Good Taste Has No Boundaries

Transcription

1 Good Taste Has No Boundaries And there are a lot of people who haven t yet tasted the best coffee or beer in the world. By James Dominick Consumption trends in emerging markets have remained a topic of great interest throughout 213, as these markets continue to see much stronger fundamentals than their peers in the developed world. Further, as a result of their rapid growth in recent years, the emerging markets have now come to represent a significant part of many multinational corporations businesses. Within the emerging markets, the BRIC countries Brazil, Russia, India, and China clearly represent some of the most important markets for global consumption growth. Indeed, these four countries account for more than half of the emerging markets total GDP, and investor assessment of trends in the developing world have generally centered upon these major countries. We see Emerging Markets Insight 8

2 the BRIC markets as a good proxy for the entire group of emerging countries, given their size and geographic disparity, and believe this gives us a fair sense of how consumers may behave. We ve discussed in prior articles some of the strong categories leveraging consumption growth in these markets luxury, technology, automobiles, and others but in this article we ll be focused on the consumer staples world, and what we perceive as one of the most attractive sectors within it: Beverages. We continue to believe that emerging market consumption will be one of the biggest drivers of global growth in the 45% 4% 35% 3% 25% 2% 15% 1% 5% % BRIC market preference next decade we see $3 trillion in emerging market consumption by 225. Within that growth, there will be winners and losers as companies try to leverage that growth for their own benefit. At Mirae, we break down categories that will best be leveraged by local winners best in class local emerging market companies that know the local communities, understand distribution and consumer preferences, and other local idiosyncrasies. Concurrently, we look at categories where global leaders are going to dominate because of their significant size and scale, and massive brands and war chests. Beverages is one of the best growth categories in consumer staples, and we believe that global branded companies will be the winners within the higher value categories based upon the importance of brands, R&D, and distribution. Within beer, sustainable brand value can be created to drive a price premium well ahead of costs. There is therefore a significant intangible return on capital in beer. This comes on top of the opportunity to drive tangible returns on the significant capital tied up in production and distribution of a bulky product, which does not have an indefinite life i.e. needs to stay fresh. Based upon recent participation rates in the key BRIC markets, there are signs that BRIC markets may already be more developed than many companies believe and/or investors are aware of in terms of basic category adoption. Consistent with that, beyond early childcare categories (e.g., baby food and diapers, which only have 2-3 years of applicability in many instances), most of the For which products have you recently bought the more expensive brands than the brands you used to buy? (BRIC Markets) Emerging Markets Insight 9 categories recently adopted represent more discretionary purchases (e.g., energy drinks, air fresheners, pet food, and mouthwash). More basic categories (e.g., toilet paper, toothbrushes, toothpaste, and dish soap/detergent) appear far more penetrated. Across all categories within consumer Emerging market consumption will be one of the biggest drivers of global growth in the next decade we see $3 trillion in emerging market consumption by Average : 18% 212 Average : 18% Wine Colour cosmetics / Make-up Fragrance / Cologne / Perfume Baby food Shampoo / Conditioners Skin creams / Skin care Nappies / Diapers Deodorants Spirits / Hard alcohol Instant / Ground coffee Cheese Toothpaste Laundry detergent Beer Razors / Blades Sanitary napkins / Tampons Air fresheners Cigarettes Shaving cream / Gel Confectionary / Candy Rice / Noodles / Pasta Energy drinks Batteries Fresh milk Cough & cold medicine Mouthwash Dry fruits / Nuts Pet food Toothbrushes Curd / Yogurt Processed meat Biscuits / Cookies / Crackers Juices / Juice Drinks Household cleaners Frozen meals Liquid soap Toilet paper Iced tea / Iced coffee Bottled water Cold cereals / Snack bars Bleach Soft drinks / Colas Sports drinks Dish soap / detergent Bar soap Hot tea Salty Snacks (e.g., crisps) Dressings / Condiments Hot cereals Canned / Packaqed soup Facialtissue Household / Personal wipes Paper / Kitchen Towels Plastic bags / Wraps Source : Bernstein International Consumer Survey (212 and 213) staples, we continue to see a more advantaged environment for companies operating within Personal Care (Non-Beauty), Alcoholic Drinks, and/or Beauty (all else equal). Beer is Big Within the beverages category, we see beer as one of the best players on emerging market consumption growth in the coming decade. Of the 6 largest profit pool markets for beer globally, 4 are Emerging Markets: China is the largest generator of profit for the beer industry globally, followed by the US, Russia, Brazil, Germany, and Mexico. We estimate the global beer market represented 1.91 billion hectoliters, $172.7 billion of brewer net revenue ($91/hl) and $34.2 billion of EBIT (2% margin) in 212. Global growth continues to be driven by emerging markets, especially Latin America, emerging Asia and Africa. We estimate the Big 4 brewers account for 46% of volume, 5% of revenue and 6% of EBIT. AB InBev is 18% of volume and 32% of EBIT; SABMiller is 12% of volume and 13% of EBIT; Heineken is 9% of volume and 1% of EBIT; and Carlsberg is 6% of volume and 5% of EBIT. Geographic mix is crucial to long-term growth. Africa and emerging Asia have the most exciting upsides, as Africa is already largely dominated by four incumbents. Asia looks like the last frontier. Although China has a huge volume upside, it may never become a major

