INTRODUCTION
An overview of the global brewery market
It is revealed by IBIS (2019) that beer is consumed as the most popular alcohol drinks worldwide As the end of 2019, the market value has reached US$
The global brewery industry has seen significant growth, rising from $216 billion in 2015 to $606 billion in 2019, with a CAGR of 5.5% during this period Projections indicate a gradual increase, with an expected CAGR of 1.8%, leading the market to reach approximately $685.4 billion by 2025.
The global brewery industry has faced significant challenges over the past five years, leading to structural shifts in beer manufacturing companies Market growth and increased consumption are driven by a rising number of social drinkers in Asia and Africa, fueled by improving economic conditions and a growing middle class Additionally, rapid urbanization, cultural changes influenced by Western culture, and the introduction of innovative ingredients and flavors have further boosted demand Social media and the expansion of the global e-commerce sector have also enhanced retail channels and market presence for beer manufacturers, contributing to overall sales growth.
The report by IBIS (2019) indicated that over the past five years, the global brewery industry has been highlighted by some takeaways Firstly, the industry’s
In 2019, the brewing industry generated $606 billion in revenue from 29,711 operating companies, with significant growth observed in emerging markets like Asia Pacific and Latin America, while developed markets such as North America faced a decline The rising demand for craft beer and diverse flavor preferences are key factors driving this growth Recent innovations in production processes and the introduction of new ingredients have further enhanced the popularity of beer, particularly craft varieties, which have become a global consumption trend.
Figure 1.1: Industry by geography trends
In the saturated brewery industry, it is essential for brewing firms to prioritize value over volume and align with consumer preferences to remain competitive To sustain leadership positions, companies should explore various strategies and innovate diverse product offerings.
Over the past three years, major players in the global beer market, including Anheuser-Busch InBev, Molson Coors, Heineken, Boston Beer Company, Constellation Brands, SABMiller, and Carlsberg Group, have significantly increased their market share A key strategy for these companies has been expanding their presence in emerging economies, contributing to their growth Anheuser-Busch InBev SA/NV has emerged as a global leader, particularly after acquiring SABMiller, which boosted its market share to approximately 27% Following Anheuser-Busch InBev, Boston Beer Company and Carlsberg Group are notable competitors in the industry.
Area of the study
This study analyzes the business performance of major global brewery companies, including Heineken and Carlsberg, over a five-year period from 2015 to 2019, while also assessing the growth outlook impacted by the COVID-19 pandemic and subsequent lockdowns.
This study examines Anheuser-Busch InBev (ABI) and Diageo (DGE) through macro-economic, industry, and company analyses, with a focus on the Asia Pacific and US markets, which are the largest beer markets Based on the findings, recommendations will be provided for sustainable and profitable investments in these two major companies.
Study objectives
This study examines the business performance and growth potential of the global brewery industry from 2015 to 2019, aiming to provide valuable investment recommendations for investors Specific objectives have been established to support these overall aims.
1) To obtain a comprehensive understanding of the global brewery industry during 2015-2019 and the growth outlook;
2) To examine the effects of macroeconomic factors on the industrial growths in the two biggest markets;
3) To investigate the brewery industry with reference to performance, competition and market trends;
4) To evaluate business performance of four market leaders, Heineken (HEIN), Carlsberg (CABGY); ANHEUSER- BUSCH INBEV (ABI) and DIAGEO (DGE) through analyzing financial statements with reference to finance ratios;
5) To value four selected businesses through DCF model; and
6) To propose profitable investment recommendations regarding four market leaders of the global brewery markets depending macroeconomic, industry and company analysis
Methods of the study
This research employs a quantitative method to analyze the financial statements of four major firms: Heineken (HEIN), Carlsberg (CABGY), Anheuser-Busch InBev (ABI), and Diageo (DGE) The study utilizes various secondary data sources, including Market Line, Bloomberg, and Global Insights Key financial ratios—such as profitability, leverage, liquidity, investment, and cash flow—are examined for the period from 2015 to 2019 Additionally, macroeconomic and industry analyses are conducted using different models to assess the growth potential for informed investment decisions.
Organization of the study
This thesis comprises eight chapters: Chapter 1 introduces the topic, followed by Chapter 2, which focuses on macroeconomic analysis Chapter 3 delves into industry analysis, while Chapters 4 to 7 provide detailed insights into major companies, including The Heineken Company, The Carlsberg Company, ANHEUSER-BUSCH INBEV, and Diageo Finally, Chapter 8 presents conclusions and recommendations.
This article begins with an overview of the global brewery industry from 2015 to 2019, outlining the study's objectives, areas, and methods The second chapter examines the impact of macroeconomic factors on the business performance of beer manufacturers, utilizing the PESTEL model for analysis Chapter 3 delves into the markets where four beer manufacturers operate, providing insights into their global performance and future outlook.
6 market trends and prospects, and performance of some major markets After macroeconomic and industry analysis, the following chapters, Chapter 4 to Chapter
This article analyzes the business performance of four major firms: Heineken (HEIN), Carlsberg (CABGY), Anheuser-Busch InBev (ABI), and Diageo (DGE) using SWOT analysis, ratio analysis, and valuation models Additionally, it provides investment recommendations based on the findings from this comprehensive analysis in Chapter 8.
MACROECONOMIC ANALYSIS
The political outlook
The beer industry plays a vital social and economic role, employing millions and significantly contributing to the economy through taxes and corporate social responsibility initiatives (BA, 2020) Established in the mid-seventeenth century, it has faced numerous political challenges and legal regulations, including the thirteen-year prohibition on beer production and distribution that began in 1920 Today, the industry continues to navigate evolving alcohol consumption policies, taxation changes, political lobbying for market classification, and anti-trust concerns.
Irresponsible alcohol consumption leads to significant negative consequences for society, as highlighted by the WHO in 2019 To mitigate these adverse effects, governments around the globe are implementing various measures.
The US Government has implemented a comprehensive three-tier system to regulate alcohol manufacturing, distribution, and consumption, significantly impacting the brewery industry Unlike other consumer goods, the advertising, sale, and consumption of beer and alcohol products are subject to various restrictions, including specific hours and content limitations to curb underage drinking For instance, many states in the US prohibit the sale of alcohol on Sundays, while the EU has established regulations to address drink-driving These policies aim to reduce alcohol consumption, posing challenges for beer manufacturers who may face declining sales as a result.
The beer industry plays a crucial role in generating tax revenue for governments due to its significant market value According to the Beer Institution (2020), tax regulations vary based on business size and production volume, classifying manufacturers into large (over two million barrels) and small (under two million barrels) categories Recently, there has been a push from beer manufacturers to raise the threshold for small manufacturers to six million barrels in order to alleviate tax burdens.
Beer manufacturing and distribution face numerous regulations imposed by governments, making political lobbying a critical concern for breweries The 18th Amendment and the Volstead Act, which prohibited the production and sale of alcohol exceeding one-and-a-half percent, were enacted due to the lobbying efforts of anti-alcohol groups (Alberts, 2017) The repeal of this prohibition was achieved through the 21st Amendment, which established a framework for managing alcohol production and consumption Today, breweries continue to navigate intense political lobbying pressures, prompting them to advocate for legislation that supports tax discounts and extended selling hours.
