Mergers and Beer

On Thursday 25 October AB Inbev announced that it will cut its dividend payment in half. In the background is its acquisition of SABMiller (and the accompanying spinoff of Miller Coors to the Canadian firm Molson, because even with a pro-business bias, the US Fair Trade Commission would not allow a merger that would give a single firm a 70% market share.

  • How has that merger fared?
  • Or is the dividend cut due to factors unrelated to the merger?

One piece of information is what’s been happening to the overall market. If we look at market shares, we can calculate that the main slice on which AB Inbev focuses changed by -2.3% in 2017. Alternatively, “regional” brewers production peaked at 19.0 million barrels in 2015, but was down to 17.9 million in 2017 (or -5.8% over 2 years); data from the Brewers Association.

  • So did the AB Inbev M&A strategy make sense?
  • Or did it merely overpay?
  • Or has it hit a temporary rough patch (eg, rising interest rates making it more important to repay than to rollover debt)?
  • Or did it fail to foresee the extent to which beer demand was falling so that it may be better off post-merger, but the merger wasn’t helpful enough to offset the secular decline in beer consumption?

Articles to read:

  1. AB InBev Cuts Dividend… (St Louis Post-Dispatch)
  2. AB InBev’s $100 Billion Hangover
  3. Bud (Dividend) Light Or Stella(r) Bargain?
  4. Merger cost synergies on Seeking Alpha
  5. Optimistic take on growth vs debt and on growth in China on Seeking Alpha and on other international segments.

George paper

Here are points to read for:

  • What is the core question of the paper?
    • What dynamics in the industry does she try to explain?
    • What have others shown / failed to explain? Where does she fit in that wider literature?
    • Why beer?
  • What data does she utilize?
    • Time period?
    • Size of dataset?
    • Other limitations?
    • Why doesn’t she use other data, for example the 30 years of observations from 1970-1999?
  • What findings are “starred” as significant?
    • What findings aren’t “starred”?
    • Is she cautious, listing caveats?
    • What puzzles does she leave us with?
    • What next? – does her work point to followup projects?

Reading an Empirical Paper

  1. What question do the authors claim they are addressing?
  2. Why? Is it an interesting question?
  3. What’s new about this question? Does it use theory that extends beyond what we have studied?
  4. Data?
    • look at Table III Summary Statistics
      • big data set?
      • lots of “control” variables?
    • what can’t they “observe” (important but not in their data)
  5. empirical methodology – read but skip the really technical stuff
    • Difference-in-differences? look at two groups before and after some change
    • Dummy variables? Shareit = αi + β0 1[Post]t … indicates a yes/no variable coded as 0 or 1.
    • scan initial sentences in sections that appear unduly technical
      • example: read only the first sentence of “Section VII: Robustness Checks” (which includes Table XI that at first glance is part of the “Section VIII: Conclusion”)
  6. results:
    • count the asterisks!
    • graphs: two groups and before/after. can you eyeball?
    • with lots of ups/downs, letting the computer “see” for you is surely more reliable? or do you see what the computer sees?
  7. What do the authors claim they find?
  8. Does their analysis really lend itself to their conclusion
  9. What do they leave out? what qualifications do they make? etc. Do they believe their conclusion?

Leaders and Followers

From the 1950s into the start of the 1970s General Motors was consistently the most profitable firm in the world, earning 40% on investment and 60% on equity. How did they manage that? After all, GM faced competition from Ford and Chrysler. American Motors (formed in 1954 through the merger of Nash and Hudson) was also a nuisance, as were Studebaker and Packard (until their exit in 1958).

1955 Rambler

Now GM benefitted from economies of scale. For example, they were large enough to not just automate engine machining, but to make multiple engines while running their factories at capacity. Ford faced challenges in that regard, because their volume per engine (6-cyclinder vs 8-cylinder) were smaller. Chrysler was at an even greater disadvantage. With a broad product portfolio, one mis-step was not so damaging at GM. A poor selling model really hurt at Ford, whereas Chrysler faced periodic crises. And then there were the truly fringe firms: despite mergers that aimed to increase their scale, Nash, Hudson, Studebaker and Packard all went out of business, while Chrysler acquired American Motors (and hence Jeep) and Chrysler was ultimately acquired by Fiat to form today’s FCA.

