USA: Anheuser-Busch prices are up, but other worries could be on the way

Anheuser-Busch Cos. investors got a nice buzz when U.S. beer prices rose and stuck. However, according to the brewer's recent report, predicting lower volume, mounting market-share losses to import and craft beers, and higher input costs could cause the headache, Dow Jones commented on September 26.

Anheuser-Busch said at an investor conference Sept. 6 that its sales to retailers are up only 0.5% so far in the third quarter, compared with 1.8% in the first half of the year. They are flat if sales of Rolling Rock, acquired earlier this year, are backed out. "A-B ran into a bit of a wall in the summer," Benj Steinman, editor of Beer Marketer's Insights, said in an interview. "It raises questions about the difficulties of growing domestic beers right now."

An Anheuser-Busch spokesman said on September 25 the company had no comment beyond what it said at the Sept. 6 conference.

The five-year trend also is worrisome. In downgrading Anheuser-Busch to hold from buy last week, Stifel Nicolaus analyst Mark Swartzberg noted that the St. Louis brewer's domestic volume increased from an estimated 101.7 million barrels in 2001 to 102.5 million barrels in 2006, average annual growth of only 0.2%.

Swartzberg described the mood among Anheuser-Busch distributors at the National Beer Wholesalers Association annual meeting last week as "sober."

To be sure, the largest U.S. brewer has some buffers, including the acquisition of the Rolling Rock brand and its 50% ownership of Grupo Modelo SA, which has posted strong U.S. Corona sales.

Anheuser-Busch shares have slipped during the last month, yet they remain near the 52-week high of $50. Shares were trading recently at $47.81, up 6 cents.

The big brewers, including SABMiller PLC's and Molson Coors Brewing Co., control the lion's share of the U.S. beer market - Anheuser-Busch alone has 48.8%. But they continue to lose market share to the higher-priced import and craft beers, as well as wine and distilled spirits.

"We can't help but see the connection between Anheuser-Busch's organic volume troubles...and the continued strong growth of the import and craft segment," Bear Stearns analyst Carlos Laboy said in a note to investors.

In the week ended Sept. 10, for example, imports and crafts gained 170 basis points of share in supermarkets, up from 60 basis points of gain a year ago, Morgan Stanley reported. And the Beer Institute reported total import shipments were up 15.3% in July - the first month of the third quarter - and 11% year to date.

For example, Heineken USA's new Heineken Premium Light brand, which targets both the popular light-beer market and the consumer shift toward higher-priced beers, is on track to become the number-eight import brand in its first year, Laboy said. "This new brand may be in the very early stages of a long-term challenge to domestic light beers," he said.

Anheuser-Busch says it can compete in the craft category with its Michelob Marzen, Wild Hop Lager, Stone Mill Pale Ale and other specialty beers. And in the import category, besides its stake in Modelo, its U.S. distribution has expanded with Grolsch from the Netherlands, Tiger from Southeast Asia and its own Harbin brand from China.

Profits at Anheuser-Busch were up 7.4% in the second quarter, ended June 30, in part because of higher prices. Last year, its profits were down almost 10% in the second quarter and 24% in the third quarter.

But now Anheuser-Busch faces tougher comparisons, the result of lower prices that led to higher volumes last year. It has more price increases slated for the fourth quarter and for early next year.
Higher aluminum prices are another cause for worry, although Anheuser-Busch likely has hedging in place, industry watchers say.

"Aluminum is very difficult to read because some companies have contracts in place and some companies don't," and they don't disclose those hedges, J.P. Morgan analyst John Faucher said in an interview. "BUD is all about minimizing volatility" and "probably is at less risk than some of the other beer manufacturers in terms of aluminum exposure."

Money manager Mark Travis isn't discouraged about big beer. He is chief executive of Intrepid Capital Management in Jacksonville, Fla., which holds Anheuser-Busch shares in its Intrepid Small Cap Fund and Intrepid Capital Fund.

"In the case of Anheuser, it's amazing to me the way Wall Street works," he said in an interview. "They extrapolate a short trend and assume that everybody's going to be drinking hard liquor and there's never going to be any more beer consumed. The core business - this is, Budweiser and Bud Light - still is at close to 50% market share."

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