Company Watch: Anheuser-Busch to benefit from InBev acquisition
Author: Jeremy Cunnington
Date published: 2 Jul 2008
The US campaign to block InBev's acquisition of Anheuser-Busch (A-B) may, if it succeeds, end up doing in the long term what its advocates fear the acquisition would do - destroy jobs and belittle the iconic brand Budweiser. Anheuser-Busch's over-reliance on the maturing US market and lack of capacity to expand internationally quickly enough in an increasingly consolidated global market may make coming under InBev's wing an attractive prospect.
Over-reliance on the US
Of the near 15 billion litres of beer sold by Anheuser-Busch in 2006, nearly 82% was in the US. After that the next biggest market for the company was China with nearly 13% (based only in the northeast of the country), followed by Western Europe (mainly the UK) and Canada, both of which accounted for 2% of Anheuser-Busch's volumes.
This position does not fully show the company's global strength as it does have minority interests in Tsingtao, China's second biggest brewery and Mexico's Modelo. It also has joint ventures in Vietnam and India. All these markets are expected to perform well over the 2007-2012 period. However, the company's joint venture in India will have limited potential due to the country's complex taxation and infrastructure problems, meaning a national network of breweries would be required to take full advantage of the market's growth.
In Anheuser-Busch's main market, the US, its strength is based on commanding over 49% of beer sales. In actual terms, the US is expected to be one of the most dynamic (632 million litres) between 2007-2012, but this equates only to a 0.5% CAGR over the period as the market matures. Unfortunately, most of this growth will come from imported premium lagers, which the company lacks. In addition, the company will also face increasing competition following SABMiller and Molson Coors' recent joint venture, which is likely to put further pressure on margins.
In regions where A-B does not have a presence it uses licences with local market players for either importation or production of its products. Recent examples of this have been with SABECO in Vietnam, Heineken in Russia and Cervecería Barú in Panama. Budweiser is also locally brewed under the direct supervision of Anheuser-Busch brew masters in a number of countries: Argentina, Canada, Ireland, Japan, Russia, South Korea and Spain.
These activities reduce the costs of penetrating new markets for A-B and offer a low-risk method with minimal investment. This, however, does limit potential revenue generation as it has to share it with a partner, and potentially the brand may not be supported as well as if it had its own distribution company there, as the partner's main focus is going to be on its own brands. In addition, it will be up against competitors with a stronger presence in the country, which could outmuscle it.
InBev's global position
Global beer volumes are expected to grow by over 28 billion litres (3.1% CAGR) between 2007 and 2012, driven by emerging markets, led by China and followed by the other BRIC countries. Other strong contributors will include Ukraine, Mexico and Vietnam. While A-B has a presence in a number of these markets, it is either weak or partial at best as we have seen above. It certainly does not compare in terms of depth or breadth to InBev.
In 2006 InBev was the world's leading brewer with volumes sales of over 20 billion litres. The company's largest market is Latin America, which accounted for 42% of its volumes. It also has a strong presence in a number of other regions with Eastern Europe, Asia-Pacific and Western Europe accounting for 10%, 17% and 15% respectively of the company's volumes.
InBev's global position is based on a good presence in many of the world's most dynamic markets, most notably China, Brazil, Russia and Ukraine where, with the exception of China, Anheuser-Busch has a negligible presence. Even in China, InBev was nearly 50% bigger than A-B in volume terms in 2006. By becoming part of InBev and its distribution network, A-B's brand volumes would be potentially boosted in all these markets, even China. In China A-B's current distribution strength is in Northeast China, while InBev's is in East and Mid China, which accounted for 44% of total Chinese beer volumes in 2007. InBev's strong position in Western Europe will also benefit Anheuser-Busch brands, giving them good routes to market in countries with strong premium sectors and in which A-B has little presence. Meanwhile in the US, InBev's portfolio of premium imported lagers will allow it to capitalise on growth there.
This is not to say that InBev will not benefit from the deal, which will notably give it access to the US and dynamic Vietnamese markets in which its position is weak. It would also give the company access to China's biggest region in terms of beer in 2007, making it more of a national player there.
Budweiser could become a truly global brand
Anheuser-Busch will find it very difficult, if not impossible, to develop as good a platform in these markets through acquisition. This is primarily due to there being few independent companies left to acquire of a scale to make it worthwhile for the company. Just as important is the very high level of A-B's long-term debt - US$9.3 billion in 2007. This equates to a long-term debt to equity ratio of 295% in 2007, leaving it little scope for major expansion. The proposed defensive merger with Modelo, while giving the company access to the relatively dynamic Mexican market, will do little to solve its lack of global coverage.
Anheuser-Busch and its brands have much to gain, especially Budweiser, which InBev has said it will turn into its global brand, if it successfully acquires A-B, by giving it a ready made global platform to boost volumes. This is something that, with its current position, Anheuser-Busch has limited chance of doing.
Jeremy Cunnington, Senior Alcoholic Drinks Analyst: jeremy.cunnington@euromonitor.com
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