Anyway, during the 1905s and into the early 1970s GM held 50% of the market. Their worry, in fact, was not Ford, but the Department of Justice, which threatened to pursue them under then-prevailing anti-monopoly guidelines. Because of its divisional structure, with separate design, engineering, manufacturing and sales operations, the DOJ could realistically break up the firm into 2 or more pieces.

Three pieces of indirect evidence: Ford maintained copious archives. They are a research resource for everything from business history to US racial issues. In contrast, GM kept no archives; corporate policy was to destroy all documents unless needed for a short-term corporate purpose. GM’s fear of being broken in two seems to have pervaded senior management in another way: it led to a culture of deniability. Then there was a corporate reorganization that realigned the divisional structure. In the 1970s that led to a PR nightmare: the installation of engines used in plebeian Chevrolet cars in Oldsmobiles. How could GM dare use the same parts in 2 different products? You might as well have Jaguars, Mercedes and BMWs coming out of the same factory [actually, that happens at the Steyr-Magna plant in Austria].

Well, if GM couldn’t exercise market power to maximize profits by dropping price to raise their market share, then what were they to do? Ford almost went out of business when the founder Henry Ford’s maniacal focus on the Model T led to declining sales, as they had to keep dropping prices to compete against used Model Ts. In the 1920s Alfred Sloan and Pierre DuPont instituted two policies to address that issue. First they reorganized GM’s operations to focus on a range of models, from low-priced entry level ones to Cadillacs at the luxury end. Second, they began regular model changes at GM. Eventually Ford and Chrysler followed suit, with new (or at least “refreshed”) designs launched every year, to great fanfare.

As things developed, GM came out with theirs first each fall, showing them off in huge media events each fall, including tentative list prices. Ford and Chrysler launched their new models a bit later. Think a bit: if you are Ford, what price would you announce? Surprise, surprise: you follow GM’s lead. But isn’t this illegal price-fixing?

One year jumps out as anomalous: 1955. It wasn’t a boom year, but neither was it a recession. Yet sales were 45% higher than in 1954 or 1956, while prices were lower (Bresnahan 1987, 458). Price controls from the Korean War period had been lifted before 1954; import competition didn’t begin until the arrival of the VW Beetle in 1957. However, that was also the first year that the newly created American Motors launched their first new car, the compact Rambler. It was life and death for them: they had to establish a market presence, fast. So did they really sell so many cars as to sway the entire market? What else might have gone on?

Bresnahan, Timothy F. 1987. “Competition and Collusion in the American Automobile Industry: The 1955 Price War.” The Journal of Industrial Economics 35 (4): 457–82.

Quick Followup: Apple

Mark Hibben on Seeking Alpha offers an analysis of Apple’s new products that makes a claim about strategy: that Apple is offering down-market alternatives, I would claim in the face of new and potential competition from rivals (Xiaomi, Oppo, Vivo and Huawei are the “Big Four” among domestics).

It’s possible that sales of the XS are lagging XS Max because there’s a lower cost alternative to the XS waiting in the wings, the iPhone XR. The XR has about the same size screen, but uses lower resolution LCD technology. It has most of the desirable features of the XS, however, including an edge to edge screen, the TrueDepth 3D sensor for FaceID, and the Apple A12 processor. The XR lacks the dual camera system of the XS, however, but still enables Portrait Mode.

To quote, selectively – go to his post, Apple: Where No iPhone Has Gone Before, on Seeking Alpha for details.

Up until now, Apple’s approach to offering more affordable iPhones was based on selling previous generation iPhones…

I’ve always objected to this approach. I have argued that Apple needed to offer a selection of new iPhones that address a range of price points. For instance, automakers don’t just make a single high-end model car, and then rely on previous generations of that model to address lower price points.

