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The global perspective: an interview with Michael Hughes, president of Guinness Import Co.

MBA: In your view, how does Guinness fit into the world brewing picutre?

MH: As you know from our parentage, we are committed to brewing on a global scale. We've been in it for a few hundred years, and we continue to be committed into the future. I guess the latest indication of that is the purchase of Cruz Campo for a cool billion dollars. Our ability to make deals like that just illustrates how cash positive the brewing and spirits businesses are. They generate significant cash flow, and we reckon we know how to add value by spending that in our existing business. Fortunately, the results have shown that this approach has been successful, and Guinness PLC's share is the best performing share since the crash of '87. At that time, we were down there at about two pounds sixty a share, and when I looked yesterday we're nine pounds, seventy. So we're doing something right, and that's reflecting in all of the figures.

MBA: Recently it's been implied that Guinness had paid too much for Cruz Campo. What is your response to that?

MH: First of all, we saw an excellent opportunity to establish a position in continental Europe, and particularly in Spain. Spain is the fastest growing beer market in Europe, and that market is ready to take off. It is a very regional, fragmented business at the moment. Cruz Campo dominates Andalusia and accounts for about 20 percent of the Spanish beer market. It has only small volume and penetration outside of that area. That applies to all of the players in the Spanish scene. Clearly, as the market grows, and as the trade and distribution structures develop, the same national picture will emege as in the U.S.--there will be consolidation.

So, with Cruz Campo, we've got a very efficient, well-run brewery that generates a nice level of profit. It's got good brands, and it's in excellent position to take advantage of the opportunity in the rest of Spain. In terms of whether we paid too much or not, if you looked at the prices paid for brewing concerns over the last two to five years, when your talking about paying 12 or 13 times earnings, the purchase stacked up very well. And, importantly, we've got a price-to-earnings ratio in the market of 15.

MBA: Guinness PLC seems to draw quite a lot of profit out of its North American business--will that percentage continue to grow?

MH: Yes. In fact, if we can stay global for a minute, you can say, 'well, what's Guinness up to, and why does it think it can achieve what it can achieve?'

We're committed to our two core businesses, brewing and spirits. With the brewing business, we increased world-wide proftis significantly. That performance doesn't simply reflect the Cruz Campo acquisition; far from it. We've generated increases for over 20 percent on our organic business as well.

We're committed to brewing on a global scale as few players in the world market are. The American domestics clearly aren't committed to the global aspect of brewing--their actions make that clear. The Australians, sadly for them, really went for it, and then had to retrench.

Heineken, like Guinness, is a global brewer. Beyond that, only Carlsberg is truly global, but their international spread is nothing like that of Guinness and Heineken.

So, I'd say Guinness is in a very good position. We've got a lot of experience on how to do world-wide brewing, and we've got a parent that can provide us with considerable financial support.

For example, if we see business opportunities that make sense, we have the brief from our parent to take advantage of them. Wherever there is an opportunity that makes sense and meets our financial criteria, the money will be provided. I think Cruz Campo is the latest example of that.

MBA: How is Guinness' global sensibility going to have a bearing on the U.S. market?

MH: Bringing that into the American context, clearly there's an awful lot of change going on in this market. What used to be a five-horse race a few years ago is becoming a three-horse race. Within the next couple of years that process is going to be complete.

MBA: During this period of flux, has Guinness investigated a broader entry in the U.S. market, perhaps by allying itself with a large U.S. partner?

MH: Yes. Guinness has looked long and hard at involvement in a major way in the U.S. domestic sector, and we've talked to all of the players at various times. We've decided at this time that we don't want to be involved in a major way in the American domestic market.

Also, it's important to remember what Guinness is about, and this applies equally to spirits and beer. Guinness is not looking for volume, we're looking for value. We only want to be involved with premium products, because they have a profitable long-term future. Brands are a guarantee of long-term profit streams, and we want to be involved in niche marketing premium added-value products. That makes money for us, it makes money for our suppliers, and it makes money for our distributor partners. We're only as good as they are. It's in our interest that they stay whole and financially solvent.

So, our focus in the U.S. in the short-term will continue to be in the import sector, clearly consolidating the radically different company that we are now, after the acquisition of All Brands.

MBA: How has that acquisition changed Guinness Import Co.?

