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Case Analysis of Anheuser Busch

Eric Felton

MNGT 481-008

Dr. Kiyatkin

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Table of Contents

Executive Summary…………………………………………………………………………………………… 3

Industry Analysis………………………………………………………………………………………………. 4

Sector, Industry, and Segment Analysis……………………………………………………. 4 External Analysis……………………………………………………………………………………………….. 5

General Environment………………………………………………………………………………. 5

Industry Life Cycle…………………………………………………………………………………… 6

Porter’s Five Forces…………………………………………………………………………………. 6

Internal Analysis………………………………………………………………………………………………… 7

VRIO

Model……………………………………………………………………………………………… 8

Current Value Chain Exploitation……………………………………………………………… 8

Reflection of External and Internal Analysis………………………………………………………… 9

Analyses of Business-level and Corporate-Level Strategies………………………………….. 9

SWOT Analysis………………………………………………………………………………………………….. 10

Recommendations…………………………………………………………………………………………….. 11

Table of Illustrations

Exhibit 1: General Environment Analysis…………………………………………………………….. 13

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Exhibit 2: Product Life Cycle Analysis………………………………………………………………….. 13 Exhibit 3: Porter’s Five Forces Analysis……………………………………………………………….. 14

References………………………………………………………………………………………………………… 15

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Executive Summary

Anheuser Busch is a wholly owned subsidiary of Anheuser Busch InBev. An individual financial

statement for the Anheuser Busch subsidiary was not readily available. Instead, I will be using figures

that are available for Anheuser Busch InBev’s North American and US sales. Anheuser Busch InBev

from here on will be referred to as Anheuser Busch unless mentioned otherwise.

Anheuser Busch is the United States leader in beer production, accounting for 47% of the market

share (Kwon, 2012). In 2011, Anheuser Busch’s US beer shipments totaled 98.8 million barrels. This

number was 40 million barrels larger than the closest competitor MillerCoors (Kwon, 2012). Anheuser

Busch provides over 200 beers, some of which include Budweiser, Bud Light, Natural Light, Stella

Artois, Becks, and Leffe (AB InBev, 10-K, 2012).

Financial information was not available for the Anheuser Busch subsidiary so I will compare

financial information from Anheuser Busch’s 2012 10-K report. From 2011 to 2012, net income

increased by $1.47 billion (AB InBev, 10-K, 2012). Some of this income can be accounted for by

Anheuser Busch’s change from a differentiation strategy approach to an overall cost leadership strategy

approach.

Anheuser Busch falls under the NAICS code 312120 (Manta, 2013). Comparing Anheuser Busch

to the industry averages for companies with net income of over $25 million, their current ratio was 1.0

compared to the industry average of 1.0 (RMA, 2012) (AB InBev, 10-K, 2012). This ratio measures the

ability of a company to finance their current obligations. Anheuser Busch’s quick ratio was 0.54

compared to the industry average of 0.5(RMA, 2012) (AB InBev, 10-K, 2012). This ratio is a more

conservative approach to the current ratio and only includes the most liquid assets. Anheuser Busch’s

Sales/Total Asset ratio was not close to the industry average though. Their ratio of .32 was nearly four

times smaller than the industry average of 1.2 (RMA, 2012) (AB InBev, 10-K, 2012). This means that

Anheuser Busch is four times less efficient at using their assets to gain profits. Overall, Anheuser Busch

is a financially stable company that controls a significant portion of the US beer industry’s market share.

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Industry Analysis

Over the past five years, beer consumption in the major markets of the US, UK, and

Canada have all declined (Kwon, 2012). This decline in consumption has led to an overall

consolidation of the industry leading to mergers and acquisitions between several of the

industry’s top companies. In 2008, Anheuser Busch was acquired by Belgium-Brazilian based

InBev for an astounding $52 billion dollars setting a precedent for change in the industry (Kwon,

2012). In 2010, Heineken NV acquired FEMSA Cervesa for $7 billion dollars and in 2011;

SABMiller acquired Foster’s Group Ltd. for $10 billion (Kwon, 2012). This change in the

alcoholic beverage industry has been allowing companies to easily expand into new markets

around the world.

