What's going on?
Heineken, the world’s second-largest brewer, reported profits on Monday that slightly beat investors’ expectations – but its shares fell as it warned that its future profitability would be lower than its own previous goal.
What does this mean?
For the past three years, Heineken has aimed to grow its profitability (a.k.a. its margins) by 0.40% each year (which is actually pleasantly hoppy for a mature industry like beer). It fell short of that target last year, and now says it expects an increase of just 0.25% in 2018.
Part of the problem is that Heineken is ramping up spending in Brazil following its acquisition of rival Kiran’s operations there last year. But it’s also just a tough time to be in the beer industry, which Heineken says is currently marked by “volatility and uncertainty” – a bit like the bar at closing time.
Why should I care?
For markets: It’s tough being a big brewer right now.
Last week, Carlsberg’s stock sold off after it reported profits well below expectations thanks to difficulties in Russia. The world’s biggest brewer, AB Inbev, recently replaced its US chief in an effort to revive flagging sales there. One big challenge for brewers is consumers’ changing tastes – while the humble beer has become less popular, the appeal of spirits and non-alcoholic drinks has grown. And those that are drinking beer often seek out craft beverages. The big brewers are adapting, partly by buying up craft brew competitors, but it’s still a tough environment in which to grow.
The bigger picture: Emerging markets represent brewers’ best bet for growth.
Beer consumption is still growing in emerging markets: as incomes rise, people spend more on a (half-)decent pint of lager. Vietnam and Mexico are two of Heineken’s biggest markets, and Brazil has become a huge (and expensive) focus. And the mega-merger between AB Inbev and SABMiller in 2016 was partly driven by AB Inbev’s desire to expand further into emerging markets.