What Anheuser Is Doing To Win Over Customers In The U.S.

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Anheuser-Busch InBev

Anheuser-Busch InBev (NYSE:BUD) is the world’s largest brewer, selling approximately 38 billion liters of beer globally last year, out of which, nearly 30% was sold in the U.S.  The U.S. is the single largest market for the brewer, and as the overall volumes in the country’s beer market continue to decline, organic growth for Anheuser in the domestic market could be limited in the future. Beer consumption in the U.S. 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 aging population of baby boomers and lesser consumption of beer among young adults (ages 18-29) has hampered beer volume growth in the country. 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 the millennials are more health conscious and look to curb alcohol consumption. But what has hurt Anheuser even more in the U.S. is a falling market share in an already ailing domestic beer industry. In a bid to derive some sort of meaningful growth in the country, the brewer has looked to make inroads in the beer segments that are still growing.  One area of potential future growth for AB InBev in the U.S. could be craft beers and imported beers.

We have a $116 price estimate for Anheuser-Busch InBev, which is roughly in line with the current market price.

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Decline Of The Domestic Beer Segment

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] The overall decline in the beer market is primarily due to falling sales of the domestic beer brands, while imported and craft beer volumes have been rising. Anheuser holds a massive 47% share in the U.S. mainly on the back of large volumes for domestic beer brands Budweiser and Bud Light. However, volumes for the brewer have been declining in the U.S., as the demand for domestic beers remains tepid. AB InBev’s U.S. volumes fell 3.7% in the last quarter, and could continue falling as more and more customers switch to imported and craft beers.

AB InBev Strengthening Portfolio In Potential Growth Segments

Mindful of the areas where the potential growth lies, AB InBev has looked to strengthen its presence in the imported beer segment, as well as to acquire budding craft brewers.

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 a 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. Looking to boost its craft beer business, Anheuser recently acquired Oregon’s 10 Barrel Brewing, to add to the company’s craft beer portfolio in the U.S., which already comprised Blue Point and Goose Island brands. Local and regional breweries rely on experiential marketing to form strong bonds with consumers, leverage novelty names, and unique marketing initiatives, persuading customers to trade-up from the domestic beer segment. Craft beer is a high-end business, fitting right into Anheuser’s premium brand image. Selling more higher-priced brands is expected to boost the company’s profitability, going forward.

However, there might be a downside to acquiring local craft breweries. The acquisition of 10 Barrel met with a negative reaction from customers, who were vocal on social media about the probable loss in novelty and independence of the locally-favored brewer following its merger with a global beer giant. Loss of “fan-base” could cost volume sales for craft breweries, which already sell negligible volumes compared to massive big-time brewers such as AB InBev. 10 Barrel expects to sell around 4.7 million liters of beer this year, much lower than the 12,000+ million liters of volume sales for Anheuser in North America. 10 Barrel alone might not add a meaningful revenue stream for Anheuser, but similar acquisitions in the future, and expanded distribution of these locally-based craft beers, given the scale and reach that Anheuser can provide, could boost the company’s U.S. beer business in the long run.

On the other hand, while the overall beer industry in the U.S. declined by almost 2% in 2013, imported beer grew 4.5% year-over-year. [3] Moreover, volumes for the Mexican brews rose twice as much as the total imports due to the 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. [4] 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 imported and craft beer segments, albeit small, are growing at a faster rate than the overall U.S. beer market, which in fact has witnessed flat to negative growth in the last few years. By penetrating these segments, Anheuser could capture some of the potential growth in the otherwise stagnating beer industry. In addition, the brewer looks to continue adding variety to its domestic beer business in the U.S. by introducing novelty beers in the future, including a tequila-flavored beer next year. Anheuser has identified possible growth areas in the U.S., and will look to reverse the trend of declining volumes it has seen in the domestic market in recent times.

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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. The state of American beer, theatlantic.com []
  4. AB InBev earnings transcript []