It has not been an easy two weeks for the brewing sector. Downbeat trading forecasts from Heineken and Interbrew and S&N’s year-end results reflected the current delicate state of the market and were greeted less than enthusiastically by investors. Ben Cooper assesses the market reaction and the potential for recovery.
The announcement by Heineken two weeks ago that its profits for the first half of the current fiscal year would be flat did not just send the Dutch brewing giant’s share price tumbling. As one might expect when a leading company serves up bad news, the statement sent shockwaves through the beer sector as a whole.
Heineken’s share price fell by 8.7% on the trading statement and a market which had been wary of the brewing sector for some time already grew instantly more careful about the major listed brewers. However, the market’s response was not generally seen as an over-reaction, either to Heineken’s situation or to how the performance of a market leader reflected on the health or otherwise of the global beer sector.
Heineken attributed the decline to slow economic growth, the Iraq conflict, unseasonal weather in Europe and the US and the SARS outbreak in the Far East. But it would seem that it is the slowdown in the US, where Heineken is heavily exposed to the imported beer sector, which has hit the company the hardest. What is more, the weakness of the dollar against the euro, which is a key factor behind the softness of that market, is likely to prevail for some time.
“We think the (market’s) response was 100% justified,” one analyst told just-drinks. “
“The problem was that we and others had been flagging that the US import market was a danger area for the first half. All the signals were that there was a slowdown and the company did not say anything”
A number of downgrades followed for Heineken and understandably the pressure also mounted on other brewers. As the drinks analyst at WestLB Panmure, Stuart Price, put it: “If that has happened to a company with the strategic strength of Heineken what does it mean for the others?”
Indeed, investors not only had the opportunity to scrutinise Heineken’s current performance. The Heineken announcement was closely followed by what was almost universally hailed as a highly non-commital trading statement from Belgian brewing combine, Interbrew.
As a number of analysts pointed out, the Interbrew statement was very light on details, with the company focusing on the headline forecasting of “meaningful volume growth” generally viewed a rather too vague to be generally encouraging.
“In line with expectations outlined at the presentation of the 2002 results in March, Interbrew continues to believe that, excluding currency impact, it will achieve meaningful organic volume and organic profit growth for 2003,” the company said.
In light of the bad news from Heineken and an absence of reassurance from Interbrew, significant attention was then focused on the announcement of year-end results by the UK-based brewing force, Scottish & Newcastle, last week.
Stuart Price pointed out that the 10% decline in volumes in France reported by Heineken did not bode well for S&N which is France’s biggest beer producer and sure enough S&N announced an 8% decline in beer volumes in France for the year.
Although S&N recorded turnover growth of 19% and operating profit growth of 22%, with better news from its Russian joint venture, BBH, than most brewers can currently muster in mature markets, the year-end results did little ease investor worries.
“In light of trading statements elsewhere in the European brewing sector in the past week, Scottish & Newcastle’s (S&N) results shed little additional light on the broader landscape of the sector,” said Lehmann Brothers in a note. “S&N reiterated Interbrew’s and Heineken’s comments in saying that the first few months of calendar 2003 (S&N fiscal Q4) had been particularly difficult due to a combination of factors (weather, the war, difficult comparisons), but that
conditions had begun to improve over the past couple of months. However the detail of S&N’s own trading performance, particularly within UK brewing (ScotCo), was disappointing.”
While it is understandable to view Heineken’s current situation as indicative of wider problems in the beer sector,
“The question remains as to whether the generally depressed conditions in the sector will prevail and if so for how long”
Barring an earlier than anticipated recovery in the value of the dollar against the euro, analysts are generally predicting continued softness in the US imported beer market for some time. “The weakness of the US dollar is here to say for the foreseeable future given that the whole refinancing of the US is predicated on a weak dollar,” said Stuart Price.
The situation in Europe would appear to be equally sobering for brewers. Beer is not only highly susceptible to the effects of the economic cycle, it also tends to be one of the first product categories to suffer. While in the eyes of some analysts the current slump could continue for another two years, there could be worse still, in the form of a worrying demographic factor which could impinge on beer growth for years after. According to population statistics, the 19 to 34 age bracket is expected to decline by 1% per annum across Europe over the next 10 years, representing a significant erosion of the prime beer-drinking market.
While brewers point to the growth in emerging markets, notably Russia, as a compensating factor, it should be borne in mind that Russia is now more like a 5% to 6% volume growth market for beer rather than the 15% to 20% growth market it was a few years ago. Moreover, it is a market where expansion and growth is expensive.
The recent revelations may not have come as such a surprise to many of the well-informed observers of the beer market and the heightened attention the sector has received of late arguably owes much to the coincidence of three major companies publishing trading information in a short space of time. It is now likely to be quieter for a month or so but the spate of first-half reporting due in September will be eagerly and one would expect nervously awaited by the market. Investors will certainly be hoping for signs of recovery, but at the same time preparing themselves for confirmation that things will get worse before they get better.