Anheuser-Busch InBev: Headwinds In Russia To Lower Europe Volumes

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Anheuser-Busch InBev (NYSE:BUD) has looked to draw growth through mergers and acquisitions such as Grupo Modelo last year, Oriental Brewery this year and a possible SABMiller deal. But what about organic growth? Taking aside possible M&A activities, the company has tapped into emerging markets in South America and Asia and also expanded margins through economies of scale and optimization of operations. However, mature beer markets in the developed world pose a threat to Anheuser’s growth. Beer operations in North America (U.S. and Canada) constitute over one-third of the valuation for the world’s largest brewery, according to our estimates. As consumers ditch beer for other alcoholic beverages such as spirits, ciders and wine, and with a gradual shift away from a massive beer-drinking culture in the developed markets, due to growing health and wealth concerns, Anheuser’s beer volume growth might be limited in the coming future in North America. The North American beer industry witnessed a 6% drop in volumes between 2009-2013, with the exception of a slight rise in 2012.

Europe is another important market for the brewery, constituting 12% of the net revenues last year. Russia is the largest market for Anheuser-Busch InBev’s in the European zone, constituting over 24% of the volumes for this division and around 3% of Anheuser’s net volumes. Due to geopolitical tensions in the country invoking negative consumer sentiment, spending in general and on beer could decline. In addition, although markets such as U.K., Germany and Belgium are slowly recovering after the double dip recession, seeing how per capita consumption is already relatively high in Europe, growth in these markets for Anheuser could be limited. Europe forms less than 6% of Anheuser’s valuation by our estimates, as we estimate sluggish beer performance in the continent going forward.

We have a $113 price estimate for Anheuser-Busch InBev, which is roughly 3% above the current market price.

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See Our Complete Analysis For Anheuser-Busch InBev

Russia Beer Volumes To Remain Weak For Anheuser-Busch

The Russian economy has been struggling lately amid geopolitical issues with Ukraine. The U.S. and the European Union issued sanctions against Russia for supporting separatist rebels in Ukraine, an accusation denied by Russia. Due to the continual weakening of domestic demand and high levels of inflation, and with the Western countries looking to tighten restrictions on Russia’s financial, defense and energy sectors, the International Monetary Fund lowered its outlook on the country’s GDP growth rate to 0.2% this year and 1% in 2015, down from the previously estimated growth rates of 1.3% and 2.3% in 2014 and 2015 respectively. [1] Lower consumer spending due to negative sentiment is expected to hamper sales of beer in the Russian market and consequently for AB InBev.

After declining 8% in 2013, beer volumes in Russia are expected to fall by a mid-single-digit percent in 2014, according to Carlsberg, a leading brewery. Russia volumes for Anheuser fell 10% in the first half of 2014, after declining 14% last year. Ukraine is also a top ten market for Anheuser and is expected to witness a considerable volume decline this year owing to the geopolitical tensions. With almost one-third of Anheuser’s Europe volumes vulnerable to political impacts, we forecast the brewer’s volumes to remain slightly negative through the end of the decade. Despite rebounding disposable incomes, Western Europe might not be able to offset this expected decline due to health and wellness concerns and relatively high per capita consumption.

Beer Was Already Declining In Russia Prior To The Crimea Crisis

Beer decline in Eastern Europe started before the Russia-Ukraine political blowout. In 2012, reclassification of beer from foodstuff to alcohol in Russia resulted in some trading restrictions, prohibitions on selling beer between 11:00 pm and 8:00 am, and in public locations, and advertisements, thereby reducing volume sales of beer. In addition, higher taxes on beer also raised product prices, causing subdued consumer demand. Beer excise rate increased six times between 2009-2014, from $0.09 per liter to $0.55 per liter. In addition, the government plans to increase taxes on beer progressively between 2012-2015. Higher taxes will prompt further price rises and could dissuade consumers, who are already reeling under a weak economy, from beer consumption, going forward.

Despite our current estimate of low volume sales in Europe, higher marketing expenditure and strong brand recognition could spur volume growth in parts of Western Europe. AB InBev has a strong foothold in Europe, holding a massive 53% share in Belgium, and 17.2% and 8.8% volume shares in the U.K. and Germany respectively, owing to popular brands such as Budweiser, Hoegaarden and Beck’s. AB InBev’s Jupiler leads the Belgian beer market and is also the official sponsor of Belgian national football team. On the other hand, Chernigivske is the best-selling beer brand in Ukraine and also the sponsor of the Ukrainian national football team. In addition, the beer brand Hasseröder also gained exposure in Germany by leveraging its sponsorship of the 2010 FIFA World Cup.

The brewer attracted customers in Europe during the FIFA World Cup due to football related sponsorships, which resulted in 9.3%, 3.2% and 13.5% volume growths in Belgium, Germany and the U.K. respectively, in Q2 2014. Strong brand awareness as a result of higher investments in marketing and advertising during global events could spur beer volumes for Anheuser in Western Europe in the coming future. If the brewer’s Europe volumes in the long term rise to 5.5 million liters, still less than 2011 levels but more than the figure of 4.8 billion liters last year, and EBITDA margins remain flat, there could be a 3% upside to our current price estimate for AB InBev.

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Notes:
  1. IMF cuts Russia’s GDP growth rate forecast, en.itar-tass.com []