Global Breweries

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1Global Breweries

Global BreweriesFundamental Analysis and Recommendations

Cyrus CheungErvinnaJeff

November 17, 2004
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Global Breweries 2

Overview of Presentation

Industry OverviewHistory & BackgroundProductIndustryConsumers

Growth AreaKey Success Factors

Company Analysis and Recommendations: Anheuser-Busch : Cyrus CheungHeineken : ErivnnaMolson : Jeff


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3Global Breweries

Industry Overview


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Global Breweries 4

History & Background Ancient History:

There is evidence that beer was elaborated by the Babylonian, Assyrian, Egyptian (for medical purposes), Hebrew, Chinese, andInca cultures.55 BC Roman legions introduce beer to Northern Europe.500-1000 AD the first half of the Middle Ages, brewing begins tobe practiced in Europe, shifting from family tradition to centralizedproduction in monasteries and convents (hospitality for travelingpilgrims).1200 AD beer making is firmly established as a commercialenterprise in Germany, Austria, and England.

1420 German brewers develop the lager method of brewing.1489 Germany's first brewing guild, Brauerei Beck, wasestablished.

Source: http://www.beermachine.com/files/beer-science-history.htm
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History & Background

Renascence History :1553 Beck's Brewery founded & still brewing today.1587 the first beer brewed in New World at Sir Walter Raleigh'scolony in Virginia.1612 the first commercial brewery opened in New Amsterdam(NYC, Manhattan).1786 Molson brewery is founded in what is today Canada.

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Global Breweries 6

History & BackgroundModern History:

In the mid-19th Century (1850's) German immigrant brewersintroduced cold maturation lagers to the US (Anheuser-Busch,Miller, Coors, Stroh, Schlitz, and Pabst roots begin here).The modern era of brewing in the US began in the late 1800's with commercial refrigeration (1860), automatic bottling,pasteurization (1876), and railroad distribution.1880 there were approximately 2,300 breweries in the US . 1935 only 160 breweries survive Prohibition (see below).1920 Prohibition (U.S) Starts for beer, even though some regionsstarted as early as 1846, e.g. Maine. Prohibition focused more on

whiskey and other distilled products. (Prohibition ends in April 7,1933 )

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History & BackgroundInteresting Facts:

Historians speculate that prehistoric nomads may have madebeer from grain & water before learning to make bread .Most Expensive Beer in the World: Tutankhamen - US$52Country with the most individual brands : Belgium with 400

Average American annually consumes 23.1 gallons of beer,more than milk or juice.

Cenosillicaphobia is the fear of .. an empty glass.

Source: http://www.beermachine.com/files/beer-trivia.htm
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ProductHighly mature and standardized product

Firms try to distinguish themselves by differentiationQuality, Innovation, and marketingHighly segmented market

Traditional Beers:Sub-premium

PremiumMalt liquor segmentsSuper premium*Light*Ice*Dry*

Specialty Beers:Fastest growing segment (10-15% since 1990)They are perceived as higher quality by consumers
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Product - Brewing process:1. Milling

2. Mashing3. Boiling4. Cooling5. Fermenting6. Filtering

7. Conditioning8. Pasteurizing9. Packaging

MainIngredients:

MaltHops

YeastRiceWater

Highly standardized and automated process.
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Industry

Global market share of top 20 brewers is increasing1990 51%2000 65%

Industry remains fragmented5 largest account for approx. 44% of total volumeCompare this to the cigarette industry - 5 largest, 60% share

Home market dependence
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Industry

Current trends in the industryConsolidation led by major international brewersInterbrew and Heineken

Volume growth in developing marketChina, Eastern Europe, Russia

Big gets bigger
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Industry

Global Market Share 2004 (in volume)

Heineken7%Carlsberg

5%

InBev13% Anheuser-

Busch10%

SABMiller 9%others

56%
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IndustryDevelopment of the Top 10 brewers and the World Market

(in millions of hl)
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IndustryGlobal Beer Consumption

CountryShare(2001

Per CapitaConsumptio

(in liters)US 16.4 83.1

China 14.3 15.8Germany 7.3 123.1

Brazil 5.8 46.7UK 4.1 97.1

Japan 3.6 40

M exico 3.5 48.6R us sian F ederation3.1 30Poland 1.7 60.5France 1.5 35.9

C zech R epublic 1.2 158.1
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Modern US Beer industry:

