Anheuser-Busch 2007

Forest David: Francis Marion University Alan Badal: The Union Institute

A.

Case Abstract
Anheuser-Busch (www.anheuser-busch.com) is a comprehensive business policy and strategic management case that includes the companys fiscal year-end December 2006 financial statements, competitor information and more. The case time setting is the year 2007. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Saint Louis, Missouri, Anheuser-Buschs common stock is publiclytraded on the New York Stock Exchange under the ticker symbol BUD. Anheuser-Busch operates in four segments: domestic beer, international beer, packaging, and entertainment. The domestic segment operates under the brand names Budweiser, Michelob, Busch, and Natural. The international segment has breweries in Great Britain and China. Anheuser-Buschs packaging segment produces bottles, bottle caps, cans, boxes, and other packing goods necessary to product the product. BUDs entertainment division has parks in Florida, Virginia, California, Texas and Pennsylvania. The company has over 30,000 employees and is led by CEO August Busch. The firms major competitor is Molson Coors.

B.

Vision Statement (actual)

To become recognized as the premier beer company in every country in the world.

C.

Mission Statement (actual)

Be the worlds beer company. Enrich and entertain a global audience. Deliver superior returns to our shareholders. (proposed) At Anheuser-Busch, we strive to meet the needs of our customers (1) by providing them with the highest quality beverages (2, 7) using only the best ingredients. Our focus is not only on the North American market but also worldwide (3, 5). We meet and often exceed the expectations of our consumers by using the latest technology to develop healthier, fresher, and tastier alcoholic and non-alcoholic beverages (4). At Anheuser-Busch we strive to be a good corporate citizen (6) through donations and alcohol awareness (8) and by hiring the best employees and allowing them opportunity for advancement (9).

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1. 2. 3. 4. 5. 6. 7. 8. 9.

Customer Products or services Markets Technology Concern for survival, profitability, growth Philosophy Self-concept Concern for public image Concern for employees

D.

External Audit
Opportunities 1. The number of alcoholic beverage consumers of legal drinking age is strong, with a large population of 21 to 27 year olds. 2. Light beer consumption continues to dominate US beer market due to healthier living. 3. Chinas beer market is estimated to grow at least 5 percent annually for the next five years. 4. Russia has the fifth largest beer market in the world. 5. India is expected to have an annual growth rate of 8 percent in the next five years. 6. Of Chinas top three brewers, only Beijing Yanjing Beer Group does not have a foreign partner. 7. Customers prefer sprits to beer. 8. Weak dollar makes products cheaper in Europe. 9. Drinking age in much of the world is 18. Threats 1. Increase in wine sales by 5 percent shows new preference for wine. 2. Shift toward sprit consumption. 3. Shift towards healthier living among US citizens. 4. Decline in beer consumption by 1 percent in 2006. 5. Higher cost for commodities such as grains, packing material and energy used in the brewing process and delivery. 6. Alcoholic beverages are subject to high levels of taxation in the US. 7. Imported beer into the US is significantly outpacing overall domestic market share increased from 9 percent in 1999 to 12 percent in 2005. 8. New innovations by competitors such as Coors with can liners and cooler box. 9. Restrictions on beer advertisements have become increasing stricter.

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CPM Competitive Profile Matrix

Critical Success Factors Market Share Price Comp Financial Position Product Quality Product Lines Customer Loyalty Employees Marketing Total Weight 0.15 0.10 0.12 0.15 0.15 0.15 0.11 0.07 1.00 Anheuser-Busch Rating Weighted Score 3 0.45 4 0.40 4 0.48 3 0.45 4 0.60 3 0.45 3 0.33 4 0.28 3.4 Molson Coors Rating Weighted Score 3 0.45 4 0.40 4 0.48 3 0.45 4 0.60 4 0.60 3 0.33 3 0.21 3.52 SAPMILLER Rating Weighted Score 3 0.45 4 0.40 3 0.36 3 0.45 3 0.45 3 0.45 3 0.33 3 0.21 3.10

