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Heineken: drinkers’ willingness to swallow higher prices will be tested- Newshubweek

Heineken: drinkers’ willingness to swallow higher prices will be tested
Written by Arindam

Brewing is an energy-intensive business. Heineken’s costs are swelling fast. But Monday’s better-than-expected half-year profits showed that the world’s second-largest beer maker has so far met little resistance in passing costs on to drinkers.

Price increases averaged 9 per cent over the half year, making them the main contributor to a 15.3 per cent rise in price mix. That measure was also helped by the reopening of bars and the trend for consumers to opt for more expensive drinks.

Those factors should help the organic operating profit margin to hold up — or even edge ahead — this year. But it would be unreasonable to expect operating profits to go on increasing as rapidly as a top line inflated by price rises. Hence Heineken has dropped its focus on margins. Its new goal is to deliver mid-to-high single-digital operating profit growth.

Chart showing that Heineken’s operating profits are running ahead of pre-pandemic levels. Operating profit (Euros billions) against Operating profit margin (%), 2018 to 2022 (estimate).

That might seem a punchy target, given worries about the price and availability of natural gas. Europe accounts for a third of Heineken’s operating profits, compared with about a tenth for its bigger rival AB InBev. For sure, Heineken has been lessening its dependence on fossil fuels and could switch its breweries to oil. But suppliers of its packaging, not to mention its consumers, would be badly affected.

A positive contribution will be made by Heineken’s cost-cutting programme, on target to save €1.7bn compared with the 2019 base, by the end of this year. The greater scope for savings is one reason why its shares trade on a price/earnings multiple of 19, a fifth higher than AB InBev. Another is Heineken’s potential to increase its share in emerging markets.

Two charts. The first shows that sales of the Heineken brand have been strong. Heineken brand against total portfolio, year-on-year growth (%) 2012 to 2021. Second chart shows that shares have outperformed, Heineken (share price) versus MSCI Europe (index value), 2012 to 2022.

After heavy cuts during the pandemic, the marketing spend has been restored to close to pre-pandemic levels. Sponsorship of women’s motor racing and football, including the Euros tournament that concluded on Sunday, is part of that.

Marketing is aimed at boosting demand for its more expensive drinks, such as the Heineken brand. The portfolio has a higher proportion — at 40 per cent — of premium brands than the industry average. The company is betting on the premiumisation trend continuing, even as prices rise and the economy weakens. But if there is a severe downturn, expect it to lose much of its fizz.

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Arindam

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