, a major theme of Beer Blast is how companies change for the sake of change, often with negative results. Van Munching's comments about the new management focus relentlessly on this theme. He cites many examples in which the new managers wanted to make changes rather than taking advantage of local experience.
Indeed, it is interesting that he even illustrate this theme with the new brand managers hired by the company. He uses them as an example even though they were his subordinates rather than the superiors he generally criticizes. In his words, after starting their job, these managers immediately "set out to rethink the way we sold our brands, largely consulting books rather than the [existing Van Munching & Co. managers] who'd spent a combined three decades in the trenches."
Because of the consistency of his comments, I am persuaded by Van Munching's criticisms of managers' tendency to make unnecessary changes. However, even if one disbelieves Van Munching's criticisms, it is clear that there were significant clashes at Van Munching & Co. after the company's acquisition. Within a couple of years of their father's departure, both Philip Van Munching and his brother Christopher had also left their family company.
I feel such clashes offer a worrying lesson to investors about corporate acquisitions. As I've noted, the acquisition of Van Munching & Co. should have been easy. Not only was the company doing well, but existing management was willing to stay and guide the transition. Despite that, Beer Blast shows that the acquisition was fraught with strife, which led many important former employees to leave.
Now, of course, it is certainly possible that Van Munching & Co. did have serious problems that required major changes to fix. In that context, Philip Van Munching and his brother might simply have been malcontents who were unwilling to adjust to a new environment. However, it is also worth noting that Van Munching & Co. kept Heineken as the number one import beer in the US for all of the 1970s and 1980s. This was a period of major change in the beer market. It seems unlikely that such performance would have been possible if the company was riddled with problems that needed drastic changes.
If Van Munching's criticisms are broadly true, then Beer Blast offers a valuable illustration as to why corporate acquisitions are often difficult. It shows that managers are often incentivized to make unnecessary changes when they acquire companies. Such changes can alienate the acquired company's employees and drive them away. These changes can also damage the company's brand image and competitive advantage since new managers often lack the local knowledge to make changes effectively.
Even if Van Munching's criticisms are not true, it still implies that the transition period after an acquisition is extremely difficult. Key personnel may disagree with the company's direction and leave. It is often hard to tell if such problems will appear.
Either way, given how comparatively easy the Van Munching & Co. acquisition should have been, it seems reasonable that Beer Blast illustrates issues that affect all acquisitions. Certainly, there is evidence that acquisitions are often so problematic that they destroy shareholder value.
A recent National Bureau of Economic Research article argued that "over the past 20 years, U.S. takeovers [by large companies] have led to losses of more than $200 billion for shareholders." Even a CFO Magazine article that opposes the argument that acquisitions destroy shareholder value admits that "about 60% of acquisitions [studied] failed to create value."
The reason often cited for this value destruction is culture clash. A 2011 Aon Hewitt survey on merger and acquisition issues relates that "[nearly] 50% of companies in [its] survey reported that they had failed to achieve stated objectives in past transactions." The survey's top 10 drivers of this failure included things such as "Poor/misinformed strategy," "Insufficient attention/priority to workforce/people issues," and "Cultural integration issues."
These criticisms read like a litany of what Van Munching criticizes. What is valuable about Beer Blast is that it translates the dry statistics about the problems with acquisitions into a lively, readable account. After all, these days, everyone understands the issues with acquisitions. And yet, questionable acquisitions keep happening.
That is why I feel Beer Blast is valuable to investors. Van Munching's book shows investors why acquisitions are often so problematic. As I've noted, the theory is well known. However, the book shows what happens in practice when companies are acquired, and the challenges that occur even when the acquisitions make perfect sense. Hopefully, the next time managers announce an acquisition, investors will think back to the examples offered in Beer Blast and be appropriately skeptical.
Corona: Organic Growth Runs Into Trouble
If Beer Blast persuasively argues that growth by acquisition can be more problematic than anyone might imagine, it also shows that organic growth can be surprisingly hard as well. One example of this is Philip Van Munching's story of the growth of Corona.
As Van Munching tells the tale, in the late 1970s and early 1980s, "Corona started its ride…as a quirky little alternative beer in Texas and California." The beer was very light, at a time when light beer was first becoming popular. As Van Munching describes the scene, "Yuppies…[were] the import beer trendsetters of the early eighties" and "young urban professionals often seemed to gravitate towards brands that would allow them to spend more money without forcing them to move away from middle-of-the-road tastes." In other words, they wanted light-tasting imported beer - like Corona.
