Anheuser-Busch InBev Needs to Make Consumers Drink Beer Again

Brewer’s strategy of consolidating the global beer industry and cutting costs is almost out of road

Source: WSJ

By STEPHEN WILMOT

March 2, 2017

A stale beer market leaves the investment case for Anheuser-Busch InBev, which brews seven of the top 10 global brands, heavily reliant on cost savings. Yet reviving interest in the drink is crucial in the long run. Getting this balance right won’t be as easy as the company’s full stock valuation implies.

Given ABI’s heft in the mature U.S. market, investors are used to declining beer volumes, offset by price increases as marketing pushes consumers towards more expensive brews. But the $100 billion-plus takeover of SABMiller last October was supposed to revive volumes. Instead the pace of decline worsened in the fourth quarter.

Some of SABMiller’s old emerging-markets strongholds are misfiring: Volumes in South Africa fell by 5%. Old ABI markets are also problematic. Brazil, which accounts for roughly a fifth of the combined company’s volumes, continues to frustrate hopes of a cyclical revival. And Bud Light lost further market share in the U.S., particularly in Texas and California. Management still hopes to rehabilitate the brand in time, as it did Stella Artois in the U.K.

With close ties to 3G Capital, of Kraft Heinz fame, shareholders expect ABI to extract outsized savings from mergers. But management is proceeding cautiously: A new target of $2.8 billion-up from $2.45 billion including a previous SABMiller target-was lower than hoped. The shares fell 3% in European morning trading.

The caution is sensible. The shares look expensive on roughly 25 times prospective earnings, according to brokerage Bernstein. The weaker the growth outlook, the more cost-cutting is needed to justify this kind of valuation-cuts that could jeopardize growth. Management needs to make sure it doesn’t fall into this vicious cycle.

From small beginnings in Brazil, ABI has grown into a giant by consolidating the global brewing industry and cutting costs. But that game is almost over. The only course now is to rekindle drinkers’ love of beer.