Professional Documents
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Company Analysis
April 24, 2008
I. Executive Summary
Anheuser-Busch (ABI or the Company) has been the market leader in United States for
half a century now, but there are still a lot of challenges lying ahead both in terms of further
growth and keeping the leading positions. The most important issues facing Anheuser-Busch
are:
Severe competition in U.S. market, which puts enormous price pressure on the
Company
Globalization: imports to U.S. and exports from U.S. wash away the distinct
features of different national and geographic markets
Market stagnation
Our internal and external analysis revealed opportunities and strength for the future
growth of the Company. We recognized a lot of success of previous and current strategies
employed by the management of the Company, but together with that we have some
recommendations to accelerate its growth, secure its revenues and diversify its activities. The
basic strength of the company and its core competency - beer production, remains unshaken
and must be exploited further. But ABI has underperforming segments and markets and needs
to align the volume of capital expenditures and profit abilities of each segment.
The Company has yet to fully exploit the potential of foreign markets. ABIs International
Beer segment did an excellent job with its investments and acquisitions in Mexico and China.
2
The Company should focus on beverages and continue to invest more in foreign markets and
import beer, those categories proved to be several times more profitable than the U.S. beer
segment.
The Company should also seek opportunities for further diversification in order to find
profitable investment opportunities and to diversify the sources of cash flow.
Further funds for its growth can be acquired by increasing the proportion of more
profitable operations, spinning off the segments that perform significantly lower than the
company average and even issue new stock (of course, if ABI is able to reach a good
underwriting deal).
II. Issues and Outlook
ABI is the only major American beer company to be majority owned and operated in
the United States. In 2007, 93% of the Companys net sales were generated in United States
and domestic beer contributed 75% to net sales. Beer itself contributed over 94% of the
Companys revenue. This testifies to the fact that the company is heavily concentrated on
U.S. market and beer is by far the main product of the Company. In contrast SABMiller is
not concentrating on one single market but has interest centers all over the world and is also
one of the largest bottlers of Coca-Cola products in the world. Heineken also has very diverse
geographical presence around the world. Of course, Anheuser-Busch can be criticized for
lack of diversification, but at the same time the Company managed to keep the lions share of
U.S. beer market, the second largest beer market of the world (approximately 48.5% for
2007, about 2.5 times its closest domestic competitor). Thus far the strategy of one product
and one market has worked well for the Company. For example, last year ABI didnt
increase its sales in U.S. as fast as did Coors, but it did manage to grow domestic sales by 2%
whereas the similar result for SABMillers U.S. operations was negative 0.5%.
ABI became the U.S. beer market leader in 1957. Since then ABI held its position of
market leader every year. In the 1990s the Companys market share grew steadily, it peaked
in 2003. By the end of 2007 it lost its market share by 1.3 percentage points compared to its
peak year of 2003, but the Company has improved its market share compared to 2006. So
the Company has stabilized its market share above 48% for the last 8 years. You can see the
market share numbers of the Company since 1991 in Chart 1.
The response of ABI to globalization processes was the establishing of Anheuser-Busch
International, Inc. (BARI) in 1981. But the first significant foreign investment was the
investment in Grupo Modelo (Corona beer) in Mexico in 1993. Currently Budweiser is
brewed locally in 12 countries and Anheuser-Busch International sells beer to 80 countries.
The response of ABI to growing competition was aggressive pricing policies and
marketing campaign.
The response to changes in ethnic composition of U.S. population is ABIs investment in
Grupo Modelo the 1 selling beer in Mexico and one of the leading brands consumed by
Latino population in U.S. The Company also introduced Bud Light Chelada which is
flavored especially for Latino customers and has bilingual packaging. ABI also appealed to
the Latin segment by the means of advertising: they used famous comedian Carlos Mencia
in Bud Light ads.
The overall success of ABI was the result of following factors:
Cost leadership
Distribution network
combination of natural gas, fuel oil, and coal as its primary fuel materials in order to ensure
an adequate supply of fuel and electricity are available at the present time. However future
availability or market prices are unpredictable. (Refer to table 1)
Table 1.
market share it is important to address the issue due to a threat of possible growth of the
competition.
Miller & Coors Joint Venture
The proposed joint venture between SABMiller Plc and Molson Coors Brewing U.S.
operations will create a more competitive and viable competitor in the American beer
business. This deal will provide the competition with more resources to compete with
significant funds for the market place investment.
Craft beers
Further indication of the forward thinking at Anheuser-Busch can be seen in their
particular interest in craft breweries. Talking with breweries across the US they tried to
successfully integrate breweries that with proven regional traction, well-identified and
respected brands, strong growth potential, and the demonstrated ability to appeal to crossover drinkers.
(Beerscribe 2005)
capitalize on opportunities for future growth by expanding into new categories and seeking to
meet consumers where they are going, instead of following where they have been.
