DREAM BIG: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz

by Cristiane Correa

  Haddad reluctantly went along. He had no idea that the company would be transformed into the biggest brewer in the world and he would also become a partner in Brahma. The value of the stake he unwillingly bought was estimated at almost R$ 1 billion in AB InBev stock in 2012.

  How could bankers who knew nothing about the daily operations of a long-established brewing company like Brahma run it?

  “We are only entering the business with the money,” said Sicupira at the time, perhaps in an attempt to persuade the doubters. There was nothing further from the truth. Just as Sicupira himself had left the bank to make a radical change in the management of Lojas Americanas, another partner would be promoted to do likewise at Brahma. The choice was Telles.

  By that time, Telles had been with the bank for almost 18 years. Shortly beforehand, he had completed a course at Harvard called OPM (Owner/President Management Program) aimed at entrepreneurs who needed to learn more about management. (Sicupira had finished this course years earlier.) It was at Harvard that Telles, who had concentrated only on daily financial transactions until then, started to transform himself into a businessman with a long-term view.

  Running Brahma would require more than management theories. Telles was about to enter a world of which he knew absolutely nothing: plants, distribution centers, marketing consumer products, labor unions. He led a team of a couple dozen people at Garantia, whereas there would be almost 20,000 staff at Brahma. To face up to this new world, he would need the help of top people. He was not alone when he arrived at Brahma and took along a small team consisting of Magim Rodrigues, Carlos Brito and Luiz Cláudio Nascimento, known as Pantera. Each had been carefully chosen for the mission. Nascimento worked in Garantia and would be responsible for Brahma’s cash. Brito, a young engineer from Rio who had recently concluded an MBA at Stanford, would create a management control model for the company. Rodrigues, former CEO of Lacta and 47 at the time, would be Telles’ right hand man.

  Lemann, Telles and Sicupira do not usually hire an “outsider” for a key position in their companies. The priority had always been to give an opportunity to a talented insider. However, Rodrigues was hardly unknown to them. He had known Sicupira years earlier when he once went to Lojas Americanas and asked why it sold so few Lacta Easter eggs. He claimed Lojas Americanas could increase its sales of Lacta chocolate fivefold. Sicupira argued that there was not enough room on the shelves for a great volume of eggs. Rodrigues left, disgruntled with the way the meeting had ended. A few hours later, he called Sicupira:

  Rodrigues: “Beto, I’ve found the place.”

  Sicupira: “Oh yes? Then come over here. Let’s talk and someone in this company is going to get a rocketing for leaving so much spare room in the store.”

  Rodrigues’ solution would be adopted not only by Americanas, but all the big Brazilian retailers: the eggs would be hung from a structure set up over the corridors between the shelves instead of occupying space on the shelves. Sicupira loved the idea and decided to put it into practice.

  It worked. Lacta sold Americanas five times as much chocolate as the previous year. By Easter Saturday, the stock had been virtually sold out.

  Rodrigues and Sicupira kept in regular contact after this episode until Rodrigues left Lacta, hit by a disagreement among the shareholders. To clear his head, he went to live with his family in a house facing Stella Maris beach, north of Salvador. He spent a year surfing, playing tennis and sunbathing. His executive career had made him rich and he decided to give up work. Fourteen months after going into self-imposed exile, he received a call from Sicupira inviting him to a meeting in Rio. Rodrigues recounted what happened:

  “Beto said they were entering a new business and Marcel would be the partner who would take charge. They wanted me on board but did not say what the project was because they were still negotiating. When I asked what area it was and Beto said he couldn’t tell me, I said it wouldn’t work and the conversation was pointless. How could I agree when I didn’t know what it was about? Then he said it was in the beverages area. I thought it must be a Coca-Cola franchise. It never occurred to me that it involved Brahma or Antarctica, which were two old, traditional heavyweight companies... I didn’t think it had anything to do with them... Even without much information, I agreed. I didn’t know Marcel and Jorge Paulo well, but I liked Beto. He had an aggressive, dynamic, hands-on, straightforward style that suited me.”