Sector, Industry, and Segment Analysis

Anheuser Busch can be identified as being in the alcoholic beverage sector. The alcoholic

beverage sector of the US market is a heavily regulated and heavily taxed sector compared to

other sectors (Kwon, 2012). This sector includes the beer, wine, and distilled spirits industries.

Anheuser Busch only distributes beer so they are included in the beer industry of the alcoholic

beverage sector. This specific industry can be dissected into different segments, which are the

craft beer segment and the lager beer segment. Craft beers can be defined as beers that are

produced by smaller microbreweries that specialize in beer brewed with 100% barley (Kwon,

2012). Anheuser Busch falls into the lager beer segment. They produce their beers in large

quantities at a time and use less expensive grains than that of a microbrewery, making their

product cost lower (Kwon, 2012). Microbreweries pose a as potentially threat to companies like

Anheuser Busch due to the fact that they offer very specific beers to their specific customers.

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External Analysis

For the third consecutive year, beer sales in the US have declined (Kwon, 2012). This has

led many to believe that the beer industry is in its maturity phase of the product life cycle. This

can be attributed to affect that the general environment has on the industry such as political,

demographic, and sociocultural factors. A full list of how the general environment affects the

industry can be found in Exhibit 1.

General Environment

As previously mentioned, there are three major factors that are affecting Anheuser Busch

and the beer industry as a whole. The first, political, has the largest effect on the industry. US

laws prohibits anyone under the age of twenty-one to consume or purchase alcoholic beverages.

This restriction limits the amount of customers that the industry can target. The second,

demographic, has a large effect on the industry. According to the US Census Bureau, the number

of consumers reaching the legal drinking age has risen steadily in recent years (Kwon, 2012).

However, this rise in consumers of legal drinking ages has not lead to increased sales in beer.

This leads to the final factor that is affecting the industry, which are sociocultural factors.

There are two main sociocultural factors that have led to the decline of the beer industries. First,

consumers are turning to healthier alcoholic beverages like wine and spirits. According to a

survey conducted by Gallup in 2012, the percentage of drinkers that preferred wine grew by 3%

last year compared to a 3% decline in drinkers that preferred beer (Kwon, 2012). Second,

consumers over the age of 55 have a growing desire to purchase wine due to its sophistication.

The percentage of people over the age of 55 that purchased wine grew by 4%, while their beer

consumption fell by 2% (Kwon, 2012).

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Industry Life Cycle

The lager beer segment is in its maturity stage of the industry life cycle. The lager beer

segment matches all of the examples of a mature stage of the life cycle, which can be seen in

Exhibit 2. I will focus on a couple of the topics that make it in the mature stage. First, the overall

growth of the lager beer segment has declined each of the last three years (Kwon, 2012). This

suggests that the market growth rate for the segment is low which corresponds with a product in

the maturity stage. Second, the overall strategy for most lager beer companies is overall cost

leadership (Boeing, Casey, Colson, 2009). The major lager beer producers like Anheuser Busch,

Molson Coors, and Miller Brewing Co. all focus on lower cost beers. Unlike microbreweries,

these companies use low cost wheat and barley in the production of their products (Kwon, 2012).

Finally the intensity of competition in the lager beer segment is also high which corresponds

with a product in it maturity stage. Two companies, Anheuser Busch and MillerCoors, dominate

the US beer industry and account for 75% of the market share (Kwon, 2012). These two

companies are always trying to take market share away from other smaller companies and each

other.

Porter’s Five Forces

The overall threat that Anheuser Busch has from the beer industry is low to moderate.

