Anheuser-Busch set to flex international muscle
Although the largest brewer in the world, Anheuser-Busch's international development has been surprisingly slow and sporadic. But its recent tie-up with Tsingtao in China is likely to give the brewer's international progress a significant boost. Chris Brook-Carter reports.
Anheuser-Busch, the world's largest brewer, owns the world's most valuable alcoholic drinks brand and has a daunting grip on the world's most profitable beer market. Quite a set of global credentials all in all, or at least that is the image this beer behemoth cultivates.
The reality of Anheuser-Busch's history is a tale of two markets, domestic and international. On the home front A-B has, if anything, tightened its hold on the business. Towards the end of the 1990s and early into the new century, sales of beer in the US benefited from a broadly positive environment, with a booming economy and healthy industry performance supporting growth. For A-B, volume sales showed positive growth towards the end of the 1990s and into the new millennium, while price increases introduced in 1999 and 2000 bolstered turnover and profits.
These trends have continued into 2001 and 2002. Last year's full year results showed that A-B's gross sales increased to US$15 billion, up 3% on 2000, driven primarily by increased domestic revenue per barrel and higher domestic beer sales volumes. And, in its most recent third quarter results, the company saw another strong US performance drive profits up by 11%, as the brewer continued successfully to balance price increases with market share gains.
Internationally though the company's performance has been far more patchy. "Despite the existence of an international division since 1981 and the marketing of beers in 80 countries worldwide, Anheuser-Busch remains highly dependent on its domestic market," says industry analyst Euromonitor*.
In 2000, domestic sales accounted for some 95% of Anheuser's total beer sales. Moreover, in Euromonitor's latest report on the company, it highlights that in the period 1996 to 2000 the domestic operations were by far the strongest performer, with sales up by nearly 16%. International sales, by contrast, suffered year-on-year declines, with turnover down by around 31% between 1997 and 2000.
However, it would be unfair to dismiss A-B's international arm as merely the poor relation to its domestic stablemate, particularly after the highly significant deal with Tsingtao in China, announced last week. While the Tsingtao deal is the boldest example of A-B's international aspirations, the company is increasingly aware that the international arm offers the best long-term potential for growth given the maturity of the US market.
Speaking to Just-drinks, Anheuser-Bucsh International's chief executive, Stephen Burrows, says that while he would not deny there had been criticism of the company's reliance on the US, the home market had been providing "strong volume and earnings growth." Meanwhile, internationally, Anheuser had been focusing on overseas markets where Budweiser can be a success and the company can achieve a good return on equity investment for shareholders.
In 2000, while the group's international beer sales were hurt by the conversion of the company's joint venture with Kirin in Japan to a licensing agreement, volumes did show an increase, led by Canada, China and Mexico, although these were offset by slower sales in the UK.
And in 2001, the net income from the international beer segment rose by 25% to US$276.1m. As well as pushing the Budweiser brand internationally - strong gains have been achieved recently in China, which went into profit for the first time in 2001, Ireland and Canada - Anheuser does invest in leading brewers in what it terms "high-potential-growth markets".
Burrows says: "The international business can provide incremental growth and has been for a number of years. We don't feel we should be everywhere, but focus on the top 10 to 12 markets where Bud can be a success." On top of this the company will continue to look at growth markets where it can invest in the market-leading operators. However, as Burrows explains this is unlikely to mean a shift in its current market priorities. "I don't see any shift in geographic focus on Asia or Latin America," he says. "We haven't moved in Europe, which is not generally a growth market," he adds, explaining that the money others were willing to pay in Europe would mean the return on investment would be insufficient for the company's goals.
To this end Anheuser already has a 50% share in Mexico's leading brewer, Modelo, a 20% share of Compania Cervecerias Unidas SA-Chile (CCU) and a 28.6% stake in CCU-Argentina. However, a staggering US$240m of the US$276.1m 2001 international net income came from the Modelo operation alone. That analysts believe the recent Tsingtao deal could soon overshadow Modelo as A-B's leading international venture shows the kind of importance attached to the deal.
"In strategic terms it [the deal] is very significant, as part of our strategic goal is to partner with the leading brewers in countries that show growth. This epitomises that strategy," says Burrows. The agreement will see A-B raise its stake in Tsingtao from 4.5% to 27% over seven years for around US$182m. Tsingtao will issue convertible bonds to A-B in three installments.
Jin Zhiguo, the president of Tsingtao Brewery has called the agreement an "extraordinary alliance", and certainly it seems like an extraordinarily good one for A-B on the evidence so far. China, as the world's second largest beer market, and potentially the largest by some degree, offers a huge opportunity for A-B, with beer consumption growing there at about 6% a year. The US giant will not only have access to Tsingtao's high growth levels but will also be able to utilise its Chinese partner's huge domestic sales network to drive volumes of Budweiser in the country.
As Burrows explains, Anheuser has been in China since 1995 when it purchased the Wuhan International Brewing Company. Since then it has been doing relatively well, with Budweiser the number one brand in the super-premium segment, which, as Burrows explains, is "not large but growing". The investment in Tsingtao now gives it a leading presence at the other end of the market. "To have Budweiser in the super premium segment and the partnership with Tsingtao...is a nice balance," Burrows says.
Much has already been made of how Tsingtao will be able to capitalise on Anheuser's knowledge, experience and investment to bring its production standards up to international levels. But the deal will also give A-B a partner who has been operating for 100 years in what is soon to become the world's biggest beer market.
Given these circumstances and the growth potential, some analysts have even suggested the deal is a no-risk proposition. "The U$182m investment is really nothing for something that could give pretty decent upside in the future," said one beverage analyst.
There will no doubt be some eyebrows raised about A-B's choice of market. China's recent history is littered with failed business ventures. In the 1990s a number of the beer giants recognised the potential of the Chinese market and attempted to break into it. However, faced with a hugely fragmented marketplace, political interference on local and national levels and cheap domestic competition, brewers such as Carlsberg and Foster's had to scale back their plans, fingers badly burnt.
However, A-B has as good a chance of success as anyone, firstly because it has partnered with the market leader and secondly because it has the Chinese government on its side. The Chinese government for one will remain the brewer's number one investor. But it is also no coincidence that the chairman of the China State Development and Planning Commission, Zeng Peiyan, attended the signing ceremony with US commerce secretary Donald Evans. This deal means a great deal to both sides.
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