Bitter Brew: The Rise and Fall of Anheuser-Busch and America's Kings of Beer Part 24

Pa.s.sing up the opportunity to be a partner in AmBev is regarded as one of August III's two great professional mistakes. Five years later, the Brazilians merged AmBev with Belgium-based InterBrew to form InBev, which knocked A-B out of its long-held spot as the world's largest brewer (by volume)-"The New King of Beers," Money magazine proclaimed-and set the table for its eventual takeover. Had August been willing to pay the price in 1999-a mere $210 million-he might have been able to head off the takeover.

His other great mistake, of course, was continuing to promote his son.

When August IV was named president in 2002, the company's fortunes had begun to turn. All the award-winning TV commercials had managed to halt the decline in Budweiser sales, but not increase them. For the first time in nearly fifty years, Gussie's beloved Budweiser had fallen to second place, overtaken by Bud Light, the upstart offspring that no one in the family had wanted in the beginning. A-B could still boast the two top-selling brands, but the switch in places was worrisome because Budweiser, not Bud Light, was the spearhead in the company's foreign expansion plan. As the Fourth said when he was promoted to vice president of marketing, "The question isn't 'Can Budweiser grow again?' We must grow Budweiser again. Budweiser is our ticket to go international. Budweiser is our Coca-Cola."

In the first year of the Fourth's presidency, however, A-B's sales and stock price flattened as Budweiser began to sink again. He responded by pouring money into image marketing, ad campaigns, and new product development. With wine and spirit sales on the rise and cutting into beer sales industry-wide, he approved a $60 million promotional budget for a new product called Bacardi Silver, a clear malt-based, rum-and-citrus-flavored beverage developed in partnership with the world's leading rum distiller. With the Fourth overseeing the rollout, the budget naturally covered the cost of a garishly branded Bacardi Silver high-speed powerboat and racing team.

Beverage industry a.n.a.lysts noted that A-B was a little late to the races with Bacardi Silver; sales of so-called malternative or alcopop beverages-Smirnoff Ice, Captain Morgan Gold, Sauza Diablo, Skyy Blue-peaked just as Bacardi Silver hit the market. The New York Times said the new beverage category was "starting to show signs it is a fad rather than a trend."

A-B sales managers grumbled that pushing a product so strongly identified with a distilled spirit seemed counterproductive. Hadn't America's brewers been battling with distillers over the alcohol consumer's buck since back before prohibition? But now they were encouraging people to pick up a bottle that said Bacardi rather than Budweiser or Bud Light? It seemed like bad business.

The Fourth apparently disagreed. In September 2005, A-B established a wholly owned subsidiary specifically tasked with developing and marketing distilled spirits. The subsidiary was called Long Tail Libations, Inc. after the best-selling book The Long Tail: The New Economics of Culture and Commerce, which referred to "the long tail of the fast-falling demand curve in economics," and posited the theory that in the new economics of viral marketing and Internet sales, an offering of numerous smaller-selling products could equal or exceed the value of a blockbuster.

"A challenging time calls for looking at things differently," the Fourth told Fortune magazine.

Long Tail Libations' first libation, called Jekyll & Hyde, was definitely different. Aimed at twenty-one- to twenty-seven-year-old consumers, it came packaged in two "nesting" bottles-one containing a 60 proof berry-flavored scarlet liquor (Jekyll), and the other a jet-black 80 proof liquor tasting of spices, herbs, and licorice (Hyde). The two liquids were supposed to be combined in a shot gla.s.s, where they separated into layers, with Hyde on top. J&H was marketed to bars and nightclubs as a s.e.xy "back bar" display item and sold in retail stores for as much as $24. It was not a drink any self-respecting veteran of the Great Beer War would ever lift to his lips, but it apparently appealed to at least one forty-one-year-old beer company president who'd spent a lot of time "researching" twenty-one- to twenty-seven-year-old women in bars and nightclubs.

