How Anheuser's Eagle Became Extinct

The brewer saw synergies in beer and snacks. Big mistake

Eagle was grounded. As some 200 snack-food distributors gathered for a hastily assembled meeting in a suburban St. Louis hotel on Feb. 7, foreboding hung in the air. For August A. Busch III, the fiercely proud 58-year-old chairman of Anheuser-Busch Cos. whose powerful marketing machine dominates the U.S. beer industry, it was an extraordinary moment of defeat.

Standing before the grim-faced crowd, Busch said that Anheuser was no longer willing to try to extend its marketing prowess from beer to snack food. After 17 years of red ink, the $400 million Eagle Snacks Inc. unit would be shut. "This is historic," says PaineWebber Inc. analyst Emanuel Goldman. "I've never seen a high-quality trademark buried."

Busch had little choice. Almost four months after Anheuser put Eagle on the market, no serious buyers had emerged. All he salvaged was $135 million from the sale of four plants to Frito-Lay Inc., leaving Anheuser with a $206 million write-off. Nor was this the first retrenchment at Anheuser. The decision came only seven months after the company announced that its $1.5 billion Campbell Taggart Inc. bakery unit would be spun off to shareholders. Last fall it sold its money-losing baseball team, the St. Louis Cardinals. Now the $10.3 billion brewer aims to rededicate itself to two core businesses: the hypercompetitive beer market and its Sea World and Busch Gardens theme parks.

QUAGMIRE. Anheuser's misadventures in snacks and bread are an object lesson in just how difficult it is to expand far afield--even for a marketing powerhouse. That's not how it looked in 1979, when Anheuser started up its snack business, or in 1982, when it paid $560 million for Campbell. Then, the vogue was diversification. Having prevailed over rival Miller Brewing Co. in the Beer Wars, Anheuser was looking for new areas to spend its gushing cash flow.

At the time, say current and former executives, August Busch believed the synergies were dazzling, though deceptively simple. Anheuser knew distribution and marketing--and, in the case of bread, it also knew yeast, a key ingredient in beer. Salty snacks could be delivered by distributors on their normal beer routes to taverns and supermarkets. And Busch figured that by putting marketing behind bread, Anheuser could create a national brand in a fragmented industry.

The strategies quickly went awry. Beer distributors, it turns out, saw the opportunity to take on snack products as more diversion than delight. "We didn't want to dilute our focus," says Bob Delgado, president of Hensley & Co. Sales, a Phoenix distributor. "It may sound nice that beer and snacks go together, but not from a business standpoint." The two products go into different areas of supermarkets and convenience stores and are ordered by different officials, making distribution far more complicated than Anheuser anticipated.

In other words, rather than synergy, Anheuser faced a logistical quagmire. A patchwork of Eagle distributors emerged--some also carrying beer, some also carrying Campbell Taggart bread, some independent. And without much product breadth, Anheuser's costs remained high.

Distribution might have been manageable had it not been for a more formidable problem--the stirring of Frito-Lay by its parent, PepsiCo Inc. As Eagle boosted quality and began expanding from peanuts and pretzels to potato and tortilla chips in the late 1980s, "they gave us a wake-up call," says Ronald A. Rittenmeyer, a former vice-president of operations at Frito. The result: Frito launched an array of new products while upgrading distribution and cutting costs. Marketing consultant Gary Stibel says that by using the hefty profits it earned from its dominant position in corn chips to subsidize a move into potato chips, Frito slashed prices on the latter, squeezing smaller players, from Eagle to regionals.

Beer distributors gulped. "I was not willing to chase a bunny Pepsi would never let me capture," says one big Anheuser distributor. The relentless attack paid off: While Frito's share of the market jumped to around 50% from 40, Anheuser's never topped 6%. The red ink worsened: Last year, Eagle lost $25 million on sales of just $400 million.

At the same time, problems started to appear in the beer market. Though Anheuser had eked out steady gains in beer profits in the early 1990s, flat consumer demand has started to dent prices and market share. Anheuser has also come under tougher attack from No.2 Miller, which has launched several new products. Last year, Anheuser's beer profits fell 5%, to $1.6 billion, on sales of $7.8 billion, according to analyst Goldman, and its market share went from 44.4% to 44.1%. The endgame for Eagle drew near.