MH: Most importantly, we now have critical mass. We have the brand portfolio, we have a strong and effective organization, and we have a strong distributor network.

If other brands came along that fit our criteria, we'd look at them, but we certainly don't need them at the minute. We've got a lot of little jewels in the portfolio already, and we're busy polishing them.

MBA: How well has Guinness digested the A.B.I. brands?

MH: It's gone incredibly well, actually. We formally took control of the business in March of last year, and by July we have totally integrated the businesses. We had taken on the people we needed to take on, and we had closed the ABI facilities that were redunbant. We ended up with something like a 50-percent increase in the manpower of G.I.C. That has left us with a bigger and stronger organization, and in the context of other import organizations there's perhaps only Van Munching that's at that level. We've got a critical mass in terms of share of mind required at the distributor level.

What it comes down to is that we've got more feet on the street. That's what it's about--street warfare, particularly in the last 18 months or so. It's back to the account-by-account building of a brand.

When we decided to acquire A.B.I., we made a conscious decision to execute the deal with velocity. We wanted to do it quickly, because uncertainty is paralysis. People have to be assured they have a place in the future and they know what the future looks like. So, in terms of A.B.I., we squared things away within four months of completing the deal.

MBA: How about the A.B.I. brands? There seem to have been some changes after you acquired the portfolio.

MH: Well, as you know, Foster's left the portfolio in May. That was known up front because they had made it clear they would leave. That was taken into account in the price we paid for the business.

We worked with Clausthaler for the first six months and then mutually decided that we would not go forward in the same house. Clausthaler felt some discomfort, despite our reassurances, and they decided they wanted to go. It was all very amicable.

That brings us back to the idea of a global beer market. The thing is, the number of players is getting smaller and smaller. As that happens, the existing players become more inter-Qtwined.

That makes it important to part on good terms. Because, number one, you're probably going to come up against those people in the future, and you also have current relationships. Foster's is a good example. They distribute our brand in Australia.

MBA: It certainly is becoming convoluted.

MH: It's gotten to the point where you almost have to maintain a state of deliberate schizophrenia about it. Heineken would be a good example. There are many markets where we work together, and in Singapore and Malaysia, we've actually merged our businesses together. Yet, in other markets, like the U.S. or Ireland, we go head-to-head, and nobody pulls any punches. You've got to be able to live with that paradox.

MBA: Turning to your current brands, it seems like you're putting much greater support behind Pilsner Urquell. How is it doing?

MH: It's amazing. To my mind that is the best lager beer in the world. I call it my little jewel. We've got a stunning product here. It's the original pilsner, we all know that, but the whole imagery around the brand is so positive. It's the real thing in terms of product and imagery. It's super premium, which fits very closely with what we're about. Everybody makes money off it. There's no reason why this can't be a two million-case plus brand.

What it's not had to date is sufficient attention, because it's always been the baby in the portfolio. I think that was true at A.B.I.

To remedy that we've put our money where our mouth is.

The important thing for us was to sign a new agreement with the brewery. We needed a secure future with the brand before we put time and money into it. That's been done. We just signed a new long-term agreement with the brewery, which has given us the comfort to really invest heavily in people and dollars behind the brand.

MBA: Is Guinness able to get the brand over in fresher condition?

MH: Yes, we've cleaned it up a bit. There was still some old beer in the market, and as part of the acquisition deal, we wrote off a whole lot of dodgy beer, So we've got fresh stuff in only.

In terms of packaging, we carried what All Brand had been doing, a very innovative method of insuring that this package appears as premium as it does. Packaging materials of the quality we wanted do not exist in Czechoslovakia. So, we supply them with materials manufactured in Germany, and we get a reduction off the F.O.B. It's a different way of doing business, but it enables us to get the quality packaging we need.

MBA: Turning to Guinness Import Company's original brands, Bass Ale seems ubiquitous in the on-premise market these days. To what would you attribute its success?

MH: I describe Bass as a kind of 15-year overnight success story--people talk about it just coming to the fore--but its actually quite amazing to see the growth that it's had over the last couple of years--particularly the last three or four.

