Will Emerging Markets Topple the King of Beers?

Jul 02 2008

Will Emerging Markets Topple the King of Beers?

Budweiser and Busch are as American as camo seat covers in a F-150.

Yet a hostile offer by InBev SA (Brussels:INB.BR) on Anheuser-Busch (NYSE:BUD) is about to show us that the star-spangled King of Beers is up for play because it ignored emerging markets.

When you look at the dynamics behind the InBev bid, it’s important to see America as a diminished player. The headlines tell you that the economy is dismal. What Big Media rarely tells you is that smaller, developing economies are kicking our butt. American companies that count strictly on the U.S. for revenues are destined for the rustbelt of the future — or a foreign buyout.

Analysts have been badgering A-B for years that it relies too heavily on the U.S. — one of the slowest growing beer markets in the world. A-B has buried its head in the sand as InBev and other competitors have pushed into high-growth emerging markets.

While A-B claims nearly 50% the U.S. market, the company registers as a mere blip in Argentina, Brazil, Russia and Eastern Europe, which are In-Bev strongholds. The worldwide market-share numbers tell the story loud and clear…

InBev 16%
SAB Miller 12%
Anheuser Busch 9%

You would think that A-B is willing to look beyond the lower 48 simply based on the performance of beers it imports from InBev. A-B grew its volume last year by 2.9% from the previous year thanks to a successful U.S. distribution partnership that gave it InBev’s Stella Artois, Beck’s and Bass premium beers.

Of course, most American’s believe they’re carrying the day for A-B by buying 12-packs of Bud, Busch and Miller Lite. In its marketing campaigns, A-B gives credit to the Nascar and slacker crowd for its crowning achievement as the King of Beers.

A-B’s Yankee Doodle marketing trumpet has deluded many Americans into believing that the company is entitled to its success because it’s an American icon. It’s the same patriotic hogwash that we heard about the Big Three auto makers — a case study that clearly proves denial is not an a business strategy.

When the In-Bev bid became public, the governor of Missouri declared he would explore all options to keep the company in St.Louis: “I am strongly opposed to the sale of Anheuser-Busch and today’s offer to purchase the company is deeply troubling to me.”

Maybe A-B’s hometown of St. Louis is afraid of becoming the next Detroit.

Or maybe America is afraid of becoming the next France…

A “save Budweiser” petition has already attracted more than 32,000 signatures on the Internet. The site even has an anthem titled “Kiss My Glass, InBev” The Save Budweiser rallying cry is “Let’s band together as one voice and try to save more than just our beer. We don’t want another American icon turned over to a foreign company; we want the motto to remain…The Great American Lager.”

You have to wonder how many of these cowboys and cowgirls are A-B shareholders. The company’s stock price has grown less than 3% in the last year. Factor in inflation, and your A-B stock won’t even pay to fill up that F-150.

A-B’s American sense of entitlement is backfiring at the worst possible time for the company. A-B owns 50.2% of Modello, the Mexican brewer behind Corona and other major brands. The partnership took a nasty turn last month when Grupo Modelo Chief Executive Carlos Fernandez resigned from A-B’s board of directors after a 15-year clash between the Busch and Fernandez dynasties.

Fernandez could’ve been a key ally in fending off InBev. Now there’s speculation that Modelo could sell its half to InBev — potentially crippling A-B’s presence in a lucrative emerging market.

InBev is already big in Latin America. It was formed from the merger of Belgium’s Interbrew and Brazil’s AmBev in 2004. Add Modelo into the mix and A-B wouldn’t stand a chance south of the border.

Compared with A-B, InBev is a true multinational. From its headquarters in Leuven, Belgium, it sells more beer than any other company. Its operations encompass more than 130 countries. About 60% of its profits come from Latin America, giving it crucial experience in emerging markets.

While InBev savors 12% of the Chinese beer market, A-B may have wasted precious time setting up shop in what some experts say is the world’s biggest beer market.

A-B had acquired Harbin, China’s fourth-largest brewer at the time in 2004. Now Harbin has dropped to fifth place.

It may have bungled another China opportunity as well. A-B formed a strategic alliance in China with Tsingtao in 2002. Under the terms of the deal, A-B took a 27% interest in Tsingtao. At the time, Tsingtao held a 13% share. Five years later, Tsingtao reaches 14% of the market, according to Reuters. One percent in five years?

In March 2007, A-B finally got around to announcing it was expanding Chinese distribution. Yeah, sure, OK…

In the end, both A-B and InBev aren’t doing too well these days. Profit margins are squeezed by rising prices of aluminum and grains. But this story is about bigger things than a stock recommendation.

We are witnessing the decline of America’s economic might. InBev’s attempted U.S. invasion is just a harbinger of things to come.

American investors can’t ignore that companies focusing on emerging markets will land on our shores with boatloads of money ready to buy our cherished industrial-age icons of commerce. So instead giving you a stock pick, my investment advice to you is: Get used to it.

Emerging markets are leaving the shadow of the slouching American giant. Once you accept that, you’ll see the profit potential of emerging markets in a whole new light.

–Irwin Greenstein