Anheuser-Busch is the world's largest brewer, the second largest aluminum beverage can manufacturer in the U.S., the world's largest recycler of aluminum beverage cans, and one of the largest theme park operators in the U.S. Anheuser-Busch is best known for the Budweiser, Michelob and Busch brands. Budweiser is the world's best-selling beer and is available in more than eighty countries, with the U.K., Canada, Ireland, and China being especially strong markets.
Domestic Beer Business
In 1852, Anheuser-Busch started out as a small local brewery in St. Louis and has since become the leading brewer in both the U.S. and the world. Beer, produced and distributed by ABI, is Anheuser-Busch's main product. Approximately 95% of Anheuser-Busch's operating profit and sales are attributed to beer and related products. Anheuser-Busch has 12 breweries located throughout the U.S. and more than 600 wholesalers.
Despite the surge in import sales the North American beer industry, domestic beer is still the principal focus of Anheuser-Busch's operations and is the foundation of Anheuser-Busch's financial performance. Anheuser-Busch also brews specialty beers, malt liquors, and non-alcoholic products. Anheuser-Busch's brand name products include Budweiser, Bud Light, Bud Dry, Bud Ice, Bud Ice Light, Michelob, Michelob Light, Michelob Golden Draft, Michelob Golden Draft Light, Michelob Black and Tan Lager, Michelob Amber Bock, Michelob Honey Lager, Michelob Hefeweizen, Michelob Marzen, Busch, Busch Light, Busch Ice, Natural Light, Natural Ice, King Cobra, ZiegenBock Amber, Hurricane Malt Liquor, Hurricane Ice, Pacific Ridge Ale, Doc's Hard Lemon, and Tequiza. O'Doul's, Busch NA, and O'Doul's Amber are Anheuser-Busch's non-alcoholic malt beverages. Anheuser-Busch introduced Bacardi Silver, Michelob ULTRA, and American Red in 2002. The same year, Anheuser-Busch discontinued Red Wolf Lager, Doc's Hard Apple, Killarney's, and Red Label.
Anheuser-Busch is involved in strategic production and distribution agreements that reinforce its position in the U.S. beer market. Through a joint venture agreement with Kirin Brewing Company, Ltd. of Japan, Anheuser-Busch brews Kirin Light, Kirin Lager, and Kirin-Ichiban for sale in the U.S. Anheuser-Busch owns 29.5% interest in Redhook Ale Brewery, Inc, headquartered in Seattle. As a result, Anheuser-Busch wholesalers are the exclusive distributors of Redhook products in the U.S. Redhook entered the U.S. markets in 1994. Anheuser-Busch also owns 36% interests in Widmer Brothers Brewing Company, headquartered in Portland. Anheuser-Busch wholesalers are the exclusive distributors of Widmer products in the U.S. Widmer entered the U.S. markets in 1997.
Budweiser, Bud Light, Bud Dry, Bud Ice, Bud Ice Light, Michelob, Michelob Light, Michelob Black and Tan Lager, Michelob Golden Draft, Michelob Golden Draft Light, Michelob Amber Bock, Michelob Honey Lager, Michelob Hefeweizen, Michelob ULTRA, Busch, Busch Light, Natural Light, Natural Ice, Doc's Hard Lemon, ZiegenBock Amber, Kirin-Ichiban, O'Doul's, O'Doul's Amber, Widmer beer products, and Redhook Ales are sold in both draught and packaged form. Busch Ice, King Cobra, Michelob Marzen, Hurricane Malt Liquor, Tequiza, Hurricane Ice, Kirin Lager, Kirin, Light, Busch NA, and Bacardi Silver are available in packaged form only. Pacific Ridge Ale and American Red are available in draught form only.
Please refer to Table 1 for a description of Anheuser-Busch's products.
Anheuser-Busch reached 52.1% market share in the U.S. for its first quarter, ended March 31, 2003. Led by Bud Light and Michelob ULTRA sales, this was up from 49.2% market share in 2002 and 48.6% market share in 2001. Tequiza had 6.8% share in U.S "malternative" market in 2002, behind Smirnoff Ice (40.8%), Mike's Hard Lemonade and Mike's Hard Ice Tea (20.5%), and Adolph Coors' Zima (12.5%). Bud Light is the best selling beer in the U.S. and accounted for 36% of Anheuser-Busch's U.S. volume. Budweiser accounted for 32%. Bud Light sales doubled those of Coors Light, the number two light beer, and Miller Lite, the number three light beer, combined. Anheuser-Busch leads the light premium (Bud Light), high-end (Michelob), premium (Budweiser), and sub-premium beer (Natural) categories in the U.S. Busch was the second best selling premium beer in 2002, but had sales of only about a quarter the sales of Budweiser.
