What Brewery Will Anheuser-Busch InBev Buy Next?

Anheuser Busch InBev (NYSE: BUD  ) has spent the past few years acquiring competing breweries to expand its reach into growth markets. With new exposure in Asia and across the U.S. in terms of craft offerings, Anheuser Busch InBev may finally have reached a point of diminishing returns on growth through acquisitions.

The need that has been filled
Anheuser Busch InBev has acquired several domestic and international breweries over the past half of a decade in an attempt to grow into markets where it has had relatively little exposure. The company gained much-needed exposure in Asia from the January acquisition of Oriental Brewery, expanded its global presence through a merger with Grupo Modelo, and has been gradually expanding its presence in the American craft beer market through the purchases of Blue Point Brewing Company, Goose Island Brewery, and a growing stake in Craft Brew Alliance (NASDAQ: BREW  ) .

Anheuser Busch InBev's acquisition of Oriental Brewery, a company that it had owned just five years prior, from the private equity firm Kohlberg Kravis Roberts (KKR) opened up distribution and branding opportunities in South Korea and the rest of Asia.

Contrary to the American beer market, the $1+ billion South Korean beer market is steadily growing and craft breweries comprise only a tiny portion of the overall market. During its short ownership of Oriental Brewery, KKR vastly expanded the company to its now dominant position (in sales-by-volume) in the South Korean beer market. If there is one thing that A-B InBev knows about, it is operating from a position of market dominance. The Oriental Brewery acquisition provides A-B InBev with a comfortable position in a growing market, while also providing a launching point for a larger expansion to growing Asian markets outside of South Korea.

The semi-controversial acquisition of Grupo Modelo served a similar role in expanding A-B InBev's international beer presence. To meet antitrust requirements, A-B InBev ended up transferring the rights to sell in the United States to Constellation Brands (NYSE: STZ  ) , but the acquisition nonetheless put the company in a dominant position in the Mexican beer market. This came along with a greater ability to expand the reach of Grupo Modelo's already recognizable brands across the globe.

Domestically, A-B InBev has the "launching point" already well-established with an extensive distribution network. The key to expanding into the American craft market took on a different look than expanding internationally. Instead of making a grand purchase of the largest player in craft brewing (Samuel Adams brewer Boston Beer (NYSE: SAM  ) ) which could feasibly be done at less of an expense than the Grupo Modelo acquisition, A-B InBev has taken a more regional, affordable, and strategic path to faster growth.  In the short but busy two years that have passed since A-B InBev acquired Goose Island, production volume of Goose Island products has grown much faster than production at Boston Beer. A-B InBev was willing to take a risk on a slightly less-known brewery with greater room for growth, and it is paying off. As the popularity of Goose Island products expands, Boston Beer will have a national competitor at bars looking to have only one or two 'craft' offerings on tap.

The secret to its sauce
There have been two prerequisites for each of A-B InBev's plays in domestic craft brewery acquisitions. The key has been finding a brewery with a strong regional reputation that lacks widespread distribution. With those requirements considered, Blue Point Brewing Company, Goose Island Brewery, and Craft Brew Alliance have the East Coast, Midwest, and the West Coast of the United States covered. When A-B InBev initially got involved with each of these companies, distribution was limited to the companies' regions of operation.

By manufacturing the core brews of these companies at Anheuser-Busch breweries throughout the country, the company can make popular and highly rated beer available across the nation. Goose Island's most marketable, large volume products are now being brewed at Anheuser-Busch facilities outside of Chicago that are better able to handle the volumes necessary for a nationwide roll-out.  Expanding the national reach of Goose Island beers has already helped to quickly expand overall sales of Goose Island products. Likewise, with Anheuser-Busch as their distribution partner, Craft Brew Alliance's products were quick to receive a national audience that helped the company more than quadruple its market cap over the past five years. One should expect A-B InBev to use the same general approach to achieve a strong return on its investment in Blue Point Brewing Company.

At the same time, outsourcing the production of larger volume products has allowed the original Goose Island Brewery location to focus on their specialty brews, and has actually allowed the brewery to increase their production of specialty and seasonal beers. By keeping production of Goose Island's Bourbon County brands at the smaller Chicago brewery, the brand may be able to mitigate the criticism of beer enthusiasts who have an intrinsic distaste for "Big Beer."

No rock left unturned
Asia, Latin America, and the American craft beer industry were the major growth markets that A-B InBev did not have a strong presence in just five years ago. At this point, it would be difficult for A-B InBev to make an acquisition with the same potential for growth as was available from the most recent additions to their collection of brands and breweries. Domestically, the company has picked up major breweries from coast to coast that lacked national distribution; purchasing new breweries will not provide the same return if the newly acquired brewery is already distributed nationally. Likewise, it will be difficult for A-B InBev to match the success that it has had with Goose Island by purchasing another Midwestern brewery.

Acquisition options for A-B InBev still exist, but they likely won't be made with the intent of expanding the company's presence in Asia, Central America, or even the United States. Craft brewing is still in its infancy in Europe and South America, and these two continents make up the last major markets into which A-B InBev could easily expand.

Molson Coors Brewing (NYSE: TAP  ) jumped into the European craft market when it acquired Sharp's Brewery in the UK in 2011, and A-B InBev may be wise to follow the company's lead. At the very least, expect A-B InBev to expand the distribution of American craft brands on the other side of the Atlantic. The South American craft beer market is wide open. Open and growing markets make for great opportunity, and with such a solid revenue base from which it can grow, expect A-B InBev to take full advantage.

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