Strategic Decision Making Process at Anheuser Busch

¶ … Strategic Decision Making Process at Anheuser Busch

This paper will take a look at the strategic decision-making process that made Anheuser Busch "King of Beers" and outline strategies needed to stay there. Beer sales are under pressure, but Anheuser-Busch executives are confident their products and marketing strategy will stimulate growth. A-B, as the company is often called, has identified four critical marketing priorities: (1) although beer is America's favorite beverage with 58% of overall alcohol servings, Anheuser-Busch will continue to improve the image and desirability of beer; (2) beer must be kept "fun and social;" (3) beer occasions must be grown and extended; (4) retail execution must continue to be improved. While the domestic beer company has increased tactical price promotions on a specific market, brand and package basis to reduce price premiums vs. competition, company executives confirmed that the company's long-term pricing strategy continues to target increases at or slightly below the consumer price index.

The first commercial ever run on ESPN was a pitch for Budweiser. Even in 1979, the King of Beers knew that, while broadcast ads might reach the masses, cable advertising targeted the very specific, in this case, male sports fanatics. In fact, early ESPN fans might have thought they were watching the Bud Network because its logo appeared so frequently. Today, as the dominant domestic beer in the United States (U.S.), with a market share of nearly 50% and climbing, Anheuser-Busch executives bask in the wisdom of that risk-taking first cable buy. The company is pouring more and more money into specific niche network programs to push brews such as Bud Light, Michelob and O'Doul's. Current Anheuser-Busch buys include ESPN, with hefty schedules on NCAA college basketball, National Hockey League games, Major League Baseball and SportsCenter. Along with these are spots in National Basketball Association games on TNT, selected spots on BET, and two new major promotions on E!'s Wild On and CNBC's 11 a.m.- 6 p.m. business block. In the past, A-B dollars were highly targeted and very carefully placed with one aim in mind: reaching Bud's primary target audience of males 21-34 and 21-49. Beyond ESPN and TNT, however, A-B is adding more niche networks as it seeks to reach women, adults 50-plus, African-Americans and Latinos.

Anheuser-Busch, based in Saint Louis, Missouri, is the world's third largest brewing company in volume after InBev and SABMiller. The company brews thirty-five different beers and malt liquors. Anheuser-Busch's best known beers include brands such as Budweiser, the Busch and Michelob families, and Natural Light. Anheuser's manufacturing plants are the most technologically advanced in the industry. This is due to a modernization program that involved updating and replacing old equipment, and has reduced costs by around $300 million per year. It has also increased the output of each facility.

Anheuser-Busch also produces a number of smaller-volume and specialty beers, nonalcoholic brews, malt liquors (King Cobra and the Hurricane family), and flavored malt beverages (e.g. The Bacardi family and Tequiza). A-B owns twelve U.S. breweries. Overseas, Anheuser-Busch owns two breweries including the Budweiser Stag Brewing Company Ltd. In the United Kingdom. In addition, breweries in seven countries produce Budweiser locally. It owns fifty percent of Grupo Modelo in Mexico, twenty-nine percent of China's Harbin Brewery Group Ltd. And 9.9% of Tsingtao Brewery Company Ltd. In China. Under an agreement with Tsingtao, Anheuser-Busch's interest will increase to 27% during the next several years. A-B has 17 overseas offices.

In November 2004 A-B sold its twenty percent participation in CCU (Compania de Cervecerias Unidas) in Chile to a Chilean Bank, in a public bid. Anheuser-Busch owns Busch Gardens, SeaWorld, and several other amusement parks and resorts, as well as production, transportation and packaging operations related to its beer business. The St. Louis Cardinals baseball team was owned by Anheuser-Busch from the mid 1950s until it was sold to a group of private investors in March 1996. Busch Stadium, paid for and built by the brewery in the early 1960s, still bears its name, although a new stadium is under construction and the current ballpark will be demolished by 2006. A-B has signed an agreement for the new ballpark to keep the "Busch Stadium" name.

According to Fortune Magazine, the company applies venerable marketing techniques more vigorously and imaginatively than the competition.

The company's most important technique is target marketing. Anheuser-Busch sponsors events and runs advertising specifically aimed at all sorts of consumers: blacks, whites, blue-collar workers, computer-buffs, and sports fans. Sports fans make up a large, diverse population. The company has strategically positioned themselves to promote to this target audience, with 70% of their advertising dollars going towards sports programming. They have exclusive deals with 21 of 24 major league baseball teams, 21 of 28 National Football League franchises, 300 college sports teams, and most professional basketball, hockey, and soccer teams. Anheuser-Busch has been very effective in maintaining a competitive advantage over its fellow rivals.

The primary economic issue affecting this company's environment is taxation. The company is significantly impacted by federal, state and local taxes, including beer excise taxes. Beer excise taxes are a sin tax, which raise revenue for the government. The national median is eighteen cents per gallon of beer.

