🔒 As beer market loses froth, brewing giant abi loses ‘share of throat’ – The Economist

EDINBURGH — In the UK, the news is awash with concerns that we all drink too much – particularly the ‘middle-aged’ and upwards. More people are dying from drink-related illnesses, with the Guardian reporting that deaths from alcohol misuse were highest among 60- to 64-year-olds in 2017, at 29.7 per 100,000, overtaking 50- to 54-year-olds, who had the highest rate in 2001. Broken down by sex, death rates were highest among 55- to 59-year-old women and 60- to 64-year-old men. But, behind this scary story there is another trend: younger people are drinking less and it is becoming increasingly cool not to drink alcohol. While some people have a preference for drugs, others are choosing not to indulge at all. Beer, in particular, is losing its attraction. This trend might be music to the ears of healthcare funders, but it has worrying long-term implications for shareholders in global beer giant abi, as The Economist explains. – Jackie Cameron

By Thulasizwe Sithole

The global beer industry is under pressure, as consumers switch to other tipple – and teetotal lifestyles. That’s the message from The Economist, which analyses what’s likely for beer giant Anheuser-Busch InBev (abi), which has swallowed up all its major competitors, shrunk costs and has nowhere left to go to grow revenues.

The Economist points out that abi reigns over global brewing, selling almost three Olympic-sized swimming pools of beer an hour – more than its three nearest rivals combined.

“abi, which is nominally based in the Flemish city of Leuven but run out of New York, is not just much bigger than its rivals, selling one in four beers worldwide. It also generates around half the industry’s global profits.

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“Its gross operating margins were 40% in 2018, more than double the average for other listed brewers – and stellar by the standards of firms that peddle any kind of consumer goods,” says the business magazine.

abi grew, says The Economist, as a trio of Brazilian investors best-known for later starting 3g capital, a private-equity fund, used Brahma, a Brazilian beer firm they acquired in 1989, as a platform to buy up rivals the world over. These include: Interbrew, a Belgian brewer which makes Stella Artois, in 2004; Anheuser-Busch, the American owner of Budweiser, in 2008; and SABMiller, its biggest remaining rival, in 2016.

“The successful two-pronged strategy of serial acquisitions and cost-cutting appears to be nearing its limits, however. Having consolidated the fragmented beer industry – four of the ten biggest brewers in 1990 are part of its empire – no large rivals remain to be taken over without goading competition authorities. As for cost-cutting, by the end of the year abi will have wrung out the last of the $3.2bn of annual savings it expected from sab,” cautions The Economist.

Read also: African expansion: AB InBev plans additional breweries in Mozambique, Nigeria

Cost controls espoused by abi and its 3G-run cousins – starting with every manager having to justify every dollar of spending anew each year – have come under scrutiny, continues the magazine.

For example, when Kraft Heinz’s shares tumbled in February after it wrote down the value of its assets by $15bn, many took it to be a tacit admission that its cost-cutting had done the business harm.

“The announcement by Kraft Heinz on May 6th that it would have to restate nearly three years of results, after an internal probe unearthed ‘misconduct’ in its procurement procedures, though not directly linked to ‘zero-based budgeting’ or 3G’s other distinctive management techniques, nevertheless cast a shadow over them. Kraft Heinz shenanigans have cast a shadow over abi.”

Moving to abi’s much-needed growth strategy, The Economist says: “Expanding its small non-beer offering – buying Coca-Cola, for example, or Diageo, which mainly sells spirits – once seemed like the obvious thing to do. But a daring takeover seems unlikely.”

Other corporate moves that have not worked out in favour of abi, include the £79bn ($98bn) bid for sabMiller three years ago, which landed abi with net debt of over $100bn, nearly five times last year’s earnings before interest, tax, depreciation and amortisation.

“Repayment has been slow, not least because abi has borrowed largely in dollars and euros but earns most of its money in the fragile currencies of volatile emerging markets like Brazil and South Africa.”

Worries about debt caused its shares to tumble by 38% in 2018, says The Economist, a third straight year of decline.

“The share price has recovered half of last year’s losses, though it still looks cheap relative to expected earnings compared with its two closest rivals, Heineken and Carlsberg – abi’s superior margins notwithstanding. It is also still down by a third since the SAB deal, even as the shares of smaller rivals have risen smartly.

Read also: Beer wars: Heineken throws down EM gauntlet to AB InBev

“In a humbling turn, abi’s board (which the Brazilian investors control alongside a group of Belgian heirs) halved its dividend in October to pay down debt. On May 7th it confirmed rumours that it is exploring listing a minority stake in its Asian operation, estimated to be worth perhaps a quarter of the group’s $172bn market value,” it says.

Also weighing heavily on investors is a seachange in the beer industry.

“Brewers are seeing demand for their tipple dry up. In America, abi’s biggest single market by revenue, beer is losing ‘share of throat’, in industry jargon, to wine and spirits, just as people are drinking less booze.

“Youngsters across the rich world are spending less time in the pub and more at the gym (or smoking cannabis, another alternative to beer). Nearly a quarter of young Brits are teetotal.”

Still, consumption is rising in poor countries, where 57% of abi’s revenues now come from, in part thanks to SAB, notes The Economist.

“But even there growth has slowed. Beer sales used to closely track the global economy, notes Ed Mundy at Jefferies, a brokerage. In future he expects them to grow a third as fast as GDP – or a paltry 1% a year.”

Sales growth, of 4.7% a year since 2008, is largely thanks to  ‘revenue management initiatives’ – or, in plain English, selling abi’s existing beers at higher prices, it adds.