Comment - Beer - Nationalised vs Privatised
Pete Brown sings the praises of Budejovicky Budvar - for more reasons than one
As a self-confessed left-leaner, Pete Brown isn't the biggest fan of plc's. This month, he looks at Budejovicky Budvar, a state-owned brewery that, surprise surprise, he's quite a fan of.
A couple of years ago I had the depressing task of covering a beer industry conference on environmental initiatives in brewing.
The first reason it was depressing is that I had to spend two days listening to German engineers reading by rote from PowerPoint slides, each with hundreds of words on, most of them concerning 'kieselguhr'. I resolved then that, when I take charge, engineers will be forbidden by law from using PowerPoint. And, no-one will be allowed to make PowerPoint presentations in their second language. The effect of the two together is simply too dangerous.
The second reason the conference was disappointing was that, once we’d waded through the kieselguhr, there were loads of brilliant business ideas and ground-breaking technologies that rather handily helped save the planet for future generations while also making breweries more profitable in this very difficult short term. But despite this win-win, none of the big brewers I spoke to had the slightest intention of taking any of these ideas on board.
From the outside – which I always find is the sanest place to be when you’re talking business – this seems like suicidal insanity. But, when I suggested to these brewers that their lack of interest might make them a bit, you know, mad, they explained that when you’re inside the circus, it makes perfect – if grim – sense.
The payback from reducing your water and energy consumption is long term and permanent. But, the capital investment required in many of these projects is sizeable and up-front. A typical investment being pushed at the conference would take between three and five years to pay back. Again, from the outside, that sounded like a pretty good return on investment. But, I was told that corporate shareholders would resist any capital investment that didn’t start to pay back inside 18 months.
This is the tyranny of the doctrine of maximising shareholder value – it’s not always the same thing as maximising the long-term robustness and profitability of the company. In my time in advertising, we would often prove, via econometric modelling, that a particular campaign built value for the medium and long term, to clients who would smile and nod, and then slash the advertising budget because it was the easiest way to improve the bottom line in the short term. And, the short term was all anyone cared about.
I could argue that this is moronic – not only to idealistic lefties like me who, in our deluded state, think that maybe the long-term future of a planet is more important than the new car you might buy with next year’s dividend – but also to people who want to build careers and businesses, to capitalists who want to create market economies that are stable and profitable.
I could argue this, but I dropped economics one year into my degree, so what do I know?
I was reminded of all this on a visit to the Budvar brewery in Ceske Budejovice last month. I’ve been a few times, and it’s one of my favourite brewery visits because, much as I like bottled Budvar, when you do the brewery tour you get to taste the unfiltered, unpasteurised stuff that’s been maturing in the cellars for 90 days. This is beer that is so lovely it makes me cry. There are claw marks down the cellar walls from where I’ve had to be dragged away from the fermentation tanks on previous visits.
That 90-day maturation is vitally important to Budvar’s market positioning. Lager is only called lager because long, slow maturation was originally a key stage in its production. (As an aside, this means that many modern day lagers aren’t technically lagers at all. But that’s a topic probably best left for the outer reaches of the beer blogosphere).
The 90-day maturation is what we used to call a USP in marketing, and it’s a good one – it’s contributed to extraordinary growth for the Budvar brand, with production having doubled over the last ten years.
But, when this is your USP, phenomenal growth creates a headache so painful it makes a beery hangover seem like a birthday present.
Storing large quantities of beer for long periods of time requires a great deal of space. The Budvar brewery has specially reinforced floors full of 200-hectolitre tanks kept at two degrees Celsius.
It’s simple maths: if you’re maturing beer for 90 days and you’re suddenly brewing twice as much beer, you must either double your storage capacity or halve your maturation time. Either you incur massive capital costs, or you erode the USP that helped create the growth in the first place.
For any other global beer brand, the decision would have been a simple one: just like those nice environmental measures, the payback period on capital investment would have been far too long for that investment to be realistic. Shareholders focussed on short-term gain would reject it out of hand. Budvar would have had to follow its rival Czech superstar, SABMiller's Pilsner Urquell, in slashing the maturation time of its beers.
The thing is, Budvar isn’t answerable to shareholders: it’s owned by the Czech government, and profits are retained in the business. This meant that Budvar was able to spend around CZK3m (US$147,130) on new, 3,700-hectolitre, stainless steel tanks to boost its storage capacity and keep far greater volumes of beer sitting there maturing for months.
Other brewers claim there is no longer a need to store beer for so long. Yes, the cost cutting is handy, but the main reason for slashing maturation time is that modern technology means the same results can be gained over much shorter time periods. This would be easier to believe if they could produce a lager beer to rival Budweiser Budvar.
It’s heretical, if not insane, to claim these days that a nationalised industry could be more effective in business than a private concern answerable to shareholders. But in an age where shareholder-run businesses are not exactly covering themselves in glory, Budvar is turning this notion on its head and building a business that will continue to deliver sustainable profitability for decades to come.
Around the world, the few remaining unreconstructed lefties can have a quiet cackle into to their beer.
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