An increase in taxes effects costs to the company, hence, costs to the wholesalers and consumers. According to the Annual Report for 2004, taxes applicable to 2004 operations (not including the many indirect taxes included in materials and services purchased) totaled $1.16 billion, an increase of $70 million, or 6.4%, vs. 2003 total taxes of $1.09 billion. Taxes in 2003 increased 5.0%. The increases in taxes in 2004 and 2003 are primarily due to higher excise taxes on increased beer volume.

The economic constraints beer excise taxes impose considerably affect the company's overall performance.

The social environment plays a key role in how A-B effectively markets their product to its consumers. For obvious reasons, such as, alcohol abuse, underage drinking, and drunk driving, not everyone is in favor of promoting alcoholic beverages. Many individuals and organizations lobby against the brewing industry and have a strong voice in the political arena. There has been much controversy on how Anheuser-Busch chooses to advertise its beer products. Over the years, some of their most successful advertising campaigns have been targeted for promoting underage drinking.

The political environment is very influential on the brewing industry. Often, social issues affect the political realm, consequently placing more restrictions on the sales or consumption of alcohol. For instance, MADD seeks support from politicians during election time.

Political leaders may then fight to increase alcohol taxes, as well as, place more restrictions on the marketing and consumption of alcohol. In 1993, Senator Paul Simon, of Illinois, introduced legislation that would require all liquor advertising to carry a Surgeon General's warning.

Also, due to the serious problems of drunk driving, efforts were made by state and federal officials to lower the blood-alcohol limit to .08 for offenders. Political influence impacts how the brewing industry handles its operations. The National Minimum Drinking Age Act of 1984 was passed by the U.S. Congress as a mechanism whereby all states would become thereafter obligated to legislate and enforce the age of 21 years as a minimum age for purchasing or public possession of alcoholic beverages. Under the Federal Aid Highway Act, states not enforcing the minimum age would be subjected to a ten percent decrease in its annual federal highway apportionment. While this act did not outlaw the consumption of alcoholic beverages by those under 21 years of age, some states extended its provisions into an outright ban. However, most states still permit "underage" consumption of alcohol in some circumstances. In some states, no restriction on private consumption is made, while in others, consumption is only allowed in specific locations, in the presence of consenting and supervising family members, and/or during religious occasions. Pressure from MADD was credited with passage of the bill.

Last year advertisers in the United States spent a record $201.5 billion to promote their products. According to industry analysts, all advertising serves three purposes: to recruit new customers, to increase use of goods or services among existing customers, and to help potential customers choose among competing brands. This basic principle holds as true for the alcohol industry as for any other, but brewers, distillers and vintners argue that their advertising has a single purpose: market share, or to convince present drinkers to choose one brand over another.

Media analyst Dr. Jean Kilbourne in her book, Deadly Persuasion, explores this and other aspects of alcohol advertising and marketing in depth. Although market share is one of the goals of the alcohol industry's advertising, Kilbourne reveals strategies used to recruit new drinkers. Anheuser-Busch, has been criticized for its use of animals in advertising beer, from frogs and dogs to lizards and horses, in commercials which some argue appeal to underage kids as well as adults.

Kilbourne would disagree with those who go so far as to say that such child-friendly advertisements are designed to get children to drink, but she does admit that the ads are designed to promote positive attitudes about alcohol in young people. Kilbourne notes that prevention traditionally has had an individual focus -- "just say no," resist peer pressure, and so forth. But how can we expect kids to say no to alcohol and other drugs when their environment tells them yes? People make individual choices, but do so in a physical, social, economic, and legal environment. In advocating a move towards an environmental approach to prevention, she recognizes that such an approach is contrary to the basic message of advertising, that the individual has a need or problem that a product can meet or fix.

Advertising is part of the complex process that shapes people's ideas about what is normal and right to think and do. Alcohol advertising's most powerful role is in helping to sustain an environment in which drinking and heavy drinking are seen as normal activities. As many researchers have shown, most alcohol advertising seeks to associate drinking with possessing desirable qualities or experiencing pleasurable sensations.

Advertising attempts to make alcohol a pursuit of the good life, the American dream, proper masculinity, and other compelling themes in American culture. Recent literature reviews state that a large body of research indicates that exposure to or awareness of advertising contributes to an increase in drinking. For example, Atkin found that greater exposure to advertising stimulates drinking, excessive drinking, and drinking and driving, or riding with a driver who has been drinking.

The cost of regulated advertising can be a reduction in sales. To offset the loss in revenue, Anheuser-Busch has ventured into foreign markets, as well as creating new product lines that could compliment their current line but not contribute to its consumption. Anheuser has a big opportunity to increase globally. The international market is four times the size of the U.S. market. This allows them many chances to expand. With a bigger market it will also give Anheuser a chance to experiment with different product lines that may appeal to different market segments. The size of the international market may also be more likely to produce higher growth rates. A-B recently won the takeover battle for Harbin Brewery Group Ltd., the second largest brewer in China, at a cost of $720 million. Harbin had a total brewing capacity which was about a third of that individually controlled by each of the top three players in China (Tsingtao, Beijing Yanjing, and CRE), and had gained a reputation as one of the most efficient brewers in China, routinely achieving over 90% capacity utilization.

