Climate Change: An Existential Threat for AB InBev?

How can AB InBev, the world's largest producer of beer, prepare for a future where its supply chain is constantly under pressure as a result of climate change?

Led by brands like Budweiser and Corona, AB InBev is the world’s largest producer of beer, with $46B in revenue, ~28% market share, and operations in over 50 countries.[1] This scale in a single product category is incredible – but it also creates dependence on a small number of ingredients, all of which are threatened by the changing climate.

Beer is produced with four main ingredients: Water, barley, yeast, and hops.[2] (Other ingredients are often introduced to create flavor differentiation.) Changing patterns of precipitation as a result of climate change, particularly increased drought rates, present a significant risk to all four key ingredients. The brewing process requires 3.1 hectoliters of water per hectoliter of beer produced; in turn, if water supply is limited by drought, breweries are forced to reduce production rates. Drought also affects the ability of farmers to grow the hops, barley, and other ingredients that beermakers rely on.[3]

Beer’s key ingredients are universally under threat…

5 ingredients of beer

Source: AB InBev, “Beer and Brewing,” http://www.ab-inbev.com/about-us/beer-and-brewing.html

There are more subtle risks, too. For example, Canadian farmers who historically grew barley have recently begun growing more profitable crops like corn instead – a choice made feasible only because of Canada’s warming temperatures.[4]

Such trends collectively reduce the supply of products necessary to create beer, at once potentially limiting InBev’s ability to meet demand and increasing costs for production due to ingredient price increases.

CURRENT APPROACH TO THE PROBLEM

InBev is attacking the supply chain threat presented by climate change in a variety of ways. In the short-term, it is reducing water used in the brewing process; it has already reduced usage to 3.1 gallons used per hectoliter of beer from 3.5 hectoliters in 2012, and is aiming to achieve further reductions.[5] InBev is also scaling a program called “SmartBarley” – a digital platform and set of training programs that help growers implement best practices to improve yield and reduce water waste – throughout its supply chain.[6]

Reduction in water use by AbInBev in brewing process

Source: AB InBev, “Our Water Use,” http://www.ab-inbev.com/better-world/a-cleaner-world/water/our-water-use.html

Meanwhile, InBev acquired SABMiller, another beer conglomerate, in 2016. This merger has enabled vertical integration of the supply chain: for example, InBev acquired a significant proportion of hops produced in South Africa in the merger.[7] While this is not explicitly intended to mitigate the effects of climate change, such vertical integration, combined with InBev’s global reach, should allow InBev to hedge proactively against poor crop yields in other parts of the globe resulting from climate change.

Over the medium-term, InBev has announced a new program to transition to 100 percent renewable energy in its supply chain by 2025 – an effort that does not directly solve the problems presented by climate change, but will reduce InBev’s contribution to the problem and allow it to advocate credibly for policies that will be beneficial to sustainability in the long-term. [8]

ADDITIONAL STEPS TO CONSIDER

Even as InBev has committed to increasing energy efficiency, it has not announced other long-term plans for managing the effects climate change will have on its business. InBev should think bigger, creating a four-part strategy around climate-change management:

  1. Expand Current Approach: InBev should build a “SmartHops” program to supplement the “SmartBarley” program and continue to reduce water-volume used in the brewing process.
  2. Commit to Climate-Informed Supply Chain Management. Do so in three concrete ways:
    1. InBev should leverage its increasingly large scale to negotiate longer-term pricing with farmers that protects margins in the event of dropping ingredient supply.
    2. InBev should conduct a region-by-region analysis of current suppliers and their relative climate-change risk. Based on that analysis, InBev should identify opportunities to replace suppliers with others better-positioned to deal with climate change, while developing contingency plans to leverage global suppliers if some regions experience extreme weather changes at an increasing frequency.
    3. Management should collaborate with climate scientists to identify regions that will be better able to accommodate InBev’s key crops and begin to strategically acquire the best-positioned farms as a pathway to insulting the firm from both draught and supplier drift.
  3. Invest in truly future-oriented efforts. Do so in two concrete ways:
    1. InBev should partner with companies like Indigo to create drought-resistant hops and barley.
    2. InBev should leverage its internal venture program, ZX Ventures, to pursue a “climate innovation” strategy, funding early stage ventures introducing innovations in irrigation and other agricultural areas that will help its growers operate effectively in the shifting climate.
  4. Pursue Policy Advocacy: InBev should also leverage its new position as a market leader to begin formally lobbying for government policies that are beneficial to farmers who are threatened by climate change.