External Factor Evaluation (EFE) Matrix

Key External Factors Opportunities 1. The number of alcoholic beverage consumers of legal drinking age is strong, with a large population of 21 to 27 year olds. 2. Light beer consumption continues to dominate US beer market due to healthier living. 3. Chinas beer market is estimated to grow at least 5 percent annually for the next five years. 4. Russia has the fifth largest beer market in the world. 5. India is expected to have an annual growth rate of 8 percent in the next five years. 6. Of Chinas top three brewers, only Beijing Yanjing Beer Group does not have a foreign partner. 7. Customers prefer sprits to beer. 8. Weak dollar makes products cheaper in Europe. 9. Drinking age in much of the world is 18. Threats 1. Increase in wine sales by 5 percent shows new preference for wine. 2. Shift toward sprit consumption. 3. Shift towards healthier living among US citizens. 4. Decline in beer consumption by 1 percent in 2006. 5. Higher cost for commodities such as grains, packing material and energy used in the brewing process and delivery. 6. Alcoholic beverages are subject to high levels of taxation in the US. 7. Imported beer into the US is Weight Rating Weighted Score

0.04 0.10 0.04 0.04 0.04 0.02 0.10 0.07 0.04 0.07 0.10 0.05 0.02 0.08 0.06

3 4 3 2 3 1 1 2 3 1 1 3 2 3 2

0.12 0.40 0.12 0.08 0.12 0.02 0.10 0.14 0.12 0.07 0.10 0.15 0.4 0.24 0.12

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significantly outpacing overall domestic market share increased from 9 percent in 1999 to 12 percent in 2005. 8. New innovations by competitors such as Coors with can liners and cooler box. 9. Restrictions on beer advertisements have become increasing stricter. Total

0.08 0.02 0.03 1.00

2 3 3

0.16 0.06 0.09 2.61

E.

Internal Audit
Strengths 1. 2. 3. 4. 5. 6. 7. 8. Dominate the market share with 48 percent share volume in the US. Bud Light is the leading brand in the world. One of the top five global brewers by holding 11 percent market share worldwide. Products sold around the world including, China, Japan, Brazil, India, Italy, France, Spain, Great Britain and many more. Return on equity is 53 percent compared to 28 percent industry average. Exclusive sponsor of Super Bowl telecast through 2010. Exclusive beer sponsor of the 2006 World Cup in Germany. Inventory turnover is 16 compared to 9 for the industry.

Weaknesses 1. Decline in 2006 in Michelob Ultra sales of 17 percent and 23 percent in Michelob Light. 2. Limited exposure in Africa. 3. Focused to heavily on beer with little diversification into wine and other sprits. 4. Five year average sales 4 percent compared to industry average of 12 percent. 5. Debt to equity in year-end 2006 of 2.36 compared to industry of 1.0. 6. As of year-end December 2006, Anheuser-Busch reported goodwill in excess of $1 billion. Financial Ratio Analysis (December 2006)
Growth Rates % Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Price Ratios Current P/E Ratio P/E Ratio 5-Year High P/E Ratio 5-Year Low Price/Sales Ratio Anheuser-Busch 7.90 7.10 10.90 4.01 2.89 10.37 17.2 NA NA 2.11 Industry 9.90 11.70 17.50 12.50 16.15 13.16 21.7 24.4 9.1 6.87 SP-500 11.40 17.30 9.60 13.06 20.38 9.91 21.5 27.1 6.9 2.46 74

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Price/Book Value 9.80 Price/Cash Flow Ratio 14.40 Profit Margins Gross Margin 35.2 Pre-Tax Margin 14.4 Net Profit Margin 8.6 5Yr Gross Margin (5-Year Avg.) 38.2 5Yr PreTax Margin (5-Year Avg.) 17.2 5Yr Net Profit Margin (5-Year Avg.) 10.4 Financial Condition Debt/Equity Ratio 2.36 Current Ratio 0.9 Quick Ratio 0.6 Interest Coverage 6.3 Leverage Ratio 4.8 Book Value/Share 4.82 Investment Returns % Return On Equity 53.1 Return On Assets 8.4 Return On Capital 9.7 Return On Equity (5-Year Avg.) 61.1 Return On Assets (5-Year Avg.) 10.0 Return On Capital (5-Year Avg.) 11.4 Management Efficiency Income/Employee 46,818 Revenue/Employee 543,892 Receivable Turnover 16.8 Inventory Turnover 16.1 Asset Turnover 1.0 Adapted from www.moneycentral.msn.com Date 12/06 12/05 12/04 12/03 12/02 Avg. P/E 18.00 20.50 19.70 20.30 23.00 Price/Sales 2.43 2.24 2.75 3.12 3.14

12.51 30.30 52.4 20.1 12.8 50.2 16.0 10.9 1.05 0.9 0.7 6.2 2.9 11.11 27.9 9.4 13.1 28.9 7.5 9.8 24,549 244,680 21.7 8.9 0.8 Price/Book 9.57 9.08 14.93 15.80 13.42 ROE (%) 49.9 47.4 79.4 76.6 63.4

