Watch Out, Asia: Here Comes Budweiser

Budweiser may soon be on more beer menus in South Korea with its recent purchase of Oriental Brewery. Expect Anheuser-Busch InBev to use the purchase to spread further into Asia.

Feb 1, 2014 at 9:00AM

Anheuser-Busch InBev (NYSE:BUD) is overdue in its expansion to Asia, but the recent purchase of Oriental Brewery shows that the company is on its way.  Anheuser-Busch InBev should be able to use its newly acquired South Korean production facilities as a launching point into the rest of the continent.

Terms of the deal
Oriental Brewery was owned by InBev between 1998 and 2009 but was sold to the private equity firm Kohlberg Kravis Roberts as the economic downturn loomed and A-B InBev was looking for quick fixes to reduce the debt associated with InBev's recent acquisition of Anheuser-Busch. As part of the terms of the 2009 sale, A-B InBev retained the right to repurchase Oriental Brewery at a future date following predetermined financial terms based on the company's earnings before interest, taxes, depreciation, and amortization at the time of the sale.

The agreed-upon price of $5.8 billion presumably satisfies the terms of the original agreement. Both parties should walk away happy because the deal provides a great return on investment for KKR and a strong foothold into another Asian market for A-B InBev.

Expanding the Budweiser empire
The U.S. beer market is currently divided up, with almost 80% of market sales by volume coming from domestic offerings (of which A-B InBev holds a majority share), about 14% from imported offerings, and craft beer supplying the remaining 6.5%. The South Korean beer market of today roughly resembles the U.S. beer market from 30 years ago, with two dominant brewers, Oriental Brewery and Hite Jinro, controlling the vast majority of the market.

Imported products comprise around 2% of sales by volume of the growing beer market, and craft brewers are still very rare and comprise a nearly negligible portion of beer sales by volume. As in the U.S., the percentage of the market occupied by imports and craft offerings is greater in terms of dollars than in terms of volume, but the South Korean market is still by all accounts best described as a duopoly.

Anheuser-Busch InBev is reentering the South Korean beer market in the position of market dominance that it has grown so accustomed to in the United States. Over the relatively short duration that Oriental Brewery was owned by KKR, the brewery experienced outstanding growth and surpassed its largest rival, Hite Jinro, in becoming the country's largest supplier of beer. Essentially, A-B InBev is entering the South Korean beer market under the same circumstances that were realized in the U.S. in the early 1980s. At the time, craft brewers like Anchor Brewing and Boston Beer had entered the market, but they were no match for the dominating Anheuser-Busch and Miller Brewing.

By entering the South Korean beer market, A-B InBev must now choose the way it will use the acquisition of Oriental Brewery to leverage further growth in the country as well as throughout the rest of Asia. The company essentially has three new avenues for growth: expanding domestic control in South Korea, building on Oriental Brewery's success in other Asian markets, and pushing A-B InBev brands as imported options both inside and outside South Korea.

Inside South Korea, Oriental Brewery is currently at the forefront of the domestic beer market, and A-B InBev has the experience and know-how to maintain and even expand the favorable current market conditions. Under A-B InBev's direction, expect Oriental Brewery to expand its current 51%-sales-by-volume share of the South Korean beer market.

Outside South Korea, the Oriental Brewery acquisition will serve as a launching point for both A-B InBev's existing products as well as for brands that currently fall under Oriental Brewery's ownership. Oriental Brewery already has inroads to other Asian markets with third-party products marketed to nearby countries. The brewery facility will also continue its production of Budweiser and other A-B InBev products for distribution, which will expand the reach of the offerings both inside and outside the country.

Lastly, A-B InBev will now have a greater ability to market its core products to South Korea, which will be viewed as imports even though they may be produced inside the country. Like the U.S. of 30 years ago, the South Korean beer-drinking population is beginning to seek different beers. Imported offerings are the only option for the country until a craft beer market can fill the void.

A-B InBev will be in a unique position where it can expand higher-margin imports into the country while simultaneously expanding the "competing" domestic market. Though South Korean alcohol laws are being revised to provide craft breweries with a better opportunity for growth, the existing domestic duopoly and imports are likely to comprise almost the entire market for the next decade.

The takeaway
Through the acquisition of Oriental Brewery, Anheuser-Busch InBev has simultaneously gained solid footing into a new multibillion-dollar South Korean market and increased its access to the larger Asian beer market. Expansion into Asia for A-B InBev has been long overdue, and the company's newest move should prove to be very profitable over the long run.

Brewing up profits
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Shamus Funk has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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