In recent years, craft beer consumption has surged, becoming a prominent trend in the industry (AAI, 2012) Unlike traditional beers, craft beer is not mass-produced, resulting in heightened competition This competitive landscape has prompted governments and authorities to implement new regulations aimed at preventing monopolies in the craft beer market.
The rise of craft beer has increased competition in the beer industry, prompting Congress and regulatory agencies to monitor market changes to prevent monopolies According to the Brewers Association (2019), this shift highlights the need for ongoing oversight in the evolving landscape of beer production.
US beer market is dominated by such large firms as Anheuser-Busch and
MillerCoors significantly dominates the American beer market, while small brewers are beginning to establish themselves in the craft beer segment This situation raises controversial antitrust concerns among government officials and authorities regarding the acquisition of smaller breweries by larger manufacturers.
The economic outlook
The COVID-19 pandemic has caused a significant global shock, resulting in a projected 5.2 percent contraction in global GDP for 2020, marking the deepest recession in decades (WB, 2020a) Most emerging and developing economies are expected to see a decline in per capita incomes, with long-term effects including reduced investment, loss of human capital due to disrupted work and education, and fragmentation of global trade (WB, 2020a) Forecasts indicate that regions such as Latin America, Europe, and Central Asia will experience the highest growth rates at 7.2%, 4.7%, and 4.6%, respectively, while other areas like Sub-Saharan Africa, South Asia, and East Asia and the Pacific will see much lower growth rates of 2.8%, 2.7%, and 0.5% (WB, 2020b) This decline in economic growth has hindered countries from achieving their economic objectives.
(Percent change from previous year)
Percentage point differences from January
Emerging market and developing economies 4.5 4.3 3.5 -2.5 4.6 -6.6 0.3
Latin America and the Caribbean 1.9 1.7 0.8 -7.2 2.8 -9.0 0.4
2.5 -2.2 -7.3 2.1 -6.0 0.7 Middle East and North Africa 1.1 0.9 -0.2 -4.2 2.3 -6.6 -0.4
42.5 16.9 Non-energy commodity price index 5.5 1.8 -4.2 -5.9 3.0 -6.0 1.3
The World Bank (2020b) highlights that the uncertainty surrounding global growth remains exceptionally high, necessitating alternative scenarios to illustrate potential outcomes Prolonged COVID-19 outbreaks could lead to extended restrictions, disrupting domestic activities and undermining confidence This disruption may hinder businesses' ability to operate and service their debts, while increased risk aversion could elevate interest rates for higher-risk borrowers With debt levels at historic highs, this scenario risks cascading defaults and financial crises across various economies, potentially resulting in a nearly 8 percent contraction in global growth for 2020 The subsequent recovery would be sluggish, characterized by severely impaired balance sheets, heightened financial market stress, and widespread bankruptcies in emerging markets and developing economies (EMDEs), with global growth barely increasing to just over 1 percent in 2021.
Figure 2.1: Global growth ; 2.2: Government and non-financial corporate debt
The economic recessions worldwide, particularly in major markets of beer, will not only affect manufacturing activities of firms but also lower consumers’ beer consumption.
The social outlook
Religious affiliation plays a significant role in influencing alcohol consumption behaviors, as noted by Trez (2016) Many religions impose restrictions on drinking, suggesting that increased religious engagement may lead to a decrease in alcohol consumption, including beer As a result, the expansion of breweries could be adversely affected by these religious influences.
The World Beer Cup is a prestigious international event held biennially, celebrating exceptional breweries from around the globe across various categories This competition recognizes and honors the highest quality in the brewing industry, highlighting the significance of craftsmanship and innovation in beer production.
The World Beer Cup is more than just a brewing community event or beer exposition; it serves as a prestigious global competition that showcases innovative products from breweries around the world This competition allows lesser-known breweries to gain recognition and popularity among consumers globally As an annual event, it provides a valuable opportunity to highlight the finest beers from across the globe.
Effects of alcohol on pregnant women
Hassan (2014) highlights the consensus that alcohol consumption during pregnancy poses significant risks to both mothers and their children, presenting a challenge for breweries Recent studies indicate a debate on whether pregnant women should merely reduce their alcohol intake or completely abstain to safeguard their children's health Regardless of the findings, breweries must acknowledge the implications of this societal perception on the production and distribution of their products.
In recent years, beer clubs have emerged in both developed and developing markets, providing social spaces for beer enthusiasts to share their preferences and experiences These clubs not only celebrate the innovation and quality of beers from around the world but also function as retailers The global brewery industry stands to gain significantly from the rising number of beer clubs, as highlighted by Seimiene (2012), who notes that these clubs offer valuable insights from passionate beer drinkers, fostering new ideas and enhancing the overall beer experience.
15 platform to test and launch new products The way how these beer clubs promotes sales and growth of the beer industry is similar to that of the wine clubs
Hassan (2014) highlights a growing awareness and concern for healthy living, with nutrition playing a pivotal role in influencing health He notes that there is no apparent link between a healthy lifestyle and alcohol consumption, suggesting that reducing alcohol intake is a crucial first step towards achieving better health Despite the brewery industry's efforts, there is a lack of evidence supporting the health benefits of alcohol, which has led to increased health concerns that pose a significant threat to the industry's growth.
Unhealthy issues in teenagers drinking
Teenage drinking, alongside a healthy lifestyle, has garnered the attention of beer consumers A 2018 study by the University of Washington indicates that teenagers who start drinking at age 13 and consume five or more drinks are more likely to experience issues with blood pressure and weight compared to their non-drinking peers If these drinking habits persist into adulthood, significant organ damage may occur Consequently, breweries face the challenge of creating products that do not jeopardize the health of their consumers.
The technological outlook
The adoption of modernized production processes due to technological advancements has played a central role in the increment of brewing efficiency This
In recent years, companies like Heineken have successfully reduced production costs and enhanced the efficiency of managing extensive networks globally (Buckley and Ghauri, 2015) Improvements in research and development within manufacturing units have led to better beer quality, storage, and transportation Consequently, brewers can now engage in large-scale production and distribution, resulting in significant financial gains and growth within the industry (Madsen and Wu, 2016) These advancements are crucial for leveraging the effects of globalization on the brewing sector.
In the past, breweries primarily relied on magazine and television advertisements to market their products However, technological advancements have introduced the Internet as a powerful alternative channel for beer companies According to Dept (2018), online advertising not only expands audience reach but also lowers marketing costs This shift allows breweries to connect with a vast number of potential consumers while generating innovative content, ultimately leading to a significant increase in beer sales.
Exchange of information, data and research
Consumer information and preferences are essential for breweries to develop new products and implement strategies to mitigate the health risks associated with alcohol consumption The rise of technology, especially big data, has transformed how breweries gather, analyze, and utilize consumer insights, making it crucial for the beer industry to adapt to these advancements.
17 manufacturers to capture sufficient information to meet up with their consumers’ demands and preferences and formulate measures to prevent negative impacts of alcohol on consumers.
The environmental outlook
Drought and climate change are significantly affecting raw material costs, prompting companies to adopt sustainable practices to mitigate environmental pollution in their production and distribution processes As public awareness of environmental issues increases, waste management and recycling are becoming more important For example, breweries can recycle water and materials from their production processes for agricultural use, which not only reduces sludge disposal costs but also conserves energy.
The legal outlook
Excessive alcohol consumption poses significant health and social challenges, leading to increasing concerns In response, several industrialized nations, including the United States, have implemented bans on public beer consumption.
