Severe Weakness in Brazil Causes Miss for AB InBev

For the second consecutive quarter,

Brazil remains incredibly weak for AB InBev and its majority-owned subsidiary Ambev. Regional organic volumes declined 5.1% in the third quarter, with beer volumes falling 4.1%, despite the benefit of the Olympics being held in Rio de Janeiro in August. Price/mix was also negative, down 1.2% in the quarter. We believe recent volume declines are linked to the weakness in the Brazilian economy, as well as the continued pressure on consumer disposable incomes. Negative pricing is a divergence from the company's stated strategy of pricing in line with the consumer price index in Brazil, which is currently running at around 8.5%, and will raise eyebrows. We do not believe the pricing model is broken, however, for two reasons. First, mix likely played a large part in the decline, as premiumisation often reverses in economic downturns and consumers temporarily switch to smaller pack sizes. Second, the shift to returnable bottles, which now account for 26% of Brazilian volume, is weighing on revenue growth. We expect this negative mix effect to eventually plateau and provide a margin-enhancing platform for growth.

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