(BeerAdvocate 2006)
Environmental movement
Anheuser-Buschs environmental contributions include their awareness and conservation
of energy. ABI also has partnerships with companies such as the Quail Unlimited in leading
the charge to restore and enhance habitat for wild quail and all upland wildlife. Not only
does Anheuser-Busch publish an annual report detailing environmental goals from lessening
injury rate to conserving water and energy, it also has a completely dedicated website
(www.ABenvironment.com) to answer questions and highlight its achievements. AnheuserBusch is consistently surpassing government standards and raising the bar for the industry.
Its environmental program received an A on its environmental program by Shopping for a
Better World.
The concept that the female segment of the ground is under marketed meaning that
Anheuser-Busch has to find the right mix of marketing signals specifically designed for
female segment.
III. External Environment Analysis
Strengths
Brand Name
ABs consumer recognition of and loyalty to all of its brand names and trademarks
are extremely important to long-term success of its principal business segments.
The
company has made significant marketing investments to build Budweiser brand recognition
inside and outside the United States.
Market Leader
In the United States beer represents 57 percent of alcohol servings and AB has 48.4
percent of the beer market. This gives ABI very big leverage for negotiating with wholesalers
and retailers.
The Company managed to keep the biggest share of U.S. beer market, the second largest
beer market of the world (approximately 48.5% for 2007, about 2.5 times its closest domestic
competitor). ABI became the U.S. beer market leader in 1957 and since then ABI has hold its
position of market leader every year. In 90-s the Companys market share grew steadily and
the Company has stabilized its market share above 48% for the last 8 years. Below you can
see the market share numbers of the Company since 1991.
Year
Market Share
1991
43.9%
1994
44.3%
1995
44.1%
1996
45.2%
1997
45.5%
1998
46.2%
1999
47.3%
2000
48.3%
2001
48.8%
2002
49.2%
2003
50.0%
2004
49.6%
2005
48.8%
2006
48.2%
2007
48.5%
10
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has peaked in 80-s and 90-s and is declining now. The answer to that issue can be further
participation in non-beer alcohol segments (the Company already has a few product lines,
most successful among them Bacardi), capturing larger market share in craft beer segment.
Exploiting opportunities in non-alcohol beverages market: Anheuser-Busch is poised to
capture market share with other products such as its energy drinks via 180 and Monster, as
well as its bottled water via Borba and its exclusive right to distribute Icelandic Glacial in the
US with a 20% stake in the company.
Chart 2. Percentage change of dollar sales in U.S. supermarkets in 2006 vs. 2005
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Opportunities
Foreign Markets
China is the worlds largest and fastest growing beer market and accounts for 45
percent for the growth in global volume. Even though AB already owns 9 breweries and is in
a joint venture with two local name brands in China it is important to keep expanding in
order to establish the brand and acquire the maximum market capacity.
Russia is the worlds fifth largest market and there is an opportunity to implement the
strategy used in China.
In India Anheuser-Busch is in formal negotiations with Crown Breweries near the
central city of Hyderabad and is also speaking with Aurangabad Breweries in Maharashtra,
Arlem Breweries in Goa and Mohan Meakin Ltd.'s brewing operations, according to sources
cited by the Economic Times.
significantly less compared to the United States or other countries ,the volume growth in the
mature U.S. market is flat, while the Indian beer market is growing at an estimated 7 percent
to 10 percent annually, according to Mark Swartzberg, a beverage industry analyst with
Stifel, Nicolaus & Co. in New York.
Beyond Beer
At this time the growth rate of alcohol is greater than the growth rate of beer and as a
result of this it is imperative for ABI to increase their participation in the alcohol category.
The company is currently testing a distilled spirit that can be served as a layered shot. The
goal is to enhance the understanding of the distribution of a liquor product as well as
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reaching contemporary adult consumers. Another high margin beverage segment that ABI
needs to attain is energy drinks, water, and vitamin water. By moving into these markets the
company will be one step closer to their goal of becoming the pre-eminent global beverage
company.
Expand the Theme Park Operations
Bush Entertainment Corp. has been successful branch of ABI in the United States.
Considering the booming economies of other countries such as China, India, and the
European Union it is important to recognize the opportunity to invest in these markets not
only with beverages but also with theme parks. By entering the market at this early stage it
will be possible to establish in the area as the ultimate entertainment attraction and by doing
so AB can take advantage of the almost untapped market.
Explore new distribution alternatives
With oil prices on the rise and consequently higher costs there is an opportunity of
acquiring a competitive advantage finding new distribution channels. Currently ABI has
invested in railroads which could be an excellent alternative of distributions compared to
only using trucks.
