Lacking Light: 2 Brewers Adjusting to America's Changing Taste
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Major beer producers such as Molson Coors (NYSE: TAP) and Anheuser Busch InBev (NYSE: BUD) have profited from the success of light beers, but recent studies have shown that people are moving away from the cheaper suds in favor of higher-quality or better-tasting adult beverages. According to Alcoholic Beverage DemandTracker, the main reason people gave for drinking less light beer is that they are “getting tired of the tastes.” Amid this shift away from light beers, these companies are making changes to keep the world drinking and their profits up.
Molson Coors has been gaining market share in the light beer industry with products like Miller, Coors, and Amstel Light. But as industry trends have reduced the company's overall light beer sales volume, Coors has begun focusing on higher-margin above-premium products like Third Shift Amber Lager and Blue Moon Belgian White. This drove net revenue per barrel to increase 2.6% last quarter.
The company is also promoting other new products like Red's Apple Ale and Leinenkugel Summer Shandy, which began national expansion last quarter. Coors' above-premium products have increased to 9% of the company’s portfolio, and should continue growing to help the company depend less on premium light products.
Coors recently had a successful second quarter thanks to its above-premium products. With revenue increasing 17.9% and earnings per share of $1.51 which beat analyst estimates by $0.12, the company's strategy of focusing on high margin products appears to be working.
Anheuser Busch InBev, the world’s largest beer producer, has also felt the negative effects of the industry’s shift away from light beer. Last quarter, Bud Light products' sales to retailers declined 4.7%, which drove Busch's overall beer volume sales down 1%.
Despite this sales decrease, the company has increased its revenue per hectoliter thanks to new, higher-margin products like Bud Light Platinum and Budweiser Black Crown. The company is also focusing on international expansion, specifically in Brazil and China, to continue its growth with global volume increasing 2.9% last quarter.
Brazil has a growing beer market, and Busch has a majority market share of 68.1% in the South American country. The company saw revenue per hectoliter increase 10% last quarter in Brazil. The country is an important market because of upcoming sporting events like the 2014 FIFA World Cup and the 2016 Olympics.
Brazil recently hosted the FIFA Confederations Cup in June, which gave Busch a chance to test the marketing strategy and promotions that it will use in the World Cup. The Confederations Cup contributed roughly 300,000 hectoliters of beer volume sales for the past quarter; the World Cup is expected to bring in four times that amount.
China’s beer market continues to grow as well, with Busch’s volumes increasing 5% and revenue per hectoliter increasing 7.4%. China is expected to deliver 40% of the beer industry's growth over the next 10 years, and Busch has made major investments in the country. Over the past two years, the company has spent $1.4 billion on breweries in China, and it plans to open nine more.
Anheuser Busch has better margins with gross, profit, and operating margins of 58%, 32.61%, and 31.81% respectively. All of these are higher than the industry average and Molson Coors, showing that Busch retains more of its sales and is operating more efficiently than its competitors.
Molson Coors and Anheuser Busch InBev are handling the American shift away from premium light beers in different ways. Coors is focusing on above-premium products, while Busch is going global.
Both strategies have potential, but between the two, I like Anheuser Busch the best. I would call it a buy for long-term investors, despite the stock having a higher P/E of 17.99 compared to Coors' 12.42. Busch continues to create new products and is working to be a global brand. I think its investments in Brazil and China will pay off over the next few years.
Ben Popkin has no position in any stocks mentioned. The Motley Fool recommends Molson Coors Brewing Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!