At the same time the Fourth was spending millions developing and marketing "innovative" new drinks, he further alienated his veteran sales force by slashing budgets for basic merchandising programs that were the traditional nuts and bolts of selling beer. He ordered a 50 percent cutback in the national account menu program, through which A-B covered the cost of producing menus for national restaurant chains such as T.G.I. Friday's, Bennigan's, and Hooter's in exchange for product visibility in the menus-encouraging patrons to order a cold Bud or Bud Light with their hot wings. The big chains had no trouble finding other beverage companies to pick up their menu tab, and the sale of A-B products went down in their restaurants.

"The Fourth had no appreciation or respect for the fundamentals of sales," said a former sales executive. "If it wasn't glamorous, he wasn't interested. He never missed a chance to fly to the Grammy Awards or the MTV Awards and spend three days in Los Angeles. He loved that juice. But the MTV Awards didn't sell beer for us. The menu program did."

The proof was in the performance. A-B's sales fell by more than 2 million barrels in 2005, causing net income to drop nearly 18 percent, the first significant decline in ten years.

Toward the end of 2005, A-B began test marketing another Long Tail product called Spykes, a caffeine-infused malt beverage containing 12 percent alcohol that was designed to compete with sweet-tasting energy drinks such as Red Bull and Rock Star. A-B promoted it as a dual-purpose drink that could be either used as a mixer or tossed back neat: "It gives kick to your beer, flavor to your drink, and is a perfect shot." The trouble was, Spykes came in mango, melon, peach, raspberry, and hot chocolate flavors and was packaged in candy-colored two-ounce bottles that resembled nothing so much as nail polish and could be secreted in the smallest of purses. At a price of less than $1 per bottle, Spykes was, as one critic noted sarcastically, "The perfect drink for a child."

The initial Spykes rollout was low-key and mostly confined to the Internet through the website spykeme.com. In keeping with the Long Tail theory, A-B executives were hoping the new product would take off virally, which it did, but not in the way they wanted.

"A shameless ploy to market malt liquor to the Lunchables set," said one writer. "A predatory move to attract underage drinking," said Joseph Califano, the secretary of health, education and welfare in the Carter administration and the subsequent founder of the National Center on Addiction and Substance Abuse.

"No thirty- or forty-year-old beer drinker is going to add hot chocolate or some other flavor to make beer more palatable," said Califano, "but kids will, and when they do they will get two drinks in one."

"Anheuser-Busch is practically begging to be investigated, subpoenaed, sued, or hauled before a congressional committee to explain this one," said George Hacker, the director of alcohol policies at the Center for Science in the Public Interest (CSPI).

The Michigan State Police put out a bulletin to its troopers warning that "these new products appear to be marketed for young people and could be easily overlooked by patrol officers, especially in a woman's purse."

The U.S. Alcohol and Tobacco Tax and Trade Bureau wrote to A-B saying the tiny, almost unreadable alcohol warning labeling on Spykes bottles violated federal law.

A group of twenty-nine state attorneys general from around the country sent a letter to August IV saying, "In our view, the labeling for Spykes is inadequate, and the content of its advertising is irresponsible, reflecting a basic disregard for consumer safety and welfare.

"Spykes exhibits all the indicia of a youth-oriented 'starter drink,' while posing the additional risks that arise from combining energy drinks with alcohol," the letter stated. The attorneys general pointed out that A-B was promoting Spykes online with free ring-tone and wallpaper downloads "that primarily appeal to adolescents, on a website with no meaningful barriers to youth access."

In an online article headlined "A Booze Buzz for Teenyboppers," MSNBC.com posted some purported customer comments pulled off the spykeme Web site:

LAURA: This stuff is sweeet! It comes in a tiny little bottle you can take with you ... so cute!

MURMUR6: I wonder if it still tastes good if you heat it up lol

ELNINA2000: I agree with Laura ... the bottles are adorable

MYTY: I'm gonna try putting one in the microwave ... see what happens? lol

STEVIE7: Actually this is my girlfriend's favorite too ... she takes them in her purse everywhere.

