What Happens When There's Nobody Else to Fire? Brito's Conundrum

FILED OCTOBER 31, 2018

Dear Client:

I've been on the phone the last week and a half with several buy and sell-side Wall Street and City (London) analysts and investors to get an understanding why ABI's stock is down nearly 40% in a roaring economy and agreeable demographics in their largest profit market, the U.S. And then they cut their dividend because they still owe about $100+ billion from the purchase of SABMiller, which means their balance sheet is constricted from making another major purchase unless they can generate organic cash flow growth from the assets they already own, particularly in their largest profit pool, North America.

So there inlies the problem: North America. It's declining. They run through North American Zone presidents like chimichangas in Laredo. I get it's a mature market, but that hasn't stopped Constellation Beer from riding herd on A-B with a fraction of the sales and marketing budget. So it begs the question: When does it become incumbent on the CEO to start taking responsibility? As one outgoing A-B exec told me last week, "How does Brito keep his job?" Good question.

Nobody has presided over the largest loss in brand equity in the history of the U.S. beer industry than Carlos Brito. Nor the amount of lost total cases. Yes, he's driven margins and profits by cost cutting and increased prices. But as far as brand building? That's the heavy lifting, and Brito hasn't lifted much, nor have his hires in the U.S. so far.

People might say Brito's killing it on the world stage leveraging his position as the largest brewer in the solar system. Not lately. In the latest quarter ABI grew global volumes by 0.5%, while Heineken NV saw its global volumes jump 4.4%. The difference is even more striking when looking at YTD total volume trends for the two, with ABI up 0.3% and Heineken NV up 8.7%.

So what gives? Any other CEO would've been shown the door, right? Not for la máquina (the machine). As one analyst put it, "You gotta see who he works for." What does that mean? Doesn't he work for the shareholders? Well, yes but he works more so for the big billionaires at 3G, Altria, the Santo Domingo Family, and a slew of European aristocrats for whom he's made a lot of money, and who can't easily sell their stock anyway, no matter its terrible strike price. Another analyst compared him to NFL Commish Roger Goodell, as in nobody likes him except for the billionaire owners of the teams, for whom he protects and takes the arrows.

As for ABI's stock price being in the dumps? Analysts generally attribute that to Brito's habit of over-selling and under-delivering. His results aren't all that bad, but they miss expectations, and analysts fall for it. And when you're a titled aging billionaire dedicating your life to growing botanical gardens in Belgium, you frankly don't give a shit what Bud Light sales are doing in some far off place called Texas (sales are horrible there, btw).

The bottom line is the strategy of buy and slash has run its course, and it's now time for ABI to pursue organic growth and clearly Brito is not built for that. You can't continually cut your way to growth. If you want highly scripted corporate buzzwords on conference calls to try to cover the fact that their overall strategy has been to just to keep firing people after big acquisitions, then he's your man.

In the U.S., their market share continues to decline at about the half share point a year mark. If it weren't for Michelob Ultra, things would be much worse. Dilly Dilly was a modest success, but failed to turn around Bud Light in a meaningful way -- and is now viewed as mundane and over-exposed. Meanwhile, consistent product supply and package integrity continue to be a problem after eight years. (A-B enjoys one consolation in that MillerCoors is doing even worse on all fronts).

Blaming distributors doesn't work. Their distributors have -- miraculously -- largely propped up Bud Light distribution numbers despite rapidly declining market share. It's not like people can't find their favorite package of Bud Light. No, this is not a sales or chain problem, but a marketing problem, an art/science that ABI has yet to prove in the U.S.

The real bottom line is it was the board, not Brito, who decided to overpay for SABMiller, and it is Brito who must now deal with that albatross, regardless of Bud Light� s performance in Texas. It sure would be an easier bird to swallow if they could grow organic sales.

MILLERCOORS Q3 SHIPMENTS UP 1.1%, DEPLETIONS DOWN 3.3%

Third quarter results for Molson Coors just hit. How'd their U.S. business unit, MillerCoors, fare over the frame?

After an abysmal start to the year, MillerCoors shipments have found their way back into positive territory. Shipments increased 1.1% "driven by an increase in distributor inventories to support further ordering system implementations at our breweries."

And they make it seem as though they have solved their ordering issue: "These increased distributor inventory levels at the end of the third quarter are expected to remain through the end of the year as we prepare for future implementations at our remaining breweries, which are currently expected to occur in 2019."

Meanwhile, U.S. brand volume (depletions) was down 3.3% in Q3, "primarily driven by lower volume in the premium light segment." That's a bit better than Q2 depletions, down 4.8%.

Net sales per hectoliter (brand volume basis), grew 1.3%. "Excluding the impact of the new revenue recognition accounting standard," net sales per hectoliter increased 1.2% "primarily as a result of higher net pricing, partially offset by negative sales mix."

Molson Coors also noted that MG&A expense for MillerCoors dropped 8.2% in the quarter, "due to a net benefit from the amicable resolution of a vendor dispute, which drove nearly half of the decline," the rest was attributable to "spending optimization and efficiencies and lower employee-related expenses."

More after the call.

BEER BRIEFS:

DOJ RE-WRITING VERTICAL INTEGRATION RULES. While the DOJ finally approved ABI's purchase of SABMiller, the Justice Department yesterday is in the beginning processes of restricting ownership of a company and its supplier, "a rewrite that could have implications for future tech, telecom and media mergers," but could also dictate how much a brewer, (A-B in this case), could own of a distributor branch.

Assistant Attorney General for Antitrust Makan Delrahim said the department is still early in the process but aims to release proposed updates for public comment in the next year.

Until tomorrow,

Harry, Jenn, and Jordan

"A good listener is not only popular everywhere, but after a while he gets to know something." - Wilson Mizner


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