Another appeal of Corona was that it was "perfect for the younger drinker of the time, who was looking for more of what marketers call an 'external product benefit' than the traditional import drinker." Van Munching translates "external product benefit" as "fancy lingo for packaging bells and whistles." In his words, "[the] package was fabulous - a clear glass long neck with a painted-on blue and white label - and, at the time, one of a kind."
Because of these qualities, Corona exploded in popularity. Corona's distributor "Barton Beers rolled the brand across the West and Midwest and watched the sales go from 1.8 million cases in 1984 to 5 million cases in 1985 to 13.5 million in 1986." The growth of Corona seemed like a perfect example of successful growth in the brewing industry. A new brand of beer had taken advantage of changing tastes to massively expand sales.
However, Beer Blast shows how, even with all of these factors favoring it, Corona still ran into difficulties with its growth.
These difficulties revolved around transshipping. Barton Beers had expanded Corona's availability in steps, taking advantage of the beer's scarcity to create interest in new markets. In doing so, the importer's wholesaler network also fulfilled a variety of responsibilities. As Van Munching puts it:
A wholesaler network brings order to the marketplace. You, the supplier, deal with your wholesalers on issues of quality control, marketing, etc., all with an eye toward sustained, long-term growth. You work together out of mutual interest...
Unfortunately, though Barton Beers had been successful in the West and Midwest, Corona's brewer decided to handle its own importing east of the Mississippi. In doing so, there was a delay in introducing Corona to those territories. That delay caused some places to turn to transshipping to get Corona. This created problems, as Van Munching describes:
Transshipping…is chaos. What it means is that a wholesaler (or any third party with a truck) in one territory sells product to a wholesaler in another territory, without the consent of the supplier.
…it's a nightmare for the supplier, because it removes any chance at quality control. A fly-by-night operation selling transshipped beer is not going to perform basic services for accounts, like picking up beer that's gotten old; worse still, there's every likelihood that he's selling old or bad beer to begin with…
Transshipping damaged Corona's most important competitive advantage, its appearance. In Van Munching's words, "the bottles, long Corona's biggest selling point, looked like hell by the time they hit the bartops of Manhattan." This also created additional image problems since "the result was a belief among some drinkers that the brewery was not the most sanitary place." At its worst, this feeling "turned into a full-fledged rumor in 1987 that Corona had urine in it."
Fortunately, the urine rumor was quickly quashed. However, transshipping also created problems with the beer's other main selling proposition, its price. One reason why Corona was appealing was, of course, its high price as an import. This was a status symbol. However, transshipping drove this price so high that even those looking for a higher-priced product were turned off. As Beer Blast notes, since "Corona was often literally sold off the back of a truck…savvy bar owners knew that with such spotty distribution, Corona pricing could be jacked up."
Thus, transshipping damaged both sources of Corona's competitive advantage - its appearance and its price. Van Munching attributes this damage to the decision of Corona's brewer to "cut out the middle man" by creating its own importer, Gambrinus Importing.
Beer Blast quotes "one wholesaler who worked with Gambrinus" as saying that "'These guys absolutely were not geniuses or students of the industry.'" Philip Van Munching never explains the problem with Gambrinus. However, it can be implied that they either moved too slowly or lacked the local knowledge to distribute Corona effectively, given that Van Munching describes them as "[dithering] over wholesaler agreements in the East" while Corona "was already being distributed there in the worst possible way: transshipping."
Beer Blast's story about Corona's growth is interesting to me because it reminds me of Heineken's purchase of Van Munching & Co. In both cases, it seems like growth should have been easy. The Van Munching & Co. acquisition, as I've noted, had many factors in its favor. Similarly, Corona's growth was supported by cultural reasons that should have made it simple to expand its scope.
In both cases, though, the brewer made decisions that created problems for growth. In Heineken's case, local executives in its US offices made the decisions while Corona's bad decisions were made by central management. Interestingly, in both cases, the decisions occurred after the brewer involved itself at a more local level in the product's marketing and distribution. As I noted in my last Beer Blast article, the new managers of Van Munching & Co. changed the mix of products offered in the US as well as their packaging and marketing. They ran into problems doing so because they lacked local knowledge and experience. Similarly, Corona's brewer had problems importing the beer itself because it lacked the necessary local knowledge and distribution skill of an existing beer importer.
