Brazilian brewer Brahma was the first foray into the consumer product manufacturing industry by Jorge Lemann, Marcel Telles, and Carlos Sicupira, the leaders of the private equity group now known as 3G. In 2000, they merged Brahma with Antarctica of Argentina, creating Ambev ABEV. The company has gone on to roll up brewers throughout Central and South America and holds several monopolylike positions in large markets, including 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 53% of both total beverage net revenue and EBIT in 2018. Until the current severe recession caused a large contraction in profitability, EBIT margins in Brazil had been at or above 45% since 2010, among the highest in the global beer industry, and while the entry of Heineken (HEINY) to Brazil may limit margin potential, we expect margins to rebound to 38% when the macroeconomic picture improves.
Philip Gorham, CFA, FRM does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.