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Financial Analysis of Anheuser-Busch Companies -

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Financial Analysis of Anheuser-Busch Companies - - February 18th, 2011

Anheuser-Busch generated gross sales of $19 billion and produced over 125 million barrels of beer in 2007[2], ranking it as the largest alcohol brewer in the United States and third largest worldwide, behind Belgium-based InBev NV, and U.K. based SABMiller. While the company brews the world's two best-selling beers (Budweiser and Bud Light) and generates two-thirds of beer sales in the U.S., the company's recent growth has come from international expansion, primarily in Latin America and China. From 2003 to 2007, BUD's domestic barrel volume has been flat, while its international operations have grown an average of over 20% annually including a 13.4% increase in 2007. In June 2008, Belgium/Brazil based InBev made a $46.3B offer to acquired Anheuser-Busch. A combination of these two titans would produce the world's undisputed king of breweries with InBev's focus on Latin America, Canada and Europe complementing Anheuser-Busch dominance in the stagnant U.S. market and Mexico. Indeed, the new entity would combine the largest U.S. brewer with the largest international brewer by volume resulting in aggregate production of over 300 million barrels. In July 2008, the last American brewer agreed to by acquired by inBev for $70 a share or about $52B.

Anheuser-Busch faces operational challenges stemming from industry consolidation as well as price increases of key commodity inputs.

1 Products & Marketing
2 Business Drivers
2.1 InBev Merger
2.2 Marketing and consumption patterns
2.2.1 Adjusting product quality and price
2.2.2 Increasing substitutability threat
2.3 Dependence on international growth
2.4 Industry Consolidation
2.4.1 Wholesaler consolidation
2.5 Dependence on grains, packaging prices
2.6 Excise taxes risk
2.7 Exposure to weather patterns
3 Comparison to Competitors
3.1 Market Shares
3.2 Operating Metrics
4 References
The world's major breweries--including Anheuser-Busch, InBev, SABMiller (SBMRY), and Molson Coors (TAP)--have grown through the acquisition of and partnerships with smaller breweries rather than organic growth. The successful integration of many disparate operations catering to different consumers and cultures will be crucial to the success of international growth. Anheuser's strategy has been two pronged: 1) partner with established brands (20% of overall beer volume) and 2) grow its own brands internationally (15% of beer volume)
Anheuser-Busch sells approximately 70% of its products to beer distribution wholesalers, a segment of the industry that is also consolidating. Fewer distributors means distributors have more negotiating power with the breweries, which could in turn translate to lower prices for Anheuser-Busch
Commodity prices for barley (8% of beer costs) and aluminum (for packaging) have increased dramatically over years. Barley has almost doubled in recent years as farmers are planting corn, soy and other commodities feeding the burgeoning biofuels industry. Aluminum prices have increased appreciably in the last two years due to increases in worldwide demand for this versatile commodity.
Products & Marketing

Anheuser-Busch brews more than 60 varieties of beers and liquors under the Budweiser, Michelob, Busch, Natural, Specialty, Import, and Malt Beverage families. The beer product line spans a wide spectrum, including lagers, ales, stouts, light and ultra light beers, as well as non-alcoholic ones. The diversity of the company's product line can be considered both a response to and an advantage in an ever-changing and wide-ranging alcohol consumption market. Still, the Budweiser and Michelob families constitute the largest category of the company’s top-line by a considerable margin, and both brands have demonstrated tremendous staying-power and consistent demand.

BUD has been known to market its products through its humorous television advertising campaigns and Super Bowl commercials. Such campaigns have at times contributed to the American vernacular and popular culture, including the company’s famous “Bud – Weis – Er” and “Real Men of Genius” campaigns. The company's marketing tactics have been successful in creating awareness, adoption, and popularization of its flagship beer brands in a manner somewhat analogous to the Coca-Cola Company (KO), albeit to a more modest degree.

The company also operates in the theme park amusements segment via its Busch Gardens and Seaworld venues, which account for approximately 7% of its net sales (i.e. after excise taxes on beer) and 10% of its pretax income. Venues such as Busch Gardens and Sea World emphasize the company’s rich history, and over 20 million people visited BUD’s parks last year.

Business Drivers

InBev Merger
Marketing and consumption patterns
The success of Anheuser-Busch depends largely upon consumer preferences for alcohol consumption, especially beer consumption. The worldwide beer market has grown consistently, although modestly, over the past decade and beer—the oldest and most popular alcoholic beverage—is unlikely to become marginalized. Markets in the U.S. and a number of other countries are mature while countries such as China have experienced considerable growth in beer consumption.

Preferences for beer can also vary greatly by individual preference, consumer age, and region. Acquired tastes and culture often lead to different purchasing habits and staying abreast of such demand patterns is crucial to the company’s success. Their diverse product line enables BUD to offer beverages for many different demographic groups. Furthermore, beer drinkers as individuals demonstrate a low level of loyalty or consistency in the purchase of beer products, which poses another challenge to the company and its marketing efforts.

Adjusting product quality and price
Beers may be categorized into three types: 1) Super-premium (e.g. Corona); 2) Premium (e.g. Budweiser); and 3) Value-priced (e.g. Natural Light). In recent years, there has been a consumer trend away from the middle tier premium beers, where the company’s flagship brands compete. Consumers increasingly pay for super-premium alcohol beverages, opting for quality products and choice, or consuming value-priced, lower cost alternatives. Premium beers have experienced less growth in demand. While this may be the result of the fact that the company’s premium beers have the largest market share and hence experience decreasing marginal returns, the company must continue to understand and capitalize on the general trend in order to drive revenue and demand for its products.