One question I am still wrestling with: How realistic is such an approach, given the diverse regional range of agricultural and political problems presented by climate change?

 

(Words: 766)

[1]  Ab Inbev, “About Us,” http://www.ab-inbev.com/about-us.html, accessed November 2017; Lisa Brown, “A-B InBev finalizes $100B billion acquisition of SABMiller, creating world’s largest beer company,” Chicago Tribune, http://www.chicagotribune.com/business/ct-megabrew-ab-inbev-sabmiller-merger-20161010-story.html, accessed November 2017.

[2] Ab Inbev, “Beer and Brewing,” http://www.ab-inbev.com/about-us/beer-and-brewing.html, accessed November 2017. Budweiser, InBev’s signature beer in the United States, also contains rice.

[3] Caitlyn Kennedy, “Climate & Beer,” Climate.gov, https://www.climate.gov/news-features/climate-and/climate-beer, accessed November 2017. Hops yields in both the northwest United States and Europe, both of which are significant producers, have been especially affected by drought in recent years.

[4] Pat Mulloy, “Climate change’s impact on beer: What you need to know,” The Growler, https://growlermag.com/climate-changes-impact-on-beer-what-you-need-to-know/, accessed November 2017.

[5] AB InBev, “Our water use,” http://www.ab-inbev.com/better-world/a-cleaner-world/water/our-water-use.html, accessed November 2017. This reduction is in part being achieved by implementing a program that enables breweries to use reclaimed waste water to clean its equipment.

[6] SmartBarley, “Working together to produce better barley,” http://www.smartbarley.com/en/home.html#about, accessed November 2017.

[7] Jason Notte, “Opinion: Anheuser-Busch InBev shuts out craft beer brewers by hoarding hops,” MarketWatch, https://www.marketwatch.com/story/anheuser-busch-inbev-shuts-out-craft-beer-brewers-by-hoarding-hops-2017-05-11, accessed November 2017.

[8] Christopher Helman, “A green energy push for Anheuser-Busch,” Forbes, https://www.forbes.com/sites/christopherhelman/2017/04/06/bud-boss-promises-green-beer-in-big-shift-to-renewable-energy/#f7330ae7ea9b, accessed November 2017.

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6 thoughts on “Climate Change: An Existential Threat for AB InBev?

  1. Great post, I love your four-pronged approach for long-term, climate-change adaptation. I have three additional strategies to contribute:

    1) AB inBev could experiment with alternative main ingredients for beer in addition to providing capital for genetic modification of barley and hops. Your paper notes that inBev recently acquired SAB Miller. They have a beer in Africa produced from Cassava, which is a hardy, drought resistant and common plant in the region. This cassava beer is not only cheap to produce, but it does not have the same fluctuations in raw materials cost or availability due to the type of plant. This strategy could be leveraged and experimented with globally with other local plants.

    2) AB inBev should get consumers involved by making them aware of their own impact on the environment while consuming beer, similar to how Nespresso encourages pod recycling. For example, I had no idea that AB inBev had so many sustainability initiatives, and if I had known I maybe would have bought more beer from them. Additionally, by making consumers aware, perhaps the consumers can help with bottle/packaging recycling and other initiatives. This would allow AB inBev to address the upstream supply chain along with the downstream.

    3) AB inBev should leverage its market dominance to influence smaller breweries towards more sustainable supply chains. For many of these breweries, vertical integration is not a possibility, but I think the water reduction efforts as well as the distribution and packaging initiatives could have real impact in smaller breweries.

