Over the past few years, SABMiller (SAB) has been one of the most compelling emerging markets stories in our consumer defensive coverage universe. It remains a strong business, with a wide moat based on its cost advantage in Africa and an impressive growth profile from its broad emerging markets presence; about 80% of earnings before tax. However, its margins lag those of local rival AmBev in the key emerging markets of Latin America, and we think there are structural barriers to the margin gap being closed in the medium term.
The first issue preventing a closure of the margin differential is scale. Brazil, where AmBev (ABEV3) has a 63% share, is the third largest market in the world by total volumes and is by far the largest beer market in Latin America, with total 2013 consumption of 134 million hectolitres. For context, the second-largest market was Colombia, where SABMiller operates a near-monopoly 98% market share, with 20 million hectolitres, and Mexico consumed seven million hectolitres.
This scale and concentration of market share gives AmBev a wide economic moat, in our opinion, a cost advantage that SABMiller is unlikely to replicate in its much smaller markets in the region.
The second issue is the affordability of beer. Our analysis shows that GDP per capita covers the wholesale price of a hectolitre of beer by 129 times in South America (ex-Brazil) and 115 times in Brazil. This is more than double the 50 times coverage ratio in SABMiller’s Latin American markets, partly as a result of lower price points in AmBev’s markets – the firm generates $85 per hl in revenue in South America ex-Brazil, versus the $126 per hl generated by SAB – and partly because GDP per capita is higher in its markets; about $11,000 versus $6,300 for SAB’s Latin American markets.
Using forecasts of per capita GDP growth from the U.S. Department of Agriculture's Economic Research Service to 2020, we estimate that at 3% regional GDP growth, it would take eight years of flat pricing for our affordability index in SAB’s Latin American segment to equal that of A-B InBev’s segment.
We believe that lower commodity inflation (led by lower demand from China) could lead to slightly lower volume and pricing inflation rates over the next few years. We expect revenue growth to be driven fairly evenly between volume and price/mix, with a slight bias to pricing, and with Latin America and Africa the key growth geographies.