Busch began shopping Eagle around last October. Sources close to the company say Nabisco Holdings Corp. took a look, as did seven financial groups. But observers estimate that it would have taken roughly $250 million to build decent market share and profitability for Eagle. "Here was a company with poor market position, poor execution, fragmented distribution, and no cost or quality advantage," says one potential buyer. Although some were still studying the financials, one source familiar with the talks says Busch pulled the plug when it became clear no quick sale was in sight.

As for Campbell Taggart, it's at least marginally profitable, returning about $50 million on sales of $1.5 billion. But one former Anheuser executive says Busch was constantly frustrated that he could rarely raise prices on its baked goods. Nor did Anheuser succeed in establishing national brands, in part because many supermarkets had strong private-label operations.

Now that Busch has finally stanched the financial drains, beer distributors and investors are lifting a mug in cheer. Anheuser's stock hit an all-time high of 71 in early February; it since has dropped to 68. Although Busch declines to comment, but sources close to him say the intense, hands-on CEO increasingly found snacks and bread an irritating diversion. Brand rollouts in beer and share repurchases, say some, were delayed. Robert C. Lachky, vice-president of the Budweiser brands, disputes that there was any distraction but adds: "Having 5% to 10% of additional senior management time has got to be a plus."

Yet the new strategy brings Anheuser back to the conundrum it started with: how to rebuild beer momentum. Sales of its flagship Budweiser have been falling for years but now appear to be recovering. Another bright spot: Bud Light, which now seems to have routed Miller Lite, is growing in double-digits. Over at Miller, Chairman John N. MacDonough, a former senior Anheuser marketing executive, is skeptical that shedding snacks and bread will make a difference. "This doesn't make them any fiercer," he says. "I never felt Anheuser was distracted."

GLOBAL MOVES. Still, there are signs that new moves are afoot. Distributors talk of much more contact with brewing executives. There's a greater focus on such issues as freshness: They're being encouraged to keep a keen eye on old inventory. On the product front, Anheuser will spend more heavily on marketing for its "mother brands," Bud and Bud Light. More than $70 million will go to Olympics ads and tie-ins. Efforts to build in the small but fast-growing microbrew segment are also under way. Some prospects: a flurry of regional products and acquisitions of microbrewers through its 25% stake in Seattle's Redhook Ale Brewery. "I have the green light to aggressively pursue growth," says William H. McNulty, group vice president for specialty brands. "We will take more risks in style and tastes."

Anheuser is also in search of even larger opportunities overseas. To make Bud a global brand, it's establishing distribution partnerships with local brewers, from Kirin in Japan to Peroni in Italy and Kronenbourg in France. Anheuser is taking direct equity stakes, too: In 1993, it paid $16.4 million for a 5% stake in China's Tsingtao and $477 million for 17.7% of Mexico's No.1 brewer, Grupo Modelo, with an option to acquire 43.9% of the voting rights by late 1997.

From a small base, overseas sales and earnings have climbed about 20% a year. International sales now contribute about $80 million to operating profits, roughly 5%. Bud has become Western Europe's fastest-growing brand, according to consultants Canadean Ltd., and in Japan it's the top-selling import as well.

Yet challenges abound. Bud's early success in Japan may begin to slow. Analyst Patricia Horvath of UBS Securities Inc. reckons that with its share slipping, Kirin "will focus on its own business." And in China, Anheuser may have bet on the wrong brewer: Though long the only national brand, Tsingtao didn't cut any deals to produce Bud in regional breweries. That's kept Bud from becoming a significant player--while more aggressive rivals, such as Japan's Asahi and Australia's Fosters, have stolen the show.

Still, such problems aren't likely to dissuade Anheuser from pressing ahead abroad, where growth prospects for beer remain far better than at home. And difficult or not, Busch now knows that he has little choice but to stick to building up in beer.

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