Examples of this can be seen in Exhibit 3. The reason I say this is because out of Michael

Porter’s five forces, three of them have low threat points. These three forces are the threats of

entry, buyer, and supplier. The largest threats come from those of rivalry and substitution.

Anheuser has only a few major competitors, but these competitors have multiple products that

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compete with products they have. Due to this, Anheuser Busch has a high threat of substitutions.

With multiple other companies offering similar products, product differentiation is low. Also,

these companies offer their products at similar prices and benefits to those of Anheuser Busch.

The second major threat to Anheuser Busch is the threat of rivalry. Just like the threat of

substitution, the threat of rivalry is also high. Even though there are a small number of

competitors that can compete on the level as Anheuser Busch, there are still a large number of

breweries and microbreweries that produce products similar to theirs (Boeing, Casey, Colson,

2009). Also, since the lager beer segment is in its maturity stage, this means that there is limited

market space available making the current market segment more competitive. Another potential

substitution for beer is wine and spirits. As mentioned previously, the percentage of consumers

that prefer wine is increasing and taking away from beer sales.

Internal Analysis

VRIO Model

Anheuser Busch currently has three sources of sustainable competitive advantage that are

all valuable, rare, costly to imitate, and well organized by the organization. These three sources

are strong market positioning, high brand satisfaction/recognition, and extensive

advertising/marketing. They also have two sources of competitive parity, which are sponsorships

and innovation.

The three sources of sustainable advantage are all related to each other. Without high

brand satisfaction/recognition, they would not have a large customer base and their strong

marketing positioning would diminish. This would ultimately lead to the decreasing in their

extensive advertising/marketing.

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The two sources of competitive parity are both valuable to Anheuser Busch, but they are

not rare, difficult to imitate, and there are substitutes. Anheuser Busch currently has sponsorships

with FIFA, the NFL, the Kentucky Derby, and many music festivals to make their beers the

official beers of that event (AB InBev, 10-K, 2012). Having sponsorships gives potential

customers the opportunity to experiment with their products. Anheuser Busch is not the only

company that has sponsorships with sporting and music events, which is why it is not a

sustainable competitive advantage.

Current Value Chain Exploitation

Anheuser Busch is an extremely vertically integrated (Kwon, 2012). They control the

production of their beer from the grain to the can. Their subsidiary, Busch Agricultural

Resources, Inc., provides their breweries with the raw materials needed for production (Anheuser

Busch, 2013). They also have another subsidiary, Anheuser-Busch Packaging Group, which

provides them with the lids, cans, bottles, and other packaging materials necessary for production

(Anheuser Busch, 2013). Both of these subsidiaries add tangible value to the company by

allowing them to control the costs that are added to their product.

Corporate social responsibility is also an area that adds intangible value to the operations

of Anheuser Busch. They focus on three key areas to do this, which are promoting alcohol

responsibility, preserving and protecting the environment, and supporting local communities. In

the past three decades, Anheuser Busch has contributed over $930 million in national campaigns

to encourage responsible drinking and prevent underage drinking (Anheuser Busch, 2013).

Regarding the environment, over the past 30 years, Anheuser Busch has reduced their water use

by 37% and has become the US leader in aluminum recycling (Anheuser Busch, 2013). Finally,

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since 1997, Anheuser Busch has donated nearly $490 million to charitable organizations

(Anheuser Busch, 2013). The combination of these three actions adds intangible value to the

organization in the community that cannot be measured.

Reflection of External and Internal Analysis

After analyzing the external and internal environments, a few SWOT can be identified.

First, some potential strength includes the following: large share of the lager beer industry,

extensive advertising/marketing, and strong brand satisfaction/recognition. A potential weakness

is that Anheuser Busch does not offer a healthy enough alternative that can compete with wine.

Another weakness of Anheuser Busch is that does not have a product that can compete with the

craft beer industry. Some potential opportunities that Anheuser Busch can pursue would be to

create a craft beer to compete with microbreweries and to pursue expanding to the expanding

market in China. Some threats identified are the growth of the wine industry, growth of

microbreweries and craft beers, and declining sales in the lager beer segment.