Because, if you think about it, during that time frame the on-premise sector of the amrket has been under pressure all the way through. Business has been declining, especially in the major metro areas, where of course, the import market is concentrated. Bass is not exactly the cheapest beer available, in fact it's right up there at the top of the market in terms of pricing, and yet we've had double-digit increases, not only on the Bass brand overall, but on the draft beer. What that means is we're already getting a hell of a lot more distribution, and we're getting incredible volume in the outlets that we're in.

MBA: Why is that?

MH: A number of reasons. First, the product is distinctive yet highly drinkable to the American palate. As you know, the American palate tends to go for "less challenging: beers, when compared to the world level of bitterness and body. The Budweiser and Miller brands give you a good yardstick.

Bass Ale is certainly more full-bodied and it's clearly a distinctive color. However, it's below that thresh-old of bitterness beyond which it's a problem for the American palate. So, it's pitched in the right place.

Besides that, it's just a bloody good beer. If you then overlay the imagery associated with it--it comes from the home of the pub. I always describe Bass as "the pub in a glass." That's exactly what it is in imagery terms. It's got a whole set of positive imagery working for it, which is the British pub in a glass in a highly drinkable form.

Of course, it's been around for a long time. In many ways it's the archetype for building--and building is the key word--an import brand. Like any high added-value niche product, import brands need to be built patiently and slowly over time. Hence that phrase, 'a fifteen-year overnight success story.'

The fact that Bass has been so successful reflects on the success of G.I.C. and its distributors overall. We're both committed as partners to patient account-by-account, case-by-case, keg-by-keg building of the business. It needs patience on the part of both, and it also needs the belief that there's a long-term future in the brand portfolio, and of course, in the relationship between the distributor and the importer.

MBA: While we're on the subject of your portfolio, how is your non-alcoholic entry doing?

MH: Kaliber is holding its position among imports. Imported NABs have been hurt by the big boys coming in, with their spending on Sharp's and O'Doul's in particular. We reckon the imported NAB market is off five to 10 percent. Within it, we've managed to maintain our position as number-one imported NAB, but now the big boy are here. We do believe there's an opportunity for Kaliber in the future as that market grows, and we're absolutely committed to being the number-one impored NAB.

But, the entry of the big domestics has obviously hurt in the short-term. In the long-term, it's got to be good news, because it legitimizes and gives profile for the NAB category. So it's been a short-term hit, but we're still number one in our class.

MBA: Just going back to the All-Brands deal for a moment, did the consolidation of the wholesaler network go smoothly?

MH: We've actually done quite a lot on that. It goes back to why the acquisition of All Brands was such a good idea. There was so much strategic fit on every leve. The brand portfolios were almost totally complimentary. Regionality was nicely complimentary and class of trade fit. The old G.I.C. was very big in on-premise trade and draft-oriented. The Northeast U.S. was an area of strength, with a little bit in California and southern Florida. So it was mainly concentrated on-premise in the East. A.B.I., by contrast, had virtually no draft business. It was therefore much more off-premises oriented, and stronger in the West and South. So we had a great regional fit.

Regarding distributors, there was a high degree of overlap. Of the top 100 A.B.I. distributors, 55 were common with us straight away. So it was very positive. We were able to get greater share-of-mind for the bigger G.I.C. with those distributors. The others we've gone through on a market-by-market basis. The process isn't complete yet and we are realigning them. In some cases that the A.B.I. house was stronger, we went into the A.B.I house. In other cases, we've done something completely different. For instance, in California, we've gone with Southern Wine & Spirits who've set up a totally new beer division. Southern Wines & Spirits has been a major customer of our spirits businesses there, now they handle both ends.

We believe that more and more wholesalers will be hybrids handling spirits and beer.

In the example I gave you, Southern Wines & Spirits wanted to deepen their relationship with Guinness. They saw an opportunity in beer, and we saw an opportunity to create a new distribution force in beer in Southern California.

We approach each market on a market-by-market basis. To give you a few examples, New Jersey was sorted out early, New York was already the same houses and Chicago we're virtually complete. Texas has been a radical consolidated for us.

We really haven't had any problems. We had actually anticipated problems in certain markets but it's just not come to be. Rather than taking, if you like, a brutal and crude approach to the distribution hause, we just generate a conversation between the two houses. We try to broker a conversation between houses to make it a win-win situation, rather than bring the hammer down and take it into court, which wastes everybody's time and money. It's worked out well.

