Why AB Inbev’s Carlos Brito is saying ‘cheers’

The man who poured together the world’s largest brewer has called last rounds after 32 years behind the taps.

Carlos Brito, who will step down as CEO of AB InBev at the end of June, will be best remembered for the megamerger with SABMiller, a deal worth more than $100bn that saddled his company with an uncomfortable level of debt and forced it to sell assets in a buyers’ market.

Still down 50% from their highs of more than R2,000 in 2016, AB InBev shares rallied 4% after the announcement, which accompanied the company’s earnings release for the three months to end-March.

Though the numbers surprised on the upside, Brito’s exit likely also gave many investors reason to say cheers.

While highly regarded for his ability to stitch assets together and unlock value by cutting costs and increasing efficiencies, Brito complicated his legacy by swallowing his largest rival. SABMiller, already a lean and well-run outfit, had less to fix and proved much harder to digest.

It means that AB InBev has wildly underperformed its listed peers like Carlsberg and Heineken. Since January 2018, for example, Carlsberg stock has gained 45% and Heineken has risen 10.7%, but AB InBev has dropped 27%.

Business, however, is looking up.

The volume of beverages AB InBev sold rose 13.3% in the quarter, but it managed to grow revenue by 17.2%, to $12.29bn.

Brito has long punted tipples that fetch higher prices, so the 3.7% rise in revenue per hectolitre was a sign that his strategy of "premiumisation" is more than just froth.

The push is a global one and SA beer drinkers would, in recent years, have noticed more Budweiser, Corona and Stella Artois on billboards and in bars and bottle stores. Brito refers to these as the company’s global premium brands.

In fact, the "premium" portfolio grew by 28% in the first quarter, representing over 30% of revenue, carrying a higher profit per hectolitre than its so-called core brands.

Still, it has been a harrowing year.

AB InBev was one of the first blue chips to feel the impact of Covid on consumer behaviour, as it has significant exposure to China, where the first lockdowns were enforced.

It also suffered acutely from restrictions on public gatherings — called "consumption occasions" by the company — which governments imposed in an attempt to slow the spread of the virus.

In SA SAB had to stomach a total ban on alcohol sales for weeks on end.

Overall, though, AB InBev’s first-quarter numbers showed a revenue recovery to pre-pandemic levels. Though the company achieved gains in most of its key markets, the recovery was largely driven by China, says Ninety One analyst John Thompson.

AB InBev’s results are in keeping with the recent better-than-expected figures by rival brewers and other peers, he adds.

But, says Gryphon Asset Management portfolio manager Casparus Treurnicht, "though there seems to [have been] a ‘Covid recovery’ in AB InBev’s numbers of last week, I cannot help but feel that a recovery is already priced in.

"Most share prices have been rallying on stimulus measures, so it is difficult to judge what portion is truly inherent in AB InBev’s own performance," he adds.

Most countries have responded to the crisis with some form of stimulus, which usually bodes ill for government debt levels and can weigh on currencies.

And AB InBev’s geographical mix is an interesting one.

The company earns a large share of its revenue from emerging markets, where volatile currencies are the norm, but most of its debt is in hard currency, predominantly dollars.

"Stronger emerging-market currencies are good for AB InBev as its underlying business is geared towards developing countries," says Anchor Capital’s Peter Armitage.

So when Brazil’s real, Colombia’s peso, China’s yuan or the rand strengthens, AB InBev’s colossal debt — $82.7bn at last count — becomes that much easier to service.

Brito’s successor, Michel Doukeris, has experience on the ground in both China and Brazil.

Doukeris is seen as a relatively safe pair of hands with his 20 years of beverage industry experience, the last three of which he spent running the company’s North American operations.

He has a fresh pair of eyes, is more tech savvy and also appears to be a keener beer drinker than Brito, says Thompson.

But that AB InBev is the world’s biggest brewer is hardly a reason to buy it these days.

Profit margins are under pressure as input costs rise faster than revenue. The pandemic’s disruption of global supply chains has affected the prices of everything from fuel and energy to barley and packaging.

This means Doukeris has to drive sales if he wants to grow the bottom line.

"The lines are blurring between beer and spirits and wine, and [the company wants] to take advantage of that," says Thompson.

In the US, Doukeris has been pushing "hard seltzer" — basically flavoured fizzy water with a kick — to great effect. Brands such as Bud Light Seltzer and Mike’s Hard Lemonade have grown faster than the rest of the industry and are significant contributors to the company’s "beyond beer" portfolio.

How easy it is to export American habits remains to be seen, but Flying Fish Seltzer is already on the shelves in SA. And rival drinks maker Distell has responded by launching its own version, Vawter Hard Seltzer.

Brito might be the longest-serving boss in brewing, but he is hardly as inseparable from his business as Facebook’s Mark Zuckerberg or Tesla’s Elon Musk. "It’s different from, say, the big tech companies, where the CEO in a way represents the entire business and where it is going," says Armitage. In a traditional organisation, especially in a business such as fast-moving consumer goods, the departure of a CEO need not cause much disruption, he adds.

Whether Doukeris will continue launching products in the "near beer" category to grow sales or push deeper into lucrative markets such as Vietnam, Thailand and the Philippines will become clear only after he has taken the reins.

But there is not much space to copy his predecessor too closely.

Known as a cost cutter, Brito was ruthless when it came to SABMiller after the merger, especially in SA, says Armitage. Levels of management at SAB were gutted and many of those industry experts now float around as consultants to AB InBev’s rivals, says Thompson.

Some others have banded together to start craft beer challengers.

Doukeris might find there is not much left to trim.

The brewing empire he will run is also not the powerhouse it should have been.

To get the deal through in 2016, regulators required the combined entity to sell assets in some parts of the world, while the sheer scale of its debt also necessitated putting some operations on the block. So AB InBev sold its canning unit in the US, Carlton & United Breweries in Australia and some of its Eastern European beer brands. It also had to let go of part of its Asia Pacific business by listing it in Hong Kong.

But the debt remains a hangover that makes it tougher for the company to move quickly when opportunities arise.

It means AB InBev has to trade itself into a better position. Easier said than done.

"Investors have gained confidence that the problems associated with Covid will subside, but emerging markets are still about six to 12 months behind [the developed world] when it comes to recovery measures from the pandemic," says Armitage.

Ideally, people will celebrate the end of masks and hand sanitiser with a cold one. But when will that be?

"The pandemic is now endemic, and it feels like it will be a long time before true ‘normal’ will arrive," says Treurnicht.