Analyses of Business-Level and Corporate-Level Strategies

The business level strategy that applies to Anheuser Busch is the overall cost leadership

approach. Before the acquisition of Anheuser Busch, InBev CEO Carlos Brito brought the

strategy of overall cost leadership to the European beer industry (Leonard, 2012). After merging

his Brazilian company AmBev with Belgium brewing company Interbrew, earnings margin rose

by 10% from 2004 to 2007 (Leonard, 2012). In 2008, InBev acquired Anheuser Busch and

applied their cost leadership strategy to their new subsidiary. This lead to the layoff of

approximately 1400 employees, selling off of $9.4 billion of assets, and changing the materials

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used in production and packaging (Leonard, 2012). Changing the inputs of the beer had an effect

on the overall product though. Instead of using higher quality hops from foreign countries, Brito

decided to end business with these farms and started producing lower quality hops which saved

the company $55 million a year (Leonard, 2012). However, this weakened the flavor of the beer

turning off some customers. US shipments of Bud Light fell by 3% over the past two years while

Budweiser shipments fell 13% during the same time period (Leonard, 2012).

Anheuser Busch is an extremely diverse company that has many different subsidiaries.

As mentioned previously, InBev’s acquisition of Anheuser Bush brought together two of the

largest beer producers in the world. This brought final piece of the puzzle together for InBev

bring the North American market into their business. Owning subsidiaries based in different

countries allowed InBev to enter into new markets at a lower cost than starting up their own

company in that specific market.

SWOT Analysis

Strengths

Major market share of the lager beer segment

Extensive advertising/marketing

Strong brand recognition

Vertical integration offers lower costs to raw materials, bottling, and distribution

Weaknesses

Changing the ingredients in the beer being produced could be a factor in declining sales

for certain beers.

No successful healthy alternative

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No innovation when it comes to craft beers

Opportunities

Pursue developing a craft beer division/subsidiary

Emerging market in China could offer great profits

Threats

Growth of the wine industry could take away from sale of beer

Microbreweries are taking away market share from lager beers

Lager beer industry growth is declining

Recommendations

Based on my research I would recommend that Anheuser Busch pursue the

emerging market in China and develop a craft beer to compete with microbreweries. Since

2000, beer consumption in China has increased by 80% and is still continuing to grow

(Kwon, 2012). Even though the consumption per capita is not as large as the US or UK, the

total amount of consumption, 44.7 billion liters, is almost double that of the US. Anheuser

Busch is currently third in market share China holding just over 13% of the market (AB

InBev, 2012). In order for them to gain more market share, I recommend that Anheuser

Busch acquire Beijing Yanjing Brewery. Being that it is one of the largest producers of beer

in China, this would allow Anheuser Busch to gain a larger part of the expanding Chinese

beer industry without having to pay the startup costs of starting a new brand.

Over the past few years, more beer drinkers have grown tired of mass produced

lager beers and have changed tastes to craft beers (Kwon, 2012). This offers up a large

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market that has not been explored by large lager beer companies. Craft beers are produced

by microbreweries or small breweries, which use 100%, malted barley instead of cheaper

grains (Kwon, 2012). In the craft beer segment for 2012, there was an 18% increase in

breweries in the US, 15% more beer produced by volume, and a 17% increase in sales

(Tuttle, 2013) In order for Anheuser Busch to enter into this expanding market, they would

have to do it the correct way. By this I mean that they could not cut corners when it came to

production. They would have to use the same process as microbreweries so that their

product can compare in taste to craft beers. Operations in North America had net income of

$4.7 billion in 2012 (AB InBev, 10-K, 2012). A portion of this income could be invested into

the creation of a craft beer division.

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General Factors How Factors Affect Anheuser BuschDemographic The number of consumers reaching the legal drinking

age has steadily risen over recent years. This leads to more potential customers (Kwon, 2012).

