AB InBev Earnings Review: Brewer Shaky Amid Macroeconomic Headwinds In Key Markets

When times are tough, even the most resilient players feel the pressure. As expected, headwinds in certain crucial beer markets dragged down Q2 results for the world’s largest brewer, Anheuser-Busch InBev (NYSE:BUD). Revenues declined 9% in the quarter to $11.1 billion from $12.2 billion a year ago, including a 2.2% fall in volumes (organically). Considering approximately 70% of AB InBev’s top-line comes from markets outside the U.S., the strengthening U.S. dollar against certain foreign currencies dealt a blow to the brewer’s financials. The currency was an 11 percentage point headwind on the net sales this quarter.

The gist of the quarterly results was the weaker performance in the top markets. In the U.S., Brazil, and Mexico – three of the four largest markets for AB InBev – the brewer holds 50% or more volume share. It’s tough for the maker of Budweiser, Corona, and Stella Artois to hold on to such massive shares in these markets, and even tougher to achieve further growth. And with the general tepid global economic environment and volatility in markets such as Brazil, Russia, and even China, the beer market is facing headwinds.

We have a $122 price estimate for Anheuser-Busch InBev, which is slightly above the current market price.

See Our Complete Analysis For Anheuser-Busch InBev

Just after the announcement of Q2 results, AB InBev’s share price dropped by ~5%, reflecting how lower revenues and profits hurt investor perception, as well. The company has looked to invest more in expanding its reach through mergers and acquisitions, which has also helped grow margins due to the benefit of economies of scale. However, the fall in organic volume sales is testament to how the tough market conditions are getting to even the biggest and sound beverage companies.

United States Sales Continue To Decline, But This Time By More

The U.S. contributes roughly 30% to AB InBev’s top line and is the single largest market for the brewer– also the toughest to achieve growth in presently. Not only is the beer market in the country mature, with industry selling-day sales to retailers (STRs) down in the last few years (with the exception of 2012), but Anheuser is also losing its strong grip in this market. 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%, which could have meant that the market might be ready to return to some sort of growth. However, industry STRs are down again by 1% in this quarter, with the brewer’s own STRs down 2.2%– all of which is not good news.

With a mature beer market and an already peaking market share for Anheuser, 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. Both Bud Light and Budweiser lost more market share this quarter.

In a bid to reverse this declining trend, the company has looked to penetrate the craft and imported beer segments which, although they are only 26% of the beer market presently, are growing by solid high single-digit percentages. In addition, the successful product launches in the premium and flavored drinks categories, such as Bud Light’s Lime-a-Rita drinks, have helped boost sales. But the presence of AB InBev in these segments is still much lesser than that in the domestic beer category, less enough to not have a huge impact on the brewer’s net sales at least for now.

At the start of the year, it was thought that the low gas prices and improving economic environment in the U.S. could maybe propel growth in the country’s ailing beer market, as well. However, with six months gone and industry STRs down a further almost 1% from 2014 levels, growth might be hard to come by. That’s more bad news for AB InBev.

Volatility in Brazil And China Keeps AB InBev’s Growth In Check

Anheuser’s beer volumes were down 8.6% year-over-year in Q2 in Brazil, which theoretically has a huge potential to grow because of the low current beer penetration in the country. But with economic conditions remaining weak, coupled with high interest and inflation rates, and negative customer sentiment, consumer spending has taken a hit in the country. In addition, as the company was overlapping the strong growth in volume sales due to the FIFA World Cup activation this time last year, beer volumes were hurt by as much as 5.5 percentage points in Q2.

Where growth lies in Brazil, in the near term, is increasing beer revenue per hectoliter, which rose by 15% this quarter. Economic inequality in Brazil is one of the highest in the world. 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.

On the other hand, growth in China’s beer market has been thwarted by the slowing economic conditions, with a 6.5% fall in industry-wide volumes in Q2, after a 2% fall in Q1. The good news for AB InBev is that although the market conditions remained harsh, the brewer’s volumes remained essentially flat in this market, growing the company’s share to 18%. Once beer demand in China starts to rise again, AB InBev could be in good shape to further improve volumes organically, considering that the brewer has remained resilient even in tough times.

A shaky first half for AB InBev, especially in the top markets, raises concerns over growth in the near term. This could also be a near term headwind, perhaps, at least where currency translations and volatility in South America and Asia are concerned. However, the beer business in developed markets is mature and AB InBev is losing share in traditional domestic segments, and these factors will persist even when global economic conditions improve. So, the brewer will aim to grow its revenue per hectoliter in the absence of solid volume growth, in a bid to drive revenues up. But will that be enough? Maybe they will look to more acquisitions in the future to grow inorganically?  Time will tell.

See the links below for more information and analysis:

• Does the declining U.S. beer trend spell doom for brewers?
• Can Anheuser achieve more growth in the U.S.?
• Diageo could be a good buy for Anheuser-Busch InBev
• What does North America have in store for Diageo
• Trefis analysis: Anheuser-Busch InBev North America Volumes
• Trefis analysis: Anheuser-Busch InBev South America Volumes

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