Ambev S.A. (NYSE: ABEV), the world’s largest brewer formed following the purchase of Anheuser-Busch by InBev in 2008 and then SABMiller in 2016, houses brands such as Budweiser, Stella Artois and Corona in its portfolio. After years at the top, it’s encouraging to see that Ambev’s ability to reinvent itself has not faded – like last week investor update shown, the company’s innovation platform continues to run at full speed. While the tone of the digital narratives and the long-term growth opportunities presented by management are compelling, it’s hard to ignore the short to mid-term challenges in the beer business. With the new pockets of value that Ambev is targeting still relatively small (compared to weakness in the core beer segment), and the stock valuation at a premium of around 23x P/E, I would hold off on the instant.
Troubleshoot issues in RGB/On-Trade
Prior to 2019, Ambev had “over-earned” by taking excessive prices on its higher-margin returnable glass (RGB) bottle packs, resulting in a premium of around 10% over margin one-way packs lower. After 2019, however, this led to a parallel channel issue for the company, as customers opted to purchase one-way packs from commercial channels (primarily cash & carry) at a lower price than RGB directly. with Ambev. As a result, the proportion of low-margin one-way packs increased within Ambev’s mix versus RGB, which fell ~14%pts – the negative mix shift has since weighed on profitability and market share. market.
In part, this “mea culpa” explains why prices have not improved in recent months despite the strong post-COVID market share recovery. That said, management has adjusted its pricing tree and as a result, RGB pricing has increased to approximately 90% of one-way presentations (up from 109% in 2019). This should result in a positive mix shift going forward and, perhaps more importantly, some margin relief as higher RGB penetration leads to less exposure to rising aluminum costs. In the long term, however, it remains unclear whether the favorable mix change can be sustained, as the emergence of cash & carry stores could lead to a structural change in presentation prices in one direction. Thus, execution in the RBG/on-trade channel will be crucial if Ambev is to maintain its strong position within this channel and continue to generate higher margins and customer loyalty in the future.
Beyond Beer Presents Long-Term Growth Opportunities Despite Mainstream Weakness
Above all, Ambev has struggled with the erosion of its brand equity in the mainstream beer category over the years. By direction, the core segment’s share saw a sharp decline to 48% of the market (from 61%) over the period 2018 to 2021, while premium and core-plus increased to 33% (from 15%). Thus, it makes sense to focus on improving the portfolio through innovation and marketing initiatives to regain revenue growth and unlock pricing power.
A key part of the consumer-centric and innovative mindset is Ambev’s drive to lead the category’s expansion beyond beer in Brazil. Given the growth track, this could prove to be a major long-term bet – the category currently represents a share of around 2% of beer volumes in Brazil, well below penetration levels in the markets in development (e.g. South Africa at ~18%) and developed markets (e.g. US at ~23%). Volume growth beyond beer should also be accretive to the overall profile – ~75% of volumes are incremental, while the category also generates a 2.5x higher gross margin compared to the beer category basic. By over-indexing younger female consumers, Beyond Beer is being guided to attract 10 million new consumers, although there could be even more benefits if Ambev successfully leverages the full extent of its distribution reach and digital capabilities. .
Reigniting ROIC momentum
While underlying NOPAT margin erosion, led by Brazil, has been a concern, Ambev’s asset turnover has increased, leading to higher return on invested capital (ROIC) over the past year . With Ambev now focusing on developing its technology stack, this should generate structurally higher ROICs and added economic value (EVA). Therefore, Ambev focuses on return on investment (vs. margins) as the key metric to assess business going forward. The move towards economic value makes sense, in my view – many of the new technology initiatives are much more capital-light and, therefore, more accretive to the P&L profile than Ambev’s core operations. BEES’ ordering platform is a great example of this – not only does it require limited capital investment, but it also maintains negative working capital and adds incremental profits as the revenue base grows over time. . Ambev’s ROIC remains well below the previous cycle’s peak of >35% in 2016, and as a result, the recent 2021 ROIC recovery to ~20% still leaves ample room for upside value creation for investors. shareholders.
Still very popular despite short-term headwinds
Management has done an excellent job of driving positivity around the core business and the multiple growth opportunities Ambev is leveraging, including a promising technology platform and innovation pipeline in the premium and core-plus segments. That said, beer consumption in Brazil is slowing and experiencing more intense competition, while rising raw material costs (and falling margins) could weigh on the earnings outlook. In the long term, however, it is difficult to see Ambev triggering significant enough growth momentum to move the needle against its >R$200bn market cap. Additionally, the stock is richly valued at ~23x – a premium to its historical P/E.