3 Average Beer per Cap (Litres) 1 9 GDP vs. Beer per Cap in Emerging Markets (211) 8 Venezuela Russia 7 Slovakia South Africa 6 Brazil Mexico 5 Peru Argentina 4 China Colombia 3 Tanzaina Thailand 2 Nigeria 1 source of profits. Romania Poland India 5, 1, 15, Croatia 2, Average GDP per Cap (US$) Source : Plato, IMF and Bernstein research The production, distribution, selling and marketing of beer lends itself to the replication of scalable processes across brands and markets. Get this right, as AmBev/ABI has historically done in Brazil, and a beer business can drive a near 5% EBIT margin. Brands and brewing assets have an extremely long life, which in some cases, can be measured in hundreds of years. The need for capital investment to maintain operating capability can be significant but is normally infrequent. This means cash generation can be very attractive. Barriers to entry and exit in beer are high. Returns to equity have been supercharged in the last decade or so through the use of leverage and latterly cheap credit extended against very, very predictable cash flows. The attractions of the industry to generate cash and returns to equity owners and the growth opportunities at the national and regional level meant that until the 198 s brewers were primarily national players with export or partnership with other brewers the preferred route to expand brands into new markets. Consolidation started to accelerate in the 198 s and 199 s but the watershed year was 1999 when Interbrew floated, South African Breweries shifted its prime listing to London and AmBev was created. Since then the equity and debt capital base of brewers in the public market has increased by over 7x. This has come at the same time as the rise in demand driven by emerging market consumers. The industry is still delivering volume growth, driven by emerging market consumers ahead of fixed cost. Pricing power is increasing (or more precisely those markets where pricing power has increased are a growing proportion of the total profit pool) ahead of through-the-cycle variable cost inflation. This should drive industry margins upward and support industry profit growth in line with the c. 7% CAGR seen in the last decade. North America may not be a high-growth region; but it is still the biggest regional profit pool by far. Although the United States (78 liters per capita) and Canada (68 liters per capita) are mature beer markets, with high per capita consumption, they are still structurally much more attractive than Western Europe. Demographic trends are more favorable and the macro/consumer environment is arguably brighter. Furthermore, market structures are oligopolistic, and in the U.S., the distribution system insulates brewers from direct exposure to aggressive retailers, and the federal excise tax has not increased since Average Beer per Cap (Litres) gdp, Beer per capita and profitability Importantly, however, Mexico combines all the features to make a perfect cocktail: Still plenty of potential to increase volume and premiumization and a duopolistic market structure. In fact, the Mexican beer market follows typical emerging market patterns where beer volumes have grown broadly in line with real GDP on average. And given Mexico still lies beneath the GDP/beer per capita curve, we believe there are still plenty of opportunities to grow per capita consumption (see the chart on the left). Latin Liquidity While Mexico is a tremendous growth market, the Central and South (C&S) American beer market offers the most attractive near/medium-term upside with very favorable demographic trends, plenty of room to grow per capita consumption and increase penetration of premium beer, robust GDP growth prospects and oligopolistic market structures. All this makes this region the most profitable in the world for beer. We estimate that the C&S American beer market represented 241 million hectoliters (13% of global beer volume), $24.6 billion of net revenue ($12/ hl and 14% of global beer revenue) and $7.8 billion of EBIT (31.8% margin and 23% of GDP per Cap vs. Beer per Cap (211) Regional Beer Revenue per hl vs. (%) EBIT Margin (211) North R²=68% 8 America C&S America A C&E Europe 6 C Western North B Europe 3 America 5 C&S America 25 4 C Africa 2 3 Asia pacific 2 15 A B 1 1 C&E Europe Western Africa Asia pacific Europe 5 1, 2, 3, 4, 5, Average GDP per Cap (US$) Average Net Revenue per hl (US$) % Normalized EBIT Margin Note : Size of bubble denotes population. N. America includes Mexico Source : Plato, IMF and Bernstein research Source : Plato, company data and Bernstein research Emerging Markets Insight 1

