PABST, PRESENT AND FUTURE

JAMES TENSER

SAN ANTONIO -- Catch up with Lutz Issleib at one of his three offices at the corners of the country and he is likely to light up a cigar and singe a few industry buzzwords.

Issleib is president of S&P Brewing Co., based in Mill Valley, Calif., which controls the production and marketing of some 94 regional beer and malt beverage labels -- "a treasure chest of brands," he says, which includes Falstaff, Pearl, Olympia, Hamm's, Lucky Lager, Olde English 800 and Pabst Blue Ribbon, with volume totaling some 8 million barrels a year.

Speaking with Brand Marketing at the San Antonio headquarters and plant of Pearl Brewing Co., one of four S&P operating divisions, he outlines a pragmatic philosophy of running

lean and nipping the heels of the big three brewers. It allows very little use for Efficient Consumer Response, category management, trade marketing or a host of other disciplines of the moment, which Issleib dismisses with a mild obscenity.

"It all boils down to one point, and I tell everyone that I've ever had in here: Sell beer cheap," he says, raising his voice slightly over the hush of a blower that exhausts his cigar smoke. "They shouldn't call it ECR; it should be SBC. Sell Beer Cheap ought to be the punch line."

By pursuing a single-minded policy of low everyday prices, an ultra-lean field force and a virtual ban on spending for media advertising, S&P managed to reverse a slump that nearly buried it in the late 1980s and injected new life into several of its venerable brands -- most notably the 150-year-old Pabst -- while building Olde English 800 up to where it is No. 1 among malt liquors.

Lacking the sheer scale of a Bud or a Miller, S&P limits consumer advertising to an absolute minimum. It focuses instead on selling its products in retail stores, and for that the company relies on quality product, attractive packaging and its network of 1,200 wholesale distributors.

"We are chain-driven. We don't do a lot on-premises [in bars and restaurants], with the exception of the Midwest and a few pockets in Washington state and Oregon, where we have a nice concentration. Otherwise it is what we sell in the supermarket. We are supermarket sellers, for sure," he said.

S&P was founded by Paul Kalmanovitz, a Polish immigrant who assembled the privately held concern over 35 years of bottom-fishing among the nation's hard-pressed regional brewers for weak companies with strong brands. For much of that time, Issleib was his protege, learning how to squeeze a profit out of those old brands and helping to engineer the $63 million buyout of Pabst Brewing Co. in 1985. The younger man eventually stepped up to run the company after Kalmanovitz died in 1987.

Today, S&P operates three breweries, the largest being Milwaukee-based Pabst. The others are Pearl Brewing Co., San Antonio, and General Brewing Co., Vancouver, Wash.

S&P's headquarters in Mill Valley has a total population of eight people. "We keep it very thin. We have no middle management B.S. I don't spend my days corresponding back and forth with internal folks here. Everything is done by fax and telephone, very quickly and expediently."

For selling purposes, S&P is divided into three divisions -- East, Central and West -- each with a division manager who operates "fairly independently," Issleib says. "I have got 15 people in our sales organization for the whole country. So there is not one guy that roosts at a wholesaler warehouse that helps him manage his business."

With such a pared-down organization, initiatives such as category management that currently occupy the attention of small armies at the big three brewers get pushed down into the distribution pipeline.

Asked whether Pabst provides any category management services for its major retail chains, Issleib's reply is, "No. Never."

As for his wholesale distributors?

"They might. They probably do. It is up to them," he says.

"I have all the confidence in the world that they know how to sell beer. This is part of their independent businessman concept. What we do on occasion, we do help make a sales call."

Does ECR have a meaning in Issleib's world? "None whatsoever. You got to be kidding. All these buzzwords, you know. It all goes back down to value and price."

The stripped-down approach to sales and trade relations is consistent with the company's value-pricing philosophy. "We have been EDLP since 1986," says Issleib.

"I think the guy who invented EDLP was Paul Kalmanovitz in 1952. That's when he first got in the beer business. He has been selling EDLP in all his labels from this point forward," he said.