  In the months preceding the closure of the purchase, Rodrigues, Nascimento and Brito occupied a meeting room at Garantia to prepare to take over Brahma. A lot of Rodrigues’ time was spent on international trips. He needed to understand how the beer market operated and traveled to Argentina, Chile, Germany, the United States and Japan. It was an old Garantia saying put into practice once again: why start from scratch when you can learn from the best in the world? It had worked for Garantia itself, which copied the best practices of Goldman Sachs. It had worked with Lojas Americanas that had been strongly influenced by Walmart. It would also work with Brahma.

  A few weeks before announcing the purchase, Lemann convinced Gregg to authorize the company to “hire” Rodrigues and Brito. Rodrigues headed off to the beer plant in Minas Gerais state and Brito to Agudos in upstate São Paulo. They would then be ready when decision day arrived – or at least they thought they would be.

  Just as Sicupira saw his paycheck shrink when he took over Lojas Americanas, Telles gave up his bonus as a partner in Garantia to become the CEO of Brahma, although he continued to receive dividends from the bank. This was not a problem as far as he was concerned. Telles saw in Brahma the opportunity to build the company of his dreams, a kind of tidier version of Garantia.

  He entered the brewer for the first time on November 6, 1989, and found an unexpected problem already waiting for him. In its rush to conclude the deal with Brahma, Garantia had brushed aside the traditional due diligence, a detailed analysis the buyer makes of the accounts of the company to be purchased before the deal is settled. When he finally had access to all the numbers, Telles got a shock. The brewer’s pension fund had assets of US$ 30 million and needed reserves of US$ 250 million to meet its obligations – four times the amount the bank had paid to buy the company. When they discuss the matter today, Telles, Lemann and Sicupira say it was good that they had not done their homework, as they would probably not have gone ahead had they known the size of the problem.

  The blow needed some fast, drastic action. This was when the former market trader showed his steady nerves. Telles was never the kind of person to put off a decision. Although the effects of his decision were unpopular, he moved quickly. He analyzed the situation and came to the conclusion that Brahma’s own executives had created a distortion in the company’s private pension scheme. (A similar situation arose in 2009 and was one of the main reasons why the American carmaker General Motors sought bankruptcy protection.) Telles said the distortion had to be corrected or it would put the whole company at risk. He decided that the amount of the pension to which the directors had a right would be cut by half while managers would have their amount cut by 30% to 40%. The shop floor workers were the only ones to have their rights preserved. Almost 400 individual conversations were needed to reach a new format for the pension plan. The decision caused an uproar among the executives.

  At the age of 39, recently-separated from his first wife and childless, Telles dived into his new job with new energy. With his casual clothes, thick beard and long hair, which made him look more like a labor unionist than a banker, he started to gain close knowledge of the Brahma plants and vendors throughout Brazil. He visited breweries abroad (including Anheuser-Busch) and spoke personally with all the main executives. During the whole of his first year in charge of Brahma, his Saturdays were spent in meetings with Rodrigues, Sicupira and Nascimento. They started at 9 a.m., but had no fixed time to finish. The meetings sometimes took place in the apartment-hotel where Telles was living at the time in the Southern Zone of Rio, or at his home in Búzios.

>   The four participants used these meetings to discuss everything that had happened in recent days and outline the upcoming week. Fine tuning was essential to avoid losing control of the new business they still barely knew. Telles also wrote regular letters to his Garantia partners telling them what had happened at the brewer. It was a way of organizing his ideas and to show, to some extent, that his absence from the bank would be worth it for everyone. He sent 13 reports to his partners from November 1989 to January 1991.