7.78 11.70 34.5 17.7 12.5 34.3 16.3 11.3 1.11 1.1 0.9 32.2 3.7 17.87 25.5 7.8 10.3 18.6 6.4 8.6 92,684 811,196 14.5 8.6 0.8 Net Profit Margin (%) 12.5 11.6 14.2 14.7 14.3 ROA (%) 12.0 10.5 13.1 14.1 13.7 Interest Coverage 6.3 5.7 7.8 8.5 8.5

Date Book Value/ Share Debt/Equity 12/06 $5.14 1.94 12/05 $4.73 2.17 12/04 $3.40 3.10 12/03 $3.34 2.69 12/02 $3.61 2.16 Adapted from www.moneycentral.msn.com

Net Worth Analysis (December 2006 in millions)

1. Stockholders Equity + Goodwill = 3,938 + 1,137 2. Net income x 5 = $2,000 x 5= 3. Share price = $47.00/EPS 2.73 =$17.22 x Net Income $2,000= 4. Number of Shares Outstanding x Share Price = 733 x $47.00 = Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall $ 5,075 $ 10,000 $ 34,432 $ 34,451 75

Method Average

$20,989

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Strengths 1. Dominate the market share with 48 percent share volume in the US. 2. Bud Light is the leading brand in the world. 3. One of the top five global brewers by holding 11 percent market share worldwide. 4. Products sold around the world including, China, Japan, Brazil, India, Italy, France, Spain, Great Britain and many more. 5. Return on equity is 53 percent compared to 28 percent industry average. 6. Exclusive sponsor of Super Bowl telecast through 2010. 7. Exclusive beer sponsor of the 2006 World Cup in Germany. 8. Inventory turnover is 16 compared to 9 for the industry. Weaknesses 1. Decline in 2006 in Michelob Ultra sales of 17 percent and 23 percent in Michelob Light. 2. Limited exposure in Africa. 3. Focused to heavily on beer with little diversification into wine and other sprits. 4. Five year average sales 4 percent compared to industry average of 12 percent. 5. Debt-to-equity in year-end 2006 of 2.36 compared to industry of 1.0. 6. As of year-end December 2006, AnheuserBusch reported goodwill in excess of $1 billion. TOTAL Weight Rating Weighted Score 0.60 0.48 0.20 0.30 0.20 0.08 0.16 0.32 0.10 0.03 0.12 0.05 0.07 0.02 2.73

0.15 0.12 0.05 0.10 0.05 0.02 0.04 0.08 0.10 0.03 0.12 0.05 0.07 0.02 1.00

4 4 4 3 4 4 4 4 1 1 1 1 1 1

F.

SWOT Strategies
SO Strategies 1. Create a new low carbohydrate beer for the Budweiser family (S1, S2, S5, S8, O1, O2). 2. Joint venture into India (S1, S2, S4, S5, S8, O5). WO Strategies 1. Develop a strong marketing strategy with increased advertising of the Michelob family aimed at younger drinkers (W1, O1, O9). 2. Decrease the price of the Michelob family (W1, O1, O9).

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ST Strategies 1. Enter the wine/sprit market by acquiring a wine/spirit company (S1, S5, S8, T1, T2). WT Strategies 1. Enter the wine/sprit market by acquiring a wine/spirit company (W3, T1, T2).

G.

SPACE Matrix
FS 6 5 4 3 2 1

Conservative

Aggressive

CA

-6

-5

-4

-3

-2

-1 -1 -2 -3 -4 -5 -6

IS

Defensive

ES

Competitive

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Financial Strength (FS) Return on Assets (ROA) Leverage Net Income Income/Employee Inventory Turnover Financial Strength (FS) Average Competitive Advantage (CA) Market Share Product Quality Customer Loyalty Technological know-how Control over Suppliers and Distributors Competitive Advantage (CA) Average

3 1 6 5 6 4.2

Environmental Stability (ES) Rate of Inflation Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry into Market Environmental Stability (ES) Average Industry Strength (IS) Growth Potential Financial Stability Ease of Entry into Market Resource Utilization Profit Potential

-2 -2 -2 -6 -3 -3.0

-1 -2 -1 -2 -2

4 5 2 4 4 3.8

-1.6 Industry Strength (IS) Average

x-axis: -1.6 + 3.8 = 2.6 y-axis: 4.2 + -3.0 = 1.2 Coordinate: (2.2, 1.2)

H.

Grand Strategy Matrix

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Rapid Market Growth Quadrant II Quadrant I

Weak Competitive Position

Strong Competitive Position

Quadrant III Slow Market Growth

Quadrant IV

I.