The U.S. beer industry includes more than 300 breweries, but is dominated by three companies who controlled approximately 80% of the market share in 2002, namely Miller Brewing (now SABMiller) with 18.8%, Adolph Coors with 10.9%, and Anheuser-Busch with 49.2%. These three companies have increased their respective market share in the past at the expense of smaller national brewers, such as Strohs Brewery. Obviously its most profitable beer market, Anheuser-Busch has been the market share leader in the U.S. for forty-six years, outselling its competitors at a rate of nearly two to one. Many of Anheuser-Busch's competitors, however, have announced that they will be focusing on making share gains this year, which could hurt Anheuser-Busch's standing if it remains committed to price increase strategies.
The U.S. beer market is poised to experience significant growth in the next seven years. In 2002, beer was a $74.4 billion (USD) industry in the U.S. It accounted for 54.2% of the total U.S. alcoholic beverage sales (spirits had 30.6% and wine, 15.2%) and 87.1% of the total U.S. alcoholic beverage consumption (spirits had 5.0% and wine, 7.9%). After reaching a low in the late 1990's, the core beer consumer demographic (consumers between the ages of 21 and 27) is expected to grow by 13% from 2003 to 2010, which translates to a growth of about four million young adults. This could result in increased sales not only for Anheuser-Busch, but also for the industry as a whole. This age group currently represents 13% of the U.S. population, but accounts for more than 27% of total U.S. beer consumption. These favorable demographics are expected to contribute to a 1% to 1.5% annual increase in the total U.S. beer market.
International Beer Business
ABI beer products are sold in over eighty countries and U.S. territories worldwide. A wholly owned subsidiary of Anheuser-Busch, Anheuser-Busch International, Inc. (ABII) is responsible for the marketing and sale of ABI brands, namely Budweiser, outside the U.S. ABII operates breweries in the U.K. and China. On behalf of ABI, ABII also negotiates and administers license and contract brewing agreements with foreign brewers and negotiates and manages investments in foreign brewing partners. In 2002, Anheuser-Busch's international sales volume was eight million barrels, which is an approximately 50% share of the global beer market.
Anheuser-Busch Europe Limited (ABEL), another wholly owned subsidiary of Anheuser-Busch, markets, distributes, and sells ABI brands in twenty-nine European countries. Specifically, ABEL sells Budweiser, Bud Ice, Michelob, and Michelob Golden Draft brands in the U.K. to on-premise accounts, brewers, wholesalers, and off-premise accounts. ABEL manages and operates the Stag Brewery near London, England, where Budweiser, Bud Ice, and Michelob are brewed and packaged. ABEL imports Michelob Golden Draft into the U.K.
Budweiser, Bud Light, Busch, and Busch Light are brewed and sold in Canada, through a license agreement with Labatt Brewing Co., a subsidiary of Belgian brewer Interbrew SA. Among Canadian consumers, beer is the most popular alcoholic beverage, accounting for 81.3% of the total sales volume of beer stores, liquor stores, and other outlets in 2001/02, according to Statistics Canada. Totaling $14.5 billion (CAD), sales were up 6.8% from 2000/01 and accounted for 51.1% of the total alcoholic beverage sales. Imports are increasingly popular in the Canadian market and continue to expand their market share. At $712.3 million (CAD), imported beer sales were up 13.8% in 2001/02 and account for 9.6% of the Canadian beer market. The import segment is the only one experiencing significant gains in the Canadian beer market. Canada is Anheuser-Busch's largest market in terms of volume and second largest market in terms of profit. Anheuser-Busch's Canadian volume increased by about 5% in 2002. Budweiser is the best selling packaged brand in Canada. The light beer segment in Canada is much smaller than in the U.S. Bud Light was fourth in terms of sales in this segment in 2002.
Anheuser-Busch's partnership with Grupo Modelo, Mexico's leading brewer with 56.9% market share, is responsible for a significant portion of its global profits. Modelo's exports increased by 11.3% in 2002. Grupo Modelo's Corona has a solid hold on the number position in the expanding U.S. import market. In spite of decreased volume in 2002, Corona Extra had 28.25% of the U.S. import market share, followed by Heineken with 19.26%, and Labatt Blue with 5.07%. The volume decrease was attributed to a weak U.S. economy and price hikes implemented by both Corona and Heineken. Budweiser and Bud Light's volume and profit grew by double-digits in Mexico for the second year in a row. Budweiser owns 50.2% of Modelo.