Threats
Miller & Coors Joint Venture
Most likely one of the most troublesome issues facing Anheuser-Busch would be Miller
Coors delving into a joint venture. In mid 2008 MillerCoors should be under final review
from the United States for a green light in antitrust laws. This new joint-venture will affect
Anheuser-Busch primarily in the combining distribution of the two products. Obviously the
14
joint-venture will enjoy economies of scale, but not to the extent that Anheuser-Busch has;
the only foreseeable threat to Anheuser-Busch would be distribution of the craft and specialty
beers from the two companies can now be easily distributed throughout the country.
Changes in Consumer Taste
Premiumization
There is a trend, certainly in the USA to trade up for things once coined as
commodities. This is most evident in the beer category; with the introduction of Heineken
Premium Light, introduced in 2006, it self-proclaimed itself as creating a new luxury light
segment. This trend has obviously caught on and is getting everyone on board. Drinkers
today dont mind paying a bit more for a beer that has certain branded attributes. Many of
these are status symbols that will bring the drinker into a members only status amongst
regular beer drinkers. Anheuser-Busch has responded with products such as Bud Select,
Michelob Ultra line, and on the import side Becks Premium Light.
Fragmentation
In 1997 supermarkets sold a total of 672 different beer or flavored malt beverage brands,
contrast that with in 2007 they sold 1,125, an 82% increase. This is compelling evidence that
the market and more specifically consumers want a beer that is personalized and
customizable to their preferences.
strategy. On the one hand it has its marketing department advertise explicit differences
between their products and the competition.
15
consumer to see how their products align with their style. The other front Anheuser-Busch
has launched is with its innovation and product development. This is apparent with its push
for crafted and imported beers that come to consumers with very distinctive positions.
Occasionization
In line with fragmentation, occasionization now divides a beer drinkers taste amongst
different situational factors such as time and place, seasonality, and situational circumstances.
Anheuser-Busch has responded by placing its products in distinct situational lights that will
place the product in the correct light for the average drinker. They are also trying distributing
certain types of beer at certain points in the year to try and tie seasonality with that certain
product. For instance, Beach Bum Blonde is released in the summer months to correlate it
with the summer atmosphere.
Feminization
Although this phenomenon is not new to the society and market, there are still grounds
to believe that female segment of the ground is under marketed. What this means is that
Anheuser-Busch has to find the right mix of marketing signals specifically designed for
female segment. Obviously the same channels that drive men to buy beer will not work for
women. The release of Michelob Ultra proved to address this issue becoming very popular
among women. Another response from Anheuser-Busch was Peels line of fruit-flavored malt
beverages. The latter response wasnt campaigned so successfully and has been discontinued
since.
New Competitors from Foreign Markets
16
New foreign beers have entered the US market in the past years saturating the
industry even more. In order to fight this threat ABI obtained various licensing agreements
for distribution European and Chinese beers in the US market.
Economic recession and commodity prices
Another enormous, sometimes seemingly insurmountable, issue facing AnheuserBusch is the combination of rising commodity costs and slowing consumer spending.
Combine rising transportation costs, a worldwide shortage of hops, and a slowing in the US
economy it will make for a very troubled beer market. With the rise in gas prices, smaller
brewers are feeling the effects of getting their product out to the nation much less the world.
Add to that a rise in prices of hops due to climate conditions worldwide, and you will find
small brewers taper off. Although this issue can be beneficial for ABI in competition with
local breweries, the offsets can be much bigger in terms of declining nationwide sales
volumes and profit margins. The most effective answer to this scenario is cost leadership
because the lower-end market is the largest segment. Anheuser-Busch has reported to the
Consumer Analyst Group of New York (CAGNY) that its sales for its lower-tiered beer such
as Natural Light and Busch have been accelerating. Due to the fact that Anheuser-Busch has
such a diversified portfolio it stands to reason that it will not be as affected by the rising costs
and tightening of the consumer wallet as smaller companies will.
Risks associated with international operations
Anheuser-Bush has significant international operations including equity investments
in China, Mexico and the United Kingdom. Therefore these operations are subject to the
inherited risks of international business such as:
17
Changes in the relations between the United States and foreign countries
Actions of foreign or United States governmental authority affecting trade and foreign
investment
i.
Capital requirements
18
In order to compete in these industry there are two main channels to enter. The first
channel is through a large brewery in which case the capital requirements are considerably
high. However, new trends of competition, which are small breweries, have taken the market
by surprise specially because there is no need for a large capital investment. ABI took action
to neutralize this trend and acquired several small breweries.
Differentiation
Brand name is very important in the beer industry since it is a signal of quality and
taste. ABI spends a large amount of capital on promoting their brand names as well as
differentiating themselves from the competition.
Switching Costs
Switching costs for consumers in the industry are non existent, therefore it is
important to establish customer loyalty and differentiation in order to maintain market share.
Bargaining Power of Suppliers
ABI's main inputs are commodities; ABI purchases commodities through following
channels:
Direct purchases from farmers through its Agricultural Division - Busch Agricultural
Resources, LLC.
