Is This Bud for You, August IV?

The Busch dynasty has its first non-family CEO. But the eldest son may yet inherit his father's crown

"The King of Beers" may be the slogan of Anheuser-Busch Cos.' (BUD ) flagship brand, Budweiser, but it could just as easily describe any of the company's chief executives of the past century-and-a-half. Until this past July, all in that illustrious group had been named Busch, and if the family has its way, the current aberration will be extremely temporary.

At a time when the image of the regal boss is more than just troubling, the Busch family seems somehow exempt from many of the rigors currently being imposed on the rest of Corporate America--even though the two most prominent family members own only about 1% of Anheuser-Busch. August A. Busch III, perhaps the shrewdest, sternest Busch to emerge since Adolphus Busch took control of the St. Louis brewery in the mid-1880s, has begun a succession process as tightly orchestrated as any in the House of Windsor. After 27 years as chief executive, Busch III has relinquished his operating titles, although he remains chairman. And here, one supposes, is his concession to today's pressures: He deemed his eldest son, 38-year-old August A. Busch IV, not yet prepared to take over the $15 billion company. Hence the July 1 appointment of longtime A-B executive Patrick T. Stokes as CEO.

That gives the Fourth, as he's called, roughly five years to prove himself before Stokes, who's 60, retires. Busch IV has worked at the family company for about two decades. Over the past several years, he has played a crucial role in reinventing A-B's marketing, showing an instinctive understanding of the kind of advertisements that stir young men. The Budweiser bullfrogs came to life under his watch, as did such tropes as "Wassup." Even rivals acknowledge that the company in recent years has produced the most consistently inventive beer advertising in the U.S. But the Fourth hasn't yet made a name for himself in any other way: He has never operated the company's network of a dozen U.S. breweries, managed its complex relations with independent wholesalers, or run its international and theme park units. And even though he's approaching 40, he still has a reputation as a party boy, which could be a problem for the head of a brewery. Busch IV also had a serious brush with the law in college.

As Stokes moved into the chief executive's office, Busch IV was given responsibility for the corporation's crown jewel, the domestic beer operations. When asked about his future, the Fourth says: "I don't take anything for granted in this company. It's not a foregone conclusion that I'll go any further."

He's not just being modest. His 25-year-old half-brother, Steven Busch, is emerging as a potential rival. Steven is known to be smart, hardworking, and serious. He's considered a long shot, but A-B has a long history of sibling warfare for the top spot. For now, few are willing to hazard a firm prediction on how the Fourth would fare in a bigger role. "August Busch IV is a little bit of a dark horse," says Caroline S. Levy, a beverage analyst at UBS Warburg. "Wall Street doesn't know how bright he is, how good a leader he is. He's not a character who has been tested or tried."

What makes this family drama all the more critical is that the beer business is shifting in particularly challenging ways. Under Busch III, now 65,

A-B has been a domestic juggernaut, grabbing market share, mainly from its floundering archrival, Miller Brewing Co. Today, fully one-half of the beer consumed in the U.S. comes from Anheuser-Busch; domestic beer accounted for 77% of A-B's $12.9 billion in sales last year. That huge scale has allowed it to achieve efficiencies in brewing, distribution, and advertising that have brought it a disproportionate share of the industry's profits. A-B's annual earnings have grown an average of 8.5% since 1996, to $1.7 billion in 2001. During that time, the company's stock has risen 61% as the Standard & Poor's 500-stock index has stayed flat. In the third quarter, A-B's net income rose 11%. That's no mean feat in an industry that's growing by less than 2% a year.

But Busch III has run the company with a heavy hand. His treatment of those who cross him, from wholesalers to rivals, is swift and rough. That aggressive style may have helped propel the company to dominance, but it has also exacted a price, particularly overseas, where the brewery will have to seek more of its growth in the future. It is few companies' first choice for a partner; its most important relationship, with the Mexican brewer Grupo Modelo, was strained for years because Busch III treated Modelo as a rival rather than an ally. Indeed, A-B has largely been left out of the industry's increasingly rapid global consolidation--capped by Miller's recent $5.6 billion merger with South African Breweries, a move that catapulted SAB to No.2 in volume worldwide. Busch IV's less astringent manner could help him forge the strategic relationships his father couldn't.

The Anheuser-Busch board has posed few challenges to Busch III's authority, and that goes for his succession plan as much as anything else. Anheuser-Busch's strong performance over the past five years has no doubt kept many directors quiet. "They think: If the family can run a company that is the world leader, keep the Busches coming," says Patrick Schumann, an analyst at Edward Jones in St. Louis.