In 2001, Anheuser-Busch increased its ownership in Compañia Cervecerias Unidas (CCU) in an attempt to further its position in Latin America. Despite economic and political concerns, Latin America has become an extremely attractive market for large brewers looking to strengthen their global position. Latin America currently has relatively low beer consumptions rates that are expected to skyrocket in years to come as it's growing population includes a large segment of people aged twenty-one to twenty-seven. Again, this is the primary beer consumer demographic. Economic instability, however, has recently caused a slowdown in several South American countries, including Chile and Argentina, CCU's primary markets. Anheuser-Busch's profitability in Argentina specifically was hurt in 2002 by economic crisis and peso devaluation. In the midst of the industry decline, Budweiser gained market share and volume grew 12% in Argentina in 2002.
Budweiser is brewed and sold in Japan through a license agreement with Kirin Brewery Company, Limited. Budweiser is brewed and sold in Korea, the Republic of Ireland and Northern Ireland, Italy, and Spain through license agreements with Oriental Brewery Co., Ltd., Guinness Ireland Limited, Birra Peroni Industriale, and Sociedad Anonima Damm, respectively.
Budweiser has been involved in ongoing legal battles with the Czech Republic's brewer Budejovicky Budvar (BBNP) over the international use of the Budweiser name for years. A legal settlement with Anheuser-Busch in 1939 banned BBNP from using the brand name in North America. The leading Czech beer exporter markets the traditional Czech beer in the U.S. under the name Czechvar, but Budweiser Budvar in parts of Europe. BBNP holds 380 trademarks in over 100 countries and is currently involved in approximately forty judicial disputes over the name. Anheuser-Busch began using the Budweiser name in 1876, nineteen years before BBNP was founded and feel that they should have exclusive rights to the brand name. BBNP, on the other hand, argues that the name has been used to refer to beer brewed in the are of Ceske Budejovice (where the company is located) for centuries. The U.K. is the only country in which both brewers sell beer using the Budweiser name. It is interesting to note that the U.K. has been an especially challenging market for Anheuser-Busch to date.
Packaging Business
The operations of Anheuser-Busch's packaging business are handled by several of its wholly owned subsidiaries. Metal container Corporation manufactures beverage cans and beverage can lids. Anheuser-Busch Recycling Corporation buys and sells used beverage containers (bottles, cans, kegs, etc.) and recycles aluminum cans. Precision Printing and Packaging, Inc. manufactures metallic and paper labels. Eagle Packaging, Inc. manufactures crown and closure liner materials for ABI. Anheuser-Busch owns and operates a glass manufacturing plant in Jacinto City Texas, through a limited partnership. This plant manufactures glass bottles for Anheuser-Busch's Houston brewery. Anheuser-Busch's packaging business accounted for 15% of its 2002 revenues and only 4% of its earnings.
Entertainment
Anheuser-Busch is involved in the family entertainment industry through Busch Entertainment Corporation (BEC), a wholly owned subsidiary. BEC owns nine theme parks, both directly and through subsidiaries. Busch Gardens theme parks in Tampa, Florida and Williamsburg, Virginia are operated by BEC. Adventure Island (Tampa, Florida), Water Country, United States (Williamsburg, Virginia), and Sesame Place (Langhorne, Pennsylvania) are operated by BEC. Discovery Cove, a reservations-only attraction that offers interaction with marine animals in Orlando, Florida, is also operated by BEC. Anheuser-Busch also owns a 16.1% interest in a theme park near Barcelona, Spain called Port Aventura, S.A. Anheuser-Busch's entertainment business only accounted for 6% of its 2002 revenues and 4% of its earnings.
Anheuser-Busch's entertainment competitors on the national level include Cedar Fair, (NYSE: FUN), Walt Disney Co. (NYSE: DIS), Vivendi's Universal Studios (NYSE: V), Six Flags Parks (NYSE: PKS), and Viacom's Paramount amusement parks (NYSE: VIA). Last year saw a lot of profit variation in the industry. For example, Cedar Fair, Universal's Islands of Adventure and Holiday World, a smaller independent park, experienced attendance growth, while Six Flags and Disney experienced decreases. This year, Six Flags is hoping to increase attendance by up to 4% by regaining visitors it lost to competition last year. Cedar Fair also hopes to increase their revenues by 3-5% this season, despite cool May weather. Overall, the regional amusement parks are less sensitive to recessions or economic slowdowns, as people target parks that are closer to home and requiring less travel. Disney, Vivendi, and even Anheuser-Busch's parks will face bigger challenges this season as their Florida and California parks rely more heavily on vacationing tourists. Due to the current economic condition in the U.S., these parks will have to assume unusually large price discounts this summer to ensure solid attendance. Revenue lost because of these price cuts may not be worth the potential attendance increase.