  There was never any shortage of issues for the Saturday meetings and the letters to his partners. Brahma was bogged down in bureaucracy, waste and inefficiency. The company’s administrative expenses jumped from 12% to 17% of its net operating revenues between 1988 and 1989, a rare case of supposedly fixed costs becoming variable. The company’s plants were ageing, with machinery that was an average of 40 years old. The previous management did not seem to have been bothered about obsolescence and preferred to concentrate on the fleet of shiny cars. There were 1,000 cars in the company’s parking lot and another 40 Opala Comodoros on order. The directors had the right to 45 days holiday a year. Their salaries were an average of 30% higher than the market rate and those above manager level received a 14th and even 15th extra salary. Although the company had an agreement with PepsiCo to distribute its soft drinks in Brazil, Brahma had never taken advantage of the opportunity to do some benchmarking with the Americans. Executives spent most of their time preparing overblown reports and taking part in meetings that rarely decided anything. This situation led to an internal joke that Telles heard just after his arrival.

  A group of archeologists would discover the ruins of Brahma one day and find an enormous number of files, reports, forms and the like. After analyzing the material, the archeologists would come to a single irrefutable conclusion: they had found the site of a paper factory with so many drunken employees that the management had built a brewery alongside.

  The only good point about a company with so many obvious problems was that any change would bring quick results. Telles told all areas at the end of 1989 that they had to cut costs.

  “He said costs had to be cut by 10% and revenues expand by 10% every year,” Rodrigues recalled. “I thought he was mad.”

  The pressure meant that departments like marketing, HR, supplies and finance would have to cut expenses by a total of US$ 50 million in one go. Part of this reduction came from reducing the headcount. Three months after Telles arrived, 2,500 workers had been dismissed. (This included those who had been fired, retired or sought voluntary redundancy.) This was equivalent to 10% of the entire workforce, but 18% of the payroll. “They (Lemann, Telles and Sicupira) were forced to absorb an industrial culture that takes the long term into account, but they did not lose their financial intelligence,” Jorge Gerdau said. “This made all the difference at Brahma.”

  To speed up the changes, Telles and his men adopted more or less the same approach used in Garantia and Lojas Americanas. The walls of the directors’ offices were torn down and gave way to a big table they all shared. The number of secretaries shrank and the executives had to get used to sharing them with their colleagues. Reserved parking places for directors were abolished and those who arrived first got the best spots, a rule that applied to Telles himself. The executive restaurants were closed and the segregated bathrooms for executives and “others” were also scrapped.

  “Marcel took the best of the Garantia philosophy, introduced it to Brahma and left the company with his touch,” said Bruno Licht, a former partner in the bank.

  Changes like this would shock many companies, even today. It is still common in the 21st century to find Brazilian companies with private restaurants for their executives, where meals are served by white-gloved waiters. Telles sprang an enormous surprise at Brahma at the end of the 1980s with his measures and left many directors feeling uncomfortable. They gradually adapted to the new times. One of them was Danilo Palmer, the finance director from Rio who had been working there for 20 years when the Garantia team arrived. (He did not give up his executive functions until 1999, but remained on the board of directors of Brahma and then Ambev for a number of years.) The other was the marketing director, Adilson Miguel, hired by Brahma in 1962.

  “I had an office measuring about 40 square meters, three phones, my own secretary and an extraordinary status,” Miguel recalled. “Despite this, my orders were unheeded and I made no money whatsoever.” Not only did this veteran identify with the new management, but he became Telles’ right hand man. Now, aged 71 and officially retired, he still works in the brewer as a consultant and is responsible for the company’s relationship with the Brazilian Football Confederation (CBF), which Brahma sponsors. Miguel went on to describe Telles’ arrival:

  “His appearance at the company was like someone completely different from anything we could imagine. He arrived wearing jeans, running shoes with no socks, a diver’s watch on his wrist and carrying a backpack. Everybody at Brahma wore suits, ties, everything correct, groomed, clean shaven. Marcel was the opposite. I really thought he was odd... One day, he appeared in my office, told me what he was planning to do and asked my opinion. I replied that he should really go ahead and change the company and that I would probably be the person most hit by the situation that the company had lived through until then. I was marketing director, but Brahma never intended doing any marketing. I reported to a committee of people who knew absolutely nothing about marketing or the market. It was frustrating. I was criticized for traveling too much to get to know the market. People said sarcastically that I should work in an area called “Brahmatur.” How can you create a marketing strategy for a company if you don’t know what’s happening on the market, what’s happening with the client and distribution? I told Marcel he needed to change the whole marketing department, including perhaps its director.”