Whether the postings were the cynical compositions of company-paid ad copywriters or the sentiments of real customers, they weren't written in the voice of twenty-one- to twenty-seven-year-old women.

Perhaps the most surprising aspect of the Spykes controversy was the company's tin-eared response. A-B's vice president of communications and consumer affairs, Francine Katz, released a statement calling the critics "perennial fear-mongering, anti-alcohol groups whose members are in the business of spreading misinformation."

Katz was A-B's highest-ranking female executive, the first woman to serve on the strategy committee, and a member of the Fourth's management team.* As such, she was tasked with delivering the official reply to the attorney general's letter to the boss. The content and tone of her response pointed up that A-B had parted ways with Fleishman-Hillard and was handling its public relations in-house.

Spykes was designed for "contemporary adult consumers" who were "looking for innovative alcohol beverages to match their active lifestyles," the statement said. "Those who criticize Spykes fundamentally misunderstand the behavior of many illegal underage drinkers. They drink for instant impact. The fact that Spykes are sold in 2-ounce bottles and have a total alcohol content equivalent to only one-third of a gla.s.s of wine makes it much less likely that illegal underage drinkers will choose Spykes as opposed to similarly colored and similarly flavored products that are 70 to 80 proof hard liquor.

"Those who are concerned about the concealability of small containers should focus on those hard-liquor beverages [such as airline mini-bottles] already on the market that have three to four times greater concentration of alcohol by volume than Spykes," the statement went on. "If the attorneys general believe that 50-ml bottles are a problem because their size makes them easily concealable, this standard should apply not just to malt-based products, but to hard liquor as well.

"One would think that if there were going to be a double standard applied, it would favor the lower alcohol content products, not the type of hard-liquor products made by Beam Global and other hard liquor manufacturers."

One would also think that a 129-year-old alcoholic beverage company could come up with a more mature and measured response to a large group of concerned law enforcement officials, a response that didn't sound so put-upon, and didn't miss the point so completely. Katz's name was on the statement, but the Fourth's fingerprints were all over it. He apparently didn't grasp that the critics weren't so much worried about underage college girls carrying around Spykes in their purses as they were about their twelve- and thirteen-year-old daughters who had nail polish bottles on their makeup tables that looked almost exactly like Spykes. Perhaps if he'd been married with children, he would have understood.

It was not a battle that A-B could win; the optics were just too d.a.m.ning. A week after receiving the attorney general's letter, the company issued a statement saying that August IV had decided to pull Spykes off the market. But it was left to another member of his management team to explain why. "Spykes has not performed up to expectations," said Michael Owens, A-B's vice president of marketing. "Due to its limited volume potential and unfounded criticism, we are ceasing production." He insisted that there was nothing wrong with Spykes or how it was marketed, and repeated that it had been "unduly attacked by perennial anti-alcohol groups."

Critics applauded the move but not the company. "The real question is how this ill-considered product slithered from the drawing board to the a.s.sembly line in the first place," said George Hacker of the CSPI. "One also wonders whether the company truly hit bottom with Spykes, or whether it will again stoop to market kid-friendly drinks after the furor subsides."

Indeed, the fact that A-B management remained petulant and unapologetic to the end-and that the Fourth took no responsibility for the decisions that led to the debacle-pointed up just how far the company had drifted from Gussie's belief that serving the public good always served the company best. It appeared that Anheuser-Busch had lost more than its ranking as the world's largest brewer; it had lost its moral compa.s.s as well.

In July 2006, St. Louisans learned that the town's most notorious bachelor, the legendary "playboy" of the Central West End, was once again engaged to be married. Readers of the local newspapers had been able to follow the Fourth's chain of dalliances through the years-from previous fiancee Judy Buchmiller to California girl Sage Linville to local beauty queen Shandi Finnessy ("the pride of Florrisant") to an East St. Louis topless dancer name Karla Stratton. Now the Post-Dispatch reported that the next potential Mrs. Busch was twenty-five-year-old Kathryn ("Kate") Thatcher, who held a marketing degree from Boston College and hailed from the tiny town of Fairlee, Vermont (population 967), where her father was a high school athletic director and coach of the boys' basketball team.