Certainly, local knowledge and distribution skill were critical in Beer Blast's example of an unquestionably successful import beer roll-out in the US. That was the roll-out of Canadian beer Molson Golden, now produced by Molson Coors (NYSE:TAP), in the 1970s.
Like Corona, Molson Golden benefitted from word-of-mouth advertising from people living on the border. In this case, it was college students going to schools near Canada who brought the beer home on vacation. Similarly, like Corona, the beer benefitted from its scarcity and the fact it was a fairly light beer.
Despite that, Beer Blast implies that Molson Golden would never have become popular in the US without the local knowledge of its US distributor, Gerald Regan. Regan insisted on importing Molson Golden in addition to the heavier beers pushed on him by Molson's corporate office. Regan also understood the value of import beer imagery in the United States, so he "convinced Molson to switch from its drab brown to the brighter green of the Heineken bottle." As Beer Blast puts it, he even "knew a thing or two about distribution as well." Because he managed Molson Golden's expansion to be not too fast and not too slow, he successfully made it the second most popular import beer in the US before Corona's introduction.
The story of Molson Golden's successful US introduction offers some worrying lessons to investors. As Van Munching tells it, the roll-out's success was because of Regan's leadership. Of course, Van Munching is probably biased, since Regan was a former Van Munching & Co. employee. Van Munching has reason to speak well of his former family company's former employees. Moreover, as a former beer importer employee, Van Munching is no doubt inclined to attribute imported beers' success to their importers' heroics. That said, if his story is even partly true, it implies that companies' growth successes, even in large markets, might be attributed to fairly unknown managers.
After all, Regan wasn't a Molson employee. He led his own importer, which imported Molson Golden to the US. Even today, it might be hard to learn about someone like him, given that he led a private company and didn't have any previous experience as a CEO.
This is a problem. Beer Blast seems to imply that figures such as Regan can make or break a company's growth efforts. However, it is difficult for even the best informed investor to learn about figures like Geoffrey Regan, even if they prove important to companies such as Molson. Does a well-informed investor need to understand not only the individual qualities of his holdings' executives, but also the qualities of the executives of their major customers? If so, what happens if those qualities can't be inferred from publicly available information?
I don't have an answer to that question. However, the near impossibility of this sort of due diligence reminds me of a story I related in my most recent Beer Blast article. One of my favorite investing bloggers, Nate Tobik of the Oddball Stocks blog, described how he once worked at a startup. The startup almost collapsed one day, and was only saved by an employee's efforts. In Tobik's words, investors never "knew they were hours away from losing everything." Because of this, Tobik says that "[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 think this is why growth ended up being so difficult for the companies profiled in Beer Blast. Companies are complex beyond imagining. A myriad of inputs goes into their success. Such inputs include the abilities of their employees, the skills of their competitors, and even cultural trends. Growth adds even more factors into the mix. It is nearly impossible to know the factors that will cause a company to grow or not grow. As Beer Blast shows, these factors are affected by employees' incentives, which sometimes aren't aligned with those of shareholders'. This makes growth often far more challenging than expected. It also makes it difficult for investors to know if a company will grow successfully.
That said, Beer Blast does offer some signals for investors to consider about whether a company's organic growth will run into difficulties. Molson's growth is described as slow and measured. As Beer Blast puts it, "Regan stage-managed Molson's growth a few markets at a time." In contrast, Corona's growth is described as rushed - Van Munching even uses the words "out of control."
Of course, it is hard to tell if external factors may have influenced this difference in the two beers' growth strategies. Corona seems to have become more popular faster, and thus may have needed a faster growth strategy. However, this dichotomy between rushed, unsuccessful growth and slow, methodical, and successful growth has appeared elsewhere. A March 2015 Fortune magazine story describes how Ikea has had success because of the deliberate way in which it expands. In contrast, Target's (NYSE:TGT) unsuccessful attempt at expanding into Canada has been attributed to the fact that it "revved up too quickly" as a January 2015 Slate article puts it.