Hibben elaborates on this, and details the new features, visible (display) and not (chipset). However, as I look at it, this is still an incomplete response, because it’s a narrow range of features. Then again, since I’ve not been in the market for a new phone in some time, maybe they are now a commoditized product where base features are the same for everyone. Still, is Apple leaving itself open to disruption?

Apple’s Future

Eating apples without asking what they were was a bad move for Adam. How about investing in Apple without knowing how it makes its money may prove dangerous as well.

This summer I listened to The One Device, Brian Merchant’s history of the iPhone. The idea of a smart phone wasn’t new. Research In Motion began selling its BlackBerry phone in 2002. Nokia was around, and in Japan commuters were looking at retailer’s cellphone-oriented sites in the early 2000s. Apple itself launched a smart phone in a joint venture with Motorola, which flopped. Apple’s iPhone didn’t come out until Summer 2007, and initial sales were slow. So what made a difference?

…you don’t swat at gnats…

In Merchant’s telling two things stood out. One was a fanatical attention to the user. Sleek design, sure, and cool icons for the initial limited functionality. More central was that Steve Jobs wanted his phone to be intuitive in operation, so much so that it could ship without a user manual. The one key in-house technology Apple developed was coordinating swipes with what was on the screen. Even parts of that were purchased from the outside, but it really was novel and required a lot of development of the concept and how to implement it.

Source: Yahoo! Finance

It’s not that everything else was easy, or open source. Apple worked on power management, realizing it needed a more efficient yet reasonably powerful processor chip. Toward that end it used a RISC processor, working on a design from ARM and finding a semiconductor “fab” willing to make it. Fitting everything into the sleek case, pulling in the camera stabilization hardware developed by a Japanese firm, on and on. It was really neat engineering.

The second key was the App Store, which was not part of the company’s vision. Apple sought to keep its operating system closed, in part because of real fears about bugs crashing the phone if people could start modifying an as-yet new and complex software system. Almost immediately, though, hackers found ways into the system, and added functionality that Apple did not – or refused – to provide. That differentiated it from the Canadian maker of BlackBerry, which targeted big banks and other business customers with a phone where emails were encrypted and where users couldn’t download games or otherwise undermine its value as a secure email platform.

Ten years later, where are the entry barriers? As I see it, there are none. Apple engaged in a $1 billion-plus lawsuit with Samsung over design issues, which generated $10s of millions in lawyer fees, if not more. That’s the sort of bullying tactic that works with small firms, but in the end style is hard to defend. Operating systems? Android is freely available, as in free. Hardware? Suppliers designed the guts of chips, not Apple, and once the initial version is past exclusive use contracts, they can sell to whomever. The guts of the phone don’t stay proprietary; a lot is simply the time to market required for a rival to launch comparable features, hence Apple’s obsession with secrecy. Oh, and Google has an app store for products that use its operating system (as does Microsoft).

…cash cows eventually stop giving milk…

So as I see it there are no entry barriers. Indeed, in China, India, Southeast Asia and Africa neither Apple nor (to my knowledge) Samsung are major players. [Transsion is the biggest player in Africa, assembling its phones in Ethiopia.] On a global basis, Apple is losing market share in the overall cell phone market, which still includes a lot of flip phones. (The latest reports give them 15.6% of the smart phone market in 2018Q1, about where they were in 2010Q1.) Anyway, those markets are far bigger than those of the US and Europe and Japan – China alone has over a billion smart phone users. [Go to Statista for data on OS shares.]

But if there are no entry barriers, profits must fall. A lot. So how can we justify a market cap of $1 trillion? Or are we simply in the waning days of a bubble driven by years of 0% interest rates? Or am I missing a wide moat that will keep rivals at bay for years to come?

Alternatively, what does Apple’s demand curve look like? Is it shifting, and if so in which direction?

