Anheuser’s Domestic Beer Volumes To Remain Weak In The Near Term

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Anheuser-Busch InBev

The combination of InBev and the American brewer Anheuser-Busch in 2008 resulted in the formation of Anheuser-Busch InBev (NYSE:BUD), which controls over one-fifth of the global beer volumes. The acquisition expanded the company’s operations in North America, which forms over one-third the company’s valuation by our estimates. U.S. is the largest market for Anheuser, forming over 90% of the brewer’s North America volumes and more than one-fourth of its overall volumes. However, the domestic beer industry has been facing a continual slowdown in consumption, as consumers look to avoid or restrict unhealthy beverage intake. Moreover, beer also faces stiff competition from spirits, ciders and wine, which have comparatively lesser consumer penetration, and are steadily growing at the expense of beer.

If industry headwinds weren’t enough to impede growth for Anheuser-Busch in the U.S., increasing prominence of craft breweries and small brands threatens sales of large brewers. With anticipated declining volumes in the domestic market, the maker of bestsellers such as Bud Light and Budweiser might not derive significant returns from its North America unit in the near to mid term.

We have a $113 price estimate for Anheuser-Busch InBev, which is roughly 1% above the current market price.

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See Our Complete Analysis For Anheuser-Busch InBev

Health Concerns And Alternatives Mar Beer Growth

U.S. beer market volumes declined by 6% from 2009-2013, with the exception of a slight rise in 2012 due to new innovative product launches. Volumes declined by 2% in 2013 to roughly 234 million hectoliters, fueled by shifts in demographics and consumer preferences. [1] An ageing population of baby boomers and lesser consumption of beer among young adults (ages 18-29) hampered beer volume growth. According to a survey, beer consumption among young adults dropped to 41% in 2012-2013 from 71% two decades ago, while liquor and wine sales rose from 13% to 28% and 14% to 24% respectively, during this period. ((Is America facing a beer crisis, marketwatch.com))

The trend of falling beer volumes could continue going forward, as millennial customers are more health conscious and look to curb alcohol consumption. Beer penetration in the U.S. is also relatively high at around 80 liters per person, which although lesser than the 90+ liter per capita beer consumption in most European countries, beats the intake per capita figures of most emerging economies, which are expected to be the major contributors to global beer volume growth in the coming years.

Declining Domestic And Rising Craft Beer Sales To Hamper Anheuser

Anheuser-Busch leads the U.S. beer market with a massive 47.2% volume share. The second spot is held by MillerCoors, a joint venture between SABMiller and Molson Coors, which controls just over one-fourth the industry-wide volumes. Not only does Anheuser enjoy a firm hold over the domestic beer market, but with its premium brand positioning and cost-effective methods of procurement and production, the brewer boasts industry leading operating margins of late-30 percent for its North America business. In fact, Anheuser buys about 15% of the U.S. crop each year, and sells over 110 million hectoliters annually in the country, earning higher profits on each incremental sale due to economies of scale. However, with domestic volumes expected to slowdown for Anheuser in the near term owing to category headwinds, and on account of high operating leverage for the brewer, profitability might also be hampered. We expect the company’s North America volumes to remain relatively flat through the next five years.

Why we expect Anheuser’s domestic beer volumes to slightly contact in the near term is because of stiff competition from craft breweries and tepid demand for domestic beers, in addition to the overall market decline. The U.S. beer market can be divided into domestic beers, imported beers and craft beers, which constituted 78%, 14% and 8% respectively of the net volumes last year. [2]

  • Craft Breweries Eat Into Volume Shares Of Larger Breweries

According to the Brewers Association, American craft breweries are those which produce under 6 million barrels a year and are independently owned, with less than 25% investment by a non-craft beer alcohol company. Growing demand for diverse beer products and increasing global taste preferences have boosted craft beer volumes, which rose as a percentage of overall industry volumes to 8% in 2013 from only 2.6% in 1998. Local and regional breweries, such as Samuel Adams and Sierra Nevada, rely on experiential marketing to form strong bonds with consumers, and leverage novelty names and unique marketing initiatives to further expand their customer base. With an increase in craft beer sales in a stagnant beer market, non-craft beer volumes and consequently Anheuser-Busch’s volumes could decline.

  • Demand For Domestic Beer Is Declining In The U.S.

Rising craft and imported beer volumes in the U.S. is coming at the expense of domestic beer volumes, as the net industry volumes remain flat to negative. Anheuser’s brands led by Bud Light, the highest selling beer in the U.S., formed six of the ten highest selling domestic beers in the U.S. last year, with combined dollar sales of nearly $4 billion. [3] The brewer boasts strong brand recognition, and due to widely popular domestic beer brands, could witness volume growth in the country if beer consumption improves. However, what could hurt Anheuser is that the domestic beer category is on a decline in the U.S., as some beer drinkers look for varied tastes of craft breweries or imported beer brands. Although this category is still expected to form a bulk of overall industry beer sales, volume growth for Anheuser and other domestic beer brands might be limited going forward.

Strong Demand For Mexican Imported Beer Could Drive Growth

Seeing the strong sales for imported beer brands, Anheuser will also import the Mexican beer brand Montejo in the Southwestern states starting September this year. As part of an antitrust agreement with the U.S. Justice Department, Anheuser-Busch had transferred the operations of the Mexican Piedras Negras brewery and sold the exclusive rights to market and sell Corona as well as some other beers made by Grupo Modelo in the U.S. to Constellation Brands, before the brewer could go ahead with the Grupo Modelo combination last year. As a result, Anheuser-Busch cannot benefit from the high demand in the U.S. for Corona and Modelo, whose variants form three of the top four imported brands in the country, with combined sales of nearly $1 billion in 2013. [4]

While the overall beer industry in the U.S. declined by almost 2% in 2013, imported beer grew 4.5% year-over-year. [5] Moreover, volumes for the Mexican brews rose twice as much as the total imports due to rising Hispanic population and increased marketing initiatives. Montejo will start selling in California, Arizona, Texas and New Mexico, where 70% of America’s Latino population resides. [6] The Hispanic population in the U.S. is expected to grow by 12% between 2015-2020 to form nearly 20% of the country’s net population, which is estimated to grow by only 4% during this period. [7]

With domestic beer volumes declining, Anheuser could derive growth from the imported beer segment. If we estimate North America volumes to rise by 10% through the end of our forecast period, which means an average increase of 1.2% per year, the price estimate for Anheuser-Busch InBev will reach $117, 2.5% above the current market price.

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Notes:
  1. Beer in the U.S., euromonitor.com []
  2. Craft beer takes a bigger swig of the shrinking beer market, wsj.com []
  3. Sales of leading domestic beer brands in the U.S., statista.com []
  4. Sales of leading imported beer brands in the U.S. in 2013, statista.com []
  5. The state of American beer, theatlantic.com []
  6. Anheuser-Busch targets Latinos with new Mexican beer import, latimes.com []
  7. U.S. demographic projections []