Commodity exchanges
The Company also has its own farms, milling and storage facilities, and processing
plants
Both raw materials and energy supplies are acquired from diverse sources and so
there is no significant supplier power or threat of consolidation of suppliers.
19
This issue is present in virtually all industries dealing with consumer products. Craig
Purser, president of the National Beer Wholesalers Association says he has concerns for the
long-term in shifting power to retailers. Such as Wal-Mart, Costco, Albertsons, Safeway,
Kroger, etc. He firmly believes that this shift will be prevalent in determining who gets shelf
space. At Anheuser-Busch, we work to understand our retailers business issues, their
business needs and objectives, and how the beer category fits into the retailers overall
strategy across the entire store. We then develop recommended strategies and tactics to help
our retailers meet their business objectives, their consumers and drive sales and profitability
for the beer category. says Joe Patti the vice president of retail planning. His position, and
moreover his department was more or less created in anticipation of this shift in retailer
power. It is obvious by his objectives that they intend to form a deep personal relationship
with their retailers to better enable both parties to gain from their relationship.
Threat of Substitute Products
20
marketing campaigns, capital investments, and innovation that has to take place in order to
keep the market share.
IV. Internal Analysis
Internal Strengths
Its really hard to consider the Company in isolation to tell its internal strengths and
weaknesses because, after all, almost every factor inside the Company is connected to the
outside world. So, taking the responsibility of classifying factors into internal and external
types, here are most of the ABIs internal strengths and weaknesses.
wholly-owned
subsidiary,
Wholesaler
Equity
Development
The Companys financial condition is good. The current and acid test ratios are high,
debt volume and interest payments are low and better than its closest rivals in U.S.
market.
Asset utilization of the Company is much better than its main competitors.
Employee relations of the Company are good. Within the United States most of the
employees are members of a labor Union called the Teamsters, approximately 7800
of the employees outside U.S. are members of workers organizations that are not
subject to collective bargaining agreements.
The administrative and distribution costs in relation to sales are lower than those of
SABMiller and Coors Companies.
Internal Weaknesses
International segment's income only 2.4 times. This means the Company funds U.S.
beer operations on the expense of opportunities in more profitable foreign markets.
Companys product prices (especially retail) are affected by energy costs; the
Company uses natural gas, fuel oil and coal as primary fuel materials and the increase
in costs cant be compensated completely by increasing the price of beer.
Inability to improve production costs: during the past four years, costs of goods sold
of ABI increased faster than the sales volume growth.
Big debt to equity ratio: Currently debt/to equity ratio is 2.9 and the Company will be
unable to get more funds through debt financing on advantageous terms.
Internal Threats
Not bound by any contractual liability that can potentially cause losses for the
Company
Company has more than enough cash flows to cover the service of the debt
Internal Opportunities
The Company can spin off the segments that are underperforming and invest them to
the more profitable segments. Specifically the Company may choose to spin off the
Packaging segment or some of its theme parks.
The Company can improve its CGS/Sales ratio by changing its price war with rivals
towards the strategy of differentiation. We don't recommend increasing prices in
lower-end categories such as Bush or Natural Light, but ABI could definitely use the
differentiation approach in middle and high-end price categories.
The Company can change its capital distribution between its segments: more capital
to International Beer market and new products, less expenditures on underperforming
divisions.
24
i.
SABMiller
Coors
ABI
SABMiller
Coors
ABI
SABMiller
Coors
2007
2007
2007
2006
2006
2006
2005
2005
2005
Assets
12.33%
6.55%
3.69%
12.00%
6.17%
3.11%
10.54%
8.83%
1.90%
Return on Equity
Gross
Margin
67.12%
13.07%
17.98%
49.89%
12.83%
11.39%
47.40%
17.53%
4.21%
Percentage
Gross
Margin
35.05%
16.26%
40.18%
35.32%
16.82%
40.44%
36.11%
13.56%
39.95%
17.34%
10.11%
20.76%
17.30%
10.94%
9.94%
16.53%
10.42%
4.07%
Current Ratio
87.87%
58.98%
102.38%
81.00%
58.15%
81.01%
88.70%
82.85%
65.65%
34.35%
37.71%
71.92%
41.82%
34.88%
56.15%
45.75%
45.58%
38.86%
Debt to Equity
Times
interest
2.90
0.50
0.32
1.94
0.58
0.37
2.17
0.43
0.47
earned
Resource
5.97
3.89
5.09
6.02
6.04
4.06
5.47
4.18
3.22
(Days)
Age of accounts
24.73
21.72
36.42
24.96
25.17
33.5
24.87
20.75
34.7
Receivable (Days)
Age of accounts
17.61
28.33
44.72
16.72
29.21
51.7
16.54
21.73
54.9
Payable (Days)
49.34
64.27
37.52
51.23
69.2
44
47.49
41
6.10%
21.64%
5.90%
4.53%
18.65%
6.10%
0.68%
-
13.51%
27.89%
7.60%
10.20%
12.49%
4.99%
37.00%
31.70%
12.65%
13.45%
-3.18%
-13.94%
195.99%*
246.47%*
17.90%
-
76.90%
71.89%
-22.96%
-99.44%
Profitability Ratios
Return on Total
Percentage
(Operating
Income/Revenues)
Liquidity Ratios
Leverage Ratios
Management
Ratios
Age of Inventory
Growth Measures
Sales
Net Income
Earnings
per
25
15.16%
Total Assets
Cost of Goods
4.75%
5.98%
15.92%
-1.07%
71.13%
-1.66%
2.36%
6.74%
153.34%
Sold
6.60%
22.47%
6.37%
5.82%
22.97%
5.20%
6.65%
11.04%
6.42%
As you can see the return on assets and equity are much higher than its main competitors.