In 2018, several countries, including France, implemented bans on beer advertisements in sports This has led to intense market control battles among multinational companies due to licensing, acquisition, and strategic collaborations Moreover, the European Union has consistently focused on the effects of alcohol on social issues and public health.
(2017) also revealed that Europe is one of the largest market of alcohol with the
The article highlights the 18 countries with the highest levels of alcohol consumption per capita and the prevalence of drinkers, emphasizing the significant link between alcohol consumption and public health As a result, beer manufacturers are compelled to restrict their marketing efforts and product offerings targeted at young consumers Additionally, campaigns addressing the dangers of drinking and driving impact the operations and performance of beer companies The legal landscape surrounding the brewing industry fosters mergers and strategic collaborations, resulting in the emergence of mega-breweries that dominate both regional and international beer markets.
The investigation reveals that various macroeconomic factors significantly impact the global brewery industry, affecting major players like Heineken, Carlsberg, Anheuser-Busch InBev, and Diageo Political, economic, social, technological, environmental, and legal influences create both opportunities and threats to the profitability and growth of these companies Therefore, understanding these factors is essential for ensuring the sustainable growth of brewery firms.
INDUSTRY ANALYSIS
The performance of the global brewery industry
Beer, one of the oldest and most popular alcoholic beverages globally, is made through the fermentation and brewing of malted barley, wheat, and rice, with hops providing its characteristic bitter flavor The beer industry has evolved into a global business, featuring numerous multinational corporations and thousands of smaller breweries Despite facing challenges from 2014 to 2019, including declining per capita consumption in traditional markets like North America and Europe, the industry has seen growth in emerging markets driven by rising disposable incomes and a shift towards higher-quality, branded beers This trend has been further supported by the remarkable rise of craft beers and foreign brands, which have contributed positively to the industry's overall performance.
The global beer market, valued at USD 69.14 billion in 2019, is projected to reach USD 96.24 billion by 2026, with a CAGR of 4.22% (Fortune, 2020) Beer holds a significant market share compared to other alcoholic beverages and is increasingly popular among young consumers and working professionals due to its diverse formulations and flavors While traditionally consumed in regions like Europe and North America, global demand is now rising, positively impacting the overall business The introduction of new brewing technologies in developing economies has further enhanced consumption patterns, as consumers seek innovative and flavored beer options, contributing to market expansion.
Improving economic conditions and rising GDP in developing regions like Asia Pacific and South America have led to increased per capita disposable income for consumers This rise in disposable income significantly contributes to the growth of the alcoholic beverage industry, as higher purchasing power encourages discretionary spending on alcoholic drinks Additionally, the acceptance of western culture and modernization among consumers has further fueled the expansion of the beer market Consequently, the growing food services sector worldwide is closely monitoring consumers' drinking habits and beverage purchasing behaviors.
The food services sector is increasingly focused on opening new on-trade venues, including restaurants, bars, and pubs, where alcoholic beverages are served This growth in establishments is a significant driver of market expansion Notably, in 2019, China was the world's largest beer consumer, while Mexico ranked fourth, experiencing a 5.3% increase in consumption compared to the previous year.
The alcoholic beverages market is experiencing significant growth, particularly in developing economies with large consumer bases, such as India and China Manufacturers are focusing on sourcing raw materials to meet this rising demand, with malted cereal grains like wheat and barley being readily available Over the past five years, global wheat production has increased, making it more accessible and affordable for beer manufacturers This affordability and availability of wheat are key factors driving its production on a global scale.
The global alcohol market is experiencing significant challenges due to strict regulations on the marketing and advertising of alcoholic beverages aimed at promoting healthy lifestyles Many major markets, including India, China, and the U.K., have implemented bans on beer promotions These provincial restrictions on marketing hinder the growth of the industry.
In the coming years, the overall market is expected to evolve significantly Manufacturers are increasingly utilizing surrogate advertising to promote alcoholic beverages and other prohibited products by disguising them as different items in the market.
The competitive situation in the global brewery industry
To sustain a competitive advantage and increase market share, it is essential to conduct thorough market analysis using Porter’s Five Forces model The industry faces significant operational costs, including manufacturing, equipment, labor, and distribution expenses Additionally, competition is intense as companies strive to maintain their market share, driven by the potential for high returns Despite variations in products and services, there is a high level of homogeneity, giving customers a broad range of choices.
Suppliers play a crucial role in the industry, as the quality of their products directly impacts the overall quality of market offerings Additionally, the industry grapples with challenges related to drug abuse and crime, which negatively influence market perception (Porter, 1998) Analyzing these factors is essential, and the five forces model provides a comprehensive framework for understanding the industry's dynamics (Ireland et al., 2008).
The Threat of New Entrants
The beer industry's attractive profitability draws potential investors eager to capitalize on its lucrative returns However, entering this market requires significant initial investments in factory setup, quality equipment, and machinery, along with high supply costs.
Entering a market involves navigating 23 legal requirements, including environmental protection, standards, and governmental regulations, which can create significant barriers due to high costs These barriers are further compounded by substantial marketing expenses When a well-established foreign company with a strong global brand enters the market, it poses a threat to existing firms, leading to potential customer loss and reduced profits for them.
The already existing firms thus counter the threats of new entry through customer loyalty which can be maintained through consistency in production of high quality beer, lowering the cost involved, changing the pricing mechanisms such as lowering beer costs and achieving economies of scale (Porter, 1998)
Threats of Substitute Products and Services
In the competitive beer industry, product quality, flavor, and style are crucial differentiators, as customers can easily switch between brands if costs and flavors align This potential for switching poses a threat to company profitability, highlighting the need for effective product differentiation Establishing a strong brand identity, offering unique flavors and brewing styles, and maintaining high quality are essential strategies Additionally, companies should consider pricing relative to substitutes, diversify their product offerings to appeal to a broader audience, and implement effective marketing and distribution networks to enhance their market presence.
The bargaining power of customers in the beer industry significantly influences market dynamics, as beer is often viewed as a luxury that consumers can forgo This perception, coupled with associations of beer with drug abuse and crime, compels industry players to prioritize not only attracting customers but also retaining them amidst brand-switching tendencies To achieve this, companies must implement effective, persuasive, and unique marketing strategies that resonate with consumers Additionally, investing in customer research is essential to understand their needs, preferences, and requirements, which should be integrated into the manufacturing and brewing processes.
To enhance brand loyalty, players in the beer industry must prioritize product quality improvement and establish strong connections with customers Given the individual differences among consumers, effective product and market segmentation is essential This can be achieved by offering diverse packaging styles at varying price points and fostering innovation.
In the beer industry, suppliers hold significant bargaining power, impacting the prices of essential inputs such as labor and raw materials Their influence is crucial as it affects both the quality of the products and their final pricing.
1998) This poses as a challenge to the firm where there is low competition for the suppliers The firm needs to make use of strategies focused on emphasizing and
To enhance the quality of inputs and reduce supplier bargaining power, firms should prioritize bulk purchasing, particularly of raw materials for brewing, to achieve economies of scale (Rainer & Turban, 2009) This strategy is crucial given the significant role that inputs play in the overall production process.
