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Morningstar | AB InBev Hits a Sticky Patch, but Developing Markets Provide Long-Term Growth Runway

Anheuser-Busch InBev has one of the strongest cost advantages in our consumer defensive coverage and is among the most efficient operators. Vast global scale and near-monopoly dominance in several Latin American and African markets give AB InBev significant fixed cost leverage and pricing power in procurement, especially following the acquisition of SABMiller in late 2016. This plays out in the firm's excess returns on invested capital and best-in-class operating and cash cycles, asset turnover ratios, and working capital management. AB InBev delays payments to trade creditors more than 20% longer than its closest rival Heineken, and its free cash flow conversion has been consistently higher than peers in recent years. Driving AB InBev's profitability is its majority stake in Ambev, the Latin American brewer that generates a whopping near 40% EBIT margin in beer in Brazil.Highly effective cost strategies are at the core of AB InBev's success. The firm has been acquisitive, having made transformative deals for Interbrew and Anheuser-Busch, and more recently acquiring Grupo Modelo, Oriental Brewery, and SABMiller. Management's playbook is to buy brands with a promising growth platform, expand distribution, and ruthlessly squeeze costs from the business. We think the acquisition of Modelo perfectly demonstrates the strategy. Corona is a premium brand, so it plays well in an environment of premiumisation in beer consumption. AB InBev can enhance profitability by removing duplicate costs, expanding volume (it has tripled Budweiser's volume in China in less than three years and has doubled its share in the United Kingdom), and bringing distribution in-house, thereby capturing the downstream margin opportunity. While the acquisition of SABMiller will undoubtedly offer opportunities to cut costs, particularly in Europe and Latin America, and across centralized functions, it is the access to Africa that is the crown jewel in the deal. The high-single-digit revenue growth we expect the company to achieve in Africa in the medium term will help offset the secular decline of midpriced brands in developed markets.