Increasing substitutability threat
Sales of wine and spirits have increased at a faster rate than that of beer in recent years, as customers increasingly opted for alcohol types outside of beer. Beer brewers target a fickle and wide-ranging demographic which considers many alcoholic beverages to be substitutes. As a result, beer makers compete with wine and spirits companies in addition to other beer breweries. As BUD’s dominant product is beer, the company faces the dual threat of dual competition and alcohol substitutability.

In 2005, for instance, beer shipments in the US fell 1.2% while wine grew 4.8% and spirits grew 2.9%. Within the beer segment, super-premium and import beers have grown more rapidly than premium beers, which saw relatively flat growth. The company has begun limited distribution agreements with foreign brewers to augment their own premium domestic offerings.

Dependence on international growth
Anheuser-Busch currently dominates the United States beer market (48% by barrel volume) but lags InBev NV -- a Belgian company with over 200 brands, including Stella Artois and Becks -- in the worldwide market (by volume share). Growth abroad will depend on increasing brand presence in various quickly growing markets, particularly Latin America and China. The company has relied heavily on growth by international partnerships and acquisitions. BUD currently owns or has interests in Grupo Modelo (the Mexican maker of Corona) as well as Chinese brewers Tsingtao, Harbin and others.

As seen in the chart below, international effort across its own brands and brand partnerships have fueled the company's growth in beer sales by volume since 2003. BUD's domestic market for beer has remained relatively stagnant during this time.

Industry Consolidation
The brewing industry has several dominant large players along with much smaller specialty and niche companies (e.g., micro-breweries). Major breweries such as BUD, InBev, SABMiller, and Molson Coors have largely grown through acquisition of these smaller outfits. BUD has invested in several breweries in China, Latin America, and Europe, and has formed numerous distribution partnerships with companies in order to expand its international presence. This strategy can be more economically viable versus investing capital to start another brewery, given the large fixed costs and the ingrained cultural preference for tried-and-true, familiar local brands.

In October of 2007, SABMiller, and Molson Coors announced that they would merge their US operations to better compete with BUD. The joint venture, Miller Coors, will unite several of the United States' most recognizable brands including Miller, Miller High Life, Coors, Coors Light, Keystone Light, and Milwaukee's Best. According to company spokespeople, the tie-up is expected to generate $500 million in savings. The substantial savings of the tie-up will allow Miller Coors to increase US advertising budgets and lower prices to grab market share from BUD. Increased domestic competition could have a substantial impact of BUD because the US currently contributes 70% of revenues.

Wholesaler consolidation
Anheuser-Busch sells approximately 70% of its products to wholesalers, who then distribute their products to the retailers. In recent years, trends seem to point to a consolidation of the wholesalers that distribute BUD’s products. One significant ramification of this trend is wholesalers' increasing leverage to obtain lower prices from breweries, including BUD.

Dependence on grains, packaging prices
The company utilizes several key agricultural and commodity products in brewing and bottling its beverages. For beer, the most important inputs are hops and barley. The company mitigates price fluctuations of these commodities by using derivatives (e.g., futures) in order to manage input price risk. Barley typically constitutes 8% of the brewing costs of beer, and a significant price increase in barley, for instance, would increase the cost of the company's goods sold and put pressure on margins. Barley prices have increased 85% because of a dwindling supply. Farmers are increasingly attracted to farming crops such as corn and soybeans instead of barley because of the burgeoning biofuels industry.

Anheuser-Busch has vertically integrated its bottling facilities, which requires materials ranging from glass to aluminum. Aluminum prices, in particular, have increased around 50% in the past two years because of increased demands from various industries.

Excise taxes risk
As an alcoholic beverage producer, Anheuser-Busch is subject to changes in the legal environment regulating its business. One significant regulation in the U.S. is the excise tax on alcohol, which are collected at the state and federal levels. In 2007, the company paid over $2.3 billion in excise taxes, equivalent to 12% of the company's $19 billion in gross sales. Changes in excise taxes levied on alcohol can, therefore, result in material changes in operating results.

Exposure to weather patterns
The alcoholic beverage industry tends to be subject to changes in weather. Climactic changes, such as especially “hot” summers can drive beer and liquor sales.

Comparison to Competitors

The highly competitive brewing industry has been consolidating worldwide as companies attempt to gain market share and leverage returns to scale. Anheuser-Busch ranks among the largest breweries in most markets, along with Belgian-based InBev NV and London-based SABMiller Plc.

In spite of consolidation and evolving consumer preferences, the beer industry is still spotted with thousands of smaller brewers who produce niche beers products. These specialty brewers often focus on local buyer preferences and, as such, frequently charge higher prices to offset lower volume.

Market Shares

2006 Beer Market Shares
Market Share Anheuser-Busch InBev NV SABMiller Molson Coors Pabst Boston Beer

US 48.4% 1.1 23.0 11.0 2.7 0.7
Europe 3.0 16.1 6.9 9.8 n/a n/a
Rest of World 11.5 14.0 11.0 3.8 n/a n/a
Operating Metrics
Several key operating metrics are provided below for BUD and several of its largest competitors. The companies typically gauge the effects of volume and pricing by looking at the quantity of barrels of beer sold and the revenue per barrel sold (or hectoliter for non-US companies). Efficiencies may be measured by the gross profit per barrel (Rev/Barrel - Cost/Barrel) and the quantity of barrels sold per employee hired.

Key Operating Metrics
Metrics BUD TAP InBev NV SABMiller
Barrels Sold* (in MM) 125 41.2 210 150
Revenue per Barrel (USD) $143.20 137.57 85.35 102.00
Cost per Barrel (USD) $80.80 57.50 34.81 n/a
Margin per Barrel (USD) $62.40 80.07 50.54 n/a
Barrels per Employee 5,169 4,429 5,494 2,790

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