Latin America To Drive Volume And Margin Expansion For Anheuser-Busch InBev

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Anheuser-Busch InBev

Nearly 45% of the world’s largest brewer Anheuser-Busch InBev‘s (NYSE:BUD) valuation comes from its beer operations in Latin America, comprising beer in Mexico and South America, according to our estimates. The region constituted less than 30% of the net volumes last year, but high operating margins and anticipated steady growth in Latin America for the company are reasons for the high valuation. Amid headwinds in the beer market in the developed world, Anheuser-Busch InBev will look to derive growth from its operations in Latin America and also the fast-growing Asia-Pacific market. 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 the U.S., the largest market for Anheuser-Busch. Europe is another important market for the brewery, constituting 12% of the net revenues last year. Hurt by slow economic activity and stiffer competition from large breweries such as SABMiller and Carlsberg, organic volumes for Anheuser-busch InBev declined by over 9% in 2013 and 7% and 2012 in Europe.

North America and Europe beer divisions together formed nearly 43% of the net volumes last year, and we expect this figure to fall below 37% by the end of the decade. On the other hand, we expect Latin America beer divisions to form over 35% of the net volumes by 2020, up from 31% in 2013. Moreover, due to higher operating profits for Anheuser in Latin America, and with higher estimated volume growth in the beer business in this region, relative to the other divisions, the company’s overall profitability should also rise. We have a $113 price estimate for Anheuser-Busch InBev, which is roughly in line with the current market price.

See Our Complete Analysis For Anheuser-Busch InBev


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Low Penetration And Growing Incomes To Boost Latin America Volumes

Brazil, Mexico and Argentina are the largest markets for Anheuser-Busch in Latin America. Latin America South volumes constituted around 7.7% of the overall volumes in the first half of 2014. While beer volumes in the region rose 0.3%, beer volumes in Argentina declined by 0.8% during the period, hurt by weak economic conditions and negative consumer sentiment. In addition, devaluation of the Argentinian peso this year also impacted Anheuser’s top line and profits from the country. The Argentinian peso declined by 12% in 2012, 33% in 2013, and continues to fall in 2014 against the U.S. dollar. Deteriorating macroeconomic conditions in the country, where Anheuser holds a massive 78.5% market share, could continue to impact the brewer’s business in the near term. [1] As the company has a premium positioning, with brands such as Budweiser and Corona, market share could also decline in Argentina, as consumers look to switch to cheaper and affordable beers.

Despite the near term anticipated weakness in the Argentinian beer business, we expect strong Brazil and Mexico sales to drive volume growth for Anheuser-Busch InBev in Latin America.

  • Brazil:

Almost one-fifth of Anheuser-Busch InBev’s total volumes were contributed by Brazil last year, making the country the second largest market for the brewer behind the U.S. Anheuser’s subsidiary Ambev holds a massive 63% volume share in Brazil’s beer market, owing to popular brands such as Brahma, Antarctica and Skol. [2] Owing to the brewer’s strong brand recognition in the country, volumes could grow with the overall increase in market size. Although Brazil economy’s has been slowing this year due to high inflation and interest rates, along with export bans to Argentina, disposable incomes are expected to rise in the country in the longer term.

Brazil is one of the most unequal countries in the world, where wealth is mostly concentrated in the top-tier of the population. Growing proportion of the middle-class population might increase per capita beer intake and fuel overall beer volume-growth, going forward. Per capita beer consumption in Brazil is still low at around 70 liters. In comparison, per capita beer consumption in the U.S. is nearly 80 liters and 90+ liters in most European nations. The country’s middle-class population, with an average income between $586 and $2,530, is expected to form 50% of Brazil’s population and over 46% of the national income in 2014, up from 37.56% of the net population and 37% of the national income in 2003. [3] With a steady increase in the middle-class population and their incomes, per capita consumption of beer could also grow. This trend is also expected to benefit Anheuser, which witnessed a 9.1% rise in Brazil volumes through June, despite the weak economic conditions. This growth was also bolstered by a strong FIFA World Cup activation, as the brewer was one of the official sponsors of the global event held in Brazil this year.

