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Budweiser Accused of Watering Down Beer

bw-4The company that advertisers itself as the King of Beers, Budweiser is accused of watering down beer that it produces. The company has been hit with a lawsuit that could hurt its reputation and send beer drinkers into believing, ‘This Bud’s Not for You!’

The watery beer allegations can hurt Anheuser-Busch because it relies heavily on traditional beer brands like Michelob and Budweiser, which have been losing share in the U.S. A sign of just how weak the brewer’s position is can be seen by the fact that it was trumpeting a 0.2% increase in sales in the U.S. market in the Fourth Quarter of 2012. That’s right — a .2% sales increase is good news for the world’s largest brewer.

Bud Stock Not Watered Down

Any drop in sales caused by watery beer charges can hurt Bud’s sales, but it may not show in the share price. The share price rose by $1.89 on February 27, the day after the watering allegations came out. The price is actually approaching the 52-week high of $94.49. The market isn’t paying much attention to the watering allegations even if the media is lapping the story up.

It’s easy to see why the lawsuit isn’t affecting the stock—Bud just paid a dividend of $1.56 a share. It also posted a P/E ratio of 20.16 and an EPS of 4.55. The basic financials are good even if the beer is watered down.

So why is the stock doing well even if the company’s share of the U.S. beer market is falling? One possibility is that investors like Bud’s potential outside the U.S., especially in the developing world. Even though American beer drinkers are no longer drinking traditional brands like Bud and Michelob in droves, people elsewhere in the world are. Bud’s big growth in recent years has been in Brazil and China, where legions of industrial workers can afford a cold one.

May Hurt Premium Beers

There is one way this lawsuit could really hurt Anheuser-Busch. It might derail the company’s new strategy of launching premium brands aimed at niche beer drinkers, that is, more expensive, bc-4high-quality beers for serious beer drinkers—the kind of people who traditionally don’t go near brands facing watering allegations.

Part of this strategy is buying the biggest brewery in Mexico, Group Modelo, for $20.1 billion. The idea there is to tap the U.S.’s growing population of working class Hispanics, many of whom prefer native brands to American beers. Another is the introduction of more new specialty beers, such as a strawberry flavored beer and Budweiser Black Crown, a stronger version of Bud.

Black Crown is one of the beers named in the watering down lawsuits, and it is one of Anheuser-Busch InBev’s few success stories in the U.S. beer market. Its appeal is based on its higher alcohol content. If the public starts thinking Black Crown is watered down its sales might sink.

Even if Anheuser-Busch can survive the scandal, the company still has a lot of work cut out for it. It once had 50% of the U.S. beer market but fell to 39% in 2012. Apparently the company’s slogan, ‘This Bud’s for You’ hasn’t been the case for millions of beer drinkers for a long while.

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