A few days ago the WSJ had an interesting article about how beer giant AB InBev is … voluntarily incentivizing its distributors* to carry more of its products and less of its competitors’. John D. Rockefeller would be proud.
One of my pet self-education projects is to trace the history of how the world’s great beer brands—each of which started life as just another local brewer—managed to grow so large and dominant. It’s clear that economies of scale are a large part of the answer, and it’s also clear that economies of scale are self-fulfilling, in that scale, once established, leads to economies of scale, which tend to lead to more scale, etc. But that raises two questions:
- How does scale get established in the first place?
- What exactly does the process by which scale leads to economies of scale look like on the ground? (the linked article gives one example)
I’m skeptical that it’s worth an investor’s while to spend too much time on the first question. It may well be that a butterfly flaps its wings somewhere and causes one player to establish scale in a given industry, and it’s too random to predict.
But it’s the second question that interests me more. I’m convinced that the process by which a company takes a random initial scale advantage and turns it into something durable is initially a quiet one, consisting of many small actions, and plays out without much fanfare from markets or the media. And I’m at least somewhat convinced that the investor who works hard enough, and knows what to look for, can observe and predict the outcome of this process in advance of securities markets.
Of course it’s way too late in beer—the giants of that industry emerged a long time ago. But by studying its history, perhaps we can get some feel for how durable economies of scale develop on the ground for the scale industries of the future.
*Back in college I’d sometimes screw up the courage to attend a fraternity party. I’d usually spend the entire time standing silently in the corner, but as often as not I’d catch sight of some guy with way more self-confidence than me having a much better time than I was, and later someone would tell me that his family owned the exclusive Budweiser distributor for South Florida or something like that. “Is that even a thing?” I’d ask myself. “How could a humble immigrant like me get in on that?” 20 years later I have the answers: “Yes that’s a thing” and “You can’t, that’s the entire point.” School can teach you something about the real world after all.