THE GIST
Anheuser-Busch InBev (ABI), the world’s largest beer company, is at a crossroads. With new CEO Michel Doukeris at the helm since July 1, the multinational behemoth must find a way to alleviate its crushing debt burden—sooner rather than later. If it doesn’t, it will continue to suffer constraints on its ability to invest in its future, will alienate investors, will face higher borrowing costs, and will likely devalue its stock price.
ABI carries a net debt of more than $83 billion, much of it accrued in its purchase of SAB Miller in 2016; the company now controls roughly a third of the global beer market. The Wall Street Journal reports ABI’s goal is to carry a debt level that’s two times earnings before interest, taxes, depreciation and amortization. Currently, net debt stands at 4.8 times that.
Despite its size, ABI’s debt ties its hands. Like a shopper with maxed-out credit cards, ABI is unable to make the mergers and acquisitions that for years have propelled it to growth. Following the SAB Miller merger, ABI is also required by the Justice Department to inform the agency’s antitrust division of any plans to buy craft breweries. As future acquisitions look less likely, ABI investors are in an increasingly tight spot, with no guaranteed strategy for ABI to return the company to strength or return cash on those investments. One of its minority owners, the tobacco conglomerate Altria, has the option to begin selling its stake in October. Whether or not Altria sells its 10% share in ABI—worth more than $13 billion—is considered a bellwether of investor confidence in the beer company. Outsiders have suggested it would be wise for Altria to exit what Reuters says “hasn’t been a great investment” for the company, as the value of ABI stock has fallen 50% since Altria began its investment. If Altria exits, it would be a huge blow to ABI’s fortunes, and likely, its stock price.
The beer company needs to inspire confidence before this fall, or generate enough forward momentum to temper potential news that Altria will sell its share this fall. But it’s not clear where growth would come from.
Doukeris’ predecessor, former CEO Carlos Brito, is considered to have cut costs ruthlessly, leaving little room for further savings.
ABI can’t buy up many new companies, saddled as it is with debt.
The company’s core beer portfolio, led by Bud Light, has been losing share in the U.S. for years, while its hard seltzer portfolio hasn’t kept up with competition from Mark Anthony Brands’ White Claw and Boston Beer Company’s Truly.
ABI has made greater inroads into emerging beer markets in Africa and Asia over the past five years, but as The Wall Street Journal puts it, that investment “has yet to really pay off.” The U.S. remains a critical piece of ABI’s possible route forward, but as it stands, there’s not an obvious roadmap to growth.
ABI’s magic bullet will need to come from within. Doukeris, who has worked there for 25 years, is widely considered to be “cut from the same cloth” as Brito, as one former ABI employee described him to Good Beer Hunting. The selection of Doukeris, the only internal candidate ABI considered to succeed Brito, is evidence that the company doesn’t intend to shake up its existing business strategy or culture. This has been the status quo for the multinational, and it’s what led it to its current predicament.
ABI may not have the opportunity or flexibility in capital to spend on acquisitions—like the spate of craft breweries the company acquired over the last decade—to find its next white-hot product. It’ll have to generate that win itself, or catalyze existing brands into much larger revenue drivers.
The new CEO tells Bloomberg the focus will be on both ABI’s traditional beer brands as well as its non-beer offerings, like hard seltzers and the Cutwater line of spirits-based cocktails: “I feel a special responsibility to continue to lead and catalyze the beer industry globally, but it feels special as well to take advantage and compound our growth in what I call the beyond-beer space. We really need to smartly allocate our capital to where the biggest opportunities for growth are.”
But the company hasn’t created a true home run since Michelob Ultra, which debuted in 2002, and became the fastest-growing domestic beer brand in the U.S. From 2013 to 2018, Michelob Ultra averaged 16% year-to-year growth, while Budweiser averaged a drop of 3.2% per year and Coors Light and Miller Lite essentially stayed flat. Last year, Michelob Ultra became the second-best-selling beer brand (by dollars) in U.S. chain retail stores tracked by market research firm IRI, leapfrogging Coors Light for that title.
Ten years ago, ABI hoped acquiring craft breweries might provide a similar shot in the arm. Those breweries were good at innovation, the thinking went, and ABI had the muscle to scale up beers that were becoming huge hits. But in 2021, the acquired craft breweries haven’t proven game-changers for the company overall. ABI’s last major purchase was Craft Brew Alliance, a $220 million deal which closed in 2020 and which was widely considered too good for ABI to pass up. In the first half of 2021, ABI’s craft beer portfolio was down -3% versus last year (note that that’s against strong numbers from COVID-related pantry-stocking) in IRI-tracked chain retail; that’s just slightly better than the overall craft category, which was down -4% in those stores during the same period. The craft portfolio isn’t tanking by any means, but it’s not going to be the engine that drives ABI out of its debt spiral.
So, where can ABI find the next Michelob Ultra? It’s struggled to put internal momentum behind innovation in recent years. Founded in 2015, ZX Ventures was intended to be ABI’s internal “incubator,” a team tasked with thinking creatively to find the next true beverage innovation. But in 2018, former employees told Good Beer Hunting that even ABI’s “disruptive” mandate was stymied by the larger company’s focus on quarterly earnings and short-term returns.