The Internal-External (IE) Matrix

The IFE Total Weighted Score Strong 3.0 to 4.0 I Average 2.0 to 2.99 II Weak 1.0 to 1.99 III

High 3.0 to 3.99

Medium

IV

VI

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The EFE Total 2.0 to 2.99 Weighted Score

Anheuser Bush

Low 1.0 to 1.99

VII

VIII

IX

Hold and Maintain

Geographic Region United States International Percent Revenue 92 8

J.

QSPM
Further expand into Europe AS TAS ----3 4 4 3 --3 3 1 --1 0.36 0.20 0.40 0.15 --0.12 0.24 0.10 --0.12 Diversify into wine/spirits AS TAS ----1 2 2 4 --1 4 3 --4 0.12 0.10 0.20 0.20 --0.04 0.32 0.30 --0.48 80

Strategic Alternatives Key Internal Factors Strengths 1. Dominate the market share with 48 percent share volume in the US. 2. Bud Light is the leading brand in the world. 3. One of the top five global brewers by holding 11 percent market share worldwide. 4. Products sold around the world including, China, Japan, Brazil, India, Italy, France, Spain, Great Britain and many more. 5. Return-on-equity is 53 percent compared to 28 percent industry average. 6. Exclusive sponsor of Super Bowl telecast through 2010. 7. Exclusive beer sponsor of the 2006 World Cup in Germany. 8. Inventory turnover is 16 compared to 9 for the industry. Weaknesses 1. Decline in 2006 in Michelob Ultra sales of 17 percent and 23 percent in Michelob Light. 2. Limited exposure in Africa. 3. Focused to heavily on beer with little Weight 0.15 0.12 0.05 0.10 0.05 0.02 0.04 0.08 0.10 0.03 0.12

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diversification into wine and other sprits. 4. Five year average sales 4 percent compared to industry average of 12 percent. 5. Debt-to-equity in year end 2006 of 2.36 compared to industry of 1.0. 6. As of year end December 2006, AnheuserBusch reported goodwill in excess of $1 billion. SUBTOTAL

0.05 0.07 0.02 1.00

-------

------1.69

-------

------1.76

Key External Factors Opportunities 1. The number of alcoholic beverage consumers of legal drinking age is strong, with a large population of 21 to 27 year olds. 2. Light beer consumption continues to dominate US beer market due to healthier living. 3. Chinas beer market is estimated to grow at least 5 percent annually for the next five years. 4. Russia has the fifth largest beer market in the world. 5. India is expected to have an annual growth rate of 8 percent in the next five years. 6. Of Chinas top three brewers, only Beijing Yanjing Beer Group does not have a foreign partner. 7. Customers prefer sprits to beer. 8. Weak dollar makes products cheaper in Europe. 9. Drinking age in much of the world is 18. Threats 1. Increase in wine sales by 5 percent shows new preference for wine. 2. Shift toward sprit consumption. 3. Shift towards healthier living among US citizens. 4. Decline in beer consumption by 1 percent in 2006. 5. Higher cost for commodities such as grains, packing material and energy used in the brewing process and delivery. 6. Alcoholic beverages are subject to high levels of taxation in the US. 7. Imported beer into the US is significantly outpacing overall domestic market share increased from 9 percent in 1999 to 12 percent in 2005. 8. New innovations by competitors such as Coors with can liners and cooler box. 9. Restrictions on beer advertisements have become increasing stricter. SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE

Weight

Further expand into Europe AS TAS 2 ----4 ----1 4 3 1 1 --1 ----------0.08 ----0.16 ----0.10 0.28 0.12 0.07 0.10 --0.02 ----------0.93 2.62

Diversify into wine/spirits AS TAS 3 ----1 ----4 1 2 4 4 --4 ----------0.12 ----0.04 ----0.40 0.07 0.08 0.28 0.40 --0.08 ----------1.47 3.23

0.04 0.10 0.04 0.04 0.04 0.02 0.10 0.07 0.04 0.07 0.10 0.05 0.02 0.08 0.06 0.08 0.02 0.03

K.

Recommendations
81

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The QSPM strategies assessed whether expanding the brand name and image more in Europe would be more effective than acquiring or starting a new wine/spirit company to counter the drawdown in the beer industry. The QSPM reveals diversifying into sprits would be the more advantageous approach at this time. Constellation Brands is a publicly-traded company that produces, wine, sprits, and has bottling rights for other beer producers. BUD should acquire STZ. Constellation Brands (STZ) Net Worth January 2008
1. Stockholders Equity + Goodwill = 3,400 + 3,000 2. Net income x 5 = $327 x 5= 3. Share price = $20.00/EPS 1.29 =$15.50 x Net Income $327= 4. Number of Shares Outstanding x Share Price = 215 x $20.00 = Method Average $ 7,400 $ 1,635 $ 5,069 $ 4,300 $4,610

L.

