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How AB InBev will derive growth in Brazil during tough times

August 9, 2016
Consumer Packaged Goods

Brazil is Anheuser-Busch InBev‘s second largest market behind the U.S., forming ~20% of the net volumes for the brewer, which operates in Brazil and other parts of South America through its subsidiary Ambev. Brazil is also in deep recession. This puts AB InBev’s growth prospects in danger in the country.

Through the first half of 2016, AB InBev’s Brazil beer volumes declined 6.7%, more than the overall company’s only 0.8% volume decline. Poor performance in Brazil is weighing on the brewer’s financials. However, AB InBev has looked to maneuver through this period of low customer confidence and weak economic conditions by focusing on creating value, and protecting profitability in the country. The company has emphasized sales of returnable glass bottles (RGBs), which have made their way back in off-trade channels. RGBs are cheaper, and attract customers who are looking for smart choices in terms of purchasing, in a weak spending environment in Brazil, where disposable incomes are falling. Although RGBs negatively impact top line growth, they are accretive to margins, thus helping AB InBev protect its profitability. Providing customers affordable options seems like a solid strategy for AB InBev, which is battling slowing consumption in Brazil. RGBs are gaining popularity in homes, with volume sales for AB InBev in supermarkets more than doubling in the first half of 2016.

On the other hand, AB InBev is also benefiting from the growth in consumption of its premium and near beer brands, which are relatively expensive, and hence, accretive to margins. Economic inequality in Brazil is one of the highest in the world. High interest and inflation rates and tight credit availability don’t tend to adversely impact the more affluent individuals, and this could be one of the reasons why AB InBev’s premium beers have grown at a rapid pace in the economy that is otherwise struggling. And there is room for further growth. Budweiser, sold as a premium beer in Brazil, grew by double digit percentages in the first half of the year, growing the share of premium and near beer brands to more than 10% of the brewer’s overall Brazil volumes, which is still low, implying that there is a further potential growth opportunity.

Emphasis on affordable options for customers and growth in premium brands are expected to boost volume sales in Brazil in the second half of the year. In addition, AB InBev is expected to gain from higher consumption due to the higher activation during the Rio Olympics taking place right now. Global events attract large numbers of tourists, and although the Olympics is not typically a’beer’ event, AB InBev’s beer and net volumes are expected to get a boost from the increased marketing and distribution. Emphasis on RGBs and premium brands are also expected to have a positive impact on the operating margin for Brazil, part of AB InBev’s South America unit. The brewer’s South America unit reported EBITDA margin of 50.6% in 2015, compared to the overall company’s margin of 39%.

AB InBev lowered its full-year guidance to flat revenue growth in Brazil this year, down from the earlier estimate of mid to high single digit organic revenue growth in the country, due to the weak economic conditions and lower consumption in the country. However, the third quarter volumes and, in turn, revenue could increase more than expected due to the Olympics boost and growth in RGBs and premium brands. South America Beer is the most valuable division for AB InBev, according to our estimate, contributing ~30% to the overall value of the stock, and Brazil represents roughly three-fourths of the net volume for this division. Although Brazil revenue is expected to be hurt by lower consumption and negative currency translations in the near term, AB InBev’s strategy in the country seems to be effectively in place to derive growth in this prolonged period of tough economic conditions.

Source: Forbes

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