  Miguel’s assessment of the problems facing Brahma was music to Telles’ ears.

  “Like crazy people”

  Having a beer in Brazil in the 1980 was only for the most ambitious. As the temperature rose, not only did prices rise, but the drink simply disappeared from the shelves. The plants were not producing enough and the retailers lacked distribution. The situation was so inefficient that more careful consumers used to stack up at home before summer arrived. Those who were not so far-seeing had to put up with lines in supermarkets and even rationing. A report in the Folha da Tarde newspaper in December 1987 showed what happened to clients who tried to buy beer at the Paes Mendonça chain, one of the biggest retailers in Brazil at that time:

  “Customers formed lines early to hand over empty bottles and get a number that allowed them to buy 12 bottles at a time.”

  A pathetic state of affairs from any viewpoint, it did not make any sense to the Garantia team to lose sales opportunities due to the inability to get the product onto the shelves. The production process needed to be lubricated and, most importantly, make the vending side more efficient. Telles had spent a couple of weeks getting to know American brewers and saw firsthand how the giant Anheuser-Busch handled its distribution – a highly adjusted system that could deliver its main product, Budweiser, to practically every bar, restaurant and supermarket in the US. Compared with Brahma, Anheuser-Busch won hands down. What did Telles do? He used the old “Garantia culture” formula and copied the best of what he had seen abroad.

  Miguel, the Brahma executive who probably knew the beer market best – not through spreadsheets and reports, but because he made personal visits to clients and retailers – was chosen to lead the change.

  “Our distribution was in the hands of a lot of unprepared companies that had usually only been chosen because they were run by a friend or relative of some Brahma director,” Miguel said. “The distribution passed from father to son through a process that was like notary offices, even though the performance was not very good.”

  To make things even more difficult, Brahma was working with almost 1,000 vendors, which made the operation enormously
complex. Everything was so dispersed that few of these distributors even made much money. They were discouraged and so short of cash that they invested almost nothing in enhancing their performance. The result was a vicious circle that fed on itself.

  Telles believed the best idea would be to have fewer distributors who would make their money by increasing their scale and he began a tricky process of squeezing the chain, which upset most of those retailers who were excluded. The next step was to standardize the processes as, until that time, each operator worked the way that suited it best. Within a short time, the remaining vendors had targets to meet, and their results were measured on a regular basis. The best received awards at an annual event Brahma organized.

  “We reached the point when our distribution was better than Coca-Cola’s,” Miguel said.

  Brahma’s massive presence throughout Brazil would give it another advantage. This was a lesson learned from the Walmart people. A company with scale has the firepower to negotiate better prices and payment conditions. As Brahma grew, its suppliers and the retailers that sold its drinks had to adapt to the company’s new rules. All of them were forced over the years to reduce their profit margin and be more flexible in their payment conditions. (The company would later start paying its suppliers only 120 days after buying a product or service.)

  Brahma’s engines got fired up not only in terms of processes and results, but mainly by the formation of people. As was the case at Garantia, Telles sought ambitious young people with a glint in their eye, fire in their belly and a willingness to work hard and sacrifice their personal lives. The big difference between recruiting at the bank and the brewer was the size of the problem, as Brahma had almost 100 times more employees than the bank. One of the initiatives put into practice straight away was to hold speeches in prestigious universities to try and hook young people before they graduated. Telles and Rodrigues took turns at being the company’s public face. A year after Brahma was acquired by Garantia, its first trainee program was set up.