Meanwhile, the U.S.’s other large beer companies can spend freely to accelerate new, popular beyond-beer products: Molson Coors Beverage Company, for example, inked a deal with Topo Chico to produce a so-far successful line of hard seltzers, and Boston Beer Co. last week announced a joint partnership with spirits giant Beam Suntory that would expand Boston Beer’s non-beer offerings. ABI, meanwhile, has its eyes fixed internally.
Logic dictates ABI could succeed in hard seltzers, and might have seen those products make up for declines in core beer brands like Budweiser and Bud Light. (Bud Light, still the largest draft beer seller by volume in the U.S., saw its share of draft sales decline from 19% in 2017 to less than 15% year-to-date this year, according to data from Fintech InfoSource.)
But despite ABI’s solid head start in the hard seltzer sphere, it never converted that to industry-leading brands. In 2016, ABI acquired SpikedSeltzer, the first-to-market hard seltzer that, in essence, created the entire category. ABI had the production and distribution muscle to scale that new product quickly.
Then it bobbled the ball. After three years—and the ascendancy of big competitors like White Claw and Truly—the company completely rebranded the SpikedSeltzer line (which it had once called “our choice for the [hard seltzer] segment”) as Bon & Viv Spiked Seltzer. Year to date, Bon & Viv makes up just 0.5% of the U.S. hard seltzer market in IRI-tracked chain retail stores.
Subsequent ABI hard seltzer launches have also failed to meaningfully rival White Claw and Truly, which, as of the first half of this year, make up about 38% and 30%, respectively, of the U.S. hard seltzer market. ABI’s best-selling seltzer brand, Bud Light Seltzer, is in third place, but with much less market share: just 9%. Michelob Ultra Organic Seltzer has captured about 3% of hard seltzer share. Some shops don’t see a long-term future for Bud Light Seltzer: A Goldman Sachs survey of convenience store retailers found they plan to allocate less shelf space this year to Bud Light Seltzer (33%) at nearly or more than double the rate that they’ll be scaling back White Claw (14%), Truly (14%), and Corona Hard Seltzer (17%).
This year, ABI also bet big on Cacti, a hard seltzer line developed with musical artist and producer Travis Scott, which launched to initial fanfare in spring 2021. Doukeris was quick to tout Cacti’s early returns, telling CNBC that retailers “have never seen anything like this before: sold out within one day. … We are ramping up now production and delivery because we sold out completely yesterday.” But quickly, its momentum cooled: For the four-week period ending June 19, Cacti just cracked the top 10 hard seltzer brands, with 1.1% of hard seltzer share in chain retail stores tracked by Nielsen. (In the midst of this, ABI is also embroiled in a trademark lawsuit with Constellation Brands over the latter’s right to sell Corona Hard Seltzer.)
ABI is used to being the volume leader in its segments: Bud Light is still the U.S.’s best-selling light beer, and Michelob Ultra has been without competition in the “superpremium” beer segment. But the company hasn’t been able to move beyond number three in hard seltzer, and not for lack of trying. It’s rolled out several new seltzers, none of which have made a significant dent, while competitors Mark Anthony Brands and Boston Beer Co. invest millions in their tried-and-true, winning brands. Fighting to maintain share as an also-ran is not something the company is used to.
ABI has always had advantages because of its size: It can make deals, and it can flex its distribution power. While an $83 billion debt load prevents it from doing the former, recent moves at the federal level may also keep it from doing the latter.
On July 9, President Joseph R. Biden issued an executive order aimed to promote “open and fair competition” among U.S. businesses. Essentially, the order directs federal agencies to create plans to increase competition in the U.S. economy; the order specifically named beer, wine, and spirits, among other industries.
“To protect the vibrancy of the American markets for beer, wine, and spirits, and to improve market access for smaller, independent, and new operations,” the order directs the Secretary of the Treasury, Janet Yellen, to create a report examining the alcohol industry’s structures, with a particular eye to anti-competitive practices that squeeze out small companies. The report is due to the President within 120 days of his order being issued, which would be the first week of November.
This likely puts large beer companies—and their affiliated distributors—squarely in Yellen’s crosshairs. ABI wholly owns 5% of its distributors (itself an antitrust-related cap) but through “alignments,” it has massive influence over the non-wholly-owned distributors it works with. Molson Coors does the same, creating the so-called “red” distributors aligned with ABI and “blue” distributors aligned with Molson Coors. As distributor consolidation has increased in recent years, influential distributors and beer companies have only become more powerful.
No doubt ABI distributors see a potential target on their back in this directive from President Biden’s executive order, which authorizes a report on: “any unlawful trade practices in the beer, wine, and spirits markets, such as certain exclusionary, discriminatory, or anticompetitive distribution practices, that hinder smaller and independent businesses or new entrants from distributing their products.” Practices such as exclusive territories (where a given geographic area is supplied by a single distributor of a brand) or other protections distributors have could potentially be under scrutiny.
While ABI would argue it doesn’t engage in unlawful practices, the company also wouldn’t be wise to pressure distributors during a time when it’s under the Treasury Department’s watchful eye. Another one of its strongest arrows—its ability to influence distribution decisions—will have to go back into the quiver.
Facing federal scrutiny, burdened by debt, and with major investors potentially walking away from the company in October, ABI is in uncharted waters. It’s always been at the top of the U.S. beer pecking order, able to buy what it couldn’t produce internally. The challenge for new CEO Michel Doukeris is to steer the company toward growth without spending on acquisitions. The rest of the year will be a test of just how quickly a large ship can turn.
Words by Kate Bernot