Jorge Paulo Lemann’s Mea Culpa

The past week has seen wrenching performances by two of the investment world’s greatest icons, Warren Buffett of Berkshire Hathaway and Jorge Paulo Lemann of 3G capital. First, during the traditionally upbeat BH annual meeting, investors were shaken by Buffett’s cheerless discussion of financial history and his gloomy assessment of current investment opportunities. Buffett’s pessimism, a reflection of his huge exposure to “Old Economy,” mature and highly cyclical industries, highlighted his neglect of the market’s tech darlings, which has caused his underperformed relative to the S&P 500 for well over a decade. A few days later, speaking at the annual Brazil Conference at Harvard-MIT, Lemann also appeared beaten and forlorn. Lemann, who has recently characterized himself as a “terrified dinosaur” in the face of accelerated innovation and disruption, provided a brutally honest account of past mistakes and the difficult road ahead.

Until a few years ago, Lemann’s 3G Capital was at the top of the financial world. Masters of financial engineering, operations and cost control, 3G built an empire by acquiring  beer companies with bloated cost structures which were then aggressively benchmarked to industry-best standards. Unfortunately, at one point hubris led to expansion into new segments (fast food, Kraft-Heinz) and overpayment for beer assets (SAB Miller).  The company relied extensively on a brotherhood of Brazilian managers that embraced an aggressive macho culture of results. As the company grew these Brazilian managers were dispatched around the world, finding themselves running businesses that they didn’t understand in countries they had no familiarity with. (e.g. A Brazilian executive was relocated from running a faltering railroad chain in southern Brazil to become CEO of Burger King).

For years, 3G’s Brazil operation was considered the best place to work for ambitious graduates from Brazil’s best universities. However, in recent year’s  Brazil’s best and brightest have turned their backs on the company, preferring instead  more entrepreneurial and tech-driven start-ups. The same has happened with millennial MBAs in the U.S. who reject the company’s in-your-face, “macho” culture.

Lemann points to three had lessons the company has learned.

1. The company has to transform itself from a production-driven operation to one that is consumer-centric.
2. The company needs to bring in new talent. This means building a team of managers who understand new distribution and information channels and modern data-gathering/artificial intelligence tools. These are different people than the ambitious hustlers that came up the ranks in the past.
3. ABInbev overpaid for SAB Miller and the acquisition was so large that it taxed the management capacity of the company.

The two charts below show the poor performance of 3G’s beer publicly traded beer assets (Ambev and ABInbev) on an absolute basis and also relative to their primary competitor Heineken.

Here follows Lemann’s apology:

Jorge Paulo Lemann at the annual “ Brazil Conference Harvard-MIT”, May 8, 2020.

“I think about 30 years ago, more or less, we bought Brahma, and the first 25 years were very, very successful; return on equity and everything was exceptional. Then, these last five or six years, we haven’t done as well; and I think a lot about why we haven’t done as well.  And, so we had a formula which was to attract very good people, pay them very well, manage things very efficiently, keep expenses down, have a big dream and everybody driven in that direction.

And, we sort of missed out a little bit on two things. We missed out on being more consumer centric. You know, the whole world has become consumer centric; the consumer has many more options than he had before. He can access things over the internet and so on. An, we remained with our focus on producing things well, good quality, cheaply, etcetera… and assuming they will be bought. We never really paid attention, as we should have, to what the consumer really wanted… So that was the first thing. The culture we built our companies on was very production, bottom-line oriented and did not take into consideration as much as we should have what the consumer wants.

The second thing is that the world has changed a lot; there’s artificial intelligence; there’s a lot more digital information and you have to have different people running your businesses and people who are much more familiar with getting information from your clients as they are today – knowing how to deal with that – and, so, we have been a little bit late on that also. The businesses we had all had big market shares. We were comfortable with that market share we had, and, so, basically we didn’t give tge consumer enough attention. And, we didn’t attract the people to our culture that know how to deal with the information that you need nowadays to deal with becoming a consumer-centric company. So, we were late in that. We’ve been punished in terms of our market value in recent years and we’re having to adjust. We have now new people, different people, who are much more focused on the kind of things that I have been talking about and that’s going on in all our organization, at the beer company, at Kraft/Heinz, at RBI., etcetera… So, we’re doing it. It’s an ongoing process. It will take some time, I think we realize.

An then, we were a little bit over-ambitious four to five years ago. We made a very big purchase of SAB-Miller, this company that has a big presence in Africa, and Africa is where all the growth in consumption of beer will probably come from in the next 20 years… So, we overpaid for that and it also took our focus off what was a very well-run business. We had to deal with new things, a bigger company. So, that has hampered us a bit. So, we’re fixing that.

We are still very optimistic for the next 10-20 years, but we are having to deal with these problems at the moment, and, obviously, having to deal with these problems in the current circumstances of the virus, and that makes it a little bit more difficult. But, you know, we are confident that we will make it and that twenty years from now we will look back and say we did it again…”