Case Studies

Craft Beer in the U.S.

During the second quarter of 2018, we increased our investment in Anheuser-Busch InBev.  ABI is the largest global brewer by volume with roughly triple the scale and double the operating margin of the #2 player Heineken.  In addition to strong brand equity, ABI owns the distribution networks in most of its markets, which is a strong secondary moat for the business.  We have witnessed the power of superior execution at the point of sale in other successful emerging market businesses (e.g. Arca Continental) that have a highly fragmented route to market because of the large informal market populated by mom and pop stores.  As the dominant player in many of its markets, ABI enjoys substantial pricing power, which helps the company pass on, with some lag, input cost pressures.  We also remain pleased with the progress ABI continues to make with the integration of the SAB Miller merger.  These cost savings and cross-selling opportunities, particularly upselling of premium products, will flow to the bottom line over the next few years.

Craft brewing growth in the United States is waning, and we do not expect craft to be a huge threat in other ABI markets for several reasons.  First, brewing is a scale business with large capital requirements.  Second, without the Unites States three-tier distribution system that is a legacy of Prohibition, the route to market outside the U.S., where the producer can also be the distributor, tends to exclude new entrants.  Third, ABI, aware of the risk, is intentionally innovating its own “craft” beers to satisfy customer demand in its emerging markets before third parties can gain a foothold.  In the United States, headlines have focused on the falling demand for Bud Light, but declines in Bud Light volumes are somewhat mitigated by the continued strong growth of Michelob Ultra.  In total, the U.S. business continues to be a cash cow generating over $6 billion of annual operating profit that can be redeployed into fast-growing emerging markets.  ABI is forward thinking about managing demographic trends, creating attractive offerings for women, nurturing premium brands, and targeting wine and spirits drinkers.  In a vote of confidence, controlling shareholders and the CEO continue to buy shares in the open market.  In fact, they have purchased about $200 million worth in the last four months alone.