Case Studies

Assessing ABI’s Go-To-Market Around the Globe

We traveled all over the world in 2019 visiting Anheuser-Busch InBev (ABI) markets, including various stops in Africa, Europe, North America, and South America.  These visits build our understanding of ABI’s overall point-of-sale execution and positioning relative to key competitors in each market.  While not perfect, we observed that ABI’s go-to-market approach was working well, which was reflected in its operating results.  In the first half of 2019, ABI enjoyed its best volume performance in the past 5 years.  The business is experiencing healthy volume, revenue, and market share growth in Mexico, Western Europe, Colombia, South Africa, and several other African countries.  Budweiser sponsorship deals with the English Premier League and Spanish La Liga underscore the company’s focus on premiumization to drive revenue and profit growth well in excess of volume growth.  3Q19 results were not as positive, with volumes and revenue coming in below expectations (although revenue still grew).  The most pronounced third quarter weakness was in China, which was attributable to the Chinese government’s crackdown on night clubs/KTVs and the phasing of summer activation shipments into 2Q19.  While this pressure in ABI’s Asian business likely continued through the end of the year, we believe both issues are passing phenomena and that the long-term growth picture remains intact in China.  Budweiser is the number one premium beer in China, and premium penetration in the country is only about one-third of developed market levels.

The U.S. business is stable.  The craft market is increasingly saturated, and the threat of continued market share losses for ABI is fading.  We spent a couple of days at the craft beer convention in Denver, which improved our understanding of the category and the pressures facing these sub-scale brewers.  We also met with Molson Coors while in Denver.  This competitor to ABI is struggling with falling market share, revenues, and profits.  We expect its business to decline further in the near to medium term.  On the other hand, Michelob Ultra, with its attractive gross margin profile, continues to grow quickly for ABI.  In fact, Michelob Ultra has surpassed Budweiser and Miller Lite in volume.  The hard seltzer category has eaten into beer, wine, and spirits consumption, and ABI is mounting challenges to White Claw and Truly with Bud Light and Natural Light Seltzer launches.  We are closely watching share gains and competitive responses in this exploding category, and ABI still needs to demonstrate it can stem volume market share losses.  However, revenues and margins remain steady, and we continue to expect the U.S. to be a source of re-investable profits for ABI’s emerging market businesses.  We are also interested in opportunities for ABI and the Coke bottling system to introduce the hard seltzer category outside of the U.S.

We remain pleased with management’s capital allocation decisions.  The combination of the pending sale of the Australian business and the successful IPO of Budweiser APAC (ABI’s Asia business) at rich valuations relative to ABI’s share price was a good result for shareholders.  Management is using the proceeds to retire debt, bringing ABI’s net debt-to-EBITDA ratio below 4x, about a year ahead of previous guidance.  We expect this ratio to fall below 3x by the end of 2021, absent any major acquisitions.  We believed at the time that the market’s punishment of ABI stock price in 4Q18 over leverage concerns was unfounded, which has proven true.

After the sale of its Australian franchise, ABI will be a 70% emerging market consumer business by volume.  This profile is attractive for long-term growth, although the nature of these end-markets will create some bumpiness in quarterly results.  ABI currently offers a 7% owner earnings yield, and we continue to expect these owner earnings to grow in the mid- to high-single digits annually over the next decade thanks to secular volume expansion (led by emerging markets), premiumization, pricing power, cost rationalization, and investments in breweries and route-to-market assets that promise returns on invested capital above 20%.  With less leverage at ABI and APAC equity currency, management will also be able to selectively pursue M&A opportunities.  Trading at a wide discount to its intrinsic value, ABI is a high-quality, well-run business that will be substantially bigger and more profitable in a decade.