Bud Brews a Better Quarter

Sometimes an earnings announcement provides an interesting glimpse into the psyche of a company. This seems to be the case with Anheuser-Busch InBev (NYSE: BUD  ) . The firm devoted the first section of its just-released first-quarter figures to the fairly marginal improvements it made in U.S. sales. Readers had to dig deeper into the document to read about the better successes it's had abroad. Glancing at those non-U.S. numbers, that reader might wonder why the company seems so concerned with a flat domestic market that is now no longer its biggest geographic segment by volume.

Not fancy enough
One major reason that the domestic market is trending sideways is that Americans haven't been as thirsty for beer lately. For decades, beer was the alcoholic quaff of choice for the nation, but that's been changing as beverages like wine and liquor that are seen as more sophisticated have been eroding beer's market share. Recent research indicates that in the U.S., wine and beer are almost neck-and-neck in terms of preference. That's quite a shift from 20 years ago, when the numbers were heavily in favor of the amber liquid, by 47% to 27%.

This is one big reason that Anheuser-Busch InBev's quarterly sales to U.S. customers grew marginally, at around only 1.3% year over year. Interestingly, much of this growth came not from the company's traditional products like flagship brand Budweiser, which declined 4.3%, but from premium offerings such as Michelob Ultra (+7.2%). Meanwhile, sales of non-American Stella Artois grew 22.5% over that time.

For those who want to grow beer sales in the U.S., premium is really the only way to go. The smaller craft beers have done better than their mass-produced rivals; these days any higher-end restaurant, for example, is expected to have a few specialty beers on its menu. Although its craft offerings are somewhat downmarket, Boston Beer's (NYSE: SAM  ) Sam Adams line does a growing business catering to more discerning drinkers who want quality beer. As a result, Boston Beer has had better success maintaining a laser focus on the domestic market. Its fourth-quarter 2011 profit leaped 46% on an annual basis to $17.8 million, while revenue increased 23% to $142 million.

Of the world's major brewers, Anheuser-Busch InBev is by far the top seller of beer in the US. After InBev's 2008 purchase of Anheuser-Busch, the company is actually quite well diversified across the globe these days. North American revenues were only 41% of the firm's total in 2011, followed closely behind by the more promising Latin American market, at 38%.

Contrast this with the much more domestically obsessed Molson Coors (NYSE: TAP  ) . Last year, a full three-quarters of that company's sales ended up in the hands, refrigerators, and bar taps of North American consumers, with 18% coming from the U.K. That doesn't leave much room for the rest of the world. Hence the company's expensive purchase of middling Central European brewing group StarBev recently -- some international diversification is better than almost none at all.

But there are worse markets
At least neither of those companies had the sales profile of poor Heineken (OTC: HINKY). Unlike the neighboring Anheuser-Busch InBev, which also operates from the Benelux corner of Europe, Heineken devotes the bulk of its efforts to its native continent. It's nearly as determined and focused on Europe as Molson Coors is on North America, with Continental sales comprising a huge 63% of its 2011 revenue.

Given the stumbling economies and generally poor prospects of that continent, this is not a good profile to maintain just now. Anheuser-Busch InBev would readily admit that; its own first-quarter volume dropped hard in Western Europe (by 5.1% year over year) and much harder in the Central and Eastern part of the landmass (9.7%). It's good, then, that only around one-tenth of the firm's total production was sold there.

Learning how to say "beer" in Chinese
Foreign markets that aren't Europe are where the growth is these days. The company's highest revenue increases by region occurred in Latin America, where volume grew by almost 4.5% year over year.

Volumes in the huge Brazilian market grew a pleasant 4% year over year for Anheuser-Busch InBev this past quarter. This was a full percentage point higher than what the company estimates to be growth for Brazilian beer sales as a whole. What helps is that Budweiser is still a novelty in the country, having only been launched this past summer. Brazilians also seem to really be taking to Stella Artois; that brand saw a 70% jump in sales over the same quarter of 2011.

There's certainly more beer to be sold there, a trend that goes double for China. Overall beer sales volume for all brewers on that market grew a collective 3.2% annually this past quarter. Anheuser-Busch InBev blasted past that number with a 9.1% increase in sales of its core "focus" brands: Budweiser, Harbin, and Sedrin. Unlike with Brazil, the company's strategy in China is to replace its traditional local brands with brews like Bud that have a higher international profile. Considering how much Chinese consumers like Western brands, this is a smart strategy.

Fizzy growth
We'll see if that strategy becomes priority No. 1 for Anheuser-Busch InBev. Even though its home office is a continent away, the company still seems resolutely determined to defend its U.S. market share at all costs -- its ad spending for the Super Bowl, for example, would bankrupt a lot of smaller companies.

Having said that, the firm's recent moves in a more international direction are encouraging. Earlier this month it was announced that it spent a princely $1.2 billion to enter into a joint venture with and acquire nearly 10% of Cerveceria Nacional Dominicana, a big Latin brewer.

So it seems the company is well aware of where its growth prospects lie. Hopefully for its shareholders, it will concentrate its efforts accordingly. The American mid-market is as flat as a Budweiser left open for a week; it's the emerging countries that have the fizz these days.

But not for every company; read about several cutting-edge firms that have a strong domestic footprint and will likely profit handsomely from it in our free report "The Future Is Made in America." Download your copy here.

Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services have recommended buying shares of Boston Beer and Molson Coors Brewing. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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