Losing its fizz

The partly empty stadiums during the Olympics drove it home again: Brazil is in deep recession. Moreover, per capita beer consumption has been flat for several years at 63 litres and people have taken to drinking beer at home rather than at a bar. Off-premise consumption is 37 percent. This puts AB-InBev’s growth prospects somewhat in danger, considering the clear signs that its strategy, which focused on the on-premise with mainstream brands in returnable glass bottles, no longer seems to move the needle, so to say.

Brazil is AB-InBev’s second largest market behind the US, contributing about a quarter to its profits. Its local unit AmBev has a beer market share of nearly 70 percent.

Through the first half of 2016, AB-InBev’s beer volumes in Brazil declined 6.7 percent, it was reported. However, AB InBev has looked to steer through this tough period by focusing on the lower and the higher end of the market to protect its profits.

Media say that the company has pushed the sales of returnable glass bottles (RGBs), which have made their way back into the off-trade channels. RGBs are cheaper, and attract customers who are looking for smart choices. Although the RGBs will not exactly boost revenues, they are good for margins. RGBs are gaining popularity in homes, with volume sales for AB InBev in supermarkets more than doubling in the first half of 2016, media say.

On the other hand, AB InBev is also benefiting from the growth in consumption of its premium beer brands, which are relatively expensive, and hence, a boon for margins. The premium segment includes AmBev’s domestic premium lagers Bohemia and Antarctica Original, as well as international brands such as Heineken, Stella Artois, Budweiser and the recently introduced Mexican brand, Corona Extra. Usually served in long neck bottles (non-returnable most of the time), these beers are gaining in popularity with young adults. Along with local craft beers, premium brands account for about 9 percent of total consumption, up from 5 percent in 2010.

Economic inequality in Brazil is one of the highest in the world. As affluent consumers don’t seem to be affected much by economic wobbles, this could be one of the reasons why AB-InBev’s premium beers have grown at a rapid pace. Budweiser, which sold as a premium beer in Brazil, grew by double digit percentages in the first half of the year.

Emphasis on affordable options for customers and growth in premium brands are expected to boost volume sales in Brazil in the second half of the year. In addition, AB-InBev hopes to benefit from higher consumption during the Olympics. It is expected that the emphasis on RGBs and premium brands will have a positive impact on the EBITDA margin for Brazil, which is fairly high already at 50 percent (2015), compared with the company’s overall margin of 39 percent.

Nonetheless, AB-InBev does not think it will hike revenues this year, due to the weak economy and lower consumption in the country.

Brazil – beer market shares (2015)

Brazil – top 10 beer brands (2014)

Source: Beer Sector in Brazil, Flanders Investment & Trade São Paulo, 15 December 2015