Sunday's Super Bowl will be the year's marquee advertising event for Anheuser-Busch
It's troubling that Anheuser-Busch has been prompted to reduce its guidance so early in the year. Last quarter's results certainly threw up a few red flags. While international volume shot up to 4.7 million barrels, from 2.5 million shipped last year, that increase would have only been a scant 2.7% if the company hadn't acquired Chinese brewer Harbin last July. Stateside volume was even worse, dropping 1.5% to 22.9 million, as wholesaler sales to retailers declined by 3.2%. Even with the aid of an October price increase (with another on tap for this week) that lifted revenues per barrel, domestic sales still came in flat, at $3 billion.
Compounding the sales slowdown was a contraction in gross margins, which fell 110 basis points during the quarter to close the year at 39.9%. The company cited rising costs from its aluminum can manufacturing and recycling operations. The brewer couldn't even get any help from its theme parks, as profits in the entertainment segment dropped $6 million on higher operating costs.
Still, investors may be justified in seeing the bottle as half full. Sluggish volume growth is hardly a company-specific concern, and even with the recent drop in gross margins, Anheuser-Busch is still far more profitable than rival Coors
While the battle with Coors and SABMiller for domestic market share is as fierce as ever, a threat is beginning to mount from another direction -- the increasing popularity of wine and distilled spirits. If the company isn't careful, it may one day win the battle but lose the war. But the brewer is fighting back, having more than doubled its on-premise (bars, restaurants, and the like) marketing budget to $30 million this year in an attempt to win customers right at the front lines. Later this month, with great fanfare, there will also be a nationwide launch for the latest addition to the Budweiser family -- Budweiser Select.
The stepped-up promotional activity is essential to staying a step ahead, even though management has already cautioned that it may drain revenues per barrel this year. Anheuser-Busch has proved that it has what it takes to stay on top. The question is, how much will it cost?
Enjoy a cold one with your friends in the Fool's beer discussion board.
Fool contributor Nathan Slaughter is eagerly awaiting a taste test for Budweiser Select, but he owns none of the companies mentioned.