The beer industry is highly competitive, characterized by intense rivalry among existing firms that share profits and face the risk of customer attrition (Porter, 1998) Recent years have seen significant consolidation in the global beer market, resulting in numerous product launches and mergers among multinational brewing companies Anheuser-Busch InBev stands out as a dominant player, commanding approximately 32% of the global market share (Euromonitor, 2019) Factors such as high production capacity, market trend awareness, and a robust distribution network contribute to the company's sustained growth and market leadership Other significant players, including Heineken N.V., China Resources Breweries, Carlsberg A/S, and Molson Coors Beverage Company, further consolidate the market Increased innovation efforts and investment by manufacturers are anticipated to drive sales growth in the forecast period from 2019 to 2026.
The trends in customers’ demands in the global brewery industry
Consumers worldwide are increasingly favoring either premium or value-based beers, as evidenced by market trends over the past five years A report by Euromonitor (2019) indicates that in mature markets like Western Europe, the U.S., and Australia, there is a notable shift towards premium beers, although Spain is an exception due to its economic challenges, leading to a rise in value beers Even in high-growth emerging markets such as Brazil, where core beer brands continue to expand, there is a significant movement towards the premium segment.
Craft beer has emerged as a significant trend in the beverage industry, with a notable increase in demand for traditional beers, including craft varieties Defined by the American Brewer Association (ABA), craft beer is produced by small breweries using traditional or non-mechanized methods, highlighting its artisanal nature and appeal to consumers seeking unique flavors and quality.
Independent craft breweries produce 6 million barrels of beer or less annually, distinguishing them from traditional breweries In these independent establishments, less than 25% of ownership and control is held by the beverage alcohol industry, emphasizing their commitment to craft brewing.
27 member (McKinsey & Company, 2019) Additionally, the demand for craft beer in some potential markets are driven by preferences beer styles and an increase in disposable income Craft beer is typically more expensive than standard lager beers
Consumers with higher incomes are the primary target for the global craft beer market, as increased earnings drive demand for both premium products and a wider variety of options Consequently, it is evident that the craft beer market has experienced significant growth in industrialized nations alongside rising income levels over the past few decades.
Figure 3.3: Global craft beer market
THE HEINEKEN COMPANY
Business description
Founded in Amsterdam in 1865, Heineken has grown to become one of the largest beer manufacturers globally, operating over 3,000 brands by the end of 2019 In addition to its diverse beer offerings, Heineken also produces specialty products such as flavored beers, ciders, and malt beers According to the 2019 annual report, the company achieved an impressive production volume of 185 million hectoliters Heineken's commitment to innovation, long-term brand investment, disciplined sales execution, and focused cost management has significantly enhanced its performance and profitability By the end of 2019, Heineken employed more than 85,000 individuals worldwide.
Currently, the Company has operated through more than 70 countries with five market segments, including operates through five segments: Africa, Middle
The Africa, Middle East, and Eastern Europe segment features prominent brands including Heineken, Primus, Amstel, Walia, and Goldberg, while also encompassing regions such as the Americas, Asia Pacific, and the Head Office, along with other eliminations.
Figure 4.1 presents organizational structure of Heineken
SWOT analysis
According to Namugenyi (2019), strengths refer to aspects which enable the business to obtain competitive advantages over their rivals Heineken has stayed competitive owing to the following strengths:
1) Differentiation strategy with an abundant portfolio: Although Heineken have approximately 300 drink brands (Heineken, 2019), not every brand is distributed in every market Differentiation strategy is effectively employed by Heineken; different brands are sold in different markets For example, while Heineken, So and Tecate are the key brands in the American market,
Heineken, Amstel and Walia are popularly consumed in Africa, Middle East, and Eastern Europe Heineken, Tiger, Larue and Anchor are brands which are marketed in the Asia Pacific
2) Variants: The way how Heineken delivers a wide number of variants for each brand also enables the company to obtain the competitive edge More variants means more accesses to consumers For example, Heineken beers are known for their numerous variants For example, Amstel brand is sold throughout the world with such variants as Light, Larger, Premium, Bright, Radler, and Affligem Tiger is also another brand by Heineken which is sold with a wide range of variants such as Crystal, Strongbow, Blind Pig, Old Mout and so on (Forbes, 2020) These variants enable the company to capture a larger pool of customers and to satisfy their preferences
3) Focus on Heineken brand: Although the company has operating with nearly
Heineken stands out as the sole international brand among 300 beer brands with a strong profile Research into Heineken's marketing campaigns indicates that all promotional efforts are centered around the Heineken brand (Marques, 2018) This focused strategy significantly enhances brand recall and recognition for Heineken.
4) Target segment: It is stated by Heineken (n.d.) that while the competitors do not state their target segments for their products, Heineken clearly defines their target segment for each brand or flavor For example, Heineken targeted at the segment of young adults for brands of flavored beers Before defining target segment, Heineken often administered a wide range of researches to explore consumers’ preferences
Namugenyi (2019) also referred to weaknesses as business areas which requires the improvements because these may negatively influence the company’s performance Some of the key weaknesses of Heineken include:
1) Fluctuations of currency: It is estimated that more than two thirds of revenue of Heineken are generated from foreign markets (Heineken, 2019); therefore, the company’s revenue greatly influenced by the fluctuation of currency under the effects of such events as Brexit, the rise of dollar, and the Euro crisis
2) Poor margins: Although in recent years, Heineken has witnessed good margins in various categories of flavored beers, the margins of core brands are shrinking (Heineken, 2019) Additionally, the primary markets of Heineken are developed and saturated markets; hence, the margins of these markets are reduced
4.2.3 Anheuser Busch Sab Miller Integration: For years, Anheuser Busch is one of the biggest competitors of Heineken In order to strengthen the suppl chain, Anheuser Busch conducted a merger with their competitor Sab Miller which turned them into the largest firm in the sector of brewery This merger has created great pressures on Heineken’s business
Namugenyi (2019) defines opportunities as external favorable factors which can increase the company’s returns Some opportunities may benefit Heineken’s business include:
1) Establishment of microbreweries: When craft beer becomes the trend and driving force of the brewery industry, many investors invested in small breweries for craft beer production Additionally, some pubs have started their own production of beer to serve their consumers’ preferences Although this trend may generate greater competition for Heineken, the company may utilize this opportunity to establish their own microbrewery chain worldwide
2) Changes in consumer preferences: Consumer preferences have changed rapidly which provides the opportunity to expand to other markets and to broaden the company product portfolio This opportunity may enable Heineken to increase their revenue and capital
Environmental factors can adversely impact a company's business performance (Namugenyi, 2019) These factors are viewed as threats to the business Heineken may face several potential threats that could affect its operations.
1) Scarcity of raw materials: There is an exhaustion of some raw materials for beer productions, leading the increase in prices of raw materials The increase in material price may reduce Heineken’s margins
2) Intensive competition: Besides the competition from the traditional competitors such as Anheuser Busch or Miller, Heineken has also suffered from the fierce competition from small breweries of craft beer
3) Legal hassles: Because of harmful impacts of alcohol on public health and drinking-driving, Heineken may encounter threats from regulations and laws of both domestic and foreign markets.
Ratio analysis and forecasted financials
Ratio analysis, as defined by Nissim and Penman (2001), involves the evaluation and comparison of financial statement line items within a business This analytical tool is utilized to assess various aspects of Heineken, including its profitability, liquidity, and investment performance Key financial ratios for Heineken are summarized in Table 4.1.
