Friday, December 21, 2007

Devil's in the Details

I read a whole hell of a lot every day; whether it's online, in print or even on TV, especially about the beer industry. I hope this blog helps pass on some info we all glean so that you don't have to read it all, as do other great beer bloggers online today. With that said, I read the Fitch Ratings for Anheuser-Busch in its entirety, something I suspect I wouldn't just volunteer to read had I a different job and passion. In this there's some pretty important and revealing information for those of us who enjoy our craft beer. I'll try to keep this short.

Domestically, BUD participates in a mature beer market and is facing growing competition from craft and imported beers as well as spirits and wine. In addition, rising energy and commodity costs have pressured margins recently. Price increases instituted in the United States late in 2006 and the beginning of 2007 and less promotional activity have produced a better than expected operating performance in 2007. BUD is again raising prices going into 2008, which should help to partially offset continuing rises in commodity costs, particularly agricultural ingredients. The pending SABMiller/Molson Coors joint venture, which could close in the second quarter of 2008, is expected to eventually result in additional competitive pressure on BUD's brands but may sustain an improved pricing environment.

Longer term, low domestic beer volume trends, limits on pricing actions, changing consumer tastes regarding craft and imported beers as well as other alcoholic beverages, and trading up to more premium products are concerns. Expected profit growth from international markets including equity investments, which accounted for 24.5% of net income in 2006 up from 14.2% in 2000, somewhat offsets potential weakness in domestic operations.

A few things I find important to note.
  1. "facing growing competition from craft and imported beers..." No surprise here, right? Hooray for craft beer!
  2. "rising energy and commodity costs have pressured margins recently." OK, pay attention to this. If there's ANY concern with margins and costs with energy and commodity prices for A-B, you can bet your shiny pennies that craft brewers are feeling the squeeze even more. Why? Well, it sorta says it when it talks about 'economies of scale' prior to this quote. A-B accounts for 48.4% of beer's total market share in the US today, which means they get the sweetest deals in terms of raw material and indirect costs... and not just by a little bit.
  3. "BUD is again raising prices going into 2008..." Did that get your attention? If you missed the point of number 2, this is it folks. Price of beer is going up, and if there's an exponential savings afforded to A-B for their buying power and sheer size, you can assume an exponential nature in price increases for your favorite craft beers. Now, there is something we've got going for us, the vast majority of brewers in the country are private businesses owned by a few investors. It is more likely that these people won't demand equal compensation, like A-B's share holders, but they're business people too and won't sit back and just eat all the new/rising costs of materials. Remember this. Your beer will be more expensive in 2008, but you can rest assured this increase isn't making your favorite brewers rich. Tip well.
  4. "... changing consumer tastes regarding craft and imported beers... and trading up to more premium products are concerns." Interesting, I think that's pretty self explanatory.
The report referenced was all supporting one thing, Anheuser-Busch is still a "stable" investment, regardless of the items mentioned here. Why? Seems largely due to their impressive cash flow and manageable debt. You can read that to also say, they can absorb the flux in material pricing experienced globally right now. Can the same be said for the craft brewers of the world? I suspect, for the most part, they can. I really don't think we'll see a horrific year of doom and gloom - I just don't see it happening. However, I suspect there are more than a few who don't have the cash-flow and perhaps lack the credit to get them through these price increases.