That's not only because of good performance, it is also because the Company has historically
relied less on equity financing (this can also be a result of Busch family's policy to keep their
dominant position in the management of the Company).
Debt to equity: the company uses debt leverage very well: yes, D/E ratio is higher than
its competitors, but the interest coverage is lower. This means first, the company has
sufficient cash flows and income, second the Company managed to get debt financing on
better terms.
Growth in sales and net income is lower than its main rivals, but the return on assets is
much higher. So the relatively faster growth of the competitors sales is because these
companies have unutilized potential, whereas the asset utilization of ABI is much better.
ABIs costs of goods sold were growing faster than volume of sales during last three
years. In contrast, Coors and SABMiller managed to grow their sales faster than their CGS.
One of the reasons why ABI fell behind in this issue is the aggressive pricing policy of the
Company in U.S. beer market.
possible. They dominated both in diverse products and in geography. The current strategy
of the Company could be described as one product beer and one market U.S. ABI is very
unique because other big companies like SABMiller and Heineken are very diverse
geographically and dont have any main centers of activities. By the mid-90s top
management at ABI realized that being a global player was essential for future growth. They
first sought to capitalize on this global market by attaining a 30% stake in Grupo Modelo,
which is the #1 Mexican beer company. This move played extremely well in venturing out
into the global market without overexposing themselves to a high level of risk and moving
into the Latino segment. Secondly, they ventured into the Chinese market by direct and
indirect investments in Harbin and Tsingtao. With these first moves, ABI now has advanced
itself into selling products in 80 countries with breweries in 12 countries. ABI is currently
investing in new markets and trying to grow its global presence, all the while the American
beer market remains their core and they are avidly protecting it. Since ABI offers products
ranging from premium lagers to lower-tiered discounts brand it pursues both cost-leadership
and differentiation strategies.
The company is vertically integrated both forwardly and backwardly. We can see this
with packaging operations. Horizontally, they are diversified with their Busch Entertainment
Corporation.
Anheuser-Buschs competitive advantage over its rivals is mainly attributed to its
size. With market share looming around the 50% mark every year it is highly unlikely that
another competitor is to show up competing head to head with Anheuser-Busch. With this
unrivaled distribution infrastructure it is easy to see that Anheuser-Busch enjoys many cost
27
advantages. It is able to bring a premium brand to further cities in the nation, and worldwide,
at a lower cost than its rivals, and that by definition is a competitive advantage. That being
said, the two biggest, long time rivals of Anheuser-Busch; Coors, and Miller, are also
susceptible to Anheuser-Buschs size, particularly in distribution. That is why we see them
trying to team up in that respect; so that they too may enjoy the fruits of such a network. The
amount of synergy involved in the company is another competitive advantage over its rivals.
Breaking the company into functions and operations can be done by competitors; but when
all the elements are put together it forms an organization that the whole is truly greater than
the sum of its parts. Obviously one of its most intrinsic advantages is brand recognition.
This is truly a competitive advantage for the basis of this advantage lay in historical
precedent. Anheuser-Busch, after prohibition ended, made a historical journey on 34th street
in New York City to deliver the first case of post prohibition Budweiser to New York Mayor
Al Smith. You cannot simply re-create that moment. It is forever forged into the pages of
history for all to know.
spear head a project with many of its expertise and with such large capital expenditures that
new competitors would face almost insurmountable capital costs in addition to acquiring high
fixed costs. The beer industry is one of lumpy assets, in that if you want to supply just 5%
more beer to the market and your facilities are at 100% operation you cannot simply incur
small marginal costs. You must expand facilities at a high cost and at once to increase
capacity so that you can serve that extra 5%. As you can imagine this is quite costly to a
newcomer. To boot Anheuser-Busch has a extensively effective first-mover advantage in
many instances. One of its most notable first move advantages is in international markets.
