Comment - Nelson's Column - Global brewers, Reader's Digest-style
Remember Reader’s Digest? At some point in our lives we’ve all encountered it, most likely in lengthy stays in doctor’s waiting rooms, its condensed treatments of some of the world’s greatest literature, combined with excruciating humour, somewhat reliving the tedium. At the height of its powers in the 1960s, Reader’s Digest sold in excess of 20m copies worldwide; it was only last year that it was surpassed as the best-selling magazine in the US.
Today, Reader’s Digest is in trouble, with circulation dropping and advertising eroding as its readership ages without younger subscribers coming on board to replace them. The US-based parent company has just emerged from a Chapter 11 reorganisation; the UK division remains in administration.
Yet, its technique of condensing stories into bite-size chunks remains a useful staple of journalism to this day. So, in homage to Reader’s Digest, we present here everything you need to know about the year-end results of Anheuser-Busch InBev, Carlsberg and Heineken, all reporting with the last month, in 800 words or less.
We sold less beer organically. Carlsberg’s like-for-like comparison had a 4% decline in beer volume; Heineken reported a similar 4.6% drop; A-B InBev fared best with a 0.7% drop.
It could have been worse, given the fragile economy. As A-B InBev succinctly phrased the matter: “Despite the weakness in global economies, global demand for beer remains relatively resilient.”
Despite this, profitability improved – a lot. This was true by all relevant measures – profit margins, operating profit, EBITDA, pre-tax profit. For A-B InBev, EBITDA grew by a whopping 16.6% to US$13.1m. All three reported unexpectedly high levels of free cash flow. (Heineken’s free cash flow tripled in 2009 compared to 2008.) The dosh was used to address an immediate perceived need.
We paid down debt, deleveraging faster than expected. A-B InBev led the charge. At the close of 2008 its net debt to EBITDA ratio stood at close to 5.0; it ended the year at a 3.7 ratio. Debt reduction remains A-B InBev’s “top priority”, with it targeting a ratio below 2.0.
In Copenhagen the results were similarly happy, with Carlsberg paring its debt to EBITDA ratio from almost 4.0 to 2.7 over the course of 2009. As for Heineken, the Dutch multinational sheared its ratio from 3.3 to 2.6 and remains committed to reducing its debt load further.
We reduced debt in part by extracting synergies and not investing capital. A-B InBev forecast at the end of last year that it would achieve a fantastic $1bn drop in capex for 2009. It bettered this forecast, by a sizeable sum, slicing $1.5bn. Carlsberg’s spend was DKK2.9bn (US$535m) a 45% decrease from 2008. For Heineken, capex was in the region of EUR700m, a drop in excess of EUR1.1bn in 2008.
We’re not increasing capex spend soon, because we don’t need to. Carlsberg has noted that in past years maintenance capex spend has exceeded depreciation; the reverse will be true “for a while,” according to Carlsberg's CFO, Jørn Jensen. Similar sentiments emerged from Amsterdam: 2010 spend is forecast to be broadly in line with that of 2009. The A-B InBev capex figure for 2010 is $1.7bn.
That said, given beer market resilience globally and pockets of growth in Latin America, China and India, capex can’t be constrained forever, a reality acknowledged by multinationals with exposure in growth markets. Heineken CEO Jean-François van Boxmeer told Brewers’ Guardian late last year that his brewing network is well maintained and equipped. “So if I don’t invest during two years nobody will notice anything,” he said. “We shouldn’t do that for five years.”
That said, we’re not neglecting marketing. Broadly, marketing costs were contained thanks to media price deflation, with more space and minutes on offer from hard-hit media outlets for the pound, euro, dollar, etc.
There may be trouble ahead, especially in Russia. In contrast to the world’s fourth multinational leader, SABMiller, which has limited exposure in Russia due to a premium brand strategy, there are reasons to be nervous for the other global giants, ranking first through third in Russian market share.
The news wasn’t great in 2009. In an overall beer market that declined by an estimated 10% to 12%, Carlsberg fared the best with a 6% decline in volume and an increase in share, with the Danes now claiming 40% of the market. A-B InBev volumes fell 13.9%. Heineken fared worse, with a 17% volume reduction, yet improved profitability by refocusing on a smaller portfolio of key brands and cutting cuts with the closure of two breweries.
These figures were flattered by increased orders from wholesalers in Q4 in advance of a tax increase in January that tripled beer duty. Needless to say, forecasts for 2010 are not cheery, with Carlsberg anticipating that the market will shrink by a double-digit figure.
The bottom line: we’re going to be even more profitable next year. Carlsberg was the most bullish, forecasting a 20% increase in net profit with operating profit in line with 2009. A-B InBev anticipates a further $500m in synergies to be realised this year.
If in a hurry, the digested column digested. 2010 promises to be a clone in terms of performance for the big three with the priority to be debt reduction. Capex will be collared, marketing will level peg. M&A activity isn’t expected, especially if it involves cash, hence the Heineken-FEMSA tie-up based on share issues.
Environmental performance, especially as it dovetails with cost-cutting zeal, will set the news agenda this year, as will corporate social responsibility initiatives. In these two respects the pace is quickening.
Larry Nelson is the editor and publisher of Brewers' Guardian.
Is beer good for you? The health benefits and drawbacks of beer have long been studied and debated. But is beer good for your country? Most definitely, conclude Larry Nelson and Frank Zappa....
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