Sociocultural Many consumers have turned away from beer in favor of wine and spirits. This has been lead to wine and spirits being healthier alternatives to beer. Also, people over the age of 55 have a decreasing desire to consume beer and consume wine instead. They do this because wine has greater sophistication (Kwon, 2012).

Political/Legal US law prohibits citizens under the age of 21 from consuming or purchasing any alcohol. This can affect the number of potential customers Anheuser Busch can target.

Economic Economic factors such as a recession can lead to the decline in sales. There has been a high unemployment trend among beer’s core male audience (Kwon, 2012).

Global Global prices of wheat and barley, which are the main components of beer, can affect the overall cost of beer to the producer. This increase in costs could lead to higher prices. Also, China is becoming an emerging market for beer distribution that should be explored (Kwon, 2012).

Exhibit 1: General Environment Analysis

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Factor Maturity Stage Beer IndustryGeneric Strategies Overall cost leadership Overall cost leadership

Market Growth rate Low to moderate LowNumber of Segments Many SeveralIntensity of Competition Very Intense IntenseEmphasis on product Design

High Moderate to high

Overall Objective Defend market share and extend product life cycles

Defend market share and extend product life cycles

Exhibit 2: Product Life Cycle Analysis

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Exhibit 3: Porter’s Five Forces Analysis

Type Level ReasoningThreat of Entry Low The cost that is required to start a

multimillion barrel beer producer is too large for a company to come into the market. Anheuser Busch also already has 47% of the market and would be very difficult to take that away (Kwon, 2012).

Threat of buyers Low Anheuser Busch works closely with 500 independent wholesalers across the country and owns and operates distributors in 13 major cities. This close relationship the buyers has with the company means that the buyers cannot control the price (Anheuser Busch, 2012)

Threat of suppliers Low Anheuser Busch is very vertically integrated. They have their own farms where they produce the wheat and barley necessary for production. They also bottle their products.

Threat of substitute High A threat exists from beer, wine, and spirits. There is also a low switching cost to consumers who wish to switch (Kwon, 2012).

Threat of rivalry High There are a small number of companies that compete with the large amount of product differentiation Anheuser Busch has. Craft beers can offer consumers more specialized products catered to their individual wants.

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Reference:

AB InBev 10-K. (2012). Our top 10 markets. Retrieved from http://www.abinbev.com/pdf/AR12/AB_InBev_AR_OurTopTenMarkets.pdf

AB InBev. (2012). 10- k annual report. Retrieved from http://www.abinbev.com/pdf/AR12/BUD_AR12_EN_Online_v2.pdf

Anheuser Busch. (2013). Anheuser busch homepage. Retrieved from http://anheuser-busch.com/

Boeing, L., Casey, B., & Colson, J. (2009). Beer brewer’s industry analysis. Retrieved from http://www.nku.edu/~fordmw/mgt490projectbeer.pdf

Kwon, E. (2012). Alcoholic Beverages & Tobacco Industry Surveys. Standard & Poor’s. Web. 1 May 2013. <http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/showIndustrySurvey.do?task=showIndustrySurvey&code=abt>.

Leonard, D. (2012, 10 25). The plot to destroy America’s beer. Bloomberg BusinessWeek, 1-6. Retrieved from http://www.businessweek.com/articles/2012-10-25/the-plot-to-destroy-americas-beer

Manta. (2013). Anheuser busch incorporated. Retrieved from http://www.manta.com/c/mmc1qgk/anheuser-busch-incorporated

RMA. (2012). Annual statement studies. Financial Ratio Benchmarks 2011-2012, p. 299

Tuttle, B. (2013). As craft beer gets bigger, will it become more like big beer? or perhaps wine?. Retrieved from http://business.time.com/2013/03/22/as-craft-beer-gets-bigger-will-it-become-more-like-big-beer-or-perhaps-wine/