AB InBev Earnings Review: U.S. Volumes Continue To Decline On Lower Demand For Domestic Beer

Anheuser-Busch InBev (NYSE:BUD) reported strong organic growth in revenues and EBITDA in the first quarter, on May 6. As expected, AB InBev’s commitment to its premium brand profiling, and more emphasis on sales of premium beer brands, led to a solid rise in revenue per hectoliter, which increased by 7.5% year-over-year in Q1, excluding the impact of currency translations. ^[1] The growth of sales per unit volume was slightly offset by a 1.2% decline in volume sales, resulting in a 6.2% rise in organic sales this quarter. However, a stronger dollar compared to certain local currencies weighed on the financials, dragging down net sales by almost $1 billion to $10.45 billion. Lower sales volume was mainly impacted by a decline in sales-to-wholesalers in the U.S., which declined by 6% due to a tough comparable resulting from a rise in wholesaler inventory levels in Q1 2014, as part of contingency planning ahead of labor negotiations.

The U.S. is the largest market for AB InBev, accounting for 24% of net volumes and 30% of net revenues last year. The brewer continues to lose share in this market, which could be worrying considering the fall in demand for domestic beer brands. However, AB InBev is looking to boost its future growth in the U.S. by backing its focus brands such as Bud Light and Budweiser, and also its imported and craft beer brands, which are relatively nascent as of now but could contribute meaningful volumes in the future.

AB InBev’s performance in its other key markets such as Mexico, Brazil, and China has been solid this quarter. Despite smaller volume growth, the brewer has managed to grow on the back of higher revenue per hectoliter, by focusing on its premium brands. EBITDA rose by 11% this quarter, on a strong top line growth and lower cost of sales, which rose 4.8%. AB InBev already boasts a strong positioning in most of its key markets, and could continue growing organically due to higher revenue per unit volume, as well as inorganically, owing to the brewer’s M&A activities, which focuses on acquiring local brands that already have a loyal and established customer following.

We have a $122 price estimate for Anheuser-Busch InBev, which is slightly above the current market price. The stock rose 2.5% after the announcement of results on Wednesday, and is trading at just under $120 a share presently.

See Our Complete Analysis For Anheuser-Busch InBev

What The Continual Fall In U.S. Volumes Means For Anheuser

The biggest beer brands for Anheuser in the U.S. are Bud Light and Budweiser, which continue to lose volumes in the country. Beer is a relatively mature market in the U.S. Beer consumption has declined in the country in the last few years as millennial customers are more health conscious and look to curb alcohol consumption. But in the last year or two, with improving economic conditions in the U.S., due to lower energy prices and historically-low unemployment rates, higher customer purchasing power has led to lower rates of decline in the nation’s beer market. According to Anheuser’s estimates, the industry declined 0.6% in 2014, after a larger 1.8% decline in 2013, and in the first quarter, the beer market fell by only 0.5%. The slightly improving market conditions have boosted the industry-wide average revenue per hectoliter, also raising Anheuser’s beer only revenue per hectoliter by 1.3% this quarter. However, the real downer for the brewer has been falling sales-to-retailers for both Bud Light and Budweiser, as demand for domestic beer brands continues to fall in the country.

Imported and craft beer volumes grew by 6.9% and 17.6%, respectively, in the country last year, outpacing the 0.5% growth in the overall market. Anheuser is bringing in more Mexican imported beer brands in the country, seeing how this segment, which forms around 8-9% of the U.S. beer market, grew 11% in 2014, and continues to thrive on an increasing Hispanic population in the country and higher customer demand. Distribution of the Mexican brand Montejo spreads to eight additional states in 2015, and more Mexican brands are expected to follow. The beer brand started selling in September last year in California, Arizona, Texas, and New Mexico, where 70% of America’s Latino population resides, and the initial roll-out of Montejo has been successful.

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, such as Oregon’s 10 Barrel Brewing, Elysian Brewing Company, Blue Point, and Goose Island. However, the imported and craft beer segments together form only 26% of the beer market, which is still dominated by the domestic beer segment, which, in turn, is the segment where Anheuser is predominantly present.  As Americans continue to fall out of love with domestic beer brands, and choose craft and imported beers over Bud Light and Budweiser, the brewer could continue to lose share and volume sales in this market going forward. Anheuser is looking to grow its presence in imported and craft beer segments, which are growing at a relatively faster rate, and operate at higher price points, but it might be a few years before the growth in these segments offsets the numerically larger declines in sales of Bud Light and Budweiser.

Solid Brazil And China Sales Boost AB InBev’s Financials

Weak economic conditions in Brazil, with high interest rates and inflation rates, and negative customer sentiment, continue to hamper consumer spending in the country. AB InBev’s volumes were slightly down in Brazil this quarter, but higher proportionate sales of the brewer’s premium brands resulted in an impressive 11% rise in revenue per hectoliter.

Brazil is one of the most unequal countries in the world. Despite having a small proportion of high net worth individuals (HNWI), Brazil’s combined HNWI wealth of around $4 trillion is the third largest for any country. ^[2] High interest and inflation rates, and tight credit availability don’t tend to adversely impact the more affluent individuals, and this could be one of the reasons why AB InBev’s premium beers have grown at a rapid pace in the economy that is otherwise struggling. And there is room for further growth. The brewer’s premium brands grew 20% in Brazil last year, with Budweiser registering an impressive 40% growth. But premium brands still form only 8% of the industry-wide volumes in the country, compared to 75+% of the net volumes in the U.S. This presents further potential growth opportunities in the premium segment in the Brazilian beer market. Furthermore, growth in the legal drinking age population is expected to continue for at least the next ten years, meaning that AB InBev’s target customer base should continue to grow.

On the other hand, growing beer volumes in China, despite a 2% fall in industry-wide volumes, was good news for Anheuser this quarter. AB InBev’s volume growth remained positive at 4.7%, reflecting strong growth in the brewer’s focus brands in the country. The company improved its market share in the country by 90 basis points to 15.9% at the end of last year, and including the recent mergers and acquisitions, the share, rose to 16.8%. In Q1, the brewer’s share further increased to 18.5% on solid volume growth. AB InBev could be in good shape to further improve volumes organically in China, once demand for beer starts rising again, as beer penetration is still low in the country and incomes are rising.

AB InBev continued its strong growth in revenue per hectoliter this quarter as well, but what might be worrying for the world’s largest brewer is the continually declining volume sales in the U.S. This might continue till the brewer starts gathering meaningful sales from its imported and craft beer brands.

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1. AB InBev Q1 results [↩]
2. Sales of luxury cars boom in Brazil, June 2014, ft.com [↩]