Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Carlos Brito has started flying by private jet. And there are other signs that AB InBev's famously penny-pinching CEO is softening on costs.

The brewer's fourth-quarter earnings missed estimates, partly because it's spending more on advertising and promotions to get its mainstream U.S. beer brands moving again. It's also the best way to encourage American drinkers to buy more premium brews.

The results haven't improved yet: sales to U.S. retailers fell 1.1 percent in the fourth quarter, sending underlying profit in the region down 7 percent. Still, it won't hurt AB InBev to relax its iron grip on margins to try to pump out some top-line growth.

Mega-Margins
AB InBev has squeezed out famously impressive margins, but weakening sales mean it's having to turn on the spending taps
Source: Bloomberg Intelligence

AB InBev, known for a fearsome performance culture, isn't proud of its U.S. travails. Unusually for a company known for ripping out costs, it's now spending to reverse market share losses. That's needed to reinvigorate U.S. brands such as Bud Light. AB InBev's also trying to move upmarket into craft beer, whose popularity brings more growth and higher prices. Sales and marketing investment rose 9.4 percent in 2015, and is expected to expand by 8-12 percent this year.

While investors needn't worry that the misers at AB InBev are about to become spendthrifts, the shift does show there's more to running a brewer than cost control. It also has implications for its proposed $100 billion takeover of SABMiller.

When "Megabrew" was announced back in November, it promised $1.4 billion of annual savings, or 9 percent of SABMiller's sales. That was below previous AB InBev deals, partly because SABMiller is better run, and operates in more complicated markets.

The hope from some shareholders was that AB InBev was under-promising on synergies and would surprise us all by over-delivering, helping explain why it's performed better than global stocks since a deal was agreed in October.

Lager Top
AB InBev has performed better than global stocks since deal was agreed
Bloomberg data

AB InBev's U.S. difficulties, challenging conditions in China, and foreign exchange headwinds in Brazil and Mexico, show again why it needs SABMiller -- not least to let it access Africa's rapid growth. But even emerging market drinkers are starting to show a thirst for tastier beers, so the extra spending needed to lure jaded boozers in Boston might soon be needed in Botswana too. Plus premium products demand more expensive ingredients.

Meanwhile, the converting of sales from the Brazilian Real or Mexican Peso to U.S. dollars shows some costs are beyond control. AB InBev's cost of sales increased 3.9 percent last year and it expects it to increase again by mid-single digits in 2016 because of FX impacts and spending on premium brands.

The SABMiller deal looks just about sewn up given that it's 60 percent-funded, according to Bloomberg Intelligence analyst Duncan Fox, apart from regulatory hurdles such as in China. AB InBev still expects to close in the second half of the year.

The promised savings don't look in any danger for now, but the target is looking more and more like prudent expectation management rather than something more. Anyone expecting another round of drinks from this deal may be disappointed.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net