Little cheer for A-B at home or abroad
As Anheuser-Busch faces another challenging year in the US, analysts have suggested it is further compromised by a lack of international progress compared with other major world brewers, notably its keenest rival on the home market SABMiller. Dean Best reports.
After a disappointing 2005, the prospects for 2006 do not seem much brighter for US brewing giant Anheuser-Busch. The Budweiser brewer was long seen as the dream stock, dominating the most profitable beer market on the planet and posting earnings per share growth quarter after quarter.
But just over a year ago, when it reported its full-year results for 2004, Anheuser-Busch warned of a "challenging" year ahead as it began to feel the pinch from the slowdown in the US beer market.
The brewer had hoped a raft of measures, most notably a series of price cuts, would help it maintain market share in the US. Last week, however, Anheuser-Busch posted an 18% fall in net income, hit by falling revenues from its domestic beer business. The company moved to reassure shareholders that its US business - which accounts for the lion's share of profits - was showing signs of recovery, pointing to market share gains in US supermarkets and its moves to increase prices again following last summer's price war with Miller Brewing.
Nevertheless, according to analysts, there appear to be fundamental questions surrounding Anheuser-Busch's potential to grow sales - and earnings - over a longer-term period.
According to Carlos Laboy, beverage analyst at Bear Stearns, Anheuser-Busch's current woes are a symptom of its over-reliance on the US beer market, at a time when the beer category across the Atlantic is going through an image crisis. Add a resurgent Miller to the mix and it's easy to see why industry watchers are less than confident about Anheuser-Busch's growth prospects.
"A-B has been left over-reliant on a domestic beer category suffering from an image problem and without an exposure to emerging markets," Laboy told just-drinks.
Laboy believes that, as category leader, Anheuser-Busch was wrong to start a price war last summer, given the poor image of the beer category among consumers and growing demand for premium wine and spirits. The brewer, he argues, is caught between its duty to protect the beer category as market leader and its desire to increase market share. "It's incumbent upon the market leader to protect the category but, looking at A-B's growth algorithm, its priority looks to be to protect market share - so will there be a price war again?" Laboy asks.
The slump in domestic revenues looks to have discouraged Anheuser-Busch from going down that route again. Chief financial officer W. Randolph Baker says the brewer last month began increasing prices in "selective" markets and that he believes the "pricing environment for 2006 is favourable". Price increases, coupled with the brewer's plans to tailor the marketing of its brands at a more local level, will see sales rebound this year, Baker says.
"We do expect a resumption in domestic beer growth. We obviously had a difficult year in 2005 and we took a number of actions to significantly improve our profitability. Now, we're seeing restored volume growth and more positive underlying trends."
However, Mark Swartzberg, a beverage analyst at Stifel Nicolaus, believes the domestic beer category will continue to suffer at the hands of wine and spirits. The critical factor behind this trend, he argues, is that wine and spirits producers are spending more on marketing their brands than brewers, spending that has proved crucial in attracting the key 21-27 age group, the biggest drinkers in the US.
"Wine and spirits marketers, most especially spirits marketers, are acting upon the realisation that (marketing) spending in excess of inflation is the key to maintaining favourable per capita trends," Swartzberg says. "We are less convinced brewers are prepared to keep up the marketing pressure (and) we begin 2006 with Anheuser-Busch planning a slight decrease in annual marketing-related spending - after a major increase in 2005. If indeed brewers are entering a phase of slowing marketing spending, we would expect beer to lose share to wine and spirits at a faster rate than we have projected."
Indeed, the turnaround of Miller since it was bought by the then South African Breweries in 2002 has largely been based on marketing. Miller's brand marketing has proved a success with Miller Lite and it has set its sights on relaunching its flagship Miller Genuine Draft. Laboy believes Miller has the added advantage of SABMiller's global reach, meaning the brewing giant is less dependent on the US and able to match Anheuser-Busch's moves on price last year.
"A-B's scale advantage over the number two player has been diluted by the bigger geographical diversity of that number two player and the growth prospects of the number two player," Laboy says. "SABMiller has 82% of its operating income from emerging markets around the world so they can take the pain (in the US) a lot better over the long term."
The slowdown in the US beer market would not have had as great an impact on Anheuser-Busch if the brewer had been more active in investing overseas. Fellow brewers Heineken, Scottish & Newcastle and Carlsberg have all suffered from an over-reliance on domestic beer markets in the last year. They have seen profits in Western Europe hit by flat beer sales, where the category has been subject to similar demographic and competitive pressures to the US.
Stagnant Western markets have made it imperative that global brewers have a strong presence in the world's emerging beer markets to secure long-term sales and earnings growth. The size of a global brewer in absolute terms is becoming less and less important - what matters is its access to emerging markets.
"Everyone else is on a shopping spree - and (A-B) hasn't done anything with the exception of China," says Laboy. "(A-B) has been investing in China but they've been paying very rich prices and the financial performance so far is poor, while others have been very active in China and been quite successful."
A-B's leadership position in China and its stake in Mexico's largest brewer Grupo Modelo are significant but it has been left behind in the race for a presence in other key emerging regions, notably South America, which is all but tied up between InBev and SABMiller. Looking at the respective rosters of the global brewing giants and their investment in developing beer markets, it's clear that Anheuser-Busch's presence is nowhere near as wide as its rivals.
Baker, however, is confident that Anheuser-Busch's international operations can thrive, despite pre-tax earnings from that side of the business falling by 26% last year. "Going forward, we expect the very strong growth from our international segment to continue," he says, pointing to Anheuser-Busch's "very favourable" investment in Grupo Modelo and the prospect of "long-term significant profit growth" from China.
The problem for Anheuser-Busch is that, for all its long-term forecasts of growth from China, questions still surround its domestic business. It could be a long year ahead.
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