Oldest company date back to the 17th

centuryIndustry dynamics traced back to the repeal of prohibition in 1933.Following the repeal of Prohibition, legislative changes

required the industry to be divided into 3 distinct parts:1. Brewers2. Wholesale Distributors3. Retailers
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Business model:High transportation cost to be offset by highquality price premium as company seek todifferentiate themselves and reach larger

markets.Maturing industry highly concentrated as theresult of Mergers and acquisitions ( scaleeconomies in operation and marketing)
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Share of Total Beverage AlcoholRetail Dollar Sales

Share of Total Beverage AlcoholConsumption

Wine15%

Spirits31%

Beer 54%

Wine8%

Spirits5%

Beer 87%
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US MarketDuring the 3rd Quarter (Volume)

4.0

11.4

6.1

49.8

18.3

10.4

Miller

Coors

Market Share (%) Chg-0.1

+ 0 . 5

-0.4

-0.2

+ 0 . 3

-0.1

Pabst

Others

Pts

Pts

Imports

% ChangeShipments

+ 0 . 9

+ 4 . 0

-2.9

-4.6

+ 4 . 0

-0.7

+ 1 . 1Total

Anheuser -Busch
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Market Share by Brewer

Source: A -B Internal

0

10

20

30

40

50

60

1 9 8 3

1 9 8 4

1 9 8 5

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

M a

r k e

t S h a r e

( I n c

l u d i n g

Anheuser -Busch

SABMiller (excludes Fosters, Pilsner Urquell & Presidente )

Pabst (includes Stroh, etc.)

Coors (including Molson) Imports

Micros & Regionals

US Market
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US Market
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US Market

Taxation:Highly regulated byeach state

Beer Excise Tax (tax

for each barrel of beer sold)

Federal($0.58/gallon)

State

(average:$0.25/gallon)
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Global Breweries 22

Product Segments:

Super PremiumImports, microbreweries,specialty ( low carbs)

PremiumNational brand, light beer

Sub PremiumMalt Liquor, popular priced( cheap)

Premium56.3%

Super Premium

18.2%

SubPremium

25.5%

2003 US Market
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Global Breweries 23

Consumers & Trends

-9.1%

3.6%

-0.8%

1.6%

0.5%

10.5%

-0.6%

0.7%

0.3%

0.7%

4.8%

Soft Drinks

Coffee

Milk

Beer

Bottled Water

Tea

Juices

Powdered Drinks

Wine

Distilled Spirits

Cider

U.S. All Beverages: Total Beverage Consumption (Gallon Basis)

Total Beverages Trend: +1.6%

CHANGE IN CONSUMPTION 2003 v. 2002

Source: Adams Beverage Group 2004, Ranked on Volume (Gallons)

The Growth of Beer Consumption Slowed in 2003
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Global Breweries 24

Beer Consumer Demographic Profile

0 20 40 60 80 100

$65,000 +

$50,000 - $64,999

$35,000 - $49,999

$25,000 - $34,999

$15,000 - $24,999

Under $15,000

Other

Married

Single

Other

Hispanic

Blacks

Whites

Not Employed

Grey CollarWhite Collar

Blue Collar

Not in Labor Force

Retired

Part Time

Full Time

Total US Beer Consumer

Source: Anheuser -Busch, Inc. Eagle Eye, Beer Poll

Beer Consumers skew towards Male, Younger, Low to Moderate Educa ted,Blue Collar, and Moderate Income Households.

0 20 40 60 80 100

College Grad.

Some College

High School Grad.

Some High School

Grade School

65 years +

55 - 64 years

45 - 54 years

35 - 44 years

25 - 34 years

21- 24 years

Females

Males

Six Persons +

Five Persons

Four Persons

Three Persons

Two Persons

One Person

Consumers & Trends
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Global Breweries 25

The Number of Core Beer Consumers Is Expected toContinue Growing, Generating Greater Category Sales

After Bottoming Out in the Late 1990s, a Core Beer Consumer Demographic Will Grow by 16% over the Next 6 Years

Source: U.S. Census

23

24

25

26

27

28

29

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

P

o p u

l a t i o n

( M i l l i o n

Growth Rate:+16%

Age 21 - 27

Consumers & Trends
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Global Breweries 26

Consumers & Trends

Health Conscious ConsumersRise of the low Carb diets, light beers

Changing TasteLooking for more sweet taste

Fads in the market:Cider, Wine cooler, microbreweries

Latest : Malternatives ___%growth

Non malt based alcoholic beverages (ie: coolers, hardlemonade, spirit based and others)


