Anheuser-Busch's Brazil sales contracted by 4.3% in 2013, largely on account of bad weather and inflation weakening spending

LONDON , February 26, 2014 () – Brazil is hugely important to AB InBev, which is the world's leading beer company by sales. In 2012, the company's Latin America zone accounted for 29% of overall sales (Brazil accounts for the bulk of this) and was a key driver of growth in the 2009-2012 period in particular. Therefore, when AB InBev's Brazil sales contracted by 4.3% in 2013, largely on account of bad weather and inflation weakening spending, the US became a greater focus for sales growth. With the US continuing to improve, Mexico looking better fundamentally and Grupo Modelo now fully integrated, an upbeat guidance for Brazil in 2014 announced as AB InBev reported fourth quarter results to December 2013 means AB InBev looks well placed for a strong year following a challenging 2013.

AB InBev's shares are up by about 1.7% at the time of writing, as fourth quarter core profits increased by $5.2bn compared with a consensus forecast of US$4.94bn. More importantly, from our point of view, was the upbeat guidance for its key markets. The upcoming football World Cup is expected to add 1-2% to Brazil volumes, and with Mexico and China also expected to improve this can be seen as an upbeat guidance on emerging markets. We have made the point that in some key growth markets such as China and Russia there have been several exogenous factors, including higher excise taxes levied on beer and a crackdown on gift-giving, that have hit their alcoholic drinks industries, rather than a more structural slowdown.

Brazil And US Key Markets

AB InBev's core strengths are its market leading positions in Brazil and the US, which are two of the most profitable major global beer markets with very favourable industry structures. With nearly half of the US market and close to 70% of the Brazilian market by volume, AB InBev has strong pricing power, which is helped further by the relatively dispersed nature of the US retail industry (the key off-trade customer). This allows AB InBev to keep more of the overall industry's economic pie as retailers are generally less powerful on a national level in the US than they are in other developed markets such as the UK and Australia. The power of the company's Brazilian and American businesses are the key drivers of its superior margins. AB InBev earns considerably more than its main competitors Heineken and SABMiller on an earnings before interest, taxes, depreciation and amortisation (EBITDA) per hectolitre of beer sold basis.

Compared with AB InBev, SABMiller's core strength is the overall exposure it has to emerging markets. It arguably does not have a standout market such as Brazil or the US but rather has a widespread presence across a number of countries in regions such as Sub-Saharan Africa. It is therefore less vulnerable to slowdowns in such markets given the lower concentration risk, but this also arguably makes it much harder for the company to generate comparable margins.

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