Table 4.1: Key financial ratios of Heineken 2015-2019
Source: Macrotrends, 2020a Revenue can be defined as the amount of money a company receives from its customers in exchange for the sales of goods or services (Nissim & Penman,
2001) Ratio of revenue is employed to evaluate the performance of the business It
34 is reported at Heineken’s revenue reached $26.845bn, experiencing a 1.16% increase compared to the prior year 2018 Heineken’s revenue in 2018 and 2017 is
$26.538bn and $24.74bn, accounting for a 7.27% increase and 7.53% increase from
2016 These figures imply a rising trend in the revenue of Heineken during 2015-
2019 Figure 4.1 demonstrates the revenue of Heineken for the past five years
Heineken's financial performance can be effectively assessed using the EBITDA ratio, which measures earnings before interest, taxes, depreciation, and amortization By the end of 2019, Heineken reported an EBITDA of $6.263 billion, reflecting a 9.8% increase compared to 2018.
(Heineken, 2019) This ratio was recorded at $5.704 bn and $5.583bn in 2018 and
2017 respectively The increase in EBITDA of Heineken is demonstrated in Figure 4.3
Heineken's net income serves as a key profit ratio, reflecting the company's net profit or loss after accounting for all revenues and expenses According to Heineken's 2019 annual report, the company achieved a net income of $2.426 billion, marking a remarkable 113.75% increase from 2018, outpacing the overall industry growth In previous years, Heineken reported net incomes of $2.187 billion in 2017 and $1.135 billion in 2018, demonstrating a consistent upward trend in profitability from 2015 to 2019.
Figure 4.4: Net income of Heineken 2015-2019
In addition to profit ratios, leverage ratios play a crucial role in assessing Heineken's performance The debt/equity ratio, a key leverage measure, is determined by dividing long-term debt by stockholders' equity As of the end of 2019, Heineken's debt/equity ratio was recorded at 0.77 (Heineken, 2019), with changes in this ratio illustrated in Figure 4.5.
Figure 4.4: Debt/Equity of Heineken 2015-2019
To assess a company's investment potential, the earnings per share (EPS) ratio, which reflects net earnings or losses attributable to common shareholders per diluted share, is crucial Heineken's EPS has shown a steady increase, rising from $1.92 in 2017 to $1.97 in 2018, marking increases of 2.92% and 7.05% respectively (Heineken, 2019) This growth trend in Heineken's EPS from 2015 to 2019 is illustrated in Figure 4.5.
The investment ratio of shares outstanding, which includes all shares held by shareholders and assumes the conversion of convertible debt, securities, warrants, and options, is a key focus of this study In 2019, Heineken's shares outstanding reached 1.148 billion, reflecting a 0.63% increase from previous years The company maintained a consistent figure of 1.141 billion shares outstanding in both 2017 and 2018 Figure 4.6 illustrates the trend of Heineken's shares outstanding over the past five years.
Figure 4.6: Share outstanding of Heineken 2015-2019
The analysis into some major financial ratios of Heineken during 2015-2019 indicates that investment into Heineken is profitable to investors because of positive profitability and investment ratios
Depending on the analysis of the global brewery industry, market situation, influencing factors, and historical performance of Heineken during 2015-2019, the following financial statements are predicted
Source: Marketscreener, 2020a Figure 4.3 presents income statements of Heineken in the next three years
Figure 4.7: Heineken’s Income Statement Evolution
Despite experiencing a decline in profitability in 2020 due to the impacts of Covid-19, Heineken is projected to rebound with strong performance in 2021 and 2022 Additional financial indicators are forecasted and detailed in Table 4.3 and Figure 4.8.
Table 4.3: Forecasting financial statements of Heineken
Figure 4.8: Forecasts of Finances and Leverage of Heineken
The article includes forecasts for EPS and dividends, along with the year-on-year changes in the Price Earnings Ratio (PER), yield, and the evolution of Enterprise Value to EBITDA, all illustrated in the figures found in Appendix A.
Valuation models
In this study, a two-stage DCF model was utilized to assess the intrinsic value of Heineken and establish a target price As noted by Anand and Faseruk (2008), the first stage represents a high growth period that transitions into a terminal value during the second, steady growth phase The analysis begins with the projection of Heineken's cash flows over the next decade, using previously reported free cash flow (FCF) figures It is assumed that the company will experience a deceleration in the rate of decline of its free cash flow.
41 versa It can be implied that Anand and Faseruk (2008)
Present Value of 10-year Cash Flow (PVCF) = €20b
The Terminal value, which aggregates all future cash flows beyond a ten-year period, is calculated based on a conservative growth rate derived from the country's GDP growth, as noted by Anand and Faseruk (2008) In this study of Heineken, the researcher utilizes the 5-year average of the 10-year government bond yield, set at 0.4%, to project future growth Similarly, future cash flows are discounted to their present value using a cost of equity of 5.2%.
The total equity value of Heineken is estimated at €54 billion, derived from the sum of present value and future cash flows This equity value is then divided by the number of shares outstanding With a current share price of €82.2, the stock is considered to be fairly valued, reflecting a 13% discount from its trading price It's important to note that the assumptions made in these calculations significantly influence the results.
42 valuation, so it is better to view this as a rough estimate, not precise down to the last cent
Figure 4.9: Heineken Discounted Cash Flow July 28th 2020
Heineken’s discounted cash flow forecast is based on two key assumptions: the discount rate and cash flows Focusing on investment potential, the analysis utilizes the cost of equity as the discount rate instead of the weighted average cost of capital (WACC), which includes debt A levered beta of 0.800, indicating the stock's volatility relative to the market, supports the application of a 5.2% discount rate.
This study estimates the intrinsic value of Heineken N.V by projecting the company's future cash flows and discounting them to their present value using the Discounted Cash Flow (DCF) model The analysis suggests a target price of €94.43 for the company.
THE CARLSBERG COMPANY
Business description
Carlsberg, established in 1847 and based in Denmark, is a prominent player in the brewing industry, focusing on the production, marketing, and sale of beer and soft drinks The company's diverse portfolio features well-known brands such as Carlsberg, Kronenbourg, and Tuborg, and it operates across Western Europe, Eastern Europe, and Asia In addition to its own breweries, Carlsberg engages in licensing and export activities in various markets The company also has interests in real estate development and operates through multiple subsidiaries, including Carlsberg Danmark A/S and Baltika Breweries OAO.
The annual report by Carlsberge (2019) reveals net sales by activity as follows:
(1) beer production and sales: 112.5 million hectoliters sold in 2019 primarily under the Carlsberg and Tuborg brands;
(2) production, bottling, and distribution of non-alcoholic beverages: carbonated beverages, energy drinks, and mineral waters (20.4 million hectoliters sold in 2019)
As of the end of 2019, the group operated 76 breweries across various regions, including Denmark, Poland, Western Europe, China, Asia, Russia, and Eastern Europe The geographical distribution of net sales was as follows: Western Europe accounted for 55.1%, Asia for 27.9%, Eastern Europe for 16.8%, and other regions contributed 0.2% (Carlsberg, 2019).
SWOT analysis
In this section, a business analysis of Carlsberg, which is engaged in the production, and marketing of beer, is provided, focusing on its strengths,
The company possesses a robust brand portfolio as a key strength, while facing challenges such as a decline in its operating cash flow There are opportunities for growth, particularly in the increasing demand for beer beverages However, the company must navigate threats from stringent governmental regulations affecting its advertising strategies.
