Why Mexicans Don't Drink Molson

by Andrea Mandel-Campbell

  Molson was naïve, stunningly naïve; just not in the way you’d expect. O’Neill and company knew Kaiser was a lousy brand, and they knew the sixteen Coca-Cola bottlers who were looking to sell it had artificially boosted the beer’s market share with cut-rate prices. Most importantly, they knew they couldn’t rely on those bottlers, whose first allegiance was to Coke, to distribute the beer to the country’s more than one million points of sale. Molson needed its own dedicated sales team if it was to have any hope of breaking into a foreign market where the competition was fierce, yet it opted to rely on the cola bottlers, who gleaned only minimal revenue from Kaiser. “Everybody knew it was a mistake. We knew it in advance,” says a Molson executive familiar with the Brazilian venture. “If you give your distribution to someone else, you can just forget it.”

  With that realization, even before the acquisition was complete, the seeds of the company’s swift downfall were sown. Subsequent missteps only sealed Molson’s fate that much quicker. To begin with, of its three thousand employees, the company dedicated fewer than ten people to overseeing the acquisition and management of Kaiser, a company that produced the same volume of beer as Molson. An investment banker wasn’t hired to execute the purchase because it would have cost too much. “It sounds a bit cartoonish, but Molson really made decisions like that,” said an observer familiar with the acquisition.

  More attention would have been paid to buying a brewery in New Brunswick, an executive acknowledges; yet despite the meagre resources, Brazil was a constant source of tension and jealousy within the company. While Dan O’Neill heartily embraced the venture, doubling as Kaiser’s de facto CEO, the Molson rank-and-file rebelled against the foreign foray that seemed to consume executive management’s limited time and resources. “It was a day-to-day war within the organization. It was terrible,” admits an executive. “We felt like the forgotten second child.” Many were convinced that the effort was fruitless, given Molson’s failure to even penetrate the U.S. market. “The employees didn’t understand Brazil. The feeling was if we can’t do this in the U.S., how can we do it in Brazil?”

  O’Neill helped realize their fears when he committed the company’s second major strategic error. When it came time to put someone in charge of the Brazilian operations, he called on Robert Coallier, Molson’s chief financial officer and O’Neill’s second in command. Not only did Coallier have no operational experience, but he’d never lived outside of Quebec. To make matters worse, Coallier, who spoke no Portuguese, was sent alone, without any Molson managers to back him up — the sole representative of the majority shareholder in a market already known to be notoriously difficult for Canadian companies.

  In making his decision, O’Neill argued that he didn’t want to influence the much savvier Brazilians at Kaiser with Molson’s plodding ways. Coallier was simply there to make sure the business plan was executed. It was also a convenient way to save money. The move nevertheless baffled Molson management and market analysts alike. “Everybody was surprised. It was the icing on the cake,” says one observer. “How do you send a guy from finance, who has spent his whole life in Quebec, to be an operator, not somewhere in Canada, his country, but to do a career shift in another country where the company made an acquisition that has to be integrated?”

  Once in Brazil, Coallier had to make decisions in a vacuum, without being able to bounce ideas off fellow Canadian colleagues from Molson. Instead, he had to rely on advice from the Brazilians, whose cultural context he did not understand and whose interests and motivations may or may not have coincided with those of Molson. “He had to deal with two challenges at once. He had to deal with corporate issues, and he had to try and understand the people, how they think and how to decode their recommendations to understand what’s good for the company. Some things might be good for Kaiser, but not for Molson,” explains a person close to the company. “When they tell you, you have to do something, is it really the case? What experience does he have to decode what they are telling him?”

  At the same time, Coallier was constantly in a tug-of-war with head office for more resources. It was a losing battle. “You could feel in talking with him that it was really tough,” says a person who knew him. “He felt really alone.”