EPS/EBIT Analysis
$ Amount Needed: 4,000M Stock Price: $47 Tax Rate: 35% Interest Rate: 7% # Shares Outstanding: 733M
Common Stock Financing Recession Normal Boom 1,000,000,000 2,500,000,000 5,000,000,000 0 0 0 1,000,000,000 2,500,000,000 5,000,000,000 350,000,000 875,000,000 1,750,000,000 650,000,000 1,625,000,000 3,250,000,000 818,106,383 818,106,383 818,106,383 0.79 1.99 3.97 70 Percent Stock - 30 Percent Debt Recession Normal Boom 1,000,000,000 2,500,000,000 5,000,000,000 84,000,000 84,000,000 84,000,000 916,000,000 2,416,000,000 4,916,000,000 320,600,000 845,600,000 1,720,600,000 595,400,000 1,570,400,000 3,195,400,000 792,574,468 792,574,468 792,574,468 0.75 1.98 4.03 Debt Financing Normal 2,500,000,000 280,000,000 2,220,000,000 777,000,000 1,443,000,000 733,000,000 1.97

EBIT Interest EBT Taxes EAT # Shares EPS

Recession 1,000,000,000 280,000,000 720,000,000 252,000,000 468,000,000 733,000,000 0.64

Boom 5,000,000,000 280,000,000 4,720,000,000 1,652,000,000 3,068,000,000 733,000,000 4.19

EBIT Interest EBT Taxes EAT # Shares EPS

70 Percent Debt - 30 Percent Stock Recession Normal Boom 1,000,000,000 2,500,000,000 5,000,000,000 196,000,000 196,000,000 196,000,000 804,000,000 2,304,000,000 4,804,000,000 281,400,000 806,400,000 1,681,400,000 522,600,000 1,497,600,000 3,122,600,000 758,531,915 758,531,915 758,531,915 0.69 1.97 4.12

M.

Epilogue
The second largest U.S. beer producer, SABMiller, is expected to win federal

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government approval to combine with the third largest U.S. beer producer, Molson Coors. Under the Bush presidency, it has been much easier for large competing firms companies to merge. "I would frankly expect that they will (get approval), in part because it's the Department of Justice," said Ben Sharp of Perkins Coie LLP, reflecting a view among some experts that the department challenges few mergers. "I doubt very much that it would have got approval under the Clinton administration," Sharp said. Michael Keeley of Axinn, Veltrop & Harkrider, LLP agreed: "I'd be stunned if they did anything to stop this deal." The Anheuser-Busch company, which produces Budweiser, Busch and Michelob, is the longtime U.S. market leader with just under half of all U.S. beer sales. However, Miller holds 18.7 percent of the market and Coors 11 percent, according to Michael Scherer, who teaches management at Harvard's Kennedy School of Government. The rest of the market is shared by imports and microbrewed beers. The proposed merger would give Anheuser-Busch and the new MillerCoors joint venture control over nearly 80 percent of the U.S. beer market. According to the Herfindahl-Hirschman Index used by antitrust experts to assess illegality, the U.S. beer market is already concentrated and the joint venture would push the index up by more than 300 points. Deals that raise the index by more than 100 points in concentrated markets "presumptively raise antitrust concerns," according to the Justice Department's merger guidelines. "This is one that clearly violates the anti-merger guidelines," said Scherer, who follows the beer industry. "So it seems to me that the government should take a hard look at it." If the Miller/Coors joint venture is approved, that firm would have annual sales of $6.6 billion. Ownership would be split with each company holding a 50 percent voting interest, but the larger SABMiller would take a 58 percent economic interest compared to Molson Coors' 42 percent. The deal could hurt Pabst Brewing Co, which has 3.38 percent of the U.S. beer market, since Miller brews most of Pabst's beer and could opt to shut down that plant, said Scherer. "This could put them in a very squeezed position," he said. Despite a second request for information from the U.S. Justice Department, both companies say they expect to win approval and close the deal by mid-2008. Miller and Coors have argued that the deal will be good for the average American beer drinker but this is debatable. Miller and Coors may use their combined clout with wholesalers to squeeze competitors, meaning that some smaller brewers could lose their distributors.

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