IC view of the brewery sector
- Big brewers are fighting to clean up their image as the world looks for more environmentally and socially responsible practice
- Will big company margins survive the shift to at-home drinking and what does that do to the investment case?
- Featured companies: Heineken, AB InBev, Carlsberg, Adnams
What makes a great beer? The quality of the hops and the aroma they give. The balance of a smooth and frothy texture. The golden bubbles as the liquid is poured from the tap?
Aficionados on the many beer rating apps and websites use these characteristics and many more to point peers in the direction of their favourite brews. But judging by the expenditure of the world’s biggest beer companies, the key in fact lies in the marketing. Over the last four years, Anheuser Busch Inbev (EBR: ABI), Heineken (AMS: HEIA) and Carlsberg ( CPH: CARL) - the three biggest breweries in the world - have spent an average of 11.2 per cent of their revenues on marketing and branding. For most of their beers, the recipe has not changed for decades.
Storytelling with the help of a powerful marketing campaign is arguably even more important at the smaller breweries. The storming success of Brewdog - which, prior to the pandemic was the UK’s fastest growing food or drink company - has been largely attributed to its unique advertising; Andy Wood, chief executive at Suffolk brewery Adnams acknowledges that the brand is “a big proportion of what people love”. Although, of course, “the product has to live up to expectations.”
Over decades of generous marketing campaigns, the brewers have created powerful, valuable brands, which contribute to the sector’s high barriers to entry. In 2020, Heineken booked almost €5bn (£4.3bn) of brand value on its balance sheet, an increase on the previous year despite the challenges of lockdown. Carlsberg’s brands - which have made the company the number one brewer in most of the Baltics and eastern Europe - were worth DK14.6bn (£1.7bn) at the last count. And Belgian-based AB InBev, which dominates Western Europe and has given Molson Coors a run for its money in the US has brands worth $40bn ($28.8bn).
More important are the big brewers’ distribution networks, including local breweries, tight relationships with pubs and deals with big sports venues. These have created an economic moat which even the most creative of craft brewers has struggled to infiltrate. The big brewers are therefore highly resilient, with quality fundamentals which have helped them survive many economic downturns.
|Big brewers: quality and reliability|
|3-yr av operating margin (%)||3-yr av operating cash conversion (%)||3-yr av ROCE (%)|
|Source: Data collected from company reports|
And with signs now beginning to emerge that the roaring twenties will bring years of plenty to the brewers which have survived the pandemic, the sector is looking inviting. Heineken reported better than expected first quarter revenues after beer volumes were flat on the previous year. In March, Carlsberg acknowledged that while demand was still thin, the company was starting to see improvements. At Adnams, Wood is “looking forward with cautious optimism”. Like many of the more positive economic commentators he thinks that money saved during lockdown is starting to be spent in the hospitality venues which have been allowed to open.
But the world that the brewers are emerging into is different to the one they left pre-pandemic. Dealing with the shift will be important to their continued success and investors should consider the changing dynamics when assessing the case for buying or selling shares.
What the world wants
A clean, green healthy image isn’t an easy task for a company which has spent over 100 years aggressively farming and pumping out emissions to create a product which makes people drunk. But clean and green is what the world wants, so the big brewers are trying to fit in. Heineken’s EverGreen strategy aims to make the company carbon neutral by 2040. AB InBev redirected $5m of its sports marketing budget to the Red Cross in 2020 and it is backing many campaigns to promote responsible drinking.
But Wood at Adnams warns to beware of greenwashing: “We’ve seen some tragic events through 2020, we all have to follow through on what we are saying.” For his company, that includes investment in low alcohol beers, wines and spirits. And there is no denying strong demand for these products. The company’s 0.5 per cent volume Ghost Ship pale ale was at times its best selling beer in 2020. This is a “long-term trend that is here to stay,” said Wood.
Heineken’s low-alcohol beer range by volume has risen from 12.5m hectolitres in 2017 to 14m last year. AB InBev proudly claims to be producing the same proportion of low-alcohol options as the entire beer consumption of Colombia and aims to have the division contribute a fifth of global volume by 2025.
The end of the craft surge
Low and no-alcohol beers might find a gap in the market left by the many craft brewers which have not survived the pandemic. Evidence of the challenges for the smaller players is shown clearly by Carlsberg, where the alcohol-free range reported 11 per cent growth in 2020, while its craft beers were flat. A survey by the Brewers Association at the end of 2020 found that almost half of its members were not confident that they would still be in business by the end of 2021. The industry is expected to contract to pre-2017 levels.
And while that may free up capacity for the companies that have survived the pandemic, the retreat of the craft brewers may cause problems for the big boys which have relied on acquisitions to generate growth.
|Acquisition spend in the last five years|
|Heineken||Last 12 Months||All Transactions|
|Total Number of Transactions||5||138|
|Total Transaction Value (€m)||50.0||37,315.0|
|AB InBev||Last 12 Months||All Transactions|
|Total Number of Transactions||7||351|
|Total Transaction Value ($m)||2,548.5||262,754.2|
|Carlsberg||Last 12 Months||All Transactions|
|Total Number of Transactions||5||167|
|Total Transaction Value (DKm)||7359||155,230.20|
Drinking on your own
Industry estimates suggest that pubs in the UK are trading at around 60 per cent capacity right now, a level that is expected to rise on 17 May once venues are allowed to open indoors. But continued social distancing guidelines, the looming threat of another surge of coronavirus (not just in the UK) and the fact that the pandemic has accelerated the shift to home drinking, means capacity may never fully return to pre-pandemic levels.
For the brewers, that might mean a shift towards a greater proportion of off-trade sales. “Selling beer to five or six large supermarkets is a less profitable endeavour than selling beer to pubs in large barrels,” said Wood, “the efficiencies in that system have built up over many years. We have to work hard to make sure we can be as productive as possible.”
If the trend continues, brewers may begin to see pressure on their margins. That’s less of a problem for a company like AB InBev, whose operating margins of more than 20 per cent leave plenty of room for manoeuvre, but it is potentially problematic for those operating on tighter margins. If the brewers are going to have to work harder to squeeze profits out of their beer, high valuations that are characteristic of these defensive companies may become hard to justify. But for investors looking to buy into the bounce back in hospitality, the brewery sector may have further to go.
|Name||Market Cap ($m)||Price Chg (6mths)||Price Chg (YTD)||Price Chg (2020)||PE (FY+1)||PE (FY+2)|
|Anheuser-Busch InBev SA/NV||142,262.5||20.5||2.6||-21.6||23.6||19.9|
|Carlsberg A/S Class B||27,167.5||27.0||11.2||-1.9||23.6||20.8|