provide a perspective on the global Beer markets. Overall, while the market remains still impacted by COVID-19-led disruptions and with looming inflation to deal with into 2022, we focus on the emergence of alternatives to traditional lager or recreational drinking at large, be it with Specialty Beer (SB) or Beyond Beer (BB) beverages that provide opportunities and risks to the traditional lager-based industry.

 Beyond Beer and Specialty Beer drive higher growth in Global Beer.

Combined they represent a cUSD150bn market, 20% of global beer growing in 2019 at HSD% vs LSD for mainstream beer. Looking across all alcoholic segments they are providing the best volume growth opportunity powered by two strong trends: 1) consumers’ desire for healthier/lighter alternatives, and 2) accelerated innovation with more tasteful and convenient options.

 The jury is out on the LT impact but we see lager profit pools most at risk from disruption. SB+BB have boosted top-line growth for brewers thanks to positive mix from its more premium positioning, yet despite SB+BB gaining share over the past decade, industry margins have been broadly flat. We believe the major conundrums faced by the industry are: 1) Cannibalisation risks for mainstream lager though there are also some incremental consumption from new consumers or occasions, e.g., no alcohol beer; 2) A more fragmented marketplace: beer players are well positioned given their distribution set-up though with headwinds from their market shares under-indexing in the more fragmented SB+BB categories and with new competition from other beverages categories (spirits/soft drinks); and 3) Profitability/returns unclear so far with gross profit benefits offset by “sunk” A&P/ramp-up costs which may or may not pay off.

 Industry ST set-up remains difficult: Re-opening and Raw Material Costs. Across the global beer markets have not yet fully recovered, with an especially slow on-trade recovery in Europe while SE Asia is being hit by current restrictions due to the Delta variant. Besides, we highlight the fast rise in raw material inflation, picking up to the highest in a decade at c25% (esp barley and aluminum). Other things equal, the industry would need HSD price/mix to offset these headwinds into FY22 and see the focus turning to pricing and competitive actions, with little visibility on this so far in DMs particularly.

 Key stock ideas. In an ever-evolving paradigm, the winners are likely to be diverse and fragmented depending on the markets/strategy, we highlight (Heineken (OW), Constellation Brands (OW); Asahi (OW); Budweiser APAC (OW). At this point, we see Anheuser-Busch InBev (ABI; UW) and Molson Coors (TAP; UW) as most at risk being overweight to lager, and most overweight to markets such as the US where the pace of disruption from BB in particular is most apparent with an uncertain ST-MT return outlook as they are forced to either chase innovations or face perpetual core beer volume de-leverage.