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SUBMITTED BY Mark Meckler ON Mon, 06/16/2014 - 12:59
Mark Meckler, Ph.D. – Crafting A Strategy
Where will your brewery fit?
Last week I was in Europe and visited both Heineken Headquarters and Duvel Moortgat Headquarters. Both firms are in the game of operating, buying and selling breweries. Both have long histories of success and admirable balance sheets. Both boast recent international purchases and successes. Both are growing at a reasonable and sustainable pace. That’s why it is a bit odd to report just how very different they are from each other. They have similar components and very different architectures. If you are a supplier, a distributor, another brewery, a law firm, an advertising firm, or an investment bank, a business-to-business relationship with Heineken might fit your organization perfectly well, while fitting poorly with Duvel Moortgat. If you are interested in being acquired by either of these firms, your components and overall business architecture must fit with one firm or the other. It is very unlikely you would be an attractive acquisition for both.
Business Components: What are those?
Components are individual parts and pieces that are assembled together. Brewhouses have concrete floors, mash tuns, holding tanks, refrigeration lines, hops, water, filters, hoses, drains and so forth. A business has components as well. It has accounting, marketing, legal, information systems, purchasing, inventory, warehousing/storage, research, development, production, packaging, shipping, sales, after sales support, and so forth. A corporation has components as well. These are all the individual business units and divisions (companies) owned and managed under the corporate umbrella. Components should fit and integrate together well and at the same time be easy to remove and fix or replace.
Heineken owns hundreds of brands and breweries all over the world. They claim that their global reach is broader than any other beer brewing company. They have wonderful components: Breweries, transportation divisions, distribution agreements, routes, banks, managers, retail relationships, advertising and PR campaigns, all shared where it makes sense. Many of the breweries they acquire are refitted with clean steel tanks, quick release lines and valves, advanced sanitation technology, modern bottling and canning lines and new brand positions and advertising strategies. Heineken’s strategy is continuous improvement on each of these technical and social components within their existing architecture.
Business Architecture: What is that?
The general design and workflow of a system makes up the system’s architecture. The system workflow determines what parts and pieces are needed, i.e. what components, and how those components should be arranged to optimize the workflow. In a kitchen, when one changes their water faucets, gets a new refrigerator, changes the countertops, or updates their oven and stove top; they have improved all of the components, but not altered the architecture. After a number of iterations of component upgrades, it might seem like no further component upgrades will help the kitchen situation. It is time to tear it all out and redesign the kitchen to fit current needs and future needs. Counters will move, some components of the old workflow might be eliminated, new ones might be added, some things lessened, some things increased. Electric stovetops might be replaced with natural gas, floor drains might be added and hot water might be provided with a tankless unit. These innovations require an architectural change.
How could your brewery fit into Heineken or Duvel Moortgat?
Heineken is an advertising and PR juggernaut that focuses on scalable, clean, repeatable and defendable processes. They clearly establish hundreds of brands, and carefully keep the global Heineken Beer as the aspirational brand that is a “step up” from the others. Heineken is a high quality, clean and crisp pilsner. Heineken has a highly consistent flavor profile that appeals to the masses, while still being somewhat distinctive. Their strategy is to make large quantities of uniform quality beer that is marketed, advertised and promoted well and delivered on time. They do not treat their acquired local and regional breweries poorly. Rather, they help them and upgrade their components to ensure quality and efficiency. In fact, during my discussions with Heineken executives, I was surprised to find that the local and regional brands are where most of the profits are made. Heineken views these businesses as a series of strategic components, whose organization promotes, compliments and protects the core Heineken pilsner. Their passion is branding, and strategy is about market reach, complimentary offerings and positioning[i]. Even the smallest craft brewery can learn something from this component approach to a strategic architecture[ii].
For a brewery to be an attractive acquisition target for the Heineken N.V., it should be a relatively modular component. That means that it can easily fit into the rest of the Heineken system with very few adjustments or customization needed. The brand and beer should be subordinate to their Heineken branded pilsner and complimentary to it, not competitive with it. The brewery location and geographic distribution should be of the right sizes and in the right places to fit easily into the Heineken distribution system and methods. The technologies used and brewing cycles should be standard and predictable. If your brewery can easily plug into this architecture, both socially and technically, then joining the Heineken group may be a great fit for you.
Duvel Moortgat believes in customization and unique qualities rather than uniform qualities. For example, they do not seem to mind that (as they say) “it takes 90 days to make a Duvel.” The post brew house, in-bottle fermentation process takes up half or more of their physical space and time. If you are a Duvel Moortgat brewery, your brand will be maintained as unique. The technical quality of your beer must be consistently excellent. Further, unlike Heineken it will not matter if your beer or brand is seen in the marketplace as superior to Duvel: LaChouffe is excellent. Omegang is innovative, de Koninck is excellent, Vedett is fun, Liefmans is deliciously different, Boulevard makes excellent American craft ale. The key to the Duvel architecture is Michael Moortgat’s desire to maintain each brewery’s individual legacy and ecosystem, and to help them all be the best expression of their somewhat unique missions. High quality and attention to detail in the beer, the brand and organizational culture are the core goals, not cost controls or scale. This architecture is not as fundamentally efficient as the Heineken architecture, and yet it is also very successful.
A key business model difference between the two breweries is the ownership structure. A main reason that Duvel Moortgat can decide to have a somewhat less efficient structure is because they are no longer publically traded. After having a large portion of the shares publically owned for a number of years, the family bought the shares back and took the company private. This means far less daily and quarterly pressure to be as profitable as possible. They can be as profitable, or not, as they want. They are efficient and they are profitable – they just are not driven by the public corporation mantra of “maximize efficiency and maximize profitability at all times.” The company can follow Michael Moortgat’s values and vision for the long-term, rather than stock market’s values and focus on the short-term.
As you grow your brewery and brew pub business, it is advisable to grow in a way that will fit one of the broader business architectures – so that when it is time to partner, or merge or sell; your business will be ready to fit in, contribute and share the gains. It is up to each owner to choose their future, and strategically position their organization to be ready for it.
How can Duvel’s strategy be so different and still so successful? It turns out craft beer businesses can be as creative and innovative as the beer they produce and sell.
[i] Interestingly, their strategy is quite similar to Budweiser’s in the 1990s, as described in Guest Expert Blogger, Dr. Peter Whalen’s April 2014 blog (Available to our members).
[ii] Components of strategy, components of the brewery, components of the value chain… Find out how the value chain components fit together in a multi-business model approach in Sam Holloway’s 2013 Keynote Speech at Penn State University’s Global Entrepreneurship Week (Available to our members in the core curriculum).