But it's not a board known for its independence. Twelve of the 15 directors are outsiders, but some have ties to the company or to the Third that diminish their autonomy. SBC Communications Inc. (SBC ) Chairman Edward E. Whitacre Jr., Emerson Electric Co. (EMR ) Chairman Charles F. Knight, and Busch III all sit on each other's boards. A-B contributed at least $100,000 last year to Girls Inc., a charity run by director Joyce M. Roche. Until director Douglas A. Warner III retired as chairman of J.P. Morgan Chase & Co. (JPM ) in November, 2001, he headed a firm that provides investment banking services to A-B. And several years ago, Knight's son, Steven, was awarded a lucrative distributorship in Kent, Wash.

No outside board member would comment for this story; nor would August III, Steven Busch, or other family members. But Stokes, who is an executive board member, rejects the very notion of a Busch dynasty and denies that the directors are mere bystanders. "I disagree with that opinion, and the board would disagree. We take very, very seriously our obligation to have the right person in the job."

At a time when corporate boards ignore governance issues at their peril, the directors could be roused to consider other candidates for CEO, especially if the company's performance falters. Some investors believe the board will have to become more involved in the selection process. "Before a year ago, it would have been easier for August IV," says Cori B. Johnson, a portfolio manager for U.S. Bancorp Asset Management, one of A-B's largest institutional shareholders.

At the least, investors, wholesalers, and potential partners are likely to more closely scrutinize the Fourth's actions for signs of maturity, even statesmanship. In the brewing business, which must constantly fend off efforts to ban beer advertising, a central role of the CEO is to make the case, in Washington and elsewhere, that brewers are marketing their products responsibly.

Busch IV's reputation as a hard-partying guy could be a hindrance in this regard. Guests at some of his frequent parties describe his home, once owned by hockey star Brett Hull, as the ultimate bachelor pad, with beer taps in the kitchen and a giant hot tub. Others say he's often accompanied on business trips by female companions. "It's interesting seeing all the young women," says a bemused Bob Scarpelli, chairman of ad agency DDB Chicago. "It's kind of like hanging out with a rock star."

Busch, who has never been married, says his house is comparable to that of any executive and that he pays the expenses of any guests who travel with him. He also says that he engages in "responsible consumption of our products." And, he adds: "I didn't get where I am today without performing."

But the partying hasn't always been so benign. While at the University of Arizona in 1983, he had his own Chappaquiddick-like scandal: Early one morning, police found a young woman, Michele Frederick, dead in Busch's wrecked Corvette and Busch in his Tucson townhouse, dazed. Busch and the woman had been at a bar before he crashed the sports car. Busch was never charged with a crime and has previously denied that alcohol played a part in the accident. But with the beer industry under constant attack for promoting irresponsible drinking, Busch knows he can't put the incident completely behind him. "That's a chapter that's never gone, that I will always remember," he says. "But I honestly believe that, as painful as that memory is, that experience will make me a better keeper of responsibility for our products."

If he's wrong, his family won't have to look far for another Busch to lead the company. Steven is just 25, but he's already immersed in the business. While still a student at Washington University's business school, Steven worked as his father's assistant. They enjoy a bond that the elder son never shared; even the Fourth describes his relationship with his father, who divorced his mother when he was 5, as distant.

Some folks close to the family say Steven's mother, Virginia, who is currently married to August III, has made no secret of her wish to see her son take over the company. "For the past 12 years, the Fourth has said openly that his stepmother wants him to fail and her son Steve to run the joint," says one such person. "I don't know that it's true, but it's true that the Fourth feels that way." Of course, at this point Steven is far too inexperienced to be a real contender. Stokes dismisses such speculation as gossip. Ask August IV about his half-brother, and he will only say: "He spends a great amount of time with my father, he's a very smart guy, and he does a great job for my father. Other than that, I really can't comment." Steven's likely next position at A-B? "I don't know," he says.

While even rivals acknowledge that the Busch family's control of A-B has helped foster a long-term orientation, it has come at a cost. As A-B has amassed increasing muscle, it has been hard to separate its strategy from the explosive temperament of Busch III, or "Three Sticks," as he's called behind his back. After an outburst in a Hawaiian supermarket in 1995--he hit the roof when he found the store adorned with signs for other brews carried by the local Bud wholesaler--A-B revamped its agreements with wholesalers, financially penalizing those who didn't abandon all other brands.