It does stand in our favor that our brands are highly profitable, especially brands are highly profitable, espcially brands like Bass, Guinness and Harp. They are extremely profitable for distributors, and thankfully we've had a growth trend on volume over the years.

MBA: Do you view the import decline of recent years as perceptual or real?

MH: I think it was real. A number of things have happened over the last couple years as you are aware. If we go back to '89, that first year of a down-trend, and you can take it back to '88 or '87. The first thing you have to do is take the Corona factor out, and look at the rest of the market without Corona. A lot of that '89 decline was reflecting the fast fall after Corona's meteoric rise. That smooths out the curve, but you still have a gradual decline. Why? A number of factors. You've got much more aggressive promotional activity from the domestics, who'd been relatively inactive, in terms of product and packaging innovation, during the '80s. You've seen all the proliferation of different drink types, be it a dry or draft, or whatever. Also in packaging, the longneck bottles. Basically, taking some of the luster and news value off imports. So that didn't help.

Secondly, you had the decline in on-premise consumption, which has been gradual over the last few years. At least half of imports go through on-premise, although it's hard to get a more precise figure on that. In itself, it might be reflective of tighter economic times, but as much kind of long-term reduction in drinking that we've seen in all sectors. It's not calamatious, and I think it's more of a moderation trend than a rejection of alcohol. That's what's been happening.

It has to be put in context, however. Imports are five percent of the market here and their absolute volume is worth two-and-a-half times the total Irish beer market. This is a huge market. Roughtly 11 million hecto-liters or 130 million cases. The total Irish beer market is four million hecto-liters. The total British market is 60, so it's 20 percent of the total British market.

MBA: What do you see as the future for the import segment?

MH: I think the future of imports is secure in that 4 1/2 to 5 percent of total market range. I don't see it falling below that, I don't see it going much above that. The thing that drives imports is people who are looking for higher added-value. They're interested in drinking less but better.

MBA: How will the market start to look over the next few years? Will there be room for as many brands?

MH: You're going to have a major shake-out in the number of import brands available in this marketplace. People quote figures of 300 or 400 import brands available. But you know the concentration--the top ten brands account for over 80 percent of total volume. Therefore you have very small quantities of other brands coming in.

With the consolidation at the whole-saler level, you're going to get a smaller number of smarter players with larger portfolios. They'll have to apply a rigorous criteria to how they allocate their time and resource. The brands that are going to stay and benefit from that are the established brands that have a critical mass of volume. Those that are not starting from ground-zero, case one. Those days are gone for introducing a brand in this market.

Established brands with established franchises and, importantly, marketed through strong and effective organizations. Which is why the G.I.C. 120-person organization puts us at a real advantage. And that was part of the rationale for the acquisition of A.B.I., the acquisition of critical mass.

MBA: Are you starting to get any perceptible competition from the microbrewers?

MH: No, the microbrewers have not really increased in terms of scale, although they do get disproportionate air-time, because they are quite exotic and a point-of-interest. There is something quite appealing about the whole micro story. By and large there are some very good and distinctive products being produced, but you're talking about less than 0.2 percent of the market. If you look at people who go into microbrewing, it's basically people with a passion, with a hobby, like the Anchor Stem situation, with Fritz Maytag.

There's also a problem that micros come up against when they get past their first level of development. In stepping up to the next level, the costs of distribution and marketing outside of their narrow market area become prohibitive. As a result you haven't got much expansion potential for micros out of thier individual markets.

Nonetheless, there will always be a place for them, and they're likely to affect imports disproportionately. They don't source 95 percent of their volume from domestic and five percent from domestic. It's probably about half of it coming from imports. When you're talking about 0.2 percent of the market, it's not going to hurt imporits too much.

MBA: How do you respond to microbrewers allegations about lack of imports freshness?

MH: Well, of course there's a lot of over-claim. And, of course it's a biased view, because one of the problems that micros have is variability.

Bass Ale has been a prime target of micro attack, and they've made headway in certain cases. Our response in the majority of those areas has been to keep telling the quality story. We say 'look, let's just see how your micro beer stands up.' In most cases, it doesn't. They are really bad at maintaining quality. Even in their own small distribution areas. When they venture beyond that, the problem is amplified.