4 global beer profits). C&S America is one of the biggest profit contributors to three of the global brewers (SAB, ABI, and Heineken), and we believe the region is likely to continue to offer attractive growth opportunities, notably as real GDP continues to grow in the region, and therefore, we think Latin America will continue to be one of the key growth drivers for the beer category, along with Asia and Africa. However, in profit terms, it is clear that both Latin America and Africa are far more profitable than Asia due to very different market structures (series of oligopolies vs. heavy fragmentation, respectively). Brazil to Africa Within C&S America, Brazil is by far the largest beer market, accounting for over half of the region s volume, net revenue and profit. Other key markets in our analysis include Colombia, Argentina, Venezuela, Peru, Chile and Ecuador. The next largest beer markets in volume terms after Ecuador (6 mhl) in C&S America are the Dominican Republic (4.2 mhl) and Bolivia (3.7 mhl). The oligopolistic structure in each individual market creates a very benign pricing environment, leading to superior operating margins by global standards, apart from Venezuela due perhaps to specific economic and monetary issues. Africa is probably the most attractive region for long-term profit growth for the global brewers, with a large population, (very) low per capita consumption, strong GDP growth and oligopolistic market structures. Latin America has stronger margins today but African margins have more headroom and better (very) long-term growth prospects. However, most of the future upside is likely to accrue to incumbents, as high barriers to entry make it very difficult for new entrants, especially those with little experience in this operationally challenging region. We estimate that the African beer market represented million hectoliters (6% of global beer volumes), $12.1 billion of net revenue ($14/hl and 7% of global beer net revenue) and $3 billion of EBIT (24.5% margin and 9% of global beer profits) in 211. Somewhat similar to the Central & South (C&S) American beer market, the African beer market is split into a series of local oligopolies, creating a very favorable pricing environment, beneficial to margins. However, because income and per capita consumption are lower and infrastructures are weak, these countries are generally subscale/lower margin industry compared to C&S America. We believe Africa (along with emerging Asia) has the highest long-term potential upside for beer consumption. With only nine liters of beer consumed per capita, we are Emerging Markets Insight 11

5 still very far from the c.7 liters per capita observed in North America/Western Europe or even the c.5 liters per capita observed in C&S America/C&E Europe. In particular, we note countries such as Nigeria, DRC and Ethiopia have very large populations and low per capita consumption. Therefore, we believe there is little doubt that Africa will be one of the engines of growth for the beer category in the next decades. Along with Africa, emerging Asia is the region with the highest long-term potential volume upside as there is little doubt that China and India will be key drivers of future volume growth. However, unit pricing and margins are very low in China and we believe that this is likely to continue for the foreseeable future, as the four large brewers engage in a bruising slugfest. Hence the short/medium term profit upside from the region is more limited; and we view Asia as a long-term play for the global brewers at this stage. There is no doubt about the growth potential of China; but selling prices and margins are still very low by global standards due to market fragmentation. So the really big question is: If the pace of consolidation picks up, can China dominate the global profit pool in the way it currently dominates global volumes? Put another way, will China become the next Brazil or the next United Kingdom? We believe it is hard to envisage any of the current Big 4 in China exiting in any realistic time frame. So unless one believes that China evolves into stable regional oligopolies (which we view as unlikely) a U.K.-type outcome is more likely. While the coffee is a global growth phenomenon with many different drivers, coffee consumption is growing explosively in the Asia Pacific region. For example, China s chained coffee market has grown at an annualized rate of 42% over the last 1 years. And while Starbucks is nascent in India, that country s rapid economic growth and high income elasticity demand implies the Indian specialty coffee market could double by 214. Across emerging Asia, profitability and returns compare favorably to the United States, driving consolidated returns higher. While China has the greatest potential for growth, South Korea continues to grow very quickly (37% 1-year CAGR) and at 92.1 stores per million people offers a precedent for an Asian market in which rapid growth persists despite density that is even greater than that of the United States. Korea s growth is particularly impressive given that at 92.1 stores per million people, rapid growth persists despite density that is even greater than that of the U.S. Likewise, although Japan s economy is mature and growth has been sluggish, the specialty coffee market has defied the broader malaise in recent years. Starbucks in Strong Position As in the U.S., we expect Starbucks to be a key driver for and beneficiary of this rapid demand growth; the business mix should continue to shift toward emerging markets. Just as the growth of the Starbucks brand in the 199s propelled the growth of the broader specialty coffee market in the U.S., we anticipate that the company s future growth in Asia will drive a similar dynamic. Given India s rapid economic growth expected to exceed China s as soon as 214 and high income elasticity we expect the Indian specialty coffee market to double by 214 We find that in nearly all of Asia Pacific and in particular the most important one, China the specialty coffee market has substantial room to grow. If we look at spending on chained specialty coffee as a percentage of nominal GDP in the CAP markets, China is the clear outlier, where chained specialty coffee amounts to only.7% of nominal GDP the.8% figure for the U.S. is roughly ten times bigger by comparison. Emerging Markets Insight 12