Kate appeared tailor-made to please August III. She was tall and blond and radiated the same fresh-faced, All-American good looks as the two women he'd married-the Fourth's mother, Susie, and stepmother, Ginny.

"The Fourth met Kate in the company's VIP suite at a Cardinal-Red Sox game," said one of August's friends. "I think she was Miss Boston or something, a broad with a t.i.tle. It was when he was on the prowl and needed to find a wife."

The friend confirmed widespread speculation in the company and the media that the Fourth felt pressured to get married because his father had made it a prerequisite for his taking over as chief executive, much as Gussie had done with him.

"The weekend he left for his wedding, he told me, 'I don't want to do this.' He said that his father was making him, that he had to 'fulfill the contract.'"

The wedding was set for August 5, 2006, but prior to the event, the Fourth's seemingly guaranteed ascension to CEO was threatened by a rumor that spread through the executive ranks.

"I heard about him failing two drug tests," said a former executive, "one that he was put on notice for, and a second one that was covered up. The story was known below the strategy committee level, because I heard about it, and I wasn't on the committee. It was one of those things where senior executives would close their office door and say, 'I just heard that ...'"

Part of the rumor was not true. The Fourth had not flunked a second drug test, but only because he had conspired with a handful of his underlings to falsify the test results. "The Fourth's name was pulled again randomly, and he knew that he was going to test positive," said a former executive who learned about the scheme from one of the partic.i.p.ants. "The tests were always done at an independent contractor's location, and you had to make an appointment and go there. So they delayed and delayed and kept concocting scheduling conflicts for him, saying he was traveling, until they finally got the drug testing contractor to send someone to the offices of A-B's owned distributor in Boston, where they controlled the situation and were able to switch his test samples with those of a guy who worked there." So the Fourth pa.s.sed with flying colors, and apparently neither August III nor the board ever learned of the deception.

The wedding of August IV and Kate Thatcher took place in Bradbury, Vermont, followed by an elegant reception in nearby Hanover, the home of Dartmouth College, where the wedding party had taken over the picturesque Hanover Inn for the week. Anheuser-Busch made its presence felt by sending in a hitch of eight Clydesdales and a cla.s.sic red Budweiser beer wagon with two uniformed drivers and a Dalmatian perched up top, big white satin bows fastened along the sides, and a "Just Married" sign hanging on the back. The Clydesdales were supposed to parade around the Dartmouth Green in the center of town, but instead they remained stationary at the corner of Wentworth Avenue and Main Street, where a large crowd gathered to admire the famous animals. A-B representatives had pressured the proprietors of Molly's Restaurant, the Canoe Club, Murphy's on the Green, and other establishments to feature A-B products more prominently while the wedding party was in town, and most complied, some even replacing more popular local beers to accommodate the request. As he stood with his bride posing for wedding pictures with the beer wagon as a backdrop, the Fourth was careful to have a perfectly poured gla.s.s of Budweiser in his hand. The local newspaper put it all into perspective with the headline "Clydesdales Grace Green for Wedding."

Back home in Missouri, the Fourth and his new bride settled into the Huntleigh Village mansion, which he was remodeling to accommodate his growing collections of guns and cars. They spent most warm weekends at the Lake of the Ozarks, where they were celebrated as the Royal Couple, smiling from the cover of a slick new local magazine, L.O. Profile. The accompanying article-"Mr. and Mrs. August Busch IV: Newlyweds at Home"-was a fawning promo for Anheuser-Busch, but in what may have been an unintended moment of candor, Kate let slip a sad fact of their life together.

"When August first told me about the Lake, I had visions of long romantic and quiet weekends," she said. "Little did I know that it would be the two of us and several Anheuser-Busch executives." Then, brightening, she added, "After the initial surprise, though, it didn't take long to get used to spending our weekends with everyone. We always have a great group of people with us."

"He really wanted to be true to Kate," said one of the Fourth's male friends. "I think that lasted three months."