Boyden Executive Search

With food and beverage sector trends inexorably closing in, and its go-to strategy seemingly tapped out, the brewing giant needs a new way forward.

AB InBev dominates the brewing industry, selling more beer than its three closest competitors combined and generating about 50% of global profits. Its gross operating margins were 40% in 2018. This is more than double the average for other listed brewers, and extraordinary for any consumer goods company. No surprisingly, AB InBev is also one of the world’s top five consumer goods companies.

AB InBev’s management teams are devoted, and CEO Carlos Brito is revered. The loyalty of investors could be harder to secure, because despite rising profits, AB InBev’s path forward is unclear. There are concerns regarding the company specifically, and about the brewing industry at large.

AB InBev’s name reflects the series of deals from which it was formed. Behind it is the same group of Brazilian investors who founded 3G Capital, the private equity firm famous for its appetite for acquisitions. The beer empire started in 1989 with the acquisition of Brahma, a Brazilian beer company. In 2004 the group started buying up rivals, beginning with Belgian brewer Interbrew, maker of Stella Artois. Four years later it scooped up American firm Anheuser-Busch, which owns Budweiser. In 2016 it added SABMiller, its biggest remaining rival.

Brito has led AB InBev since 2005, and his management team shares a penchant for acquiring big rivals and trimming them down. This strategy has been successful, but could be nearing its limit. The once fragmented beer industry is now consolidated. AB InBev has no major rivals left to take over, at least not within the tolerance of regulators. Further, the cost controls of AB InBev and other 3G Capital-run companies, notably Kraft Heinz, have come under scrutiny, The Economist reports. Kraft Heinz is now under investigation.

AB InBev will need to devise a new growth strategy. It could expand into other beverages, but doing so through another takeover may not be an option. The company is still sorting out the nearly $100 billion in net debt resulting from its deal with SAB three years ago. The debt issue led to AB InBev’s shares falling by 38% in 2018, a third straight year of decline. In October the board halved its dividend.

Debt reduction is now Brito’s top priority, and analysts say he will try to make AB InBev’s debt more manageable by boosting profits. With dubious cost-slashing in the spotlight, this would be better achieved by growing revenue. But selling more beer could be a challenge given current trends in the brewing industry and the broader food and beverage sector. Demand is down in rich countries, including the U.S., AB InBev’s biggest market. Young people in particular are favouring healthy options. Consumption is rising in poor countries, but growth has slowed.

Brito wants to emulate the spirits-and-wine industry, where consumers willingly pay much more for top brands. Dozens of craft breweries basking in small business allure are actually owned by AB InBev, but growth has levelled off in this segment too. Brito remains optimistic. Non-alcoholic beers are gaining popularity, and beer is increasingly being marketed to women and older consumers. Things seem to be moving in the right direction: First-quarter results reported on May 7 showed 5.9% year-on-year growth.

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