6 Great Consumer starbucks Recreates Coffee With a dominant market share, its growth is accelerating. By James Dominick Photos by SHUTTERSTOCK value chain and its ownership of key segments of the coffee industry, we believe Starbucks is a strong investment both from a value and long-term growth perspective. Starbucks is one of the best beverage companies globally. Given recent business moves, it has a hybrid model that leverages the best of the restaurant category with the best growth of beverages as well. A unique coffee player with dominant market share in several key segments, Starbucks is on track to improve its operating performance and earnings with multiple drivers of upside. Significant sales momentum in China coupled with improved productivity, capacity, and profitability of its US restaurant segment and the improvement of the company s CPG (consumer packaged goods) business will all add greater than expected returns. Given Starbucks s favorable positioning on the Multiple Levels of Growth We are forecasting 24% and 23% EPS growth in fiscal 213 and 214 as Starbucks pursues multiple avenues of growth. FY13 is particularly exciting from an EPS growth standpoint, as Verismo (the company s single-serve retail system) is introduced, China continues to gain scale, and the company benefits from lower coffee costs. We also believe that loyalty programs and throughput initiatives should continue to drive strong traffic gains in the Americas division. Starbucks continues to derive the majority of profits from the US, and the company s ability to deliver both square footage growth and same-store sales growth is key to the stability of the company s earnings growth. Importantly, the company has proven itself to be best in class at managing margins, so we are not concerned with its ability to mitigate downside risk and drive addition- Emerging Markets Insight 13

7 Great Consumer al profitability when results are ahead of expectations. We believe LFL growth will come in ahead of expectations, as channel checks are showing average check growth and a return to traffic growth over the prior two months. Further, as we move through 213 and into 214, the company has significant menu board initiatives to drive traffic which has always been the closest correlation to LFL sales. From a square footage growth standpoint, the company has significant room to grow, both in traditional stores, and also in new formats and locations. Specialty coffee consumption is growing explosively in the Asia Pacific region, but the market is still just a fraction of the size of the US. China s market has grown at an annualized rate of 42% over the last 1 years vs. 15% in the US but still has just.9 units per mm people (vs in the US). While China has the greatest potential for growth, South Korea continues to grow very quickly (37% 1-year CAGR) and at 92.1 stores per mm people offers a precedent for an Asian market in which rapid growth persists despite density that is even greater than that of the US. As in the US, we expect Starbucks to be a key driver of this rapid growth, and the company s business mix should continue to shift toward emerging markets. Profitability and returns in these markets compare favorably to the United States, driving consolidated returns higher. Global Operations Can They Fix a Decade of Underinvesting? As the core business shows signs of stabilization, investors will increasingly focus on the CPG segment, in which K-Cups have accounted for 4%-5% of growth. While the latest measured channel data indicated that Starbucks maintained 15% of the K-Cup market, we believe there is upside to that number given the promotional activity in the channel. Further, as Starbucks progresses on its revamp of the Roast & Ground business in key wholesale doors, the company should see both an acceleration of margin in the category, along with a halo effect for K-Cups and other products on supermarket shelves. Regional Growth Rate Sales (%) Americas Sales (%) Americas 9 EMEA EMEA 14 China & Asia Pac China & Asia Pac CPG CPG 2 212E E 214E 215E 216E E 213E 214E 215E 216E -6-8 Managed correctly, CPG can be a significant driver of earnings upside for the company. While still early innings of the turnaround post KFT acquisition, we believe we are poised to see a rapid acceleration. Starbucks launched its Verismo offering (a single-serve system that makes both brewed coffee and espresso that retails from $199 to $399) in September of 212, and the single-serve brewer has been off to a fantastic start. Starbucks has sold out of a majority of brewers, as customers have been seeking competition in this category which to date has been dominated by Nespresso & Keurig. In 212 the global single serve coffee market was roughly $1.6 billion, up from $8 billion in 211, with slightly more than half of that market in brewed coffee and the balance in espresso. The Verismo s unique dual system of both brewed and espresso coffees and the Starbucks name behind the global launch will lead to significant market share capture on a global basis over the coming five years. Predictably and understandably, there is very little expected in current estimates on the impact of Verismo. This new driver can add both significant top line (the industry is growing at a +2% clip) but also margin expansion given the premium pricing on the Verismo pods. Emerging Markets Insight 14