  • Mexico:

Anheuser-Busch InBev consolidated its beer operations in Mexico as a separate division, following its combination with Grupo Modelo last year. Grupo Modelo has a huge 58.4% share in Mexico’s beer market, the world’s fourth most profitable beer market, according to Anheuser-Busch. Corona, one of the brewer’s global brands, grew 3.9% in terms of volumes last year. Given Grupo Modelo’s strong positioning in Mexico, coupled with large marketing and advertising investments by Anheuser-Busch, the company can improve volume sales in the country as demand for beer grows. Mexico’s beer market is expected to grow by 2.6% annually through 2020, according to Heineken’s Mexican head of operations. [4] This growth is expected to come from rising disposable incomes, growing proportion of the middle-class and drinking age population, and low current levels of penetration.

Around 1 million new individuals who are legally permitted to drink are added by Mexico each year, thereby increasing the consumer base for breweries. In addition, as Mexico’s economy is expected to rise by 3.9% in 2014, up from 1.3% in 2013, rising disposable incomes could also bolster beer sales in the country, where over half of the population still lives below the poverty line. Although Mexico is the world’s fifth largest beer market at present, the country still has a low per capita beer consumption rate of around 55 liters. This provides further growth potential for Anheuser-Busch in the country. In 2013, Mexico formed only 5.3% of the company’s net volumes, but this figure includes only volumes reported from June onward, following Grupo Modelo’s acquisition. Moreover, overall volumes suffered as the company transferred the operations of its Mexican Piedras Negras brewery, which majorly exported to the U.S., to Constellation Brands. We expect Mexico volumes to form nearly 9% of Anheuser’s net volumes in its first full year in combination with Anheuser-Busch InBev in 2014.

Profitability To Rise With Growth In Latin America Beer Business

Almost 40% of Anheuser-Busch InBev’s beer production capacity is concentrated in Latin America, allowing the brewer to enjoy low labor and raw material costs, and economies of scale in the region. As Latin America is also a high volume market for the company, producing beer near the end market also reduces additional costs of transportation and distribution. Anheuser-Busch already boasts high industry-leading operating margins, with the figure at 46.7% through the last four quarters. In contrast, rivals Molson Coors and Heineken posted margins of 16.6% and 8.3% respectively during this period. [5] South America and Mexico are the most profitable units for Anheuser, with adjusted EBITDA margins of around 52% and 46.5% respectively last year, while the company’s overall EBITDA margins stood at about 40%.

Profitability could continue to rise for Anheuser, with relatively higher volume-growth in Latin America, and due to synergies between the brewer and Grupo Modelo in Mexico. Anheuser remains committed to its aim of delivering cost synergies of at least $1 billion by the end of 2016, with the majority of that by the end of next year. The company already constitutes more than half the industry beer volumes in Brazil, Mexico and Argentina, which allows for economies of scale. In addition, with growing volume sales, and given that the brewer is highly leveraged, profits on each incremental unit sale are also expected to rise. We currently estimate the company to maintain its high margins in Latin America through the end of our forecast period. However, if cost synergies, high volumes and operational efficiencies drive Mexico Beer and South America Beer’s long-term margins to around 54% and 57% respectively, there could be a roughly 5% upside to our current price estimate for Anheuser-Busch InBev.

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Notes:
  1. Anheuser-Busch InBev’s beer market share worldwide in 2013 []
  2. Beer in Brazil, euromonitor.com []
  3. Brazil’s middle-class population grows to nearly 50% of population, laht.com []
  4. Heineken seeks to tap Mexico’s premium beer market, ft.com []
  5. Why Anheuser-Busch InBev is poised to continue strong growth, forbes.com []