AB InBev Earnings Review: Lower U.S. Volumes Continue To Drag Down Net Volume Growth

Anheuser-Busch InBev (NYSE:BUD) reported relatively weaker third quarter results on October 31, reflecting headwinds in some of the most crucial beer markets around the world. Although the brewer increased sales and marketing expenses this year by 11%, including large investments relating to the FIFA World Cup held in June-July, beer volumes haven’t risen as expected. Organic beer volumes fell 2.6% in the quarter, and are up by only 0.8% so far this year, marred by low beer volume sales in the developed world. Volumes were expected to fall in the U.S. and Europe, as consumers in these mature beer markets continue to cut down on beer consumption due to health concerns, and in some cases, amid economic instabilities. What further dragged down AB InBev’s overall volume figure was a decline in beer consumption in China, the world’s largest beer market, hurt by poor weather conditions. Volumes were also impacted by declines in parts of South America due to weak economic conditions.

We have a $113 price estimate for Anheuser-Busch InBev, which is roughly 2% above the current market price.

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Lower Volumes In The U.S. Stalls Overall Growth

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. Volumes in the country fell 3.7% this quarter for AB InBev, and the company continues to lose share in this market, which is weighing down the overall results. Volumes could remain subdued in the near term too as the brewer remains focused mainly on its premium category and also due to stiff competition from other large brewers such as MillerCoors, a joint venture between SABMiller and Molson Coors. One of AB InBev’s strongest performing beer brands, Corona, which has grown by 6.7% this quarter, is not a part of the group’s portfolio in the U.S. due to antitrust policies, so the company is also losing out on the high demand for Mexican imported beers in the country.

However, Anheuser remains committed to deriving strong mix gains and boosting its top line through emphasis on premium brands, which have relatively higher prices and tend to carry fatter margins. An increase in revenue per unit volume could offset the decline in beer volumes to fuel sales growth, and although the results for the North American business unit seem discouraging, AB InBev looks to turn to positive growth amid improving economic conditions in the U.S.

How AB InBev’s Domestic Sales Could Grow

Despite a year-over-year increase of 1.2% in the average revenue per unit volume, AB InBev’s sales in the U.S. declined 2.6% on negative volume growth in Q3. Overall beer industry volumes continue to decline in the U.S., 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 less 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. What goes further against AB InBev in the U.S. is declining market share in an already contracting market size. But despite the reasons that point towards slow growth for Anheuser in the country, we shed a light on factors that could possibly spur growth for the brewer in the coming future.

• Favorable product mix– One of the reasons why AB InBev is okay with losing share in the domestic market is its focus on the premium category, which forms around 75% of the company’s U.S. volumes. Losing out on value customers is eating into the brewer’s share, but by improving proportionate sales of higher priced premium beers, the company looks to derive higher profits on each sale. AB InBev’s largest beer brand in the U.S., Bud Light, saw sales to retailers fall 2% in Q3, but still increased its market share in the premium light beer category, reflecting how the fall in unit sales was more due to a decline in the overall category. Bud Light forms almost one-fifth of the net beer industry volumes in the U.S., and owing to its stronghold in the country, the beer brand could spur growth for AB InBev if and when demand for premium beer rebounds.

Following a negative 2.1% contraction in the U.S. GDP in Q1, the country’s GDP returned to positive growth in the second and third quarters, increasing by 4.6% and 3.5% respectively. ^[1] The unemployment rate also fell below 6% in September. More jobs and increasing incomes could prompt customers to switch to higher priced beers, and consequently boost Bud Light’s sales. Bud Light, Budweiser and AB InBev’s other premium beers in the U.S. formed around 18% of the brewer’s net volumes in Q3, according to us, and higher proportionate sales for these brands could lift the average revenue per unit volume, fueling growth in net sales.

• Growth Potential In The Imported Beer Segment– While the overall beer industry in the U.S. declined by almost 2% in 2013, imported beer grew 4.5% year-over-year. ^[2] Moreover, volumes for the Mexican brews rose twice as much as the total imports due to rising Hispanic population and increased marketing initiatives. AB InBev’s portfolio in the U.S. doesn’t include Corona, which is owned by Constellation Brands in the country, so the brewer now looks to gain from the high demand for Mexican beer brands by importing Montejo, a Mexican beer that started selling in September in California, Arizona, Texas and New Mexico, where 70% of America’s Latino population resides.

According to Anheuser, around 8-9% of the U.S. beer market is formed by the Mexican import segment, and the early sales numbers for Montejo seem promising. ^[3] Demand for Mexican beer is already high in the U.S., and with an increasing Hispanic population in the country, the Montejo and other Mexican Grupo Modelo brands, that AB InBev looks to launch in the U.S. in the coming years, could achieve meaningful volume sales. 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. ^[4]

A possible increase in premium volumes and incremental sales from Mexican import brands could slightly boost Anheuser’s North America volumes, going forward. However, the main impact of these brands is expected to be on the product mix, as premium and imported brands are priced higher. AB InBev’s North America revenue per unit volume rose 1.6% this quarter, and we estimate a similar growth rate for the figure through the end of our forecast period. Increasing average revenue per unit volume should contribute to the sales growth for the North America business unit despite estimated flat volume growth in the near to mid term.

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1. U.S. GDP growth rate [↩]
2. The state of American beer, theatlantic.com [↩]
3. AB InBev earnings transcript [↩]
4. U.S. demographic projections [↩]