Carlsberg presents strengths in some following aspects:
1) Strong product portfolio: The first and foremost strength which supports Carlsberg growth was a strong product portfolio with various famous drink brands such as Tuborg, Kronenbourg 1664, Baltika, Grimbergen and Somersby Additionally, the company also owns more than 500 local beers (Carlsberg, 2019) Owing to the abundant portfolio of products, the company successfully satisfies their consumers’ needs and preferences
2) Brand loyalty: Meyerding et al (2018) stated that it is rare that consumers changes their preferences for beer Consumers tend to buy and consume the types of beers and flavors which they get accustomed In terms of Carlsberg, consumers are loyal customers who have engaged to their drinks for such as a long time
3) Brand recall: For a long history and high quality products, Carlsberg have successfully carved an image in the minds of the customers Furthermore, innovative marketing campaigns also significantly enhance their brand recall (Simpson, 2018)
4) Geographical coverage: The annual report in 2019 revealed that currently Carlsberg’s products are available in more than 140 markets (Carlsberg, 2019); hence, this reduces the company’ reliance on any particular market
5) Marketing campaigns: According to Simpson (2018), Carlsberg is perceived as one of the companies with the most excellent marketing campaigns worldwide Innovative and meaningful marketing campaigns not only enable Carlsberg to acquire new customers but also to keep their current customers
Besides strengths, there are some remained weaknesses of Carlsberg, including:
1) Introduction of new products: There is no doubt that Carlsberg have a strong loyal customer base worldwide; however, this base heavily relies on their two international beers Tuborg and Carlsberg Strengths of other products are limited while new products are not usually created Hence, it is critical that the company should develop new lines of drinks and flavors to reduce the reliance on Tuborg and Carlsberg
2) Market penetration: Currently, the primary and large markets of Carlsberg which generate the majority of revenue for the company are developed markets (Carlsberg, 2019) The company has not obtained strong footprints in emerging markets The limitation in market penetration may limit the company’s margins and expansion
3) Decreasing financials: Although Carlsberg has showed their strong financial health for years, in recent years the company have experienced a gradual decrease in revenue and profits
Operating in the current business environment, Carlsberg may capture the following opportunities for the sustainable profitability and growth
1) Emerging markets: According to Allied Market Research (2019), there is an increase in disposable income of consumers in developing countries which generates the opportunity for market penetration of Carlsberg The company may capture this opportunity by offering new lines of products and implementing marketing strategies to boost their market share and revenue
2) M&A: The report by Euromonitor (2019) also indicates that M&A may become the opportunity for the breweries to expand their business Carlsberg may merge or acquire with local brands to take advantages of local companies for the increase of market share of profits of Carlsberg
3) Low-carb beer: In recent years, consumers tend to be more aware of health issues; hence, they are searching for drinks which do not harm their health (Euromonitor, 2019) Therefore, the production of low carb beer may bring about the growth opportunity of Carlsberg
Lastly, the company also encounters certain threats affecting business growth such as:
1) Intensive competition: Like Heineken, Carlsberg has also encountered increasingly intensive competition from other breweries, including both international beer manufacturers and small companies
2) Government legislation: The is an increase in the introduction of new and strict laws from the government for drinkers which may negatively impact sales volume of Carlsberg.
Ratio analysis and forecasted financials
In order to measure financial health and position of Carlsberg during 2015-
2019, this current report employs ratio analysis as the method Table 5.1 and 5.2 present some key financial indicators of the company
Table 5.1: Summary statements of Carlsberg 2015-2019
Table 5.2: Key financial ratios of Carlsberg 2015-2019
In 2019, Carlsberg reported a revenue of DKK 65.9 billion, achieving an organic growth of 3.2%, primarily fueled by a 3% increase in price/mix This growth was bolstered by the rising demand for premium products and effective value management strategies, including price hikes Additionally, the overall reported revenue growth reached 5.4%, supported by favorable currency effects and the acquisition of Cambrew.
In 2019, Carlsberg reported a gross profit of DKK 32.6 billion, with an organic growth of 3% This growth was driven by price/mix adjustments that offset a 3% rise in cost of sales per hectoliter However, the gross margin decreased by 50 basis points to 49.5%, primarily due to increased input costs, reduced volumes in Russia amid a tough competitive landscape, and the consolidation of Cambrew.
In the latest financial report, EBITDA reached DKK 15.0 billion, reflecting a 10.0% organic growth and an 11.8% increase in reported terms, aided by IFRS 16 Without IFRS 16's influence, organic growth would have been approximately 7% Operating profit saw a 10.5% organic increase, primarily due to robust growth in Asia and Western Europe, which compensated for declines in Eastern Europe The reported operating profit stood at DKK 10.5 billion, marking a 12.2% growth, while the operating margin improved by 100 basis points to 15.9%.
As of December 31, 2019, Carlsberg's total assets reached DKK 123.1 billion, reflecting a DKK 5.4 billion increase from 2018, primarily driven by currency fluctuations and the adoption of IFRS 16 Non-current assets also rose to DKK 105.2 billion, marking a DKK 5.6 billion increase compared to the previous year.
As of the latest financial report, total current assets reached DKK 17.9 billion, while equity stood at DKK 46.0 billion, with DKK 43.4 billion attributed to shareholders of Carlsberg A/S and DKK 2.6 billion to non-controlling interests Long-term borrowings rose by DKK 4.1 billion since December 31, 2018, totaling DKK 20.9 billion, primarily due to the issuance of a 10-year EUR 400 million bond in July 2019 and the adoption of IFRS 16.
Short-term borrowings decreased by DKK 3.1 billion to DKK 4.1 billion, primarily due to the repayment of a EUR 750 million bond in July 2019, although this decline was partially mitigated by the European Commercial Paper (ECP) program utilized for short-term funding.
Other non-current liabilities rose by DKK 2.9 billion, reaching a total of DKK 9.1 billion Current liabilities, excluding short-term borrowings, increased by DKK 2.0 billion to DKK 29.2 billion, primarily driven by higher trade payables and other liabilities The increase in trade payables was attributed to boosted sales in Asia and currency fluctuations, while other liabilities were influenced by provisions related to Cambrew, bonus accruals in Asia, fair value adjustments, and a decrease in accrued interest payable.
In 2019, free cash flow increased to DKK 10.0 billion from DKK 6.2 billion in 2018, primarily driven by higher EBITDA, proceeds from brewery site sales, and a net positive inflow from financial investments, contrasting with a DKK 1.9 billion outflow in 2018 The change in trade working capital was DKK +0.5 billion, with an average trade working capital to revenue ratio of -16.8% Additionally, other working capital saw a DKK +0.6 billion change, influenced by provisions, VAT, and other accruals.
Cash flow from investing activities was DKK -2.3bn against DKK -5.9bn in
In 2018, operational investments totaled DKK -2.8 billion, positively influenced by the proceeds from the sale of former brewery sites in Norway and Germany Notably, the sale of the Hamburg site was recognized in November 2019 upon its transfer to the buyer Additionally, total financial investments increased to DKK +0.6 billion, a significant improvement from the DKK -1.9 billion recorded in 2018.