You can find “bull” and “bear” analyses of Apple on Seeking Alpha. On the pessimist side see Apple Faces Big Challenge In The App Store and Apple: Big Red Flags.

With each release the iPhone has increased in size, now approaching that of an iPad. You can make phone calls on an iPad – it has cell phone hardware. The price point is lower. At what point do you get a small, inexpensive iPad over a large, very expensive iPhone? Or do you move away from Apple altogether, to a phone that fits in your pocket and a device that comes pre-loaded with Office?

Fall 2018 Texts

We use Stephen Martin’s text and a book by Maureen Ogle on the beer industry. Useful supplements include various industry histories and overviews, such as Deborah Cadbury’s Chocolate Wars and Smitka and Warrian’s The Global Auto Industry: Innovation and Dynamics and other volumes in Business Expert Press’ industry profile series (including ones on toys, agricultural machinery, textiles and steel).

Profit from Modern Day Music

   Between 1999 and 2011, the record industry shrunk by 64%.  With the advent of digital music, musicians were forced to find other streams of revenue as opposed to relying on record sales and touring.  Several qualities of digital music forced this change; those being the companies hosting the music downloads taking a cut, consumers newfound ability to buy only a song from an album as opposed to the entire album, music streaming, and digital piracy.  Ironically, the underlying structure of these services, the Internet, both undermines and supports artists.  With the help of the Internet, artists are able to reach listeners all over the world.  Unfortunately, the Internet also enables all the factors listed above, to the detriment of the profits of the artists.  For instance, the average iTunes user averages .25 albums a year, which equates to nowhere near enough album sales to fund an industry.

   Musicians have combated the downfall of the record industry by increasing sales of merchandise, accepting movie and TV licensing, creating fashion lines and beauty products, using crowdfunding websites such as Kickstarter, and finally, selling premium content. Items such as clothing are often sold at live concerts, so musicians that do not have the fan base to tour or play in concert are left without this option of revenue.  Rolling Stone estimates that bands such as One Direction net up to $225,000 per every show in merchandise sales.  Musicians, provided they have a hit song, are entitled to licensing fees when that song is played in a movie or television show.  Green Day licensed their song “99 Revolutions” for the movie “The Campaign” and made hundreds of thousands of dollars as a result.  One copyright licensing agent commented, “There was once a time where it was completely uncool for a band to allow their music to go on a TV commercial.  Now if you get your song on a TV commercial it’s high five, it’s great, everybody’s happy for you.”  Artists have also taken to using their fame to promote select beauty products.  One example is Justin Bieber, whose perfume “Someday” netted a three million dollar profit upon the summer of its release.  Obviously, this stream of revenue requires sufficient fame, and is therefore not an option for every musician.  That being said, musicians who are not yet famous enough to rely on these streams of revenue have taken to using crowdfunding websites such as Kickstarter in order to fund their projects.  Rolling Stone estimates that artists average around $200,000 in crowdfunding profits, which is a substantial dent in any expenses associated with creating music.

   It seems that the primary way musicians will profit in the digital age is by releasing exclusive content with their albums.  One Nielsen study found that a fifth of listeners would be willing to pay for exclusive content if given the opportunity, and that in-between 560 million and 2.6 billion dollars in revenue is possible if artists begin to increase the amount of exclusive content they release.  One such artist that uses this strategy is Nipsey Hussle, a rapper from Los Angeles.  He has released two studio albums, and each time has released his album for free but also offered a small number of copies of the album with exclusive content.  This strategy has proved profitable, as Nipsey made $60,000 the week his second studio album debuted from sales of exclusive material.  While music is far from unprofitable, it is obvious that musicians can no longer rely solely on record sales as a source of revenue.


Natl Beer Day

Political Calculations has a history of beer container patents, replete with drawings from the patents. They also append long list of links to previous posts. All that I’ve read are “serious”, I’ll let you judge whether that results in deadpan humor, or comes out flat.