The integration of InBev and Anheuser-Busch once again brings the importance of Supply Managements business contribution into the spotlight.
The merger will integrate two strong companies with little overlap in their markets, which when combined represents 40% of the global beer market. In its search for “efficiencies” InBev, renowned for its efficiency has slated $1.5 billion annually from cost savings in the combined venture. Most of these savings are said to be derived from the supply chain. A-B has already provided insight into where these efficiencies may come from through its plans to save $700 million from “production expenses”, which include energy, raw materials, supply chain, and overheads. Additionally, about $300 million will come from labor and administrative costs. Based on InBev’s history these planned efficiencies are likely to extend further and include a combination of cost-cutting, asset sales, further M&A deals or all of these.
1. Market Dynamics:
On the demand side, the flat markets of Western Europe and the US are in stark contrast to the growth and profit potential in Eastern Europe and Asia. On the supply side, higher raw materials costs are placing increased pressure on the industry to seek efficiencies to offset these cost increases.In the US, A-B and InBev have a combined market share of nearly 50%.
In addition, the Justice Department has just given approval to the combination of the US’s second- and third-largest brewers, Miller Brewing, and Coors Brewing. Creating the No. 2 player, with about 30% market share.
These consolidations will produce the kind of economies of scale required to supply these emerging markets and will have far reaching effects throughout the supply chain.
The stage is now set for a new battle in the US beer market. This time between two overseas players: the newly merged Anheuser-Busch InBev and its London-based rival SABMiller, and this time gaining market share is not likely to be as critical as controlling costs.
2. Increased Buying Power:
The global escalation of raw material costs such as barley, hops, aluminum, and glass puts added pressure on brewers to negotiate better deals with suppliers. Only now, both companies become much more import to suppliers, technology developers, and raw material producers, etc. Some prime areas for efficiencies are likely to include:
2.1 Distribution:
InBev has a record of tough dealings with distributors in Brazil, one of its main markets. InBev executives could shake up A-B’s network of more than 600 beer distributors in the U.S, the middlemen who link breweries with grocery stores, gas stations and bars. Many of those distributors have agreed to carry only A-B products and are rewarded with deals said to be plush — including paint jobs for trucks, cash payments, and easier credit terms. InBev may see those distributors as ripe for cost-cutting, some analysts have said.
2.2 Marketing:
According to Advertising Age, a large part of the slated cost savings will come from A-B’s $1.3m marketing budget with a handful of suppliers. However, InBev has publicly stated its interest in A-B’s marketing skills and its plans to capitalize on these. InBev’s approach may be to ask wholesalers to pick up more of the tab for marketing expenses rather than cutting them.
2.3 Wholesalers:
InBev may start to push aggressively wholesalers to combine to become more efficient. A-B has been more reluctant to take that step, than its competitors Miller and Coors.
2.4 Production Cost:
A-B’s in-house packaging businesses should give them a strategic insight into production cost that will prove to be a valuable weapon in early negotiations and later strategic sourcing exercises with suppliers. This will be a nervous time for suppliers as InBevs procurement team opens up the books on A-B’s deals.
2.5 Asset sales:
These could include the sale of none core businesses such as A-B’s theme parks and packaging divisions. The sale of the Packaging division is likely to have a major impact on container suppliers.
A-B’s Metal Container Corp. supplies more than 60 percent of Anheuser-Busch’s U.S. beer cans and 75 percent of its domestic lids. It also produces cans and lids for major U.S. soft drink companies including PepsiCo, Coca-Cola, and Hansen Natural Corp.
Major suppliers such as Rexam, Ball and Crown are likely to be watching developments very carefully.
3. Conclusion:
The critical impact of the supply chain becomes clear when looking at a real life example of bringing the benefits of company integration to life. Supply chain professionals must secure themselves a seat at the table as early as possible to maximize their contribution to this process. Excellence in delivering these benefits can make or break the success of the deal and provide a platform for supply management to redefine its role. In Purchasing Practice’s experience organizations that have invested in best procurement practices and taken a strategic view of procurement always outshine those who have not, and typically go on to play the dominant role in the relationship.
Nuff said …