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
Anheuser-Busch InBev is a good stock, but there's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

 

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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers