Can Anheuser Achieve More Growth In The U.S.?

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Anheuser-Busch InBev (NYSE:BUD) is the largest brewer in the world, with annual revenues of over $47 billion last year. The company’s sales are spread across 130 countries, but 30% of this net revenue last year was contributed by the U.S. alone. The country is the single largest market for AB InBev, but with a mature beer market, and an already peaking market share for the company, it might be difficult to extract more growth going forward. What’s worse for AB InBev is that its presence is mainly in the domestic beer category, which is the most underperforming category of the U.S. beer market. The brewer has looked to derive growth from international markets such as China, Brazil, and Mexico, but especially now, when the U.S. dollar is strengthening against most foreign currencies, and economic volatility in certain emerging countries has dragged down beer sales, growth in the U.S. has become more pivotal for AB InBev.

Beer is a mature market in the U.S., and 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. Beer consumption in the U.S. declined by 6% from 2009-2013, with the exception of a slight rise in 2012 (as seen in the table) due to new innovative product launches. But in the last year, with improving economic conditions in the U.S., due to lower energy prices and historically-low unemployment rates, higher customer purchasing power led to lower rates of decline in the nation’s beer market. In fact, industry production levels rose slightly in 2014. According to Anheuser’s estimates, the industry-wide selling-day adjusted sales-to-retailers declined 0.6% in 2014, after a larger 1.8% decline in 2013, and in the first quarter, the figure fell by only 0.5%. Beer sales are directly tied to customer spending capabilities, and although the country’s beer market might not recover strongly any time soon, an upbeat business environment and higher customer purchasing power could prevent a larger fall in beer volume sales going forward.

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The problem for Anheuser in the U.S. is not only that the beer market is relatively mature, but also that its volumes are declining at a faster rate than the overall industry. The brewer has a massive 46.4% market share in this beer market, but this figure has fallen little by little each sequential year from 48.86% in 2009.

As can be seen from the table, Anheuser’s sales-to-retailers growth has either been lower than that of the overall industry, or the decline in volumes has been worse compared to the overall industry.

… So why does Anheuser keep losing share in the U.S.?

This is because the brewer has a vast presence in the domestic beer segment, which is the main source of decline in the overall beer market. Domestic beers formed around 74% of the industry-wide volumes last year, but volumes in this segment have been falling, while imported and craft beer volumes have been rising. Anheuser holds a massive 46.4% share in the U.S. mainly on the back of large volumes for domestic beer brands Budweiser and Bud Light, which have been losing out in the U.S. in the last few years. Budweiser’s global volumes rose 5.9% year-over-year last year, but as has been happening for more than a decade, the drink lost both volume and value share in the U.S.

In domestic beers, Budweiser lost its position as the highest selling brand to its sister-brand Bud Light, a premium light beer, in 2001, and further lost its position to MillerCoors’ Coors Light and Miller Lite in subsequent years. Budweiser’s share of the $100 billion U.S. beer market is down to less than 8%, from approximately 14.4% a decade ago. In fact, Budweiser sold six-times the volumes for all the craft breweries combined in the U.S. a decade ago. However, craft breweries, which form around 11% of the country’s beer market at present, have been outselling Budweiser since 2013.

Growth in the U.S. will come from Craft and Imported beers

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. These two segments form 15% and 11% of the industry-wide volumes at present, and their share is expected to grow going forward, at the expense of the domestic beer segment. Why Anheuser is losing out on this growth is because it doesn’t have a solid presence in each of these segments.

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 annual sales of over $1 billion. This is because 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 in 2013. Why losing out on the growth for the Mexican brands Corona and Modelo is a blow to AB InBev is because the Mexican imported beer 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.

On the other hand, 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 11% in 2014, from 8% in 2013 and 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 increasing sales of smaller craft breweries, Anheuser could continue to lose sales in the U.S.

Anheuser is taking steps to penetrate Imported and Craft beer 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, such as Oregon’s 10 Barrel Brewing, Elysian Brewing Company, Blue Point, and Goose Island. Distribution of the Mexican brand Montejo spreads to eight additional states in 2015, and more Mexican imported brands are expected to follow from Anheuser in the U.S.  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.

However, although 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, it might be a few years before the growth in these segments offsets the numerically larger declines in the sales of Bud Light and Budweiser.

…Till then..higher average revenue per hectoliter will fuel growth

Although Anheuser’s volume sales in the U.S. were down 1.4% in 2014, revenues from the country rose 0.3%, mainly on a 1.7% rise in beer only revenue per hectoliter. In Q1 as well, Anheuser’s beer only revenue per hectoliter grew by 1.3%. The conducive market conditions in the U.S. helped improve the industry-wide average revenue per hectoliter, bolstering the beer market’s net value to $101.5 billion last year, up 1.5% over 2013 levels. Anheuser has a premium brand image, with Bud Light as the number one premium beer brand in the country. More jobs and increasing incomes in the U.S. could prompt customers to switch to higher priced beers, and consequently boost sales of AB InBev’s premium brands such as Bud Light and Budweiser, going forward. In addition, imported and craft beers also operate on higher price points, which fits right into Anheuser’s premium brand image.

Anheuser’s lineup of ‘Above Premium brands’ gained approximately 20 basis points of total market share in the last quarter, with the strongest performances coming from Michelob Ultra, Stella Artois, and Goose Island. Higher proportionate sales for Anheuser’s higher-priced premium brands could lift the average revenue per unit volume. This could somewhat offset the decline in volume sales, fueling net sales for Anheuser in the U.S. going forward.

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