Anheuser-Busch InBev (NYSE:BUD) might still rely upon the U.S. for most of its beer sales, but China is crucial to its future, not least because it is the biggest beer market in the world, bigger than the U.S. and Brazil (No. 2 and No. 3, respectively) combined.
Yet the novel coronavirus outbreak that has claimed hundreds of lives and sickened tens of thousands threatens to put the brewer's growth strategy at risk.
Already suffering a slowdown
The Chinese market was already slowing. Anheuser-Busch reported third-quarter sales suffered their greatest decline when beer volume sold decreased by 5.9% compared with the year-ago period. Volumes have also fallen in six of the last eight quarters in China.
Volume declines have mostly been a result of a slowing economy in China, which in the third quarter slumped to 6% growth. While many countries would gladly see similar rates of growth, that was the weakest quarter China has seen in 27 years.
Although China's trade spat with the U.S. likely didn't directly affect Anheuser-Busch because it has its own breweries throughout Asia, the tit-for-tat tariffs the two countries imposed on each other did contribute to weakening the economy, so they tangentially hurt results. No doubt the easing of the trade war was welcomed, but now the outbreak of the virus could further undermine the brewer.
The effects have been widespread. While Chinese officials imposed a quarantine on travel to and from the city of Wuhan, where the virus was first identified, they have also shut down entire industries to contain the virus, including the auto industry, tech companies, and even the casino industry on the tiny peninsula of Macao.
Other businesses, like restaurants, nightclubs, and bars, have been subject to temporary closures, leading Danish brewer Carlsberg to recently warn that its earnings were going to take a large hit as a result.
It's going to severely affect Anheuser-Busch as well, since it operates a brewery in Wuhan that was launched in 2018 to specifically target the growing craft beer space in China. It produced beers for its global Goose Island craft brand, as well as Kaiba and Boxing Cat, two local craft breweries that Anheuser-Busch had purchased the year before the brewery's opening.
Not only does Anheuser-Busch have a brewery in Wuhan, but it also operates a research and development center there that it was tapping to create beer recipes inspired by local flavors to help drive further growth in craft beer.
It originally closed the Wuhan brewery in observance of the Lunar New Year holiday, which began in late January, but that has now been extended as a result of the coronavirus epidemic.
The outlook is dim
Despite having spun off its Asia-Pacific business last year in one of the biggest IPOs of the year, Anheuser-Busch still retains an 87% ownership interest in Budweiser Brewing Company APAC.
The region has been the brewer's fastest growing segment, and it now represents 12% of total operating profits, up from 10% last year, as they grew at a 15.5% rate.
Still, the brewer's China business has been slowing, and now with the coronavirus outbreak, its big bet on the country is at risk of coming undone. If the virus can't be contained, and if the shutdowns are more widespread than currently expected, the possibility is great that Anheuser-Busch InBev will see growth turn into a decline, taking total production levels down with it.