Anheuser-Busch Profits In Europe Will Likely Suffer Due To Drought

The extremely hot and dry weather that much of Western Europe has been experiencing lately has been credited with some European breweries running out of beer bottles. This, of course, means that sales are not only doing just fine at the moment but going through the roof as people are looking to makes themselves feel better by consuming a cold beverage, which should be great news for breweries like Anheuser-Busch (NYSE:BUD), which owns one of Europe’s prestigious and popular brand names. Thing is, however, that the good times are likely to be short-lived. The heatwave is also killing this summer’s crop harvest in Europe, including the barley crop, which may be down by as much as 40% in parts of Western Europe.

Anheuser-Busch dominates the world, with its European brand lineup playing an important part

(Source: Statista)

As we can see, Anheuser’s position is dominant on a global scale. Part of it, of course, is its US acquisition of Budweiser. But aside from that, it has a powerful European brand it sells across the world. Stella Artois is, of course, one of the best-recognized European brand names. Even though it does have production elsewhere, there is also a lot of export from Europe towards other markets of this brand as well as many others such as Beck’s.

(Source: Anheuser-Busch)

About 15% of the company’s total sales are in Europe, according to its latest quarterly numbers. In addition to that, there is the export volume, which is not insignificant. For instance, in 2016, 2.1 million barrels of Stella was shipped to the US alone. So, needless to say, its European operations are a vital part of the business. It is not certain just yet what impact the current European crop disaster will have on Anheuser’s bottom line going forward, but early indications suggest that some input prices may soar.

(Source: Bloomberg)

As we can see, malt barley prices have already soared, and there could potentially be more to come as the situation is being assessed. It seems that it is not only the actual physical deficit, but also perhaps a deficit in quality, which could potentially further exacerbate the actual shortage the European beer industry will probably experience until the next harvest season. The price impact might, therefore, be far greater than current indicators might suggest. Beer producers in Europe in Europe may have to actually resort to producing less beer, in addition to having to absorb the higher input costs.

Stella’s Stellar recent sales growth may be temporarily halted

In the second quarter of this year, the three main brands – Corona, Budweiser and Stella – had a combined total increase in revenue of 10.1%. That number, however, includes the rather poor performance of Budweiser. It is Corona and Stella which have been driving sales volumes up. In the first quarter, where numbers are available for individual brand sales, Stella numbers were up 12.3%, while Budweiser was down 1.3% in its home market.

Anheuser-Busch has big plans for Stella, looking to push into the restaurant market, where it fancies not only competing with other brands but also with wine. It has been advertising aggressively, and so far it has been paying off in multiple markets. While the current European heat wave disaster may end up being just a bump in the road, it is possible that it may cause Anheuser’s momentum on Stella sales to stall out – and once momentum is lost, it is uncertain whether it will be regained.

Aside from potentially losing sales momentum, which could come about as a result of simply not having the necessary resources available to increase production, at least until the next European harvest, there is also the issue of rising input costs, at least when it comes to its European operations. Its current profit margins are healthy, with a second quarter profit of $2.2 billion, on total revenue of $14 billion. The higher cost of inputs in Europe might only make a small dent of perhaps tens of millions of dollars per quarter, but it is yet another potential downside in coming quarters, in addition to the potentially larger problem of its European production and sales growth plans being affected.

There is, of course, a chance that Anheuser-Busch may still be able to pursue its production and sales growth strategy with its European operations. It may be able to out-compete the smaller brewers for the needed barley on the European markets. It may be able to import some volumes from elsewhere. All this will come at a cost to the bottom line, however, which could drag down results in the next few quarters. But given the temporary aspect of this effect, it may, in fact, become a great buying opportunity for those who want to own this stock and are looking for a good place to buy in.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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