8 Great Consumer The King of Beers Set to reap the greatest benefits of globalization. By James Dominick Anheuser- Busch Inbev One of the most attractive companies globally, with incredibly strong brands and the best leverage to beer growth globally, is Anheuser-Busch Inbev (ABI). The company is the dominant player in the top 3 beer markets of the US, Brazil, and Mexico, and it controls 6 of the top 1 markets. In total we estimate ABI is 25% of global beer volume pool and near 4% of the global profit pool (pro forma for Mexico and the synergies), followed by SABMiller with 15%, Heineken with 1% and Carlsberg, 6%. With globally recognized brands such as Budweiser, Bud Light, Corona, and Stella Artois, ABI is poised to dominate the growing profit pools of beer globally. ABI s globally dominant position has been essentially built over just two decades following the acquisitions by the legacy Interbrew and AmBev companies (with the flotation of Interbrew and creation of AmBev in 1999), the creation of InBev in 24 following the merger, and then the combinations with Anheuser-Busch in 28 and the Emerging Markets Insight 15

9 Great Consumer June 4 merger with Modelo. On a standalone basis, we believe ABI can deliver close to +7% organic sales growth and +9% organic EBITDA growth as a mid-term run-rate (from 214E onward). The company recently closed on the acquisition of Grupo Modelo, which controls the Corona brand, the dominant Mexican beer player. Post the Modelo acquisition; we see organic EBITDA CAGR midterm increasing to +1.5%. By 216E ABI will be the market leader in three of the four top global beer profit pools (US, Brazil, Mexico) and #3 in China (though leader in the international premium segment), driving economies of scale through this market leadership, as well as strong revenue/hl growth. Premiumisaion While the mid-term volume growth outlook for US beer is modest at around +.5% growth per annum, we are impressed with ABI management s focus on driving price/ mix growth in this market, and its portfolio strengthening strategy. Premium-priced innovation (Platinum, Lime-A-Rita) has been successful, and we believe will continue (roll-out of Bud Black Crown, Strawber- Rita in 213). We forecast price/mix growth of +4.% per annum in the US. While the last four By 216E ABI will be the market leader in three of the four top global beer profit pools (US, Brazil, Mexico). quarters have seen EBITDA margins decline y/y as ABI has adjusted its supply chain to a more complex product portfolio, we believe EBITDA margins will expand from Q2 213 onward. While the weak Brazil beer volumes were the shock of ABI s Q1-13 results recently, we expect Brazil market volume growth to accelerate to +4% pa from 214E onward as ABI benefits from the World Cup (214) and Olympics (216) in Brazil. Against this backdrop we expect ABI to take market share (especially in the North/North-East) and roll-out the Bud brand nationally in anticipation of these events. A key opportunity for the Brazil beer market is premiumization, with premium beer representing only 6% of total market volumes today and potential to reach 15% in the long-term. Taking into account the Modelo accretion, ABI is trading on 16.3x 214CY P/E, which is a small discount to the European Beverages sector. We believe that ABI should trade at a c1% sector premium, given +14.4% EPS CAGR E as well as very powerful cash generation. This is one of the best companies in the world tremendous categories, fantastic geographies, and superb management will deliver tremendous total shareholder returns, and we are poised to leverage this in the Mirae Asset Global Great Consumer funds. Emerging Markets Insight 16