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Morningstar | Ambev's 1Q a Mixed Bag as Return to Volume Growth in Brazil Comes at the Expense of Gross Margin

Brahma, the Brazilian brewer, was the first foray into the consumer product manufacturing industry by Jorge Lemann, Marcel Telles, and Carlos Sicupira, the leaders of the private equity group now known as 3G. In 2000, they merged two Brazilian brewers; Brahma and Antarctica, creating Ambev. The company has gone on to roll up brewers throughout Central and South America and holds several monopolylike positions in large markets, including an 81% volume share in Argentina, 68% in Brazil, and 61% in Peru.In part because of the favourable industry structures, and in part because of its 3G heritage, Ambev is a highly profitable business. The company has a well-entrenched cultural focus on cost management, and implemented zero-based budgeting over a decade ago. Ambev’s largest market is Brazil, which represented 53% of both total beverage net revenue and EBIT in 2018. Until the current severe recession caused a large contraction in profitability, EBIT margins in Brazil had been at or above 45% since 2010, among the highest in the global beer industry, and while the entry of Heineken to Brazil may limit margin potential, we expect margins to rebound to 38% when the macroeconomic picture improves. In addition to its strong focus on costs, Ambev is pursuing a two-prong growth strategy. First, its core markets, with the exception of Canada, offer solid long-term consumption growth opportunities. According to Global Data, annual per capita beer consumption in the low 40 liters is below the global average of around 54 liters. Even in Brazil, Ambev’s most mature market outside Canada, annual per capita consumption of 65 liters offers some upside for volume growth. Consumption per capita is generally around 80 liters or more annually.Another opportunity for revenue growth lies in the long-term premiumisation of the market. Currently, the premium beer segment represents just 5% of Brazil's beer volume, versus almost 15% in Argentina and Chile, and we think Ambev’s portfolio of local premium brands, as well as its access to Anheuser-Busch InBev’s global portfolio, positions it to benefit from a strong mix effect in the medium term.