AB InBev's Cost-Cutting Power May Be Losing its Punch

(Bloomberg Gadfly) -- When the going gets tough, the tough get cutting.

Anheuser-Busch InBev NV, steered by the famously no-nonsense Chief Executive Officer Carlos Brito, has had a shockingly poor final quarter. The Budweiser maker missed analysts' forecasts for sales, underlying profits and organic volume. Brazil, the brewer's largest market after the U.S., was particularly weak.

So here come the cuts: most of the executive board, including Brito, won't get a bonus as the 2016 performance was so disappointing. The company's also found some more beer money, targeting $2.8 billion of savings from last year's $100 billion acquisition of SABMiller, up from its previous estimate of $2.45 billion. AB InBev said it expects revenue growth to accelerate this year, with some headwinds in Brazil dissipating.

Analysts at Exane BNP Paribas suggest that there might be an element of "kitchen-sinking" in the numbers: getting all the bad news out there now that the Megabrew merger's done, so that the combined group can subsequently outperform.

AB InBev is adept at ferocious cost reductions: just look at its operating margin, which already dwarfs rivals'. It's also a well-known deal-making machine. But even with those two well-tested weapons for boosting performance, it cannot escape the malaise that is affecting the whole of the consumer sector, particularly given its exposure to Brazil.

Investors should be wary of the company's promises Thursday that this is last of its poor performance. Cuts are already getting close to the bone, and it can't do any M&A for the next few years until it has digested the Megabrew deal and got the business back on track.

The shares, which fell as much as 3.3 percent on Thursday, are down about 13 percent since October, when the company reported a weak third quarter. The forward price earnings ratio, at 22 times, has lost some of its premium to Heineken NV and Carlsberg A/S.

Unless volumes improve, AB InBev will be forced to find even deeper cost cuts. Finding ever more money down the back of the sofa will become increasingly difficult, particularly given that Brazil, where most of the problems lie, is already a lean operation.

There's also the risk that management will be demoralized by the lack of bonuses. The company rejects this, saying that it will only motivate staff to improve performance.

It had better be right. With Megabrew now complete, analysts are watching for its next possible deal, with The Coca-Cola Co. mooted as one potential target.

But that can't even be contemplated until the SABMiller cost savings have been delivered, and the core business is back on track. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

To contact the author of this story: Andrea Felsted in London at afelsted@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.