Snooty ale connoisseurs mock Budweiser's usurped title of "King of Beers." No one, however, quibbles that Bud's purveyor, Anheuser-Busch InBev (ABI), reigns over global brewing.
The all-conquering firm sells almost three Olympic-sized swimming pools of beer an hour — more than its three nearest rivals combined. Yet even as profits have frothed, weariness has descended upon the head that wears the crown. ABI's prospects, once as golden as its Corona lager, have assumed the cloudier quality of a Belgian witbier.
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.
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. It has devoted managers, nearly all recruited out of university. Employees' fealty to ABI boss Carlos Brito is reminiscent of General Electric under Jack Welch.
Investors' similar devotion to the company is increasingly being tested. The first set of worries is specific to ABI.
Its agglutinated name points to a firm whose trajectory has been set by financiers, not brewers. At its core is a trio of Brazilian investors best-known for later starting 3G capital, a private-equity fund that snapped up other food firms such as Burger King and Kraft Heinz.
They used Brahma, a Brazilian beer firm they acquired in 1989, as a platform to buy up rivals the world over: Interbrew, a Belgian brewer which makes Stella Artois, in 2004; Anheuser-Busch, the U.S. owner of Budweiser, in 2008; and SABMiller, its biggest remaining rival, in 2016. Brito is their main lieutenant.
The successful strategy of serial acquisitions and cost-cutting appears to be nearing its limits, however. Having consolidated the fragmented beer industry — four of the 10 biggest brewers in 1990 are part of its empire — no large rivals remain to be taken over without goading competition authorities. As for cutting costs, by the end of the year ABI will have wrung out the last of the $3.2 billion of annual savings it expected from SABMiller.
At the same time, 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. Kraft Heinz's shares tumbled in February after it wrote down the value of its assets by $15 billion. Many took it to be a tacit admission that its cost-cutting had done the business harm.
Brito is adamant that problems at Kraft Heinz are not ABI's concern. His own cost-curbing philosophy — to redirect spending from wasteful things to wiser ones like marketing, he said — does seem less draconian than Kraft Heinz's. "We are not a 3G company," he insists. Investors are not so sure. ABI's own share price dipped briefly in February in the wake of Kraft Heinz's impairment. ABI's erstwhile top marketer has been parachuted in to fix the food giant.
Either way, ABI needs a new growth strategy, having squeezed its historic one dry. Expanding its small nonbeer offering — buying Coca-Cola, for example, or Diageo, which mainly sells spirits — once seemed the obvious thing to do. But a daring takeover seems unlikely. The $98 billion bid for SABMiller three years ago landed ABI with net debt of over $100 billion, nearly five times last year's earnings before interest, tax, depreciation and amortization. Repayment has been slow.
Worries about debt caused its shares to tumble by 38% in 2018, 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 SABMiller deal, even as the shares of smaller rivals have risen.
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. Last week, it confirmed rumors that it is exploring listing a minority stake in its Asian operation, estimated to be worth perhaps a quarter of the group's $172 billion market value.
No wonder Brito said reducing debt is his priority.
Beer making is not what it used to be, however. Brewers are seeing demand for their tipple dry up. In the U.S., 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 don't drink.
Consumption is rising in poor countries, from where 57% of ABI's revenue now comes from. But even there growth has slowed. Beer sales used to closely track the global economy, notes Ed Mundy at Jefferies, a brokerage. In the future he expects them to grow a paltry 1% a year.
Exclude acquisitions and ABI has not increased beer volumes in over a decade. Sales growth, of 4.7% a year since 2008, is largely thanks to selling ABI's existing beers at higher prices.
Brito wants to emulate the spirits-and-wine trade, where consumers pay vastly higher prices for top brands than for mainstream ones.
For example, ABI owns lots of labels that are nothing special at home but marketed as posh overseas: Budweiser, America's bog-standard lager, sells for a premium in China; Stella, which Europeans quaff at football games, is served with three-course dinners across the pond. Around the world, dozens of craft breweries that ooze local charm and anti-capitalist mystique — think Camden Town Brewery or Goose Island — are, in fact, owned by ABI. But growth in craft-beer consumption, too, looks flat.
Brito insists growth is still there if you know where to look for it. Nonalcoholic beers have got tastier thanks to improved recipes. Once considered the preserve of young men, beer is increasingly marketed to women and older folk. First-quarter results reported last week suggest Brito could be on to something. Revenue grew a respectable 5.9%.
Skeptics question whether a corporate culture built around Excel wizards can be retooled into one where marketers eek out incremental market-share gains, quarter after quarter. Brito may yet prove the doubters wrong. If he has learned anything, it is that reigning over the brewing world is more work than seizing the crown.