Many wholesalers resented the loss of control--these days, A-B even gets deeply involved in their succession plans--but they can't argue with the result. According to Busch IV, its wholesalers average far higher operating profits per case than rivals who juggle many brands. And A-B doesn't let anybody forget that: Some distributorships are bestowed as rewards, others are rescinded as punishment. Today, 61% of A-B volume goes through exclusive wholesalers; in 1996, it was only 40%. The company's clever advertising may get the most attention, but "the wholesaler system is where the company has its edge," says Jeff Kanter, an analyst at Prudential Securities Inc.

Still, the Third's behavior has hurt the company overseas. Just ask Grupo Modelo, the Mexican owner of Corona beer. Since A-B owns a 50.2% stake in Modelo (though it doesn't have voting control and it isn't Modelo's U.S. importer), it has profited handsomely as Corona has become the No.1 import in the U.S. Last year, A-B's equity stake in Modelo accounted for 14% of its net income. Until recently, though, A-B regarded Corona as a threat, and did all it could to derail the brand. The company financially penalized wholesalers who carried it and ran ads warning consumers that beers in clear bottles are likely to be stale. It even went so far as to launch two Mexican-style brews to challenge Corona.

The lesson stemming from A-B's partnership with Modelo--along with its lax management of Denmark's Carlsberg and Japan's Kirin--has not been lost on other companies. For years, Busch III has been promising wholesalers a European import to fill that crucial gap in their portfolio, but no one has been rushing to do business with A-B. It has fared better in forging licensing agreements in such markets as China and Italy, but those don't yet contribute significantly to sales. "Typically, they go out and piss people off, because A-B wants it all," says a former company executive. "That's where their family lineage has hurt them, and that includes Stokes."

The fact that the Fourth is less belligerent than his father could help him build global alliances. Already, he has helped defuse tensions with Carlos Fernandez, Modelo's 36-year-old CEO and a member of A-B's board. Busch IV acknowledges as much, though carefully. "I'm a different person than my father," he says. "That doesn't mean I'm any less or more effective than he is, but I am different."

To satisfy shareholders, Busch IV will have to keep the cash-generating domestic beer unit humming. But how much more Bud can A-B sell? Besides, the real action now is in booming imports and other high-price beers. Over the years, the company has tried to develop craft brews and flavored "malternatives" but hasn't had much success. Its latest such attempts: the malternative Bacardi Silver and low-carbohydrate brew Michelob Ultra. When asked about the challenges he now faces, the Fourth says: "If we are able to do what we need to do here--which we will do, because failure is not an option--that will provide the resources needed to fulfill a broader international portfolio."

He chuckles as he says that, because his dad is always declaring that "failure is not an option." While the Fourth reveres his father, he admits theirs has been primarily a business relationship, sometimes a strained one at that. "I love my father," he says. "Take a walk through my house, and it looks like a father museum. Every picture on the wall is of my father, or me and my father--to the point where my mom comes over and says, `Where are all my pictures?' But he has been extremely tough on me. Maybe you can call it tough love."

Early in his long tenure at A-B, the Fourth was abruptly rotated through a series of jobs in the brewing and packaging operations, from doing grunt work on the lines to participating in a labor negotiation. Once he was put on the marketing track in the late 1980s, his inevitable promotions were greeted warily by A-B's independent wholesalers, many of whom believed he behaved too wildly after hours and operated out of his depth on the job. As he has demonstrated his knack for marketing, many of those doubts have been dispelled.

Busch seemed to come into his own at the company in the mid-1990s, at a time when it was losing younger drinkers to Coors Light, craft beers, and imports. The Fourth's response was to push Budweiser advertising in a new direction, one closer to the comic approach that had long characterized Bud Light ads. For a brand that had been portrayed in ringing, anthemic terms as a reward for a hard day's work, it first seemed risky, even reckless. But over the years, the various campaigns were able to slow Bud's years-long slump and helped Bud Light to grab the lion's share of the booming light-beer sector.

Busch IV will admit, however warily, that his fondness for the night life has helped him stay in touch with the sensibilities of young men who, after all, are the biggest consumers of his company's brews. "I think I have benefited from my lifestyle of being able to be very active in the marketplace," he says. "That has allowed me to understand our customer better and hopefully do a better job of creating products and images that are attractive to that customer."

Still, Busch IV will have to demonstrate that he has more than just a good eye for appealing beer commercials, or he could find that his younger brother is crowned the next king of suds. "They've bought themselves five years to develop August IV and Steven, and see what happens," says one longtime A-B watcher. As long as the brewer keeps pouring forth lush profits, shareholders seem content to let the kings reign.

By Gerry Khermouch and Julie Forster in St. Louis, with John Cady in New York

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