Heineken’s Brazil play – good for Heineken, good for Brazil? - Analysis

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The Brazilian beer market may be able to claim Kirin Holdings as a victim in the coming weeks, but the likelihood of Heineken stepping in to buy Brasil Kirin offers cause for optimism not only for the Netherlands-based brewer specifically, but also for the country's beer category more broadly.

Brazil is the worlds third-largest beer market, but growth is coming from the premium segment

Brazil is the world's third-largest beer market, but growth is coming from the premium segment

Beer in Brazil is big business. Behind only China and the US, globally, the market boasted a value in 2015 of about US$12bn, with volumes at 13.5bn litres - up almost 6% on 2010. It has not been without its problems, though, as Kirin can attest: Nation-wide economic stagnation, a struggling Real and the subsequent knock-on effect to consumers has impacted a market that historically has traded well thanks to healthy volumes.

Yet, as overall volume growth has slowed, the higher-end of the beer market has performed well, a trend that Heineken has capitalised on. "Brand Heineken was the fastest-growing premium lager brand in the market in 2015, as it maintained its recent trend of double-digit volume growth," notes Anna Ward, research associate at Euromonitor International. "Heineken's focus in Brazil is on value rather than volume, and the increasing premium focus of its offer is so far proving successful."

For Heineken, the purchase of Brasil Kirin would raise the brewer to a clear number two in Brazil, giving the company an estimated 20% market share, up from the present 7% - still way behind Anheuser-Busch InBev's AmBev unit, which boasts around 66% share. Despite this, Heineken is well-versed in going up against ABI in a plethora of markets around the world. At the same time, as one analyst notes: "Heineken is experienced in managing through emerging market volatility".

Of further benefit to Heineken will be the geographical expansion of its existing Brazilian footprint. While the company already owns five breweries in the country - two in São Paulo state and one each in Paraná, Rio Grande do Sul and Ceará - it is notably absent in the north of the country. And, guess which currently Japanese-owned brewer can boast a profitable presence there.

Finally, on the distribution front, this transaction makes sense for Heineken. Currently, the company relies on the Coca-Cola system for its distribution in Brazil. Kirin, however, can boast a high share of owned distribution.

The country's beer category could also benefit from the change. Even before Kirin bought Schincariol in 2011, the Brazilian brewer played at the volume rather than the value end. The pressures on the beer market subsequently made price a weapon. "We believe that Heineken ownership in Brazil would lead to a more rational pricing environment," another analyst notes. "Heineken's purchase would be positive for Brazil's profit pool, given the company's focus on brand-building and premiumisation."

As for Kirin, the win in this transaction would be the Japanese company's withdrawal from a market that has been little but trouble since it entered six years ago. As one analyst flagged late last week, Kirin was moved to admit last year that "results at Kirin Brazil have worsened considerably". Indeed, with a $1.2bn writedown at the unit in 2015 pushing the group to report its first-ever full-year loss, Kirin will likely be glad to see the back of the division.

"The deal would provide Heineken with greater scale in Brazil, greater owned/exclusive distribution, and opportunities to drive positive brand mix," one analyst concludes. "Heineken would also be increasing its exposure to Brazil, in our view, near the bottom of the current macro-cycle."

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