Heineken’s profit warning: all about EM

Heineken’s profit warning: all about EM

Oct 23, 2013 10:28am by Jonathan Wheatley

Is Russia the world’s toughest beer market? It’s beginning to look that way, after Heineken said on Tuesday it would see a 10 per cent decline in volumes sales in the country this year. That’s even worse than a recent gloomy assessment by Carlsberg, which said volume had slumped by 7 per cent in the first half. “Russia is a very, very difficult market,” René Hooft Graafland, Heineken’s chief financial officer, said on a conference call, warning that profits were likely to fall this year “in the low single digits”, sending the brewer’s shares down 5 per cent by mid morning in Amsterdam.As the FT’s Tony Barber wrote this month, brewers face especially hard conditions in Russia because of government measures including a new beer tax, advertising restrictions and the forced closure of Russia’s dingy beer kiosks. Graafland said the weather had played its part too in September, when “autumn came a month early”.

But Russia is far from Heineken’s only EM problem. In the third quarter, volume sales were also down by at least 10 per cent in Romania and Greece, Graafland said. “We didn’t expect such a negative development in central and eastern Europe,” he said.

The poor performance in the region was one of three key factors behind the profit warning. The second was disappointing sales in key emerging markets such as Mexico and Nigeria. “Given their strong fundamentals we were thinking they would start picking up in the second half of the year but we haven’t seen that yet,” he said.

Mexico had been hurt by September’s hurricanes, which was expected to be a passing problem.

Nigeria had seen stronger growth at the bottom end of the market at the expense of higher-value products. “I’m cautious about saying we will see a return to growth this year, I don’t think that will happen,” Graafland said. “But there are elections in 2015 and normally going up to elections you see some excitement and a lot of money being distributed so in 2014 we absolutely expect Nigeria to go back to growth.”

The third factor had been the impact on financing costs of currency fluctuations “in various emerging markets”. Graafland said this factor was expected to reduce Heineken’s net profits by about €40m, compared with a negative impact of €25m predicted when it published its first half results. “That difference of €15m reflects further adverse currency movements,” Graafland said, although he conceded it was hard to predict with much accuracy what the impact of currency fluctuations would be for the rest of the year.

Other big emerging markets such as Brazil and India also disappointed. One of the few bright spots in the emerging world was what Heineken said had been solid growth at its recently acquired Asia Pacific Breweries.

It’s becoming commonplace among many companies to point to developed markets as offering the best chances for growth in the next few years. Heineken identified western Europe as one of its few growth markets in the third quarter – although it did warn that “conditions in the region are expected to remain challenging, against a difficult economic backdrop and the impact of austerity measures”.