Looking at the big picture, a more responsible advertising campaign would limit Bud's liability in lawsuits and other litigation that would involve over-consumption. The alternative to limiting advertising would be to eliminate alcohol-related advertising all together. In this case, the products could only be advertised directly where they are sold. Grocery stores would only have advertisements in the liquor department, sporting events would rely strictly on the mobile beer vendors, and other venues could only advertise in the actual "beer garden."

Many analysts believe that Budweiser has been an innovator in the area of responsible advertising. While they are still not perfect, they have taken steps to encourage responsibility when drinking. Actions like those are what helped many believe that Budweiser is a responsible corporate citizen, in turn, making consumers feel better about buying Bud products. According to their website, A-B has invested over one-half billion dollars during the past two decades in a comprehensive portfolio of more than two dozen community-based programs and national advertising campaigns to promote responsible drinking and help prevent underage drinking and drunk driving.

Anheuser-Busch boldly predicted it would take the malt beverage hill and be King. It said a 50% market share could be achieved. So far, A-B has made good on its promises.

It is noticeable that some Anheuser-Busch competitors have almost adopted an attitude of surrender. They assume A-B has established a market strength that is beyond reach. The degree to which Anheuser-Busch leaders can think and plan globally while acting and responding locally will be the determinant of their length of rule. It takes a unique set of skills and strategies to take the hill and stay on top.

The fruit of strong Anheuser-Busch leadership is reflected in its growing share of market and its ability to take advantage of competitive scenarios as they emerge. In the past decade, Miller has yet to mount a credible assault on A-B's growing dominance. In fact, according to "Beer Marketers Insights," Miller not only failed to make a charge but actually lost 3.1 share points over the past ten years despite acquisitions.

Anheuser-Busch clearly recognized this competitive weakness. In key markets such as Texas, A-B has enjoyed rapid and essentially unchallenged market share growth. Despite the weak competitive threat of Miller, now SABMiller, Coors has not been able to take advantage of Miller's weakness and accelerate its overall market share growth.

The emergence of flavored malt beverages, while welcomed by most wholesalers, may be a serious two-edged sword for A-B and the entire industry. Flavored malt beverages provided a meaningful early boost to industry gross profits and may remain a long-term, though small category contributor. The strategic danger, however, is that the spirits industry has successfully introduced its branding to the core beer-drinking audience. Now, with a powerful lobby, tremendous cash, and marketing assets, Anheuser-Busch must contend with a whole new level of competition. If spirits powerhouses such as Diageo and Allied Domecq can lure traditional beer drinkers, through elite imaging and a new form of status and wealth, to align with their brands, what can we expect the competitive playing field to look like in five to ten years?

When you walk into upscale on-premise accounts in many major markets, you find a large contingent of people drinking spirits products, not beer. Wholesalers are concerned. How will the king respond? How will the industry respond?

The king of the automotive hill at one time was General Motors (GM) with a 50+ share of the market. With an air of invincibility, GM dismissed some foreign competitors by the name of Honda, Nissan (Datsun) and Toyota as insignificant, only to see their market dominance slip away.

Anheuser-Busch's strength over the past decade has been enhanced by management's willingness to make bold moves. This is the real measure of a company whose executives are committed to market leadership rather than preserving old strategies that are safe and have worked in the past. One decisive move by Anheuser-Busch was the strategic decision to create a reward or punishment system, depending how you are looking at it, for a distributor to exclusively sell A-B products. Obviously, this strategy was operationally workable for A-B due to its strong and growing market share. While there were a lot of criticism about it early on, few can argue that this strategy has been a major driver in reaching the 50% market share summit.

Anheuser's distribution gives them more power in the industry. They have devised an incentive plan for their wholesalers that rewards them for selling only Anheuser-Busch products. This plan focuses the wholesaler on selling only one product group. This approach has helped boost domestic sales over the competition.

Exclusive distribution has effectively reduced the level of complexity within participating A-B wholesalers relative to their fully consolidated competitors. In a consolidated market, the non-A-B competitor must face the complexity of selling all other brands except A-B and perhaps Corona. This requires manpower, significant time commitments to suppliers, huge complexities in warehousing and delivery, and a heavy load of retailer expectations. A-B distributors operate in a much more streamlined environment. In addition, by moving the vast majority of its volume through exclusive distributors, Anheuser-Busch can cultivate a level of candor and trust that is nearly impossible to achieve in a multi-supplier house. This relationship focus removes numerous political games and comes the closest to establishing a unified strategic vision for the A-B market and brands while maintaining independent ownership. This does not mean that multi-supplier houses cannot be highly profitable and effectively meet the needs of their supplier group. They simply must utilize their resources in a very different way. Each approach has very real strengths and weaknesses.