52 due to increased shareholdings in Cambrew and Super Bock Cash flow from financing was impacted by the share buy-back, the acquisition of the remaining 25% non-controlling interest in Cambrew and completion of the sale of the brewery site in Hamburg
Return on invested capital (ROIC) rose by 70 basis points to 8.8%, attributed to enhanced profitability and a reduced effective tax rate The increase in invested capital was primarily influenced by currency fluctuations and the adoption of IFRS 16 Notably, ROIC excluding goodwill improved by 130 basis points, reaching 22.2%.
As of 2019, Carlsberg's net interest-bearing debt reached DKK 18.8 billion, reflecting a DKK 1.5 billion increase from 2018 This rise was influenced by the company's share buy-back program, a higher dividend payout, and the adoption of IFRS 16 The ratio of net interest-bearing debt to EBITDA stood at 1.25x.
In the past year, the Company repurchased 4.5 million shares for a total of DKK 4.1 billion, as part of a buy-back program valued at DKK 4.5 billion that began on February 6, 2019, and concluded on January 30, 2020.
In 2020, the Company launched a 12-month share buy-back program, aiming to repurchase shares worth DKK 5.0 billion, divided into two six-month tranches.
The investigation into Carlsberg's current and historical performance, along with the analysis of internal and external factors impacting the global brewery industry, has led to the proposal of forecasted financial statements for Carlsberg.
Source: Marketscreener, 2020b Figure 5.2 presents income statements of Carlsberg in the next three years
Figure 5.2: Income Statement Evolution of Carlsberg
Valuation models
This section aims to establish a fair value for Carlsberg's equity and its stock To achieve this, the Discounted Cash Flow (DCF) model is utilized to calculate the company's intrinsic value.
Table 5.5 10-year free cash flow (FCF) estimate of Carlsberg
Present Value of 10-year Cash Flow (PVCF) = kr.75b
The Terminal Value is determined using the Gordon Growth formula, applying a future annual growth rate based on the 5-year average of the 10-year government bond yield, which is 0.3% The terminal cash flows are then discounted to their present value using a cost of equity of 5.1%.
Carlsberg's total equity value is estimated at kr.214 billion, indicating that the company is undervalued by 36% compared to its current share price of kr.934 It's important to note that the assumptions used in this valuation significantly influence the outcome, so this figure should be regarded as a rough estimate rather than an exact calculation.
Figure 5.4: Carlsberg Discounted Cash Flow
Depending on the same method in the calculation of Heineken, the discount rate is used at 5.1%, which is based on a levered beta of 0.800
Depending on the Discounted Cash Flow (DCF) model used for the intrinsic calculation of Carlsberg, the suggested price for Carlsberg is kr 1,469.34
THE ANHEUSER- BUSCH INBEV COMPANY
Business description
Anheuser-Busch Inbev (AB InBev) is a Belgium-based company engaged in the brewers industry The Company owns a portfolio of over 400 beer brands (Anheuser-Busch Inbev, n.d.) The Company's brand portfolio includes global brands, such as Budweiser, Corona and Stella Artois; international brands, including Beck's, Leffe and Hoegaarden, and local champions, such as Bud Light, Skol, Brahma, Antarctica, Quilmes, Victoria, Modelo Especial, Michelob Ultra, Harbin, Sedrin, Klinskoye, Sibirskaya Korona, Chernigivske, Cass and Jupiler, among others (Anheuser-Busch Inbev, n.d.) The Company’s soft drinks business consists of both own production and agreements with PepsiCo related to bottling and distribution arrangements between its various subsidiaries and PepsiCo Ambev, which is a subsidiary of the Company, is a PepsiCo bottler Brands that are distributed under these agreements are Pepsi, 7UP and Gatorade The group's activity is organized around two sectors:
1) production of beers: Budweiser, Corona, Stella Artois, Beck's, Leffe, Hoegaarden, Castle, Castle Lite, Bud Light, Skol, Brahma, Quilmes, Michelob, Harbin, Sedrin brands, etc.;
2) production, bottling and sales of alcohol-free drinks: soft drinks, malt beverages, bottled waters and ice teas
Net sales are distributed geographically as follows: Europe/Middle East/Africa (15.1%), Latin America (41.5%), North America (29.6%), Asia/Pacific (12.5%), and other (1.3%) As the end of 2019, the number of employees reached
Figure 6.1 presents organizational structure of Anheuser-Busch Inbev
Figure 6.1: Anheuser-Busch Inbev’s organizational structure
SWOT analysis
SWOT analysis, as described by Ireland et al (2008), is a strategic tool utilized by investors and managers to assess and evaluate a company's current situation This technique is applied in this section to analyze Anheuser-Busch.
Busch InBev’s present Strengths (S), Weakness (W), Opportunities (O) & Threats (T) which may influence the company’s business
Anheuser-Busch InBev stands out as a top player in its industry, leveraging numerous strengths that drive its market success These advantages not only facilitate the company's market expansion but also help maintain its existing market presence.
1) Market popularity: The annual report by Anheuser Busch (2019) revealed that currently the company has owned and sold more than 100 different brands of drinks Some most popular brands of Anheuser-Busch InBev include Budweiser, Bud Lite, Busch Beer, Stella Artois, Natural Ice, Lime- A –Rita, and so on Particularly, the company has dominated that
US market, one of the largest beer markets worldwide, with a market share of 42% (Anheuser-Busch InBev, 2019)
2) Top selling brands: Anheuser-Busch InBev acquired Grupo Modelo and established a strong entity Owing to this acquisition, the company has owned five out of the world’s top-10 selling brands of beer (Mordor Intelligence, 2019) Additionally, as the end of 2019, the company has 17 brands with annual retail sales over $1 billion (Anheuser-Busch InBev,
3) Focus on acquisitions: Acquisition is the key strategy for growth of Anheuser-Busch InBev (Anheuser-Busch InBev, n.d.) which ensures the company’s margins and growth Comparing to the margin of Heineken
(8.3%), the primary rival of Anheuser-Busch InBev, in 2019 Anheuser obtained a margin of 43.8 %
4) Work culture: Lastly, the employment of transformational power has created a superior working culture which encourages the working spirit of Anheuser-Busch InBev
Anheuser-Busch InBev SA/NV has identified weaknesses that present opportunities for improvement By utilizing SWOT analysis, the company can strategically focus on these areas to enhance its competitive advantage and strengthen its market positioning.
Anheuser Busch have some following weaknesses
1) Dependence on foreign markets: It is reported that more than 70% of Anheuser Busch’s revenues are generated in foreign markets (Anheuser Busch, 2019); hence, the revenue depends on the foreign market Additionally, the current rise of the dollar against other foreign currencies may made profit margin shrink
2) Poor organic growth: The study by Woodard (2019) revealed that for such a long time Anheuser Busch has shifted their focus to developed markets Hence, owing to the maturity of market, the company’ growth has slowed down Consequently, the company cannot rely on organic growth from this market segment
3) Integration: The merger of Anheuser Busch with Sab Miller not only generates benefits for Anheuser Busch but also poses challenges of
62 integration The company got serious troubles in handling differences in production methods and work culture
4) Managing the volumes: With a broad product portfolio and a wide range of markets, it is challenging to Anheuser Busch to manage the network and distribution as well as the legal hassles of selling alcoholic products in various geographies
External environment also generates many opportunities for the growth of company Some key opportunities for Anheuser Busch include:
1) Economic recovery and increasing disposable income: COVID-19 has ruined the global economy However, it is forecasted that the economy will experience a strong recovery in 2021 and 2022 (World Bank, 2020a) This recovery provides great opportunities for Anheuser-Busch InBev’s growth
2) Technological advances Developments in production technologies enable Busch InBev to develop new innovative flavors and drinks to rung their differentiated pricing strategy in the new market Furthermore, the use of technological advances may enhance the company’s customer loyalty through promoting their product experiences
3) Stable free cash flow: There is no doubt that Busch InBev has stable free cash flows for years which offers opportunities to invest in adjacent product segments This stability enables the company to make investment in technologies and new products segments
Lastly, Anheuser-Busch InBev is also challenged by many threats such as:
1) Rising prices of raw materials: Like other players in the brewery industry, Busch InBev’s profits are threatened by an increase in prices of raw materials
2) New environment regulations under Paris agreement (2016): There are some new regulations which are generated under the Paris agreement (2016)which may threaten the distribution of a certain number of existing product categories in some markets
3) Liability laws: The Governments worldwide have increased their attention to drinking issues; hence, Anheuser-Busch InBev may be exposed to various liability claims given change in policies in those markets
4) Intense competition: Lastly, the competition in this sector tends to increase because of stable profitability and potential for growth.