27/111

Global Breweries 27

Consumers & Trends(000 2.25 Gallon Cases)

Brand Supplier 2000 2001 2002

Smirnoff Ice Diageo 310 19,880 22,450

Mike's Hard Lemonade Mike's Hard Beverage 6,800 11,000 11,500

Skyy Blue SAB Miller/Skyy Spirits -- -- 7,000

Bacardi Silver Anheuser-Busch/Bacardi -- -- 6,000

Zima Coors Brewing 8,400 6,900 5,240

Tequiza Anheuser-Busch 3,600 2,750 2,600

Doc Otis Anheuser Busch 2,500 2,550 2,400

Hooper's Hooch US Beverage 2,300 2,200 1,500

Two Dogs Next Generat ion Mktg. 1,060 1,100 950

Rick's Spiked Lemonade US Beverage 1,000 900 900

Vibe Coors Brewing -- -- 690

Jed's Hard Lemonade Matt Brewing 500 520 450

Source: Adams Handbook Advance 2003
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Global Breweries 28

Global ExpansionsPotential markets:

Growing middle classSouth America

High ConsumptionConcentrated market ( Brazil (65%) , Argentina (80%),

East EuropeSwitching from spirit

Asia ( China)

China has the largest Beer consumption by volumeOne of the world most competitive market


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Key Success Factors

Low Cost Structure ( efficient Scale)Effective Marketing & Advertising StrategySuccessful Brand loyaltyProduct InnovationDistributionGlobal player
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Anheuser-Busch Companies Inc.
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Presentation Overview:

Company BackgroundManagementCore BusinessBusiness StrategyValue DriversFinancial Statements AnalysisStock Price PerformanceRecent News

Analyst RecommendationMy Recommendation
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Established in 1864St. Louis Based companyCurrently control by 5 th generation of Busch Family

August A. Busch III Chairman

August A. Busch IV President of Anheuser Busch, Inc. (Domestic brewing)Incorporated in 1979, is the holding company parent of Anheuser-BuschParent corporation to a number of subsidiaries

Principle business: Production/Distribution of beer, Packaging and Entertainment

Sources: Anheuser Busch Companies: At a glance (Anheuser Busch Companies, 2003)

Company Overview :

Company OverviewCompany Overview
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Management TeamManagement Team

Management Team :Names Age Officer Since Title

Busch III, August A. 66 1974 Chairman of the Board

Stokes, Patrick T 61 1981 President, Chief Executive Officer, Director

Baker, W. Randolph 57 1982 Chief Financial Office, Vice President

Jacob, John E 69 1994 Executive Vice President GlobalCommunication, Director

Kasen, Keith M. 60 2003 President and Chairman of the Board of Busch Entertainment Corp.

Busch IV, August A. 39 2000 Vice President and Group Executive;

President of Anheuser-Busch, Inc.Gonzales, Carlos F. 37 1994 Director; Grupo Modello

Forese, James J. 68 2003 Director; Americas Most Powerful People

Knight, Charles F. 68 1987 Director; Americas Most Powerful People

Source: http://yahoo.investor.reuters.com/Officers.aspx?ticker=BUD.N&target=executiveofficers%2flist
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Compensation package: Top 5 ExecutivesFor Fiscal Year Ending 12/31/2003

Names Total AnnualCompensation

All Other Fiscal Year Total

Options Total Exercised

Stokes,Patrick T

$4.91 M $0.15 M $5.06 M $46.21 M $6.56 M

Busch III, August A.

$2.14 M $0.11 M $2.24 M $46.10 M $6.41M

Busch IV, August A.

$1.81 M $0.07M $1.88 M $8.34 M $1.32 M

Baker, W.Randolph

$1.24 M $0.06M $1.30 M $28.34 M $2.26 M

Lambright,Stephen K.

