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Morningstar | We Expect Solid Volume Growth for United Breweries Despite Macroeconomic Headwinds

We think United Breweries’, or CCU's, position as the leading beer producer in Chile--where it generates more than 70% of its revenue and has 40%-plus volume share of the beverage category--and its vast national distribution network have conferred it with the brand-driven assets needed to secure a durable competitive edge. In Chile, the firm owns the best-selling beer brand, Cristal, and holds the exclusive right to produce and distribute a variety of licensed brands throughout the country, including those owned by Heineken and PepsiCo. We believe CCU’s licensing agreements (which contributed roughly a third of its volume in 2017) point to the strength of the firm’s owned distribution network, which reaches over 124,000 points of sale in Chile and would be both expensive and time-consuming for competitors to replicate.However, we don’t believe the firm’s edge has transcended to other categories and geographies, and as such, we think United Breweries falls short of earning a wide moat. For one, we don’t surmise that CCU possesses a brand intangible asset in Argentina (24% of revenue), even though it operates as the second-largest brewer in the country, given the challenging competitive landscape and the dominant position of wide-moat Ambev, which we estimate has a roughly 75% share of the beer market (versus around 20% for CCU). Further, we don’t see evidence that CCU has amassed a cost advantage in its beverage production, as we estimate the firm’s direct operating margin to be around 40%, compared with above 60% for key competitor Ambev.Still, we believe the firm is poised to drive growth and defend its market share, given investments in its brands (advertising and promotional expenses totaled above 7% of revenue in 2017). In addition, we posit that the firm’s presence in multiple categories should allow it to endure any near-term cyclicality in alcoholic beverage consumption more easily than smaller or less diversified peers. We also expect premiumization trends to be a core driver of United Breweries’ beer sales (its portfolio includes higher-end brands such as Royal Guard and Heineken), allowing for increasing revenue per liter over the long term.