Ratio analysis and forecasted financials
This section analyzes essential financial ratios to assess the current performance of Anheuser-Busch InBev Table 6.1 presents key financial indicators for the company over the past five years, from 2015 to 2019.
Table 6.1: Key financial ratios of Anheuser-Busch InBev
In 2019, Anheuser-Busch reported a revenue of $52.329 billion, reflecting a 1.34% decline from the previous year This downward trend in revenue was also evident in 2018, when the company earned $53.041 billion, marking a 6.03% decrease from 2017.
2017 In 2017, Anheuser-Busch experienced a rise in revenue with $56.444bn, a 24.01% increase from 2016
Figure 6.1 presents the trend of revenue of Anheuser-Busch during 2015-
Figure 6.1: Revenue of Anheuser-Busch InBev during 2015-2019
In terms of EBITDA, the following data were reported Firstly, Anheuser- Busch 2019 annual EBITDA was calculated at $20.828bn, a 1.46% decline from
2018 while the company also showed an annual EBITDA of $21.137bn, accounting for a 2.24% decline from 2017 Like revenue, Anheuser-Busch obtained annual EBITDA of $21.621bn in 2017, a 31.6% increase from 2016 (Macrotrends, 2020b)
Figure 6.2 demonstrates EBITDA of Anheuser-Busch through the period of 2015-2019
Table 6.2: EBITDA of Anheuser-Busch during 2015-2019
Other important financial ratios such as ROE, ROA and ROI are also presented in Figure 6.3, Figure 6.4 and Figure 6.5
Figure 6.3: ROE of Anheuser-Busch during 2015-2019
Figure 6.4: ROA of Anheuser-Busch during 2015-2019
Figure 6.5: ROI of Anheuser-Busch during 2015-2019
The Current ratio is a crucial financial metric that reflects the financial health of Anheuser-Busch As illustrated in Figure 6.6, the company's current ratio has consistently remained positive over the past five years, demonstrating its strong financial stability.
Busch Current ratio of Anheuser-Busch reached the peak in 2016 at 2.16% during 2015-2019 (Macrotrends, 2020b)
Figure 6.6: Current ratio of Anheuser-Busch during 2015-2019
The debt/equity ratio serves as an indicator of a company's financial leverage, determined by dividing long-term debt by stockholders' equity Over the past five years, Anheuser-Busch has maintained a reasonable debt/equity ratio, reflecting a consistent trend alongside its current ratio.
Figure 6.7: Debt/equity of Anheuser-Busch during 2015-2019
When making investment decisions, investors should consider key financial metrics such as earnings per share (EPS), shares outstanding, and dividend yield Anheuser-Busch's EPS history over the past five years indicates significant growth, with an annual EPS of $4.53 in 2019, reflecting a remarkable 108.76% increase from $2.17 in 2018 and $3.98 in 2017 This data highlights the company's financial performance and its importance for potential investors.
Figure 6.8: EPS of Anheuser-Busch during 2015-2019
Investors need to consider shares outstanding when making decisions, as this term refers to the total number of shares held by shareholders, including insiders, after accounting for the conversion of all convertible debt, securities, warrants, and options For instance, Anheuser-Busch's shares outstanding at the end of 2019 provide a relevant example of this concept.
70 company’s shares outstanding were 2.026bn, a 0.75% increase from 2018 2.011bn and 2.01bn were Anheuser-Busch’s shares outstanding in 2018 and 2017
Figure 6.9 shows the trend of Anheuser-Busch shares outstanding during 2015-2019:
Figure 6.9: Anheuser-Busch shares outstanding during 2015-2019
Dividend yield history serves as a crucial tool for investors in making informed investment decisions As of September 8, 2020, Anheuser-Busch reported a trailing twelve months (TTM) dividend payout of $0.84, resulting in a current dividend yield of 1.49% Additionally, the company's dividend yield history from 2015 to 2019 is illustrated in Figure 6.10.
Figure 6.10: Anheuser-Busch’s dividend yield history during 2015-2019 6.3.2 Forecasting financial statements
Section 6.3.1 has analyzed the performance and trends of performance and growth of Anheuser-Busch in the past five years Depending on the analysis, forecasts of financial statements are produced for the company in the next three years Investors can investigate the historical and forecasting financial statements to determine whether they should invest in Anheuser-Busch
Table 6.2: Valuation of Anheuser-Busch 2020-2022
Source: Marketscreener, 2020c Figure 6.11 presents income statements of Anheuser-Busch in the next three years
Figure 6.11: Income Statement Evolution of Anheuser-Busch
Table 6.2 and Figure 6.11 indicate a decline in Anheuser-Busch's performance in 2020, but the company's financial health is expected to improve in 2021 and 2022 This recovery presents a promising opportunity for investors considering investment in Anheuser-Busch.
Table 6.3: Forecasting financial statements of Anheuser-Busch
Figure 6.12: Forecasts of Finances and Leverage of Anheuser-Busch
Other forecasts of Anheuser-Busch in the next three years are also calculated and included in Appendix C.
Valuation models
Like the previous chapters, 10-year free cash flow (FCF) estimate of Anheuser-Busch as calculated as follows
Table 6.5: 10-year free cash flow (FCF) estimate of Anheuser-Busch
10-year free cash flow (FCF) forecast
Present Value of 10-year Cash Flow (PVCF) = US$69b
In this study, the researcher utilizes the Gordon Growth formula to determine the Terminal Value, applying a future annual growth rate based on the 5-year average of the 10-year government bond yield, which is 1.6% The terminal cash flows are then discounted to their present value using a cost of equity of 8.4%.
The total value is calculated at $152bn Using the same method in Chapter
Anheuser-Busch is currently perceived as slightly undervalued, with a share price of €47.0 reflecting a 29% discount compared to its estimated value However, it's important to note that this valuation is approximate, and the accuracy depends on the quality of the input data used in the analysis.
Figure 6.13: ABI Discounted Cash Flow
This calculation is based on two key assumptions: the discount rate is set at 8.4%, which represents the weighted average cost of capital (WACC), and the levered beta is determined to be 0.952.
Depending on the Discounted Cash Flow (DCF) model used for the intrinsic calculation of Anheuser-Busch, the suggested price for Anheuser-Busch is €66.56