The downdraft was swift for Anheuser-Busch InBev (NYSE:BUD) after it reported weak third quarter results and cut its dividend in half on Oct. 25. The stock plunged nearly 10% as the company said it needed to conserve cash to help pay down its massive debt load, which has swelled to $109 billion due to its 2016 purchase of SABMiller for more than $100 billion.
And though SABMiller was AB InBev's biggest acquisition, it wasn't the only one. Over the past few years, the brewer made a big push into craft beer by buying up a dozen different small labels, a handful of distributors, and two home-brew supply houses. In short, the megabrewer was making a big bet on beer -- and so far, it has failed.
Not so thirsty
Beer consumption continues to decline in the U.S. and in Brazil: AB InBev's two largest markets and ones where it holds the No. 1 market share for beer by volume. And there are no signs of improvement.
U.S. sales-to-retailers were down 1.5% last quarter, which Anheuser-Busch says is the best it has done in the past eight quarters. Sales-to-wholesalers were off 0.5%. Brazil was no better, as beer volumes fell 3.1% for the period, worse than the country's industry decline of 2.5%. Globally, the brewer saw volume increases of just 0.5%.
Although AB InBev continued to see cost savings from its acquisition of SABMiller (some $229 million in the third quarter), it wasn't enough to make up for the volume declines in the U.S. and Brazil. Revenue and EBITDA both missed expectations.
Craft's appeal wanes
AB InBev's craft beer portfolio isn't doing much better. The company's above-premium category, which includes craft beer, gained 90 basis points of market share in the U.S. last quarter, but that was due to continued growth by Michelob Ultra, which has helped the brand gain share for 14 consecutive quarters. None of the dozen or so acquisitions AB InBev made in the craft beer space were called out.
The problem is the dichotomy of results being experienced by true craft brewers. The industry trade group Brewers Association notes that while the industry is still growing, most growth occurs among the smallest brewers. The largest, like Boston Beer (NYSE:SAM), continue to struggle. The leading craft brewer reported its biggest depletion increases in years this quarter, but it came entirely from Boston Beer's non-beer business, as its flagship Samuel Adams brand is still in decline.
Consumer preferences have changed. Beer drinkers have become more discerning, drinking innovative new beers and looking more toward local brews than the big names in the space.
A possible way out
That offers some hope for Anheuser-Busch, which has seen its own new product introductions do well, including Michelob Ultra Pure Gold, the Budweiser Reserve series, and the Bud Light Orange line extension.
In the U.S., it lost 50 basis points of market share last quarter. More new-product introductions could potentially help AB InBev win back drinkers who have turned to wine and spirits, while expanding its participation in the premiumization trend. Even Boston Beer has seen traction with its Samuel Adams New England IPA.
While AB InBev's craft beer acquisitions were relatively affordable, the SABMiller purchase threw the company into a deep hole of debt that it now desperately needs to climb out of. In 2017, it paid some $8 billion in dividends to shareholders, which means the cut should allow it to save about $4 billion in cash annually, all of which will go to paying down debt.
Questioning the wisdom of the deal
AB InBev says the dividend will grow again over time, but that for now, any growth will be very slow. Yet if its beer business in the U.S. and Brazil doesn't grow, and if the synergies from SABMiller don't outweigh the continued volume declines in its top markets, it is possible that further cuts to the dividend will have to be considered.
Acquisitions were supposed to make a difference. The era of cheap money made it easy to buy companies without issuing stock. The SABMiller acquisition was an all-cash deal effected by taking on a massive amount of debt. But now interest rates are rising and growth is slowing. Gains are mostly being made by stripping out costs, which suggests the rationale behind making such a big leveraged acquisition no longer seems quite so smart.