  What Molson should have done, say analysts close to the company, was strengthen Coallier’s position by hiring the best on-the-ground operational expert that money could buy. The company had the means, but once again it wanted to save money. It eventually replaced Coallier with Fernando Tigre, a Brazilian turnaround specialist (whose last name coincidentally means “tiger”), but by then the writing was already on the wall. Molson hired 1,200 salespeople outfitted with scooters, raised Kaiser’s price and even changed the flavour, but the Brazilian competition, sensing weakness, moved in for the kill. Ambev, the powerful local brewer with a 70 per cent share of the market, made sure that Kaiser didn’t make it into the coolers of country’s countless bars and restaurants. Schincariol was equally relentless. Says an executive: “The Brazilians were exactly what Dan said they were.”

  So the question remains. If Molson’s brass-tacks CEO went into Brazil with his eyes wide open, why did he and the rest of the company wilfully choose to be blind? The simple answer is, because they thought they could be. Molson never bought into Brazil with the intention of building a global beer empire alongside the likes of InBev,* Heineken or Budweiser. It bought into Brazil with the idea of being able to sell out at a higher price. Company executives realized that Molson had already missed its opportunity to become one of the world’s global beer consolidators, so they chose the next best option: build some critical mass and try to come up with a growth strategy that would catch the attention of one of the big players. Brazil, with its huge market and the minimal presence of foreign brewers, fit the bill. Although executives acknowledge it was never discussed explicitly, the sense was that if Molson could lay claim to the country’s number two brand, it would force the global brewers to pay a premium to get into the market.

  “The Molson family was very old English Montreal. They were very local and only thought about investing here in Canada. They never expressed any interest in going abroad,” says an executive. “But if we were to maximize the selling price, we would need to increase the value by making one or more strategic investments. So the idea was, ‘Let’s move fast before the big guys get all the strategic players.’”

  Sound familiar? Opportunistic and imbued with a distinctive skimming-like quality, the strategy bore all the hallmarks of a National Policy mindset, only in reverse. This time, the Canadians would stake out a foreign market, forcing the multinationals, the ones who were actually serious about building global companies, to pay a toll fee. This dilettantish approach was further exacerbated by an overriding yet completely unrealistic expectation that Molson would continue to post revenue and profit growth quarter after quarter. Dan O’Neill had publicly committed to growing the company’s net income and, by extension, raising Molson’s share price. Canadian shareholders didn’t want to see their investment squandered and neither did Molson management, whose performance bonuses were directly tied to net income growth and whose stock options would be negatively affected by a drop in the share price.

  Molson management therefore found itself in the peculiar situation of having a salary and bonus structure that was incompatible with the company’s own expansion strategy. It had a serious problem on its hands: how was it going to roll out a major investment in a hugely volatile market while continuing to post profit growth? It soon became apparent that Molson couldn’t absorb Kaiser’s hefty price tag and pay to build its own distribution system. Management realized that if it didn’t find a way to cut costs, its share price would suffer. It came down to a question of distribution or dividends, and dividends won out.

  Even more telling, however, is the belief among management that Molson could somehow pull it off. In hindsight the entire proposition almost defies logic, yet despite O’Neill’s open acknowledgement
that Canadians were like guppies in Brazil’s shark-infested waters, there was obviously an underlying conviction that the company could commit just about every sin in the international business bible and still be redeemed. “There was some magical thinking that as a Canadian company we could somehow get away with it,” acknowledges an executive. “We were Molson — we had the name, the history, we could make things happen.”

  It’s not hard to see how they came to that conclusion. The Canadian beer market is a surreal place. In Ontario, the largest market, people buy their beer at the cleverly named The Beer Store, a government-ceded retail monopoly owned by Molson and Labatt. For those who haven’t shopped — and I use that word lightly — at The Beer Store, they’re in for an edifying experience. The product, which is handled with about as much care as a load of cod, is rolled out to the customer on a conveyor belt. The “salespeople” wear rubber gloves. As one disenchanted customer wryly wrote in a newspaper letter to the editor: “[It] is the worst retail experience in Canada; more interest is shown in the product by people selling gravel.”

