InBev: Winning The Beer Wars


Can you remember the beers you drank way back in 2008?  If you ever picked up a Budweiser product during that time, you may recall the controversy brewing (pun entirely intended) over the composition of the most popular beer on the planet.  After InBev, the world's largest beverage producer, announced that they would take over the Anheuser-Busch brand in 2005, the company changed the formula for Budweiser three years later by adding about 30% rice to the beer mix, a move that resulted in tremendous public backlash.  Traditionalists and farmers alike excoriated the move, claiming that the decision would degrade the quintessential American beer into something the public no longer recognized.  Seven years later, however, it's clear that InBev's moves to change up the standards of Anheuser-Busch proved to be the right decisions.  InBev stock (BUD on the NYSE, trading for $120.13 a share) had a fantastic month of October, rising by 15%, on top of 5% gains from their 52-week span and 20% gains from their 104-week span.  With the merger of InBev and Miller on the table, what do investors need to know about these companies' suds?

Going Back

No two companies in US history have had a rivalry to compare with that of Anheuser and Miller.  Both the brainchild of German immigrants, Miller first took root in Milwaukee in 1855 at a time when the influx of Germans fleeing the repression of the proto-Prussian state created a huge glut of competition in the beer business.  The Miller brand grew so large and popular thanks to their beer that the state officially named the region of their family farms "Miller Valley", giving the family the rights to both the land and the water flowing into the suburb of Milwaukee.  Miller beer remained a family operation until the 1960s, when Miller's granddaughter (a teetotaler) sold the company.  Miller merged with Moulson (Canada's second-largest beer company) and Coors (the US' third-place finisher) to create a rival to the Anheuser-Busch empire of beer in the 1990s, giving them fantastic market share over much of North America.  On the opposite side of the rivalry, Anheuser-Busch gained popularity from its St. Louis location by becoming the first beer company to utilize pasteurization, allowing their product to stay fresh for longer, as well as metal cans, which made the cost of their beer cheaper during the Great Depression.  Anheuser-Busch opened no fewer than 9 more breweries across the US (Miller has only 8, and only 2 that give tours) and currently sell Budweiser in 80 different countries across the globe.

Merger Madness

In an age where corporations have found it easier to merge than to compete -- case in point, five banks control half the cash of our entire nation -- it should be of little surprise that InBev and Miller have announced plans for a merger, with InBev shelling out over $100 billion in order to become the undisputed king of the hill.  Aside from the obvious implications of the merger, giving the mega-company control of two out of every three beers consumed in the United States, most agree that the biggest reason for the buyout lies overseas rather than at home.  Neither InBev nor Miller risk alienating the tens of millions of Americans who purchase their products on a regular basis given that there's surprisingly little brand loyalty amongst casual beer drinkers: sixty-seven percent of American beer drinkers who switched to a cheaper brand during the recession reported no dissatisfaction.  While the Pepsi and Coke rivalry has fierce adherents on both sides, neither Pepsi nor Coke contain any alcohol (at least, not yet), which unsurprisingly remains a bigger priority for most beer consumers than the label on the beer itself.  Rather, InBev's decision to write a 12-digit check for Miller reflects the company's need to grow in markets across Latin America, Africa, and the Middle East.  Miller enjoys only a 10% global share of beer sales, while Anheuser-Busch comes in at 21%; nobody needs an MBA in finance to see such numbers and determine where to invest the most money.  Making the situation easier, growth rates in international markets will far outpace those of North America and Europe, where a mere 1 to 2 percent growth rate makes further investment almost moot.  Compare that to growth in Africa, expected to hit as much as 5%, where Anheuser-Busch products lag far behind European beer manufacturers like Carlsberg and Heineken.  The merger, as such, can keep the rivalry between Anheuser-Busch and Miller alive -- they do own two different baseball teams, after all -- while keeping the company on the grow.

Going Forward

The merger between InBev and Miller still requires approval from regulators, requiring a mess of red tape to be cleared prior to the decision.  Miller will have to buy out their share of Moulson and Coors, sacrificing the Canadian and Colorado beers in favor of greater nation-wide and world-wide hegemony.  Anheuser-Busch may have to give up its small collection of craft beers that the company has so eagerly picked up, including California's Golden Road Brewing.  Both companies are willing to cut ties with the smaller fry in order to pursue the biggest fish in the pond, making the collective InBev stock a fantastic opportunity for investors to side with the titan that will come out of a century and a half of beer wars.

  • The Takeaway: it's hard to see any reason why InBev will suffer in the near future.  With the purchase of Miller, they've acquired their largest competitor and have an inroad to foreign markets where Miller already had a head start.  With beer consumption rising steadily world wide (faster in some places than others, but growing collectively each year), InBev has positioned themselves to become the equivalent of McDonalds in a world without Burger King.  Investors should use their stock as a major growth mechanism in their portfolio given the rise in value over the oreseeable future.
  • While it seems to be so on the surface, the beer industry isn't explicitly a zero-sum game.  The good fortune of InBev has been mirrored by Coors, whose stock (TAP on the NYSE, trading for $98.16 a share) rose the same day that InBev announced the merger.  By focusing overseas, InBev has given Coors a lot more room to grow domestically -- given that Coors sells almost no beer overseas, furthermore, InBev's expansion won't hurt them.  While Coors doesn't have the horses needed to stay with InBev, investors can consider their stock a quick riser in the near future (six to twelve months) and enjoy gains as the company capitalizes on a looser North American market.

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