Heineken makes a slow start with FEMSA Cerveza

Mexico's beer drinkers have obviously not read the script for Heineken's transformational move into their country's brewing sector, but it's too soon to be downbeat.

Heineken's management and analysts rightly lauded the brewer's EUR3.8bn (US$5.2bn) takeover of FEMSA Cerveza earlier this year as a necessary, and perhaps long overdue, move into developing markets. The brewer was more exposed than its peers to the prolonged beer market stagnation in European countries and needed an 'out'.

FEMSA Cerveza provided a gateway to the promised land. But, it hasn't really worked out that way - at least not straight away. Heineken's third quarter results today (27 October), which include FEMSA Cerveza for the first time, have left investors and analysts a little underwhelmed.

The brewer's share price fell by close to 5% today after it missed analysts' sales expectations. Its quarterly volume sales decline in Western Europe steepened to 4%, it continued to leak market share in Russia, the US remained depressed and, markedly, volume sales also fell in Mexico for the three months to the end of September.

"Bulls hoping for good news on the recently-acquired FEMSA business will be disappointed," said Evolution Securities analyst Simon Hales in a note. He kept Heineken shares on a neutral rating and said: "With no signs of stabilisation, (let alone recovery), in the top-line, and with the Mexican business already under pressure, there is little reason for a re-rating anytime soon."

Heineken's consolation prize in Mexico is that rival brewer Grupo Modelo, which leads the market in volume terms, also reported a drop in volumes for the same quarter.

Heineken's chief financial officer, Rene Hooft Graafland, laid the blame on short-term, outside factors. He cited "security problems" in northern Mexico and bad weather in the south as "the main drivers behind the slight decline of the market". He said that FEMSA Cerveza is not thought to have lost market share during the quarter.

Longer term, the underlying rationale for buying FEMSA Cerveza remains good. Heineken still reaps around 70% of its annual earnings from Europe, including Russia, but the FEMSA Cerveza deal means the earnings contribution of the Americas region has risen from 11% to 24%.  

Despite sluggish volume sales in Mexico's beer sector and a relatively high per capita consumption for a so-called emerging market - 66 litres - the country, alongside the US and Brazil, accounts for a third of the global beer industry profit pool. Mexico's beer market is set to increase in value by at least 6% per year up to 2014, according to projections in Mintel's Global Market Navigator. Mintel figures also show that FEMSA gained share from Modelo in 2009.

Hooft Graafland told analysts today that it would take time for Heineken to mould FEMSA Cerveza's business. "This is a huge company," he said. "You don't make dramatic changes, you make gradual changes in that company." Heineken said in August that FEMSA Cerveza would not add to its global profits for two years.

It is far too early to pass final judgement on Heineken's deal for FEMSA Cerveza. That said, Heineken will be under pressure to achieve synergies and cost savings faster than planned if tough conditions remain in Mexico for too long.