  Not only are consumers often forced to buy in bulk because it’s less hassle for the breweries than supplying individual cans and bottles, but competing beer companies have to play by the monopoly’s rules if they want to entertain any hope of being consigned to the store’s “discount” category. (What exactly makes Molson Canadian a “premium” beer is hard to say). The most egregious stipulation is an industry-wide standard bottling agreement, imposed by the two big breweries, that all bottled beer be sold in the same dirt-brown long-necks. Ostensibly presented as a more efficient, environmentally friendly system, the recycled bottles save the breweries a ton of money as well as the effort of coming up with any sort of attractive packaging. It’s also an effective non-tariff barrier to foreign breweries looking to crack the market.

  As gatekeepers to the entire market, the Molson–Labatt tag team are able to sign licensing agreements with foreign brewers that essentially allow them to skim royalties off the top of rented brands. The government helps keep the market closed with a minimum floor price for beer aimed at keeping cheap American imports out and a ten-cent “environmental” levy on aluminum cans, the preferred packaging for U.S. brewers. The industry was even singled out by Brian Mulroney’s Conservative government for a five-year reprieve from the 1989 Free Trade Agreement with the United States. (Arguably it was the least the feds could do to make up for interprovincial trade barriers that forced beer makers to establish a brewery in every province or region where they sold beer, handicapping their ability to be competitive.)

  The upshot? Molson never had to learn to distribute, package or market its product, and whenever it wanted to make more money, it simply raised prices, while volume growth came from imported brands. What was its reward for such lackadaisical efforts? The Canadian beer market is one of the most profitable in the world. “They have a pretty cushy ride— their costs are so low because they save so much on bottles and distribution,” says David Hartley, an analyst with Blackmont Capital in Toronto. “When you come from an environment like that and you try to get something to work in an aggressive market like Brazil, it’s pretty incongruent, isn’t it?”

  Adds a Molson executive: “The fact that Molson doesn’t have to compete in Canada means that all the brains in the organization are consumed with dealing with very small operational issues, like how to get one-tenth of a point more in market share from Labatt. We are not faced with key issues of strategic growth, which pull individuals up to that next level of thinking.”

  So was Molson naïve? Yes, but the naïveté did not stem so much from a lack of knowledge of the Brazilian market as from the company’s distorted estimation of its own abilities and of what it actually took to succeed. If anything, the experience only proved that there are tried and true formulas for tackling international markets. Those rules weren’t followed, and the reaction was predictable: the Brazilians ate Molson alive.

  FOR WHOM THE BELL TOLLS

  While Molson executives acknowledge that the company’s short stint in Brazil brought an end to the company’s 219 years as an independent brewer, Molson’s experience was positively civilized compared with the rape and pillage of bci, Bell Canada’s short-lived international wing, and tiw. They made many of the same mistakes as Molson did, and like the brewer, they had no one to blame but themselves.

  Brazil was a cable operator’s dream when Peter Legault first set eyes on the market in the late 1980s. The country’s television industry, dominated by a handful of domestic broadcasters, was closed to cable, but Legault, a Toronto investment banker who had launched First Choice pay tv, planned to be there the day it opened up. When the Brazilian government began auctioning off cable concessions in 1994, Legault and seven other Canadian partners teamed up with the country’s largest publishing house, Editora Abril, to secure majority stakes in ten licences covering the greater São Paulo area. The venture, Canbras Communications Corp., had barely begun raising money for the project when it attracted the attention of bci. Legault and his associates thought they had found the perfect strategic partner: a company with technological know-how and a Canadian cachet in country general distrustful of Americans. How wrong they were.

