According to the news report by Bloomberg, Heineken NV’s attempt to challenge the supremacy of Anheuser-Busch InBev NV in Brazil is failing and is squeezing the Dutch brewer’s profit margins. Thanks to this, the brewing giant has forecast a decline in its profits for this year.
Heineken is the world’s second largest brewer and on Monday, the company’s shares dropped the most it has in nearly 3 years. The company’s shares fell as much as 6.1% in trading in Amsterdam.
The reason the company gave was that it was expanding faster than it had expected in Brazil, Latin America’s biggest economy. The brewer’s beer business has been less profitable in this region than any other in the world.
Last year, Heineken bought over Kirin Holdings Co.’s beer business for $2.2 billion, thus becoming the second largest beer company in Brazil. The Japanese beer company Kirin has gone against the world’s number one brewer Anheuser-Busch and stumbled.
Now, Heineken is in direct competition with AB InBev, which has led the company to spend more on marketing its products in Brazil. Due to the fact that the company has had to increase marketing spend, there has been an impact on its profit margins, despite the fact that the brewer is selling more beers.
Currently, AB InBev controls 63.8% of Brazil’s beer market. Now, after acquiring Kirin, Heineken controls 20.4% of that market. The brewer is currently selling its mass market brand Schincariol as well as the more upmarket lagers Devassa and Eisenbahn in the country.
According to the company’s Chief Financial Officer Laurence Debroux, Heineken had not expected its products to sell so fast in this new market. And now that Kirin’s beer brands are also showing a turnaround, Debroux stated that they could see margins catch up to the company’s average profit level in the next 3 to 5 years.
According to CNBC’s news report, the Chief Executive Officer of Heineken, Jean-Francois van Boxmeer stated that this faster-than-expected growth in its Brazilian market was very good news, despite the fact that the country still gave lower profit margins that its other markets.
In the first half of 2018, Heineken saw double-digit growth in Brazil, vis-à-vis AB InBev, which reported a 9.4% growth for just the second quarter of the year. The Dutch brewer’s European division did not perform as well, with sales falling by 0.1% for the first half.
Heineken stated that due to currency issues (the Euro has been gaining in strength and this had hit the company’s costs), the full year profit margin is expected to drop by about 20 basis points. Previously, the company had forecast that its profit markets would increase by 25 basis points. The company’s adjusted operating profits went up by 1.3% to €1.75 billion for the first half of the year, which was below the market consensus target.
Additionally, this year’s growth in margins is lower than previous years’. The company stated that besides currency headwinds, higher raw material costs also impacted their overall profitability.
Organic growth in beer volume grew by 4.5% for Heineken, vis-à-vis the analyst expectation of 3.1%.
According to Morgan Stanley’s analyst Olivier Nicolai, the company’s performance show lead to a mid- to low-single-digit drop in forecasts for the year on a stock that has performed well overall.
AB InBev also reported less than expected earnings for the second quarter of the year. However, the brewing giant’s reasons were different from Heineken’s. The company reported that its marketing spending on the World Cup had hurt its second quarter’s profit margins.