Spotlight - Is Anheuser-Busch InBev Sitting on a Distribution Goldmine?
Anheuser-Busch InBev is reforming its business in the US
Who needs to sell more beer when you can sell the same amount for more profit? It's a theory that Anheuser-Busch InBev and MillerCoors are having to grapple with in the US, and it's one that has more longevity than you might think, according to Morgan Stanley analysts.
Anheuser-Busch InBev this week reported beer sales to US retailers down by 2.2% in volume for the nine months to the end of September. This slowed to a drop of around 1% for the third quarter.
It's not a new trend and, if anything, suggests that the mainstream beer market in the US is creeping towards greater stability. However, stability is the immediate goal, not growth. Unemployment among key beer drinkers in the US - young men - has fallen back in the last few months, but remains at historically high levels.
Within this context, A-B InBev is receiving praise for continuing to extract value from the market.
The most recent quarter marks only the third time in the last ten quarters that A-B InBev's sales to retailers have declined at a slower rate than those of its main rival, MillerCoors, according to figures supplied by Sanford Bernstein. However, in terms of revenue per hectolitre, A-B InBev has performed much better, beating gains achieved by MillerCoors in four out of the last seven quarters. In a further two of those seven quarters, the companies achieved near-enough equal rises.
For the third quarter of 2011, the group's EBITDA in North America increased by 3% to almost $1.82bn, with margin expansion of 1.4 percentage points. It's a fairly obvious point, but here is proof in a microcosm that profits can be increased without selling more beer. In October, A-B InBev increased prices in the US once more, by a further 3%. The question is, how long can A-B InBev continue to eke value out of a fragile US economy?
Anyone with a definitive answer could get very rich indeed, but Morgan Stanley analysts this week produced some detailed scenario planning on how A-B InBev might continue to create value from a stagnant market for at least the medium-term.
In a nub, Morgan Stanley sees significant savings in the US beer distribution system, with a potential win-win for both wholesalers and brewers. The analysts highlighted that A-B InBev has already tasted success with such a policy in Brazil, where the group's AmBev unit is now more profitable per case of beer than the North American business.
"One must not forget that one of ABI management’s core skills is to extract value out of a market regardless of its growth profile," said the analysts. "While there are important differences between the US and Brazil – in particular the difficulty in being able to own wholesalers in the former – we think ABI management will be able to replicate its strong Brazilian performance in the US."
Savings from the distribution system alone could improve A-B InBev's EBITDA in the US by $2bn within the next four years, said the analysts. This is significant in a market that accounts for close to half of the company's annual profits. Tentative conversations between the company and distributors may already have begun, according to Morgan Stanley.
Certainly, the idea of cutting the fat and improving best practice among the many small-scale beer distributors in the US is not new. In September last year, Boston Beer Co founder Jim Koch said at the Barclays Back-To-School Conference: "I believe there is about a dollar a case of efficiencies to be gained from the US beer distribution network, even in its current configuration. So that's about $3bn."
It's possible that both A-B InBev and MillerCoors will be looking more seriously at this scenario, given ongoing sluggish consumer demand. It could provide a neat alternative to closing breweries; a politically-divisive policy and something that A-B InBev's CEO, Carlos Brito, told analysts this week that he is not currently seeking to do, even if there is some "reshuffling" of capacity going on.
At the same time, Brito said that A-B InBev is seeking to weight more of its beers in the upper echelons of the US beer sector, away from the so-called sub-premium category.
It's a policy that has, so far, paid off in value terms. Bernstein noted this week that A-B InBev's third-quarter margins expanded in North America "on the back of synergies, pricing ahead of input cost inflation, and improved A&P efficiency".
However, Morgan Stanley believes that, with synergies from the 2008 A-B acquisition slowing down, a distribution shake-up could provide the material for A-B InBev to bridge a trading gap that has opened up between itself and SABMiller, Coca-Cola Co and its own subsidiary, AmBev.
Faced with falling demand for beer and the last splurges of current synergies rounds, it seems to me that both A-B InBev and MillerCoors will look to do something to generate extra savings in the US. We will watch with interest.
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