What will AB-InBev buy next? Pepsi? Or more U.S. distributors?
Contrary to many pundits, Germain Hansmaennel and I have always maintained that AB-InBev will struggle to buy SABMiller. In our humble opinion AB-InBev would be better off acquiring PepsiCo’s beverage business or more U.S. distributors. To our delight this was confirmed by Harry Schuhmacher, one of the most astute U.S. beverage market observers. Here’s what he wrote on 27 April 2012:
"Look, they [AB-InBev] would have to write a very big cheque indeed [for SABMiller], something north of USD 100 billion and that’s a lot of money in anybody’s language", SABMiller’s CEO Graham Mackay reportedly told U.S. distributors at a recent meeting.
If AB-InBev went after SABMiller, price would be one obstacle, says Mr Schuhmacher. But there are more to contend with.
1. SABMiller’s purchase of Foster’s and Efes has made the deal less bankable.
2. SABMiller is already lean and there are few synergies in such a deal.
3. SABMiller’s continued building of breweries in emerging markets seems to indicate that its management is in it for the long haul.
4. Major SABMiller shareholders would likely want stock for tax reasons, and the AmBev/AB-InBev controlling families are loathe to give up control.
5. SABMiller is a major Coke bottler and AB-InBev is a major Pepsi bottler.
That’s why, with U.S. volumes improving, Mr Schuhmacher thinks that AB-InBev may be looking to the U.S. beer and beverage profit pools for growth.
"If there is one thing that AB-InBev has learned over the last three years, it’s how much money can be made in the United States. I think it has even surprised them, as their synergy targets here have been consistently surpassed and ahead of schedule. And if SABMiller is indeed taken off the table, and Modelo continues to insist that it wants to remain independent, where else is AB-InBev to turn to grow margins and profits?"
Mr Schuhmacher suspects that AB-InBev could look in two places in the U.S.: its distribution network, and PepsiCo’s Americas soft drink business.
First, let’s cover the distribution business.
Mr Schuhmacher quotes the analyst Tony Bucalo of Banco Santander, who wrote on 17 April 2012 that "AB-InBev is just beginning to scratch the surface on maximising the value of U.S. distribution. AB-InBev has yet to leverage fully its ability to increase profitability of an established distribution network such as AB’s in the United States. Now that the distraction of restructuring Anheuser-Busch is completed, AB-InBev is looking for new profit opportunities in its wholesale network through consolidation around company-chosen ‘anchor’ distributors or the outright purchase of branches where this is legally allowed."
Mr Bucalo estimates that AB-InBev could hypothetically control nearly 50 percent of its distribution compared to 8 percent today and he believes it will continue to move in that direction.
Mr Schuhmacher thinks the Anchor Wholesaler concept has been a little fuzzy, probably intentionally so. "We know that Anchor Wholesalers are ‘aligned’. We know alignment includes not selling in other AB wholesalers’ markets and not selling a lot of non-AB brands. We think the Anchor Wholesaler concept also includes ones that will be willing to accept new terms. Diageo was especially successful in doing this during its wine and spirits wholesaler consolidation push about ten years ago, essentially saying: You can continue to be our consolidating wholesaler, but you must accept a different margin structure, spend more in markets, remain exclusive or have separate sales forces, or allow direct sales to chains. And while Diageo didn’t have to contend with franchise laws in most states, there are many levers a beer company can pull that a large wine and spirits company would have trouble doing: structure of freight pricing, reach-back with chain pricing, etc."
In his note, Mr Bucalo also makes the case that AB-InBev may look to purchase the Americas beverage unit of PepsiCo – PepsiCo’s Americas Beverage or PAB – so Pepsi’s shareholders can focus on the higher margin and faster growing Frito-Lay snacks unit. "AB-InBev is already a skilled Pepsi bottler and by acquiring PAB, we think AB-InBev would work to exploit the opportunities that come with additional scale in the U.S., with back office consolidation and possible distribution synergies," writes Mr Bucalo.
A purchase of the U.S. Pepsi soft drink business would be much more of a game-changer for the beer industry in the U.S. than a purchase of SABMiller by AB-InBev says Mr Schuhmacher. At a minimum, AB-InBev could consolidate warehousing, back-office, operations, and even tel-sell.
However, AB-InBev’s Zone President Luiz Edmond has said that, in a mature market like the U.S., it’s difficult to consolidate soft drink and beer delivery. While in Brazil, where you have a very fragmented market with very small drop sizes, there is a benefit for having two in the same house and on the same truck. Soft drinks don’t have the scale in Brazil. In the U.S. they have the scale to warrant dedicated delivery.
Regardless, having the U.S. Pepsi business would certainly be another reason for AB-InBev to own branches, as at least warehouse and other functions could be consolidated, argues Mr Schuhmacher.
The punchline is: How much in cost savings and topline growth could AB-InBev pull out of a PepsiCo Americas deal? By Mr Schuhmacher’s guess: about USD 2 billion.
No wonder, the AB-InBev rumour mill continues spinning fast.