Indeed, the two retailers' stories also allude to the local knowledge issue I mentioned above. The Fortune article attributes Ikea's success to its massive research before expanding. The company tries to figure out every nuance of a new location before moving in. In contrast, because of its lack of local knowledge, Target picked the wrong locations.
Thus, Beer Blast's tales of organic growth, both successful and problematic, offer valuable lessons to investors. Growth is likely to be successful when it is planned and conducted in careful stages. In contrast, hurried, poorly planned growth is likely to be challenging.
Of course, it's hard for outside investors to know if the companies they invest in are growing in a measured way, or whether they are rushing towards disaster. As I noted, Nate Tobik's story shows how outside investors often never get the full picture of what happens at a company. I honestly haven't decided how to tell if a company is growing in the right way. That is an exercise I will leave for the enterprising investor.
In my first article about Beer Blast, I noted that Philip Van Munching's book shows that even a "defensive" industry like brewing can be surprisingly volatile. I feel this lesson is reinforced by the book's examples of the industry's growth difficulties. As Beer Blast shows, every avenue of growth for the industry has been fraught with peril. This includes both growth by acquisition and organic growth.
Of course, that's not to say that growth is impossible for the beer industry. That's obviously untrue. The surviving major beer companies, such as Anheuser-Busch Inbev (NYSE:BUD), SABMiller (OTCPK:SBMRY) (OTCPK:SBMRF), and Molson Coors, as well as their smaller rivals, such as Boston Beer Co., have grown significantly over the past several decades. In doing so, they have delivered high returns for investors.
Rather, I feel Beer Blast shows that for every success story, there is a failure. One such failure which Van Munching's book only briefly touches upon is Stroh's. Stroh's was, for a time, the third largest American brewer. The company's rise and fall was profiled in a July 2014 Forbes article. That article shows how the company made many of the same mistakes as the companies discussed in my Beer Blast articles. Stroh's expanded too quickly and couldn't find the sales volumes to use up its new brewing capacity. The company then crippled its brand image by discounting and by changing its advertising imagery. It eventually went bankrupt when sales collapsed.
I feel such stories, as well as those illustrated in Beer Blast, offer two key lessons. One is how change can ruin a company. Philip Van Munching accepts that "reactive change is the best way to keep [a brand] strong." However, he says that "[p]roactive change…is mostly egotistical and foolish."
I wouldn't go quite so far, but it is striking how many of the brewing industry's major failures in the past several decades have been caused by attempts at aggressive change. In contrast, Van Munching persuasively argues that one reason for craft brewing's rise is because craft brewers give customers a sense of unchanging authenticity. This lesson about change is, I feel, valuable to investors in any luxury industry, given that such businesses often base their brand images on a feeling of longevity and history.
Of course, I also believe that this lesson can be applied to an investment portfolio. In Beer Blast, many managers make unwise changes because they want to feel that they are doing something. Others constantly change their businesses by pursuing the next fad, which they hope will bring growth. Of course, this sounds just like what many investors do in their portfolios. And of course, such behavior brings those investors disaster, just as it brings disaster to many of the managers in Van Munching's book. Because of that, I feel that Beer Blast offers an important lesson to investors about the risks of too much change.
Beer Blast's other major lesson, I feel, is how dangerous "safe" and "defensive" industries can be. Except for Anheuser-Busch, Miller Brewing, and Coors, almost every major brewer profiled in the book went into decline. Even those three brewers eventually had to sell themselves or merge with other companies. This occurred even though the alcohol industry is traditionally considered a "defensive" industry. Now, that's not to say this will happen to the competitors in today's alcohol industry. It also probably won't happen to the companies in other "defensive" industries.
However, today, the valuations of "defensive" stocks are high. In large part, this is because investors feel such companies are safe and offer guaranteed yields in a low interest environment. Given the "defensive" brewing industry's turbulent history, I think investors should consider if this belief is entirely wise.
These aren't Beer Blast's only lessons. Philip Van Munching's account offers interesting insights about many business topics. Such topics include the way that companies deal with regulators, the importance of company leaders' personal qualities, and, of course, advertising. Most importantly, he illustrates such topics in a funny and approachable way. I've heard it said that it doesn't matter how valuable a book's lessons are if no one wants to read it. Beer Blast is very much a business book without that problem.
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