Compañía Cervecerías Unidas S.A.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Compañía Cervecerías Unidas S.A. (CCU) is a South American beverage giant with operations in Chile, Argentina, Bolivia, Colombia, Paraguay, and Uruguay, primarily producing and distributing beer, soft drinks, and wine.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Operations: CCU is a leading player in the Latin American beverage market, with a diversified portfolio including both proprietary and licensed brands. The company operates through several segments: Chile, International Business (Argentina, Bolivia, Colombia, Paraguay, and Uruguay), and Wine. This geographic diversification, coupled with a range of product offerings, provides some insulation from regional economic downturns, changes in consumer preferences, and a more balanced overall business.

Revenue Distribution: The revenue mix is diverse:

  • Chile: Serves a mature and established market, representing a significant portion of CCU’s revenue. It includes the local manufacture, distribution, and sales of domestic and international brands.
  • International Business: Comprises all sales generated in other regions of South America. It varies by region, covering operations and partnerships in several countries with different economic conditions.
  • Wine: Sells the company’s wine both domestically and internationally. It’s heavily focused on premium, varietal, and popular-priced wines.

Industry Trends The global beverage industry is experiencing increased consolidation and integration. Several forces contribute to this:

  • Shift from Local to Global Brands: A trend towards globally recognizable brands. This impacts companies like CCU because the need to create brands that are appealing to a larger market.
  • Cost Pressures: Input costs are increasing. Companies are trying to maintain margins by increasing productivity, and taking advantage of economies of scale and scope and low-cost production locations. The effect of this has been clear in the consolidation of the beer industry where a few large groups have been increasing its presence by buying smaller breweries.
  • Health Consciousness: Consumers are increasingly focused on healthier alternatives, which impacts the market for traditional sugary drinks. Many companies have started investing in healthier alternatives.
  • Regulatory scrutiny: Increased regulation on alcoholic beverages and more complex taxation rules.

Competitive Landscape: The beverage industry is intensely competitive with strong regional players and large global players, creating a complex market. Specifically, for the markets in which CCU competes, we have:

  • Beer Segment: Intense competition from Anheuser-Busch InBev (AB InBev) which has a strong global presence. Also, local and independent breweries are emerging creating an increased competitive pressure.
  • Soft Drinks Segment: Competition with Coca-Cola and PepsiCo is a constant.
  • Wine Segment: Competes with other wineries in both the local and international markets.

What Makes CCU Different: CCU does not have clear differentiation. The following aspects can be used to evaluate CCU:

  • Geographic Diversification: CCU’s operations are spread across multiple countries, which may mitigate regional economic and currency fluctuations. The diversification across different cultures and economies may provide the company with access to different market needs and dynamics.
  • Product Breadth: Its product line covers all categories (from beer to soft drinks and wine) which helps in capturing different consumer segments.
  • Strong brand recognition in South America: CCU is a known brand in South America that provides it a competitive advantage.

Financials Analysis: CCU’s financials have shown interesting trends in recent quarters and years.

  • Revenues: Have shown some growth, but mainly attributable to price increases.
  • Profitability: Has seen some decrease.
  • Leverage: The company has increased the debt in recent times. The company is also showing high variability in key drivers like the return on invested capital (ROIC) and the earnings before interest, taxes, and amortization (EBITA). The current financial situation is not great, but as the company improves, they will probably get better numbers in the coming months and years.

Moat Analysis: CCU’s moat is based on a combination of:

  • Brand strength: Especially within specific regions of Latin America. Strong brand recognition can provide pricing power in its key markets. Some of its brands have been in the market for decades, giving them a certain amount of brand loyalty.
  • Distribution Networks: The company has established a robust distribution network in the countries it operates, leading to a cost advantage by allowing to reach consumers efficiently.
  • Economies of scale: CCU benefits from economies of scale due to its size which should lead to lower costs in some situations. However, in recent years the market has seemed to have a problem with overcapacity which will put downwards pressure on the profits for all the players.
  • Switching costs: Are very limited for retailers and consumers as it’s pretty easy to change brands.

Moat Rating: 3 / 5 CCU benefits from several advantages related to its brands, and distribution. But, many parts of the industry make it difficult for CCU to create a wide moat. So it can be seen to have a somewhat narrow moat.

Risks to the Moat:

  • Intensified competition: An increase in the competitiveness of the market, such as from small-medium players or new international players may take away market share or compress margins.
  • Changing Consumer Trends: Shifts in consumer preferences towards healthier products or different tastes may result in decreases in sales.
  • Economic volatility: Any economic issues that negatively impact the purchasing power of consumers will result in decreased sales.
  • Regulatory Changes: More taxes or new regulations may compress their profits.
  • Commodity Prices: Changes in the prices of commodities may increase their cost of sales. * Exchange Rate Fluctuation: As CCU operates in multiple countries, it faces exchange rate risks that make profits volatile. * Market Share instability: The market shares of different companies are changing frequently, which is problematic.

Business Resilience: CCU has a fair amount of resilience due to its wide range of products and the fact that it operates in multiple countries. But given that a large part of its sales are generated from alcoholic beverages and the negative effect of inflation and possible recessions, the company’s financials can vary greatly depending on market conditions.

Understandability: 2/5 The business model is fairly simple to understand in terms of producing, distributing, and selling beverages. The main complexity comes from the diversity of markets, the numerous licenses, the several different subsidiaries that are present all over the region and the accounting complexity.

Balance Sheet Health: 4 / 5 CCU’s balance sheet is in reasonably good shape. Here’s a breakdown:

  • Total Debt: The company has a significant amount of long-term debt. However, this is not abnormal for a company of its scale. The ability of the company to pay interest on the debt is high, so it is not at a big risk of bankruptcy.
  • Liabilities: The current liabilities are easily covered by their liquid assets.
  • Tangible assets: The company has a good amount of tangible assets, which gives it a cushion against unforeseen issues.

  • Equity: The company’s equity is in a good place, which shows a solid financial foundation.

    Overall, the balance sheet shows some strength and gives the company a good foundation to continue the business operations.

Recent Concerns / Controversies and Problems:

  • Inflation: Inflation and high input costs are a concern. The company is increasing prices to face this, but a price war might appear as new competitors start entering. As stated by CCU, “This macroeconomic environment remains volatile, with higher-than-historical inflation in all our countries.”
  • Tax Changes: The increasing changes in the tax systems may impact CCU’s profitability. Specifically, in Chile, changes in the excise tax regulations could greatly impact the company’s margins.
  • Competition: The growth of other producers in the beer and soft drinks market, including small ones, impacts their sales. They mentioned a competitive market in Colombia that is affecting margins.
  • Volume Decrease: In the Chilean market, sales have decreased slightly.
  • Acquisition Synergies: The company must ensure that they find good synergies when they acquire a company, or the ROI might suffer.
    • Employee and Executive Compensation: In a time where inflation and the cost of life are rising, the company has to take steps to ensure their employees are well rewarded.
    • Labor Issues: In the Chilean region, recent labor reforms are a major threat.

CCU’s management is focused on managing these issues and has mentioned they are focusing on the most relevant key value drivers.