  Bell was a bully from the very beginning, issuing ultimatums to the Canbras management and dragging negotiations on for seven months before finally investing in two convertible debentures that would give it a 51 per cent stake in the company. But what was worse, say Canbras founders, was Bell’s demeaning attitude towards its Brazilian partners. The Civita family, while quietly unpretentious, were the fabulously wealthy owners of Latin America’s largest publishing house. The Ugolinis, one of the original licence owners who retained a seat on the Canbras board, were the leading sugar refiners and the largest wire manufacturers in Brazil. Bell was small potatoes compared with these people, yet the bci executives treated them like “serfs,” says Legault. “They immediately pissed off our partner through their arrogance. Their attitude was, ‘We’re going to tell you peons in Brazil how to run a cable company.’”

  Omar Grine, another Canbras founder and its CEO from 1995 to 1997, considers the experience one of the most frustrating of his professional career. “The Brazilians were so disappointed in Bell. To this day if you mention Bell to them, they go berserk,” he says. “They had no interpersonal skills, no cross-cultural references or sensitivity training. They treated people like they came from the bush, as if all Brazil had was soccer and samba.”

  It would not take long, however, for Bell to get its comeuppance. It dug deeper into Brazil, teaming up with tiw in 1997 to win two mobile-phone licences, which were quickly followed up with local telephony concessions in São Paulo and Rio de Janeiro. In each case, bci took minority stakes (but had operating control) in the ventures and hired contractors, consultants and Bell retirees to run them. As was the case in many of the dozen or so countries where bci invested over the decade, there was little rhyme or reason to its strategy. Its cozy monopoly back in Canada had provided the carrier with a war chest of cash that it reportedly sprinkled around “like poker chips,”99 investing millions without having done the proper market research or developing any discernible business plan. It repeatedly introduced technology ill-suited to the market while its people on the ground complained they were given no direction from head office.100 “It became obvious that Bell didn’t have a strategy to penetrate Latin America in the proper way,” Grine confirms.

  By 1999 Michael Sabia, the newly installed chief of bci, was selling off the company’s Asian assets, turning a neat profit. It was clear that bci had never planned to stick around for the long haul — its international commitment was limited to the time it would take to flip its scattered investments. Unfortunately, in Latin America it didn’t make its getaway fast enough. In June 2000, Bell threw its lot in with Carlos Slim Helú, the shrewd owner of Mexican carrier Telmex, to create a pan–Latin American mobile phone and Internet operator, Telecom Américas. As part
of the three-way tie-up, which also included sbc Communications of Texas, bci chipped in most of its South American assets and committed to making around $1 billion in cash and capital contributions to the new venture.

  It didn’t take long for things to unravel. The money was supposed to come from the sale of Vésper, bci’s local telephony holding in Brazil. bci had tried to include Vésper in the Telecom Américas deal, but Slim, who is renowned for buying depressed assets at a bargain, wouldn’t pay the $1 billion that bci executives were demanding. After trying, and failing, to play a game of hard-nosed brinksmanship with the canny Slim, bci thought it had clinched a deal with one of Vésper’s U.S. shareholders, but the deal soon fell through. Increasingly squeezed between Vésper’s huge financial demands and its obligations to Telecom Américas, bci was dangerously over-leveraged and careening towards insolvency when the telecom bubble broke. By the end of 2001, bci was forced to write off Vésper to the tune of $86.5 million.

  Telecom Américas was restructured several times, but by mid-2002, bci could no longer stay afloat and sold its 39 per cent stake to Slim for us$366 million.* BCI was wound up, and all that remains is a shell for managing the various lawsuits launched by disgruntled shareholders. Meanwhile bci’s original investment, Canbras, went through half a dozen CEOS in as many years. In November 2000, minority investors, including the original founders, offered to buy back the struggling cable operator, but Sabia refused, saying that Canbras was extremely important to bci’s strategy in Brazil. Three years later, with Canbras facing imminent default, Bell dumped the company for the embarrassingly small sum of $32.6 million. To add insult to injury, Bell opted to sell Canbras’s assets instead of its shares so that Bell could take a tax writeoff on the $250 million it had sunk into the operator. “They left the company as a shell, which really screwed the minority shareholders,” says Legault.