Ambev Earnings: Big Step In the Right Direction on Margins but Upside Remains

Brahma, the Brazilian brewer, was the first foray into the consumer product manufacturing industry by private equity group 3G. In 2000, 3G merged two Brazilian brewers; Brahma and Antarctica, creating Ambev ABEV3. The company has gone on to roll up brewers throughout Central and South America and holds several monopolylike positions in large markets, including an 81% volume share in Argentina, 68% in Brazil, and 61% in Peru.

In part because of the favorable industry structures, and in part because of its 3G heritage, Ambev is a highly profitable business. The company has a well-entrenched cultural focus on cost management, and implemented zero-based budgeting over a decade ago. Ambev’s largest market is Brazil, which represented 54% of total beverage net revenue and 49% of EBIT in 2022. However, until coronavirus-related social distancing measures prompted the closure of on-trade in some markets, Ambev’s beer EBIT margins in Brazil had been in the mid-30% range, among the highest in the global beer industry, though they had faded from above 40% a decade ago. In 2022, those margins troughed at under 21% and have recovered somewhat year to date in 2023.

We believe rebuilding margins is important to the investment case. In our view, the most likely and significant boost to profitability would be a reversion to the historical mean of commodity costs. We estimate the company faced around BRL 3 billion in higher raw material costs in 2022, and a reversal of that by the end of 2024 would increase the gross margin by 3 percentage points, all else equal. In practice, we anticipate that some of the cost relief will be passed to the consumer, but lower costs will be beneficial to margins to a large degree.

Premiumization should be a long-term growth and margin driver. According to Euromonitor, the premium beer segment represented 15% of Brazil’s beer volume in 2021, around half of that of the U.S., and was almost entirely responsible for industry volume growth between 2016 and 2021. Ambev’s portfolio of local premium brands, as well as its access to Anheuser-Busch InBev’s global portfolio, positions it to benefit from a strong mix effect in the medium term.