In Lockdown, People Don't Reach for Premium Beers

(Bloomberg Opinion) -- Lockdowns around the world have stressed-out consumers reaching for their beer glasses. But a tipple after a hard day working from home isn’t enough to preserve the world’s big brewers from the ravages of the coronavirus. Social-distancing measures have decimated their most profitable market: selling beer in restaurants, pubs and clubs.

Anheuser-Busch InBev NV underlined the pressures on Tuesday when it halved its proposed final dividend from 1 euro to 50 cents per share, saving about $1.1 billion. It's a sensible move, given that this crisis has hit the maker of Budweiser and Stella Artois particularly hard and at an especially difficult time. Its shares rose as much as 4.4%

The company is facing challenges on several fronts, all of which are compounded by the hit from Covid-19. For a start, the $100 billion acquisition of SABMiller in 2016 left it with a mountain of debt. Before taking into account the dividend cut, Bernstein analyst Trevor Stirling estimates net debt of $86 billion will be 5.7 times Ebitda at the end of this year. Second, the company is highly dependent on emerging markets, where it gets about 60% of its profit. And yet important currencies including the Brazilian real and Mexican peso have fallen against the dollar, putting more pressure on earnings.

This is the absolute worst time for any form of socializing to evaporate because it hurts sales of the more premium brands, such as AB InBev’s Michelob Ultra.

It’s unlikely an upswing in drinking at home can compensate for a decline in sales at pubs and restaurants for any brewer. Beer in supermarkets tends to be bought when it is on special offer. And even at home, beer and alcohol consumption can be driven by sporting events, so decisions to postpone the European Football Championships and Olympics will hurt.

Given this backdrop, AB InBev should have gone further and canceled its final dividend altogether. True, another $1 billion wouldn’t have made a huge difference, and may have irritated the group’s big shareholders, tobacco giant Altria Group Inc. and Colombia’s Santo Domingo family. But it should have erred on the side of caution anyway.

It’s a choice the company has faced before, and now it’s clear that AB InBev should have been more radical when it decided in October 2018 to halve its annual payout, from 3.6 euros to 1.8 euros, saving about $4 billion. At the time, the company described this as steering a middle course between maintaining and shelving the dividend.

But Covid-19 makes the middle an even more painful place to be. AB InBev should not lose this latest opportunity, when it announces interim results in July, or sooner, to reset its dividend policy, and cancel the payout altogether.

While lockdowns should ease later in the year, there’s no guarantee that the things that drive beer consumption, from big concerts and sporting events to local pub life, will come back quickly. And when they do, people around the world may still be reluctant to visit crowded venues. And that’s before any impact from a broader economic downturn. Thrifty consumers may continue to trade down to cheaper brews.

It’s this uncertain future that calls for caution. Yes, AB InBev is good at controlling spending. And things are looking up on its debt load. It recently raised about $11 billion of bonds to bolster liquidity. Debt has an average maturity of 14 years, so there shouldn’t be any immediate cash crunch. But the recent pressures on trading do raise questions about whether it should continue to have about $128 billion of goodwill on its balance sheet.

When AB InBev bought SABMiller, rival brewers risked becoming Megbrew roadkill. Today, with stronger balance sheets, Heineken NV and Carlsberg A/S look better placed to weather the Covid-19 crisis. It’s time for AB InBev to make some hard choices.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

For more articles like this, please visit us at bloomberg.com/opinion

Subscribe now to stay ahead with the most trusted business news source.

©2020 Bloomberg L.P.