February 12, 2018 / 1:14 PM / 5 days ago

Breakingviews - Heineken’s number two status brings marginal costs

LONDON (Reuters Breakingviews) - Heineken’s number two status comes with marginal costs as well as benefits. The Dutch group is one of the few global brewers still managing to boost beer volumes. However, acquisitions will weigh on its operating margins in 2018.

The owner of the Sol and Tiger beer brands, and the world’s second-largest brewer by revenue, said on Monday that 2017 volumes grew by 3 percent. That means it is doing a better job of persuading drinkers to buy its brands than competitors Carlsberg and AB InBev, both of which reported lower beer volumes in their most recent numbers. Heineken’s focus on faster-growing premium beers – led by its namesake lager – as well as a surer eye for picking the most promising beer markets, is paying off.

The 46 billion euro company led by Jean-François van Boxmeer is less impressive when it comes to boosting profitability, however. Last year it bought the Kirin brand in Brazil, putting it into direct competition with market leader AB InBev. The purchase doubled Heineken’s market share in the promising Brazilian market. But integrating what was a loss-making business means that overall operating margins will improve by just 25 basis points in 2018. An implied operating margin of 17.5 percent by the end of the year will be less than two-thirds of the return AB InBev extracts from its sales.

Lower profitability partly reflects the challenge of competing against such a big rival. While AB InBev has traditionally opted to dominate a smaller selection of markets where it can gain pricing power – it controls 62 percent of Brazil’s beer market by volume, according to Jefferies estimates – Heineken prefers to spreads itself more widely. That strategy brings higher fixed costs and greater exposure to unpredictable swings in currencies such as the Mexican peso and Nigerian naira. And while making around 30 percent of its revenue from premium brands boosts the Dutch brewer’s top line, it also involves higher marketing expenses. What Heineken gains in nimbleness compared with its larger rival, it loses in profitability.

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