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Successfully moving and acquiring Grupo Modelo in Mexico and acquiring Harbin and a
vested interest in Tsingtao in China; Anheuser-Busch is now with a strong presence in both
countries as its leader in the beer industry.
Anheuser-Busch has a number of different management systems in place.
One of the
financial reports, control over financial reporting, and assessment of effectiveness of internal
control over financial reporting. These may sound redundant, but each has its own function.
VI. Proposal of Growth Strategies
In the following section we will present 3 strategies focused on the development of
activities with the intention to provide the company with significant growth. These strategies
will present different directions ABI can take to foment growth, depicting financial evidence
as well as data on future trends that might lead to higher than normal profits for the
Company.
Strategy 1
29
In 2007 four segments of the Company had the following shares in gross sales of the
Company:
International
U.S. Beer
70.74%
Packaging
Entertainment
15.39%
7.44%
Beer
6.42%
According to this strategy by 2018 ABI should have the following structure of revenues:
International
U.S. Beer and
Entertai
Beer and
Railroads
beverages*
55%
nment
beverages
30%
10%
5%
* U.S. segment will include wholesale distribution business and pub chain
This strategy calls for ABI to stop being a one product and one market Company. This
strategy suggests stopping price war tactics employed by the Company even if it will lead to
losing a few percentage points of U.S. market share. The reasons why we recommend in this
strategy to stop clawing for every inch of the U.S. market is are the following.
1. U.S. beer market profitability is multiple times lower than International beer segment
2. U.S. beer market is highly saturated.
More than 100 companies in 2007 (379 brewing establishments in 2002 according to
U.S. census bureau) are operating in the US beer industry.
3. Usage rate of current customers cant be increased
Decennial consumption rate per capita has been slowing down and stopped during
the last decade.
30
4. Total industry sales are increasing very slowly and market shares of competitors are
relatively stable
Physical volume of sales in U.S. grew slowly during last three years: 2% in 2007,
1.2% in 2006, 1.8% in 2005.
5. Marketing efforts are limited by federal and state laws and regulations.
U.S. Beer
14.27%
14.78%
14.72%
17.89%
14.88%
Beer
65.38%
63.41%
59.14%
59.92%
50.34%
Packaging
4.14%
3.51%
3.68%
4.46%
4.60%
Entertainment
12.80%
12.24%
11.77%
10.83%
10.92%
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As you can see, from the segmental information, the worst performing segment is the
Packaging segment. It includes Metal Container Corporation (MCC), Precision Printing and
Packaging (PPPI), Longhorn Glass Corporation (LGC), and Anheuser-Busch Recycling
Corp. Of course, their operations are very important for ABI and even if you assume that
Packaging operations are cutting inter-company sale prices still the majority of the sales of
32
the Packaging operations are to external buyers. So even if we consider the case when the
packaging operations would not be a part of the Budweiser group they would still be
underperforming with the numbers that they have now. The same time the Company can do
very well without having their own packaging operations: for the most part it uses bottles
made by external suppliers and it does not affect its price effectiveness.
In this optional strategy we recommend ABI to spin off its packaging operations. By
2007 the book value of the packaging operations total assets was 772 million dollars. So in
optimistic case the market value of the Packaging Operations could be around 300 mln.
Another segment that gets too much funding despite its relatively poor performance is
U.S. beer segment. As you can see, its profitability is slowly declining too. Yet ABIs capital
expenditures on U.S. beer segment in each of the last three years were more than two times
the size of the capital expenditures for rest of the Company. The Company should cut
significantly its capital expenditures on U.S. beer segment, this strategy does not call for
acquittal from U.S. beer market, we are recommending that ABI freeze capital expenditures
on U.S. beer production facilities and fund only the very emergent needs. We believe the
Company could cut more than 50% of its U.S. capital expenditures and if that may eventually
affect its production capabilities they could recover the potential decrease in U.S. beer sales
by increase in operations from other segments were the funds would be directed.
33
Direct investments in Russia, Central Europe, India and South America (priority
Russia and India)
Developing markets of Central Europe, Asia and Latin America have much stronger
growth potential in beer sales because of following basic factors:
The relatively low level of current GNP per capita and the fast rate of its growth
makes it possible to increase the consumption of beer per person
Significant changes in culture in countries like China and India contribute to increase
in consumption of alcohol beverages
Statistics show that Asia and Central Europe are not only the fastest growing markets, but
also the most profitable. In 2007 international beer contributed 7% of the company revenues
and 26% of net income, whereas domestic beer contributed 75% of the revenue and only
34
64% of net income. It means the profitability of international operations is more than 3 times
higher than the domestic beer.
