Breweries mitigate price increase pressure

  • Business
  • Saturday, 16 Mar 2019

A bartender serves a glass of Carlsberg beer at a bar in Kuala Lumpur, Malaysia in this July 4, 2012 file photo. - REUTERS

THE brewery business had a spectacular 2018 but this year is turning out to be a tough one.

For starters, it’s been hit by higher raw material and commodity prices.

And secondly, a depreciating ringgit could bear negatively on margins.

In a move to mitigate these cost pressures, the breweries will be increasing product prices.

Come April 1, except for some products, Heineken Malaysia will be increasing its product prices by between 3% and 5%.

On the other hand, there will be an increase ranging from 3% to 6.2% for Carlsberg Malaysia’s products per pack.

CGS-CIMB, in a recent industry report, opined that brewers have no choice but to raise selling prices as any further increase in raw material prices will lead to significant margin erosion.

“In our view, any negative impact on malt liquor market volume will be limited as we believe that the quantum of price increase is manageable.

“Despite the upcoming price hikes for beers, we note that beer remains the cheapest form of alcohol in Malaysia compared with other alcohol products available, such as hard liquor and wine.

“Based on our estimates, Heineken Malaysia and Carlsberg Malaysia’s financial year 2019 (FY19) to FY21 earnings per share (EPS) are likely to be lower by an average 0.5% to 1.2%, following the price increase,” the research house says.

FY18 was a spectacular year for Carlsberg Malaysia, which saw its profits shoot up by 25%, its share price by almost the same percentage and it paid the highest dividend it ever did for any year, a total of RM1 per share.

The year was less dramatic for Heineken Malaysia, whose share price rose a mere 0.3% on a one-year basis and profits edged up by 4.6%.

But that does not make Heineken Malaysia any less attractive.

In fact, going by some counts, it is a more attractive stock.

It trades at a less demanding historical price-earnings (PE) multiple of 23 times earnings, compared with Carlsberg Malaysia’s 26.6 times.

Going by Bloomberg data, Heineken Malaysia offers a higher indicative gross yield per share of 3.95% versus Carlsberg Malaysia’s 2.98%.

Carlsberg Malaysia commands a larger market capitalisation of RM7.8bil, compared with Heineken Malaysia’s RM6.9bil.

Heineken Malaysia has had a good run but it is facing stiff competition from Carlsberg Malaysia.

An analyst opines that Heineken Malaysia needs to grow its sales volume, defend its market share and re-establish its dominance in the premium brand segment.

“It remains to be seen how Heineken Malaysia intends to respond towards the perceived greater aggression from Carlsberg Malaysia, which has been ramping up on its marketing and promotional activities,” an analyst says.

In a tug-of-war for market share between the two breweries, it is common to see the ebb and flow as one reacts to what the other is doing.

Apart from the cost pressures, breweries are facing difficulties from the changing dynamics and demographics.

Firstly, the brewers will have to contend with a shrinking younger demographic segment. Younger consumers, which comprise Millennials, prefer drinking coffee over beer.

There is also a growing segment of health-conscious consumers.

Even in the United Kingdom, a traditional beer drinking country, the younger generation is not consuming beer in quantities like the older generation did.

In Malaysia, there is an ongoing price war between bars and pubs.

These drinking establishments are sacrificing their own profit margin in sales of beer, as they rely on the volume game. This could be a move to drive the sale of ancillaries like food, which also recoups the profit margin lost from beer.

The price war is helping to drive sales, to the benefit of breweries.

But, there is no certainty as to how long this strategy will last, given the rising cost of living.

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