Without a major advertising effort to create image, S&P's beer brands depend on their packaging, point-of-sale materials and low prices to generate consumer trial. For that reason, package design garners a significant chunk of S&P's marketing spending, he said.

"We have, I feel, exceptionally good-looking packaging. We are constantly updating it." The latest round of revisions came in September, with new outer packs for Pabst, Hamm's and Olympia 24-pack and 12-pack cans.

Says Issleib, "What we want on that shelf is a perception of value. Our price points are very competitive. They are as good as, if not better than, what the competition is. So we hope that with the various promotions we use, that within the food stores, we get the pull off the shelf."

While the legacy of Paul Kalmanovitz had been to utterly eschew advertising and apply the savings to lower product costs, Issleib says he has relaxed that policy a tiny bit.

"We do have advertising. Not a lot of it. We concentrate more on merchandising. More on point-of-sale. We have lots of point-of-sale -- shelf talkers, easel cards, banners, posters, etc. Where we do advertise, it is mainly co-op."

Issleib readily admits to following the packaging and product trends set by the big three breweries. The exteriors of Pabst 12-packs and 24-packs are covered in icy imagery, and some recent Pabst Genuine Draft billboards around San Antonio feature a familiar-looking blizzard.

S&P's beers have heritage going for them. Pabst, emerging as the company's flagship and founded in 1844, marks its 150th anniversary this year. Several of its sister brands also date back to the last century: Hamm's was created in 1857; Falstaff in 1874; Pearl, 1886, and Olympia, 1896.

Over the years, these brands have accumulated much equity with consumers, even though they may have declined from their one-time volume peaks. Issleib says S&P has learned to use this hidden brand strength in markets like California and, currently, south Texas, where the Pabst brand is being reintroduced.

S&P made startling inroads with the Pabst brand in California since 1990, drawing the ire of the big brewers and criticism from the direct-store-delivery wholesaler community. Their anger was aimed at the controversial practice of delivering Pabst and Lucky Lager beer to retailer warehouses, which seemed to bypass the DSD system.

Issleib explains that Logret Import & Export Co., S&P's master wholesaler for California, actually made the warehouse delivery deals with chains like Vons, Safeway and Liquor Barn. While Logret doesn't handle in-store merchandising and delivery in those high-volume accounts, it still takes legal possession of the beer before delivering it to the retailer.

"I believe in the three-tier system. I never had any thought of using any other mode," Issleib says.

"It just so happens that the person who made a success of this mode of distribution, selling bulk beer to warehouses, bought the distribution rights to the whole state from Pabst.

"This guy, John Lenore of Logret, he didn't buy it from me, he bought it from someone else. This was something that Pabst assigned way before we bought it."

Before Lenore got involved with the brand, it was selling just 6,000 barrels a year statewide, Issleib says. Beginning with Vons in southern California, he built the brand up over a few years to a peak of 250,000 barrels.

"I am not going to say to this man, 'Don't sell this way or any other way,' because he is an independent business operator. I don't encourage. I don't discourage. I do like the volume," he says.

The crucial California market has also been the site of some of S&P's most severe promotional battles this past summer, with Pabst enduring fierce initiatives by the big brewers. Tactics there have included mail-in rebates that effectively reduce the net consumer price of a 12-pack to as low as nine cents in at least one instance.

Similar summer promotions from Budweiser, Miller and Coors, with values like a $6 rebate off a $12 case, have undercut Pabst's value-price strategy on the West Coast and hurt market share, Issleib admits.

Pabst will press ahead with its own rebates this fall despite the announced intent of the big three not to use rebates during the fourth quarter in California. "This is my chance to get all the volume back that I have lost," he says

Because it hasn't matched its competitors' deep deals all summer, S&P has suffered a sales decrease this year, says Issleib. "In some states in the double digits, but I've just said that we have no interest in selling beer at that price."

"In the short term, you have got to make a profit to be there for the long term. So I have told my wholesalers you just can't be a horse with blinders on and charge forward and say, 'Volume at any price!' We do not subscribe to that. This was something which was taught to me by Mr. Kalmanovitz."