Growth opportunities are much higher overseas: in 2007 SABMiller company reported 36%
sales growth in India, 30% in China and 24% in Russia (this may sales growth due to new
acquisitions and investments, but still the numbers are astonishing). The physical volume of
sales growth of international beer of ABI was 5.8% (and 10% increase in dollar amount)
which is almost three times higher than the domestic rate.
The Company is very passive in Latin American (excluding Mexico) and Russian markets
(ABIs interest in Russian market is represented by distribution agreement with Heineken).
The Company should make direct investments in Russian market; add volume of investments
in Latin America and India.
2. Further investment in craft beer segment and develop a pub chain
The fastest growing segment of U.S. beer market is craft beer, 12% growth in 2007. It is
important for the company to keep strong participation in that segment. The Company
already has craft beer brands (domestic and imports), ABI also has an initiative that allows
company employees to come up with their own tastes and flavors and then those products are
tested in local markets. Craft beer is mostly brewed in microbreweries or right in the pubs.
Craft beer is more profitable: in 2007 craft beer segments volume share in U.S. was 3.6%
but the dollar share was 5.4%. There are 375 microbreweries, 967 brewpubs in the U.S. and
from the point of view of developing new products and getting bigger share of craft beer
market we would suggest ABI to open a pub chain. There is already a large tendency of
consolidation of small pubs into pub chains in United Kingdom. ABI can open a beer
35
The Company owns a subsidiary called Manufacturers Railway Co, which is mainly
used to support production needs. Taking into consideration rising oil prices and out of
control commodity market system needs for effective transportation means will grow
radically in U.S. economy and the preference of automotive transportation in U.S. will
inevitably change towards railroads. The Company can grow its railroad business in
following ways:
equity financing share is much smaller than its competitors and that is why it seems like
ABIs debt is too big because of its debt/equity ratio. But at the same time it is clear that the
debt burden is relatively the same or even less when you look at the interest coverage ratio.
Also we compared the equity/Total assets ratio of the 3 U.S. beer market leaders. Table 3
below shows that Anheuser-Busch has historically overly relied on debt financing. Thats
why we recommend at this stage, given that we are proposing expansion plans for the
Company to rely on new stocks issue.
Table 3.
Budweiser
Coors
SABMiller
Equity/Assets
2007
0.18
0.53
0.52
2006
0.24
0.50
0.50
2005
0.22
0.45
0.56
Another source of funding will be dividend cuts for the next 2-3 years. The Company
has paid more than $900 million in dividends which means 56% retention rate. We
recommend increasing retention rate to 75% for two years, which will provide another $800
million for the investments in abovementioned activities.
So, according to this plan the Company will be able to invest more than $2 billion
within next 2-3 years to the segments other than U.S. beer without increasing the level of
debt.
38
Strategy 2
Williamsburg, VA, posted an amazing 12.5% growth in 2007, the only double-digit growth
among any of the parks. This was attributed to marketing efforts and added attractions.
Adding in the fact that pretax profit was up 13% to 233 million, you can see just how
39
valuable this asset can be for Anheuser-Busch. Even still what makes this an attractive
venture is that Anheuser-Busch has positioned its parks to not compete head on with the giant
Disney; rather its parks are aimed more towards animals and wildlife than magic and
fairytales. This strategy of differentiation has put it in a niche market so that it can easily be
seen as a completely different experience than Disney.
Currently efforts are underway to expand on its differentiation strategy by promoting
a sense of wildlife conservation through their Conservation Fund. Since its founding in
2003, the fund has donated over 2.2 million to 175 projects in 40 countries. In addition to
the projects already underway we believe that a viable growth option for Anheuser-Busch
would be to aggressively invest in their experienced, highly profitable entertainment section
via Worlds of Discovery (which is the new name of Busch Entertainment Corporation). The
pricing structure is already being repackaged as to add to the bottom line and expansions into
Dubai are in the works to put into place a 4 park attraction. The parks would initially cost
upwards of 5 billion, but Anheuser-Busch has made a deal with Nakheel, an arm of the Dubai
government, to finance the parks, paying the licensing and investment fees. Investments like
this, worldwide, would establish Anheuser-Busch as a leader in entertainment, ultimately
leading to growth. In addition, similar investments would reduce the overall risk associated
with expanding worldwide since Anheuser-Busch isnt financing the entire project.
Additional financing for the projects would be done by raising equity via issuing more shares
of stock. We do understand that this would, at first, drop the stock price but we do believe
that the ROI would be quite high given the positive NPV of the project. We believe that this
expansion would achieve a positive NPV through Anheuser-Buschs extensive expertise in
40
entertainment given their excellent growth and profit record for nearly 20 years. We believe
also that our economies of scope and scale would aid us in this expansion throughout the
world.