$1.18 M $0.07M $1.25 M $13.66M $2.87 M

Source: http://yahoo.investor.reuters.com/OfficersComp.aspx?ticker=BUD.N&target=executiveofficers%2fbasiccompensation
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Core Business SegmentSegmented in 3 main areas :

Production/Distribution of beer 2nd Largest Brewer in the world ( 130 M barrel/year )

New King of Beer is InBev (161M barrel/year), the result of the merger between Belgiums Intervew and Brazilian beer in late August

Has 49.6% of U.S. market and about 10% of global marketoperating 14 breweries , 12 (in U.S.) and two overseas (UK and China)2/3rds of volume delivered by wholesalers who only carry Anheuser-Busch (A-B)

Packagingone of the largest U.S. manufacturers of aluminum beverage containers and the

world's largest recycler of aluminum beverage containers.Entertainment

Formed in 1979, consists of nine distinctive park

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Subsidiaries & SatellitesA-B Packaging : Recycling, Printing/ Packaging, AluminumProductionBusch Entertainment : Sea World, Busch GardensBusch Agricultural Resources IncManufacturers Railway Company50% Share in Grupo Modelo : Corona (93-98)27% Share in Tsingtao : Chinas largest brewer (13% of chinamarket)

29% Share in Harbin Beer Co : China regional brewer (prevented SABMillers takeover bid)20% Share in Cervecerias : Chiles largest brewer *JUST SOLD* Distribution partnerships : Labatt & Kirin (Japan)

Sources: Anheuser Busch Companies 2003 Annual Report
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Income contribution of each segmentFor Fiscal Year Ending 12/31/2003

89%

5%2% 4% Domestic Beer

InternationalBeerPackaging

Entertainment

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Beer ProductsThe company currently brews approximately 30 beers for sale in theUnited StatesWorlds No.1 and No.2 brand: Budweiser & Bud Light

Budweiser about 3% of world market

Bud light has 19.5% of U.S. marketOther Brands:

Budweiser Family : Bud Dry, Bud Ice, Bud Ice LightMichelob Family : Michelob, Michelob Ultra, etcBusch Family : Busch, Busch Light, etcSpecialty Beers : World Select, etc

Nonalcohol Brews: ODouls, etcNatural Family : Natural Light, etcMalt Liquors : Hurricane, etcSpecialty Malt Beverags : Bacardi Silver Limon, etc

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Business StrategyMissions

Be the world's beer companyEnrich and entertain a global audience

Deliver superior returns to our shareholders

Objectives / StrategiesIncreasing domestic beer segment volume and per barrel profitability

Economies of Scale

Increasing international beer segment profit growth .Made significant marketing investments to build brand recognition outside theUnited States and owns and operates breweries in China

Continued growth in profit and free cash flow in the packaging andentertainment segments.

Provide significant efficiencies, cost savings and quality assurance fordomestic beer operations

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Value DriversHome market dominance (49.6% market share)

Twice as large as nearest competitorsEconomies of scale

Extensive exclusive distribution2/3rds of volume delivered by wholesalers who only carry

Anheuser-Busch (A-B)Brand recognition and Innovation

First to introduce low carb beers

Marketing and manufacturing efficiencyLeverage 49.6% market share into 75% of markets operatingprofit

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Consolidated Balance Sheet
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Invested $200 Million in Bonds & Loans with Tsingtao Breweryin ChinaNet Increase to Debt $682.2 Million with US Dollar Notes andCommercial Paper 11% Decrease in Shareholders Equity

Balance Sheet Analysis

2003 2002 2001 Industry S&P 500

Quick Ratio 0.54 0.46 0.45 0.66 1.31

Current Ratio 0.96 0.8 0.9 1.37 1.80

Lt Debt / Equity 2.99 2.16 1.47 2.34 0.63

Return on Assets 12.05% 13.7% 12.2% 10.83% 7.38%

ROE 72.0% 54.4% 41.6% 64.01% 20.05%
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Debt Analysis


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Consolidated Statement of Income


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9% Increase in Revenues

7% Increase in COGS18% Increase in Operating Income22% Increase in Net Income

Advertising and promotional activities are a key component of A-Bs Strategy Advertising Costs were $806.7 MillionPromotional Costs were $511.8 Million

Income Statement Analysis

Dollar in millions except per share

2003 2002 2001 Industry S&P 500

Net Sales $14,146.7 $13,566.8 $12,911.0 N/A N/A

Net Income $2,075.9 $1,933.8 $1,704.5 N/A N/A

Earnings/Share (diluted) $2.48 $2.20 $1.89 N/A N/A

Dividend Yield 1.92 1.4 1.5 1.86 2.02

Annual Dividend $0.83 $0.75 $0.69 N/A N/A

Profitability Ratios

Gross Margin 40.16% 40.1% 38.4% 39.84% 46.76%

Profit Margin 12.25% 14.3% 13.2% 11.08% 13.99%
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Global Breweries