Yes, it's annoying to hear these overclaims or false claims, but the worst thing that could be done is to dignifiy that challenge by openly rebutting it, because we'd just get into a slanging match.

I worked for Coca-Cola for four years, and I learned about this dealing with the Pepsi challenge over in the U.K. All you have to do is say, 'O.K. let's get meaner on the street.' So we go into accounts and we tell the real story.

MBA: do you think there is a growing market for the kind of product that is being offered by Guinness and by the microbrewers?

MH: Well, there is a segment among consumers that is aware that other alternatives exist, and have a desire to try them. Now, typically, in any population, in any country in the world, that group is a minority. Most people tend to be middle-market and there's an awful lot of unquestioning consumption.

The people who look for something else in a product tend to be discriminating consumers in most aspects of their life. And that applies to beer as well.

MBA: If you were inclined to make a prediction, how do you think the import market will look in five or 10 years?

MH: I'd say it will still be around five or six percent of the market. I see no reason why it should reduce dramatically over time. It's a very large market, and it's got a pretty high per-capita consumption. It's not the highest in the world, that tends to be places like Germany. But beer remains a staple item for American consumers, despite the effort of neo-prohibitionist loonies, as I call them, to tell a totally imbalanced story as far as alcohol is concerned.

So I see the oerall market staying at it current level, perhaps increasing by decimal points over time as the population increases. And, looking to the next century, we will get over this unfavorable demographic wave coming through the population.

Beer will be here forever, despite anybody's efforts to tell a wrong story on it.

MBA: I notice that Guinness has joined the Century Council. Do you think the Council has the potential to improve the climate for alcohol beverage companies in the U.S.?

MH: We feel very strongly about the efforts of the Century council. It's very closely modeled on an organization we initiated in the U.K., called the Portman Group, comprised of the major people in wine, beer and spirits in the U.K.

The Portman Group's charter was set up because all of us were sick of neo-prohibitionist loonies telling a totally unbalanced story and going unchallenged.

So we said 'Hang on. Let's balance this debate, shall we?' It's not just a question of commercial self interest. Alcohol abuse is absolutely and totally bad. We are the strongest critics of abuse and we are doing things to stop it.

However, we do defend the right for everybody to consume alcohol in moderation. Abuse should be prevented and where it's present it should be punished.

But, to say in a sweeping fashion 'Thou shalt not drink' seems to me a total denial of individual right and responsibility.

So, what we've done in the U.K. is to take a whole lot of initiatives, in terms of things like identity cards so that younger drinkers cannot get drinks when they shouldn't. Educational efforts in the media and in educational institutions. The whole message being 'moderate consumption is fine,' but alcohol abuse is bad.

Also, we want to balance the public debate on the statistics.

Now, a lot of that thinking has come over here. The Century Council is really a bit of a breakthrough in terms of combining spirits and beer and the wine guys. The people who have an interest in alcohol consumption are getting together and confronting the common threat to their livelihood.

One of the things that has to happen in this country is breaking the totally invalid, specious link between drink and drugs. The implication that alcohol is as bad as heroin is absolutely ridiculous and it's totally irresponsible to say that.

Hard drugs and soft drugs are bad. Alcohol should not be abused, but it's a totally different ball of wax. It really is, and that link must be broken.

MBA: Guinness is one of the only brewer members. Is that because of your unique position in the alcohol beverage market?

MH: Well, yes. Guinness has a foot in both camps, which is why we took the lead on it. Unfortunately, none of the major domestic brewers have joined. Hopefully they can be convinced to come in. But, that's not actually stopped us. That's one of the problems you have to plan for when you're trying to put together a body like this.

In this market, there are strong players like Anheuser-Busch, Miller and Coors, who believe they can fight this on an individual basis. And they do. They spend significant amounts of money. So they're questioning whether an industry-wide approach would work any better than spending money individually. That's a point of view. But we believe that both are appropriate, i.e. spend it on your own corporate account and then have an industry-wide effort. Anything that helps get the message across is clearly positive. They're clearly not convinced of that yet, but I hope they will be.

It's very hard to get a pan-alcohol industry alliance to hold together. There have been attempts at that in the past. Hopefully, this one will work.

MBA: Thanks very much for taking the time to speak with us, Mr. Hughes.
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Publication:Modern Brewery Age
Article Type:interview
Date:Jul 15, 1991
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