Corporat
e and
Table 4
Income Statement
Information
Gross sales
US Beer
$14,158.70
Internatio
Packagi
Entertainm
Eliminatio
Consolidat
nal Beer
ng
ent
ns
ed
1,351.70
2,632.80
1,272.70
-427.2
$18,988.70
41
$3.20
$12,106.10
0.6
1,097.50
931.9
1,700.90
1,272.70
-935.7
508.5
$
$16,685.70
$749.00
49.8
68.9
103
25.5
$996.20
$2,784.00
$2.30
$1,728.40
93.3
660.1
717.9
175.8
109
262.7
162.9
-893.1
-602.9
$2,422.70
$662.40
$2,115.30
$8,142.00
5,880.80
772.6
1,548.30
811.3
$17,155.00
investments
Goodwill
Foreign-located fixed
$93.90
$21.20
3,925.60
1,343.30
21.9
288.3
$4,019.50
$1,674.70
assets
Capital expenditures
$4.50
$554.40
544.4
59.2
72.4
169.4
14.6
$548.90
$870.00
amortization
Income before income
taxes
Equity income, net of tax
Net income
Balance Sheet
Information
Total assets
Equity method
42
To be successful in this goal ABI should not only reduce domestic capital expenditures
by 50% but also concentrate on the companys core business which is beverages, especially
beer.(Refer to Table 2) In order to do this AB has to sell of these assets that do not support
the core business. The assets are those under Bush Entertainment Corporation, which include
all the Bush Garden theme parks as well as Sea World.
ABIs priority is investing in its core business, which is beverages, to enhance profit
growth. This includes increasing capital expenditures in existing international operations as
well as acquisitions and investments to enhance the companys longterm earnings growth.
Currently the companys primary source of liquidity is cash provided by operations.
Principal uses of cash are capital expenditures, business investments, and dividend and share
repurchases. Cash generated by each of the companys business segments is projected to
exceed funding requirements for that segments anticipated capital expenditures. However,
in order to pursue a strategy of this magnitude the beer business segment does not have the
capabilities to generate the required funds and also the company has a debt to equity of 2.9,
far greater than to those of SABMiller and Coors (please refer to Table 1). Therefore by
selling off Bush Entertainment Corporations assets and issuing stock AB we will gain a large
amount of capital that can be further used in a true growth strategy. Our proceeds from the
divestiture of Busch Entertainment Corporation should be used to lower the debt/equity ratio
if, current market conditions support a lower fixed interest for our debt. Otherwise we
should directly invest the proceeds into our global growth strategy via direct investments into
China, Russia, India, etc. By having all business segments support its core competencies AB
will gain a better focus of its goals as well as obtain greater synergy. At the same time while
43
this growth strategy is in process AB can also focus in the development of other beverages
with higher growth rates in the US such as alcohol, energy drinks, and vitamin water. When
these other business segments are established in the US market then they will be ready to
start taking over the global market as the beer segment did.
Funding of Strategy
We believe that the proceeds from selling the Busch Entertainment Corporation will
amount to approximately $400 million. This can break down into our estimated net worth
and goodwill we have in our entertainment division. Concurrently, we will bring to market
about $200 million in new shares of stock. We believe this is quite conceivable considering
our current position in the market.
expenditures are needed to re-invest the funds in a higher growth margin market, such as the
international one we have proposed; bringing capital expenditures down 50%, saving about
$200 million. Cuts in dividends are appropriate. Due to the fact that we are pursuing a more
aggressive growth strategy we believe our shareholders will understand a decrease in
dividends given their higher return in stock price in a few years. Estimates of the funds
gained from this would be about $300 million, or about 30% decrease in dividends. On top
of that we will invest our retained earnings annually to accompany this $1.1 billion in gained
revenues. Roughly, we approximate that we will invest about $1.5 billion in a span of two
years and this will be divided as follows: 50% investment in China, 30% investment in
Russia, and 20% investment in India.
44
The financial result in following this strategy is that overall the companys net income grew
20.22% assuming the profitability of international beer segment is the same; compare this to
the current growth of 2006 to 2007 of 7.6%.
Current Net Income/Equity Ratio
of International Beer Segment
Projected Net Income Increase
(mln. dollars)
Increase in total net income
18.28%
274.3
20.22%
VII. Conclusion
In conclusion the strategies and recommendations brought forth in this paper come from
the rational of increasing the operational margin and revenue. The history of recent years has
shown that there is huge potential in developing markets both in terms of quantitative growth
and profitability. ABI has not concentrated enough on those markets. Up to this day only
6.42 percent of the companys total revenue comes from the international beer segment. This
issue needs to be addressed, not only in the form of investing more funds from continuing
operations in the international market but also by spinning off the entertainment segment, and
cutting excessive capital expenditures on the U.S. beer division. It is imperative to act on
these recommendations with a sense of urgency in order fully capture the growth potential
the international market offers. With the passage of time these markets will become more
45
mature, consequently ABI will have to increase its investment accordingly in order to attain a
significant market share.
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