July 8, 2008 / 10:34 AM / 11 years ago

InBev cost-cutting measures set for U.S. export

BRUSSELS (Reuters) - Economy flights, enforcement of double-sided printing and fewer staff with mobile phones.

Bottles of Stella Artois beer, a brand of InBev, are displayed for sale at a store in Hong Kong, June 12, 2008. REUTERS/Victor Fraile

Belgian-Brazilian brewer InBev is likely to export its belt-tightening to the United States to squeeze out up to $1.4 billion of costs if it succeeds in taking over U.S. peer Anheuser-Busch.

“Zero-based budgeting” is central to InBev’s business model in which departments have to justify all spending, rather than just changes in their budgets.

Brought in from Latin America when Belgium’s Interbrew merged with Brazil’s AmBev to form InBev in 2004, it has been applied across the company’s regions — North America from 2005, western Europe from 2006 and eastern Europe and Asia from 2007.

Employees and union officials describe the tightest of budget controls: mobile phones taken back and returned only to employees who justified a need for one; new pens given out only in return for used ones; and an elevator at the global headquarters closed for several months.

The elevator is back in use now, although signs in the lobby read: “Why not take the stairs?”

InBev says many such measures, and notably larger water and energy conservation efforts, also serve sustainability targets and that its cost-saving push is simply one pillar of an overall strategy also focused on boosting beer volumes.

Even InBev critics acknowledge that the rules apply just as much to Chief Executive Carlos Brito as to the workers and that good performance is rewarded.

The plan typically cuts costs by 10-15 percent in year one, 5-10 percent in the second year and enough to offset inflation in the third.

In the first year in key home market western Europe, InBev laid out restrictions on 15 areas from travel to utilities that reaped 118 million euros ($186.3 million) of savings.

REVENUE BOOST, LIMITED OVERLAP

InBev has given scant details of its $46.3 billion takeover offer and so far stressed only its vision of boosting revenues by making Anheuser’s Budweiser a flagship global brand beside its stable of Beck’s, Stella Artois and Brahma.

In its defense, Anheuser has set out $1 billion of cost cuts, principally the result of reducing the workforce by between 10 and 15 percent by 2010 and speeding up price hikes.

InBev would be looking for more, analysts say. The beauty of the deal is adding Anheuser’s near 50 percent share of the profitable U.S. market to InBev’s global empire, but the limited overlap means little scope for wide-ranging cuts.

The two already have a deal for Anheuser to distribute InBev’s European beers in the U.S. market.

Savings could come from downgrading Anheuser’s corporate HQ to a North American head office, shifting Budweiser production in Britain to InBev plants, rationalizing Chinese operations and boosting U.S. sales of AmBev brands and Bud volumes in Canada.

Trevor Stirling, analyst at Sanford Bernstein, believes such changes could yield $380 million in annual synergies.

However, a cost-cutting drive mirroring that already carried out in Canada could yield a further $480-$960 million, he said.

InBev might also seek to trim the marketing spend, such as the $100 million cost of sponsoring soccer’s World Cup tournament.

“It’s about double that with related marketing. The 2010 World Cup is in South Africa, where Budweiser is not present. The U.S. is of course not a core soccer market,” Stirling said.

Leaning on distributors to consolidate and become more efficient would be another likely strategy.

Anheuser’s packaging business and SeaWorld and Busch Gardens theme parks would also almost certainly go.

RISKS OF HOSTILE BID

Anthony Bucalo of Credit Suisse in New York believes InBev would also be keen to limit spending on Budweiser’s trinkets and promotional items.

“They are famous for cutting that out. They are very disciplined about removing non-working money,” he said, describing the Brazilian bosses as more “financial engineers” than brewers or marketeers.

Bucalo sees potential risks if InBev’s takeover bid becomes hostile.

“If they go in with guns blazing and take this asset without the board and the Busch family, the new company risks a massive culture clash,” he said.

“The ZBB cost philosophy is difficult to implement without some degree of willingness from the workforce.”

Aware of Budweiser’s status as a U.S. icon, InBev has said it would keep all Anheuser’s U.S. breweries open, but it could be eyeing more job cuts than Anheuser now plans.

Belgian unions complain that a model of consensus with Interbrew management turned to conflict under InBev bosses keen to outsource functions and create more flexible part-time jobs.

“The management only listens now if we strike or threaten to do so,” said Luc Gysemberg, of the blue-collar ACV union. “They are probably also under pressure from above not to buckle.”

Roger Van Vlasselaer of white-collar union BBTK described the ZBB measures as “brutal” and said a number of U.S. counterparts had contacted him to gauge the InBev working culture.

“It sounds like Anheuser-Busch is a fairly social, family-style company so they are fearful of a takeover.”

Editing by Jason Neely

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