Real Estate Development and Transportation
Anheuser-Busch is involved in the real estate development industry through its wholly owned subsidiary Busch Properties, Inc. (BPI). BPI owns and operates The Kingsmill Resort and Conference Center in Williamsburg, Virginia. Anheuser-Busch is also involved in the transportation service business through Manufacturers Railway C., which it owns and operates.
Commentary
In 2002, Anheuser-Busch increased its share buyback program substantially. Share buyback increased by 67% to $2.0 billion (USD) from $1.2 billion (USD) in 2001. Outstanding shares have consequently been reduced by 2.5%. The program is predicted to increase further for 2003, as Anheuser-Busch historically has favored share buybacks over dividends.
For the three months ended March 31, 2003, Anheuser-Busch's net sales rose 5% to $3.28 billion (USD), reflecting growth in both domestic and international beer sales. As previously mentioned, however, Anheuser-Busch's price increase strategy may hurt its sales this year in view of the current economic environment and competitors' focus on market share gains of competitor. Anheuser-Busch is also becoming increasingly dependent on its flagship Budweiser brand. This could negatively affect its growth potential in the long run. There are also rumors in the industry that beer excise tax increases in 2003 and 2004 will be higher than those experienced in 2002. This will probably result in additional price increases that could further limit volume and profit growth potential. California, New York, and Pennsylvania are among those states facing proposed tax increases for fiscal 2004. They are also among the top five states in terms of beer consumption in the U.S. Beer sales are expected to decrease in these states should the tax proposals go through. California is also Corona's biggest U.S. market, which presents an additional threat to Anheuser-Busch.
The unseasonably cool weather of spring and early summer has resulted in profit losses across a wide range of industries this year. Typically a time when sales increase in the beer industry, the cold and wet weather of spring and early summer has caused a decrease in sales for many players in the North American beer industry. Beer giant Heineken International recently issued a profit warning, listing the inclimate North American weather as one of the causes for decreased sales. In the U.S., the peak summer sales season for the beer industry is normally Memorial Day to Labor Day. Sales volume in the U.S. actually decreased over the Memorial Day weekend. Sales volume for the recent July 4th long weekend will be important to brewers' predictions for the summer quarter. Historically, Anheuser-Busch has used price increases to offset decreases in sales volume and true to form price-hikes were announced in May to be implemented in the fall. This, however, is a gamble for Anheuser-Busch because, as previously noted, the current U.S. economic environment may not be favorable for price increases and it may experience further decreases in sales as a result.
Consolidation is the trend in the global beer industry, larger brewers acquiring smaller brewers to gain global market share. Anheuser-Busch recently announced its agreement with Tsingtao Brewery that will increase its interest in the largest Chinese brewer from 4.5% to 27%. The Chinese beer market has been experiencing rapid growth, and with approximately 239 million hectoliters in 2002. It is now the largest beer market in the world, by volume. Anheuser-Busch had approximately 12.8% market share in China in 2002, and sales of Budweiser and Bud Ice increased in China by 21.5% to 1.7 million barrels.
In addition to the international brewers who are acquiring interest in the Chinese market, there are approximately 400 domestic breweries in China. In the mid-1990s, it was the trend for Chinese party officials to demonstrate their prestige by owning a local brewery. There were over 800 domestic breweries in China. The remaining 400 are currently involved in price wars and many are experiencing significant losses. While the Chinese government is now endorsing industry consolidation, preferences remain regional for the most part. Local brands continue to dominate and the top ten brands account for less than 40% of the total Chinese market. The recent Severe Acute Respiratory Syndrome (SARS) outbreak in Asia and Canada, however, has taken a toll on many industries and has resulted in losses for companies that have a significant presence in these markets. Anheuser-Busch will face the additional challenge over the next few months of making up for this decrease in beer sales and consumption in these markets.
With its domination of the U.S. beer market and global ventures, Anheuser-Busch may very well prove to be a good investment. In my opinion, however, Anheuser-Busch is not a value investment at this time as the full value and growth potential of the company seems to have been realized. Additionally, profit growth is predicted to be slower this year based on a combination of factors previously discussed.
Address: One Busch Place, St. Louis, MO 63118, U.S.A.
Phone: 314-577-200
Internet: www.anheuser-busch.com
The Canadian Value Investor © 2003
