Healthcare Mergers are not lean but are in a race to the bottom

by admin on 06/19/2011 1:41 PM

I’ve been following the Lean Marketing column from Kevin Meyer’s “Superfactory” site for a decade or so. Medicine and Healthcare in General has a lot to learn from other industries. A recent posting by his associate, Bill Waddell, was very instructive. Mr Waddell states that he is “glad to have grown up in America before “InBev” existed – in a time when good beer was plentiful and cheap.”

With the wave of mergers going on in our medical industry, we should be taking a lesson from the breweries. Hospitals are merging, as are healthcare insurance companies; physician groups are getting larger. There are cross mergers between hospital and physician groups; between insurance companies and hospitals. However, healthcare costs are going up and patient satisfaction is going down. These are reversions from a horizontal industry to a vertical integrated industry, the antithesis of what we are proposing to make healthcare more affordable. Where are the benefits to our clients, the patients we invested 12 to 16 years in training to serve? Why are we accepting this interference with our mission in life?

AB InBev is the Brazilian led, Belgium based outfit that is systematically buying and trashing the leading global beer brands.  An interesting article on Bloomberg Businessweek describes the unfolding debacle: Profits up, cash flow strong, but sales shrinking.  It is a step-by-step story of exactly how the short-term focus on profits, financial and marketing driven, disregard for the product and customer value approach takes place.

Beck’s was once a highly regarded German beer with a small but devoted core of American customers. Same with Bass, a British beer.  AB InBev bought them, started producing them in the USA, losing quality but at a lower cost, and sales are down.  It is a clear example of how focus on being the low cost producer is not a strategy for success, but merely a race to the bottom.

Selling Budweiser in the United States should be about as tough as selling sex on a troop ship, but AB InBev has demonstrated how to fail at it.  The high quality hops growers in Germany used to get an annual visit from August Busch III, but those days are long gone:

A former top AB InBev executive, who declined to be identified because he didn’t want to get in trouble with his old employer, tells a different story. He says the company saved about $55 million a year substituting cheaper hops in Budweiser and other U.S. beers for more expensive ones like Hallertauer Mittelfrüh. It is hard to say whether the average Bud drinker has noticed. But then, the average Bud drinker is not drinking as much beer.”

InBev is doing some leanish sort of cost management.  AB InBev CEO “Brito was just as ruthless when it came to the perks to which Anheuser-Busch employees had grown accustomed. He cut the number of BlackBerrys in half. Executives who once traveled in corporate jets now flew commercial. He removed the interior walls at One Busch Place in St. Louis and turned the office into an open-plan space. Everyone would work under the same Spartan conditions that Brito embraced. (In New York, Brito shares a large table with his head of sales and his finance chief.) ‘We always say the leaner the business, the more money we will have at the end of the year to share,’ he said in a speech at Stanford in 2008. ‘I don’t have a company car. I don’t care. I can buy my own car. I don’t need the company to give me beer. I can buy my own beer.’

It is a good idea to pick up pennies in the non-value adding areas like offices and cell phones.  The problem is that Brito doesn’t know the difference between expenses that add value for customers and those that don’t.  Costs are costs everywhere with equal enthusiasm in the minds of financially driven leaders who don’t really understand and appreciate the products and customers.

He laid off approximately 1,400 people, about 6 percent of the U.S. workforce. He sold $9.4 billion in assets, including Busch Gardens and SeaWorld. AB InBev also tried to save money on materials. It used smaller labels and thinner glass for its bottles. It tried weaker cardboard for its 12-packs and cases. The old Anheuser-Busch insisted on using whole grains of rice in its beer. AB InBev was fine with the broken kind.”

The results are predictable: “AB InBev’s CEO is a skilled financial engineer, but he has had trouble selling beer. The company’s shipments in the U.S. have declined 8 percent to 98 million barrels from 2008 to 2011, according to Beer Marketer’s Insights. Last year, Coors Light surpassed Budweiser to become America’s No. 2 beer.”

Of course AB InBev’s mismanagement opens doors for local and regional companies focused on the quality and value of their product; “The craft brewing industry grew 13% in 2011.  There haven’t been this many U.S.  breweries since before Prohibition“.  What InBev has done to beer is what so many companies have done in China in pursuit of a low cost strategy.  Without a keen understanding of value and mama bear-like defense of it, broad brush pursuit of low cost inevitably leads to low value, which can only lead to lost sales, either in fewer units or lower prices.  It is also a good example of the myth of mass markets and mass production.  Mass thinking is based on one-size-fits all products and they rarely delight many customers.

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Editor’s note: What AB InBev has done to beer, hospitals, HMOs, insurance carriers have done to medical care. They fail to understand the value of healthcare. Thus they have cheapened it for the masses with a broad brush pursuit of low cost which inevitably leads to low value. The serious beer drinker has noted that the lower cost has decreased the quality of beer and has spawned the craft brewing industry. Many patients have figured out the reason for the exorbitant cost of healthcare has also cheapened healthcare. They are now beginning to understand that by paying the average yearly costs of their healthcare out of their pocket and have major medical or high deductible health insurance to cover unexpected diseases, major surgery, trauma surgery, and other unexpected costs, has lowered their total health care costs. Americans are also observing that such insurance costs only half as much as their present policy. This also reduces overall healthcare costs significantly.

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