Budweiser's Decline Clouds AB InBev's Cost-Cutting Approach

(Bloomberg) -- As Americans lose their taste for Anheuser-Busch InBev NV’s Budweiser beer, the world’s largest brewer can’t wring out costs fast enough to meet profit expectations.

The Leuven, Belgium-based company’s U.S. sales fell 5.6 percent in the third quarter and market share slipped as drinkers turn to locally brewed beers instead of its pale lagers. The stock fell as much as 3.2 percent, even as AB InBev pledged to increase savings from its $104 billion takeover of SABMiller Plc.

“We can’t remember a quarter as bad” in the U.S., Trevor Stirling, an analyst at Sanford C. Bernstein, wrote in a note to investors. “The underlying business remains incredibly weak.”

The so-called premium beer category, which includes Budweiser, is under growing pressure in the U.S., Chief Financial Officer Felipe Dutra said on a call with reporters. While the company is investing $2 billion to try to reignite growth, consumers are increasingly seeking out craft and regional brews -- mirroring a broader consumer shift toward niche labels in categories ranging from coffee to condiments.

AB InBev said sales were reduced by hurricanes that disrupted its business in Texas and Florida, echoing companies like consumer-goods giant Unilever and eyeglass makers Essilor International SA and Luxottica Group SpA in flagging a loss of sales due to the storms. Dutra said he expected the brewer to bounce back with a “very strong” fourth quarter.

The retail value of Budweiser sales in the U.S. fell 17 percent, to $3.3 billion, from 2010 through 2016, according to data tracker IWSR. Bud Light was down 14 percent, to $7.4 billion.

“We can do a better job on Bud Light,” Chief Executive Officer Carlos Brito said on a call with analysts, adding that in a more fragmented market where craft brews are gaining ground, even some of AB InBev’s own beers are putting pressure on the company’s big brands.

Market Share

AB InBev has grown in less than two decades from a domestically focused Brazilian brewer to the maker of about a third of the beer sold worldwide. But a 0.8 percentage-point loss of U.S. market share in the quarter raised investor concerns about the company’s ability to generate a thirst for its brands.

So far, AB InBev has increased earnings mostly by cutting costs, consolidating back-office functions at acquisitions such as former giants Interbrew and Anheuser-Busch. Unilever Chief Executive Officer Paul Polman has questioned the long-term viability of a business model championed by Brazilian private equity firm 3G Capital, whose founders are the largest combined shareholder in AB InBev.

“If you’re doing what we’ve been doing, you’re obviously not quite as good as you should be in marketing or developing new products,” 3G Capital co-founder and AB InBev board member Jorge Paulo Lemann said on a panel at Harvard Business School earlier this year. “The secret has been after the first cut, you buy something similar, you cut there. In the case of beer, there’s not that much more.”

AB InBev said adjusted earnings rose 14 percent in the third quarter, short of estimates. Worldwide, quarterly beer shipments declined 1.2 percent on an organic basis. Earlier this week, Heineken NV, the world’s second-largest brewer, forecast that the euro’s strength will reduce earnings this year and said poor weather led to a drop in third-quarter shipments in Europe.

Takeover Savings

AB InBev said it now expects financial benefits from its takeover of SABMiller to reach $3.2 billion by October 2020, up from an earlier estimate of $2.8 billion, which had already been raised from an initial $2.4 billion.

Now it expects procurement and engineering savings, as well as sharing know-how held by the two companies, to play a bigger role in cutting costs. The brewer said the measures will also lead to one-time costs of $1 billion, which is $100 million more than its previous estimate.

To contact the reporter on this story: Thomas Buckley in London at tbuckley25@bloomberg.net.

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Jonathan Roeder

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