Why the world’s biggest brewers have the ‘wrong’ strategy
Deal makers will be toasting the mega-merger between AnheuserBusch InBev SA and SABMiller PLC, but at least one analyst thinks both their beer drinkers and investors may be left thirsting for a better outcome.
Demand for commercial beer in the western world is on the downtrend and the globe’s biggest brewers are in desperate need of growth, so they’re looking to emerging markets as an obvious place to expand.
AB InBev’s US$107-billion deal for SABMiller is the most obvious and recent example of this approach, as the former appears more interested in buying rivals than organically developing its own brands in markets such as Africa and South America.
“Of course SABMiller wouldn’t have sold off its fastest-growing assets, so AB InBev has to buy the whole company to get the emerging market beers it wants,” said Jasper Lawler, a London-based analyst at CMC Markets.
But combining the world’s two largest brewers creates a lot of market overlap, which is why regulators have concerns about maintaining competition.
Lawler noted that the combination of such a giant merger and the subsequent asset stripping needed to appease regulators makes the AB InBev-SABMiller deal very complicated.
More worrisome, however, is that the combination will reduce the number of massive players in the global beer market to just three (Heineken International and Carlsberg Group being the other two).
“It’s precisely this false choice of hundreds of beers produced by the same companies that is spurring a craft beer revolution in the U.S., U.K. and Europe,” Lawler said.
The big brewers recognize that trend toward “real beer,” as SABMiller’s purchase of London lagermaker Meantime Brewing Co. earlier this year proves, but the analyst noted that it also serves as an example of how they can get it wrong.
Many people believed Meantime brewed at a micro-brewery in Greenwich, U.K., but it emerged that it sometimes makes its beer at Grolsch’s factory in Holland, and Grolsch is owned by SAB Miller.
Rather than spend billions of dollars on difficult and often disappointing mergers, Lawler believes the world’s biggest brewers and their investors would be better off putting money into their own emerging-market brands, while at the same time acknowledging the growing demand for craft beers in developed markets.
Such a strategy, of course, requires an investment that they don’t appear willing to make — at least not yet.
“The big brewers coupled with the supermarkets have been the biggest beneficiaries of the trend for drinking beer at home instead of the pub,” Lawler added, noting that British pubs are closing at a rapid pace even though the overall number of breweries is quickly rising due to the growth in micro breweries.
But AB InBev’s third-quarter results make it obvious why it wants to acquire SABMiller.
Total revenue fell seven per cent, while North American sales dipped more than one per cent and have declined in five of the past six quarters.
Dave Novosel, an analyst at GimmeCredit, also noted that AB InBev’s market share in the U.S. fell 90 basis points, while its flagship Budweiser brand plunged 45 basis points.
“Consumers are shifting their preferences toward craft beers and away from the old-line brands,” Novosel said in a November report.
Nevertheless, he believes SABMiller will improve AB InBev’s organic growth problem, thanks to the former’s exposure to Africa and Asia.
Novosel expects the deal will go through, but noted that if it doesn’t, AB InBev will have to pay SABMiller a US$3-billion break fee and be forced to rely on organic growth.
“Given the shifting trends in the U.S. markets and the economic conditions in China and Brazil, we think growth will be pressured,” he said.
Of course SABMiller wouldn’t have sold off its fastest-growing assets, so AB InBev has to buy the whole company to get the emerging market beers it wants.
— Jasper Lawler, analyst, CMC Markets