  2. In the Czech Republic we have a saying: “The only thing the Czechs are willing to riot about is when the beer gets more expensive.” Reading through your article I thought that we will probably have many riots coming our way in the near future.
    While some of the measures you are suggesting, such as “Smart hobs” and following the example of Indigo and creating drought-resistant hops and barley, should have a long-term impact, I am not sure that the short to medium term measures (long-term contracts, regional diversification of suppliers) can really alleviate the current situations since they have probably been used by the management already in the past and therefore are unlikely to yield many additional benefits in the future. I could imagine that AB InBev might even see decreased benefits of these in the future, if other regions experience changes similar to those in Canada, which would in turn further decrease the possibility to diversify.
    As to the point (4) about lobbying – I was wondering what should they actually lobby for and which region / country. Agriculture has always been extremely subsidized and protected industry – are you suggesting AB InBev should lobby for even stronger subsidies (e.g. to improve irrigation systems)? Doesn’t that create a vicious circle in the sense that if AB InBev is successful, companies dependent on other agricultural product would follow their example and demand the same – resulting in ever increasing government spending on agriculture? On top of that, would e.g. US even be open to global-warming-related subsidies, if it is, through president Trump, openly abandoning the Paris agreement and reducing focus on climate change?

  3. Thanks for sharing this interesting paper. An additional consideration is the potential impact on the environment of the actual production process of beer. ABInbev could likely be a leading advocate for best practices in beer / beverage production in terms of mitigating its own footprint on the environment. Given our recent discussion of the Ikea case, I wonder to what extent ABInbev should further vertically integrate its supply chain to be able to better manage the production of the raw materials used as inputs in its production process. I also think that the Company could lead a marketing campaign around sustainability to encourage changes in consumer behavior or ultimately encourage better behavior across the industry, which could help spread out the costs associated with adjusting to the challenges resulting from climate change.

  4. Great article Matt! It is very interesting to assess the different motivations that companies have to tackle global warming issues – while some do it mostly as a PR play, there are some industries where it is a fundamental play that is tied to the long term existence of the business model.

    However, as TZ mentioned, beer companies can not afford the higher prices that would be tied to operationally becoming more resource conscious and are having to technologically innovate to be able to meet their needs of the future.
    .
    In my point of view, the two places where AB Inbev should double down are:

    – Driving innovation that could yield higher crops would be a way to lower the total cost to the system while passing on most of the created value to the producers, improving the long term feasibility of the market.
    – Optimizing the amount of resources required to produce the final product. Several of the largest beverage manufacturers of the world are heavily investing on reducing the amount of water required to produce their goods. While re-usage of water is a main driver of this kind of initiatives, the cost to clean and reuse water is still a deterrent.

  5. Thanks for the great article Matt. As a big believer in the benefit of having market and private company incentives aligned with broader societal goals, it’s in some ways encouraging to see an example of a company that has a core business incentive to reduce climate change and its impacts (even if the underlying problem is unfortunate and scary!).

    I like your action plan a lot, in particular your idea to develop modified (genetically or otherwise) crops that are drought resistant (and potentially also able to thrive in a wider range of temperature conditions). Beyond protecting against climate change, making such crops available could result in several cost savings for ABInBev. If the new crops made it possible to grow barley and hops in a wider range of geographies, that should increase the number of farmers interesting in growing barley and hops; this increased supply could actually decrease prices for these crops. In addition, the flexibility these crops give could allow ABInBev to buy barley and hops that is grown much closer to their manufacturing facilities, thus reducing transportation and supply chain costs. If ABInBev could pull off such crop innovation, I’d expect them to reap benefits in both the short term as well as the longer term (as climate change gets worse).

    I am a bit more skeptical of ABInBev’s ability to successfully lobby for meaningful political change, either in reducing carbon emissions or in getting more government support for farmers. Both of these are extremely contentious political issues that no one company (or even group of companies) is likely to move the needle on. While it certainly doesn’t hurt for them to lobby for policies that benefit them, I think ABInBev should be prepared to respond to climate change without government assistance.

  6. Thank you for the interesting essay! I think investing in technological development has the potential for tremendous impact, but it may also be difficult for AB InBev. Genetically modified crops seem like one of the largest areas of opportunity. If AB InBev and its partners develop and deploy drought resistant-seeds, they could maintain much of their current supply chain despite the consequences of climate change. However, the company faces substantial barriers to introducing GMO crops. InBev is a truly international company that sources raw materials and sells beet from around the globe. Many consumers are wary of GMOs, and 17 European countries have even imposed bans on cultivating GMO crops, citing health concerns.[1] Before GMOs can be used to combat climate change, InBev may need to overcome substantial consumer and political opposition.

    [1] https://www.nytimes.com/2015/10/25/opinion/sunday/with-gmo-policies-europe-turns-against-science.html

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