Heineken profits will recover their strength
HEINEKEN’S sales slumped during lockdown, although they are starting to pick up now restrictions are being relaxed.
The group relies heavily on pubs and restaurants, so while more of us picked up a few beers in the supermarket, it wasn’t enough to bridge the gap. A 16.4 per cent fall in revenue led to a 52.5 per cent fall in underlying operating profit in the first half of the year.
This is known as “operational gearing” – which occurs when a small change in revenue causes a large change in profits. Brewers are operationally geared because they have large fixed costs and must sell a certain number of pints just to cover these costs.
Each extra pint they brew on top costs comparatively little and adds greatly to profits. Of course, the reverse is also true – when the number of pints sold falls, profits drain away quickly.
This is what’s happened to Heineken over the last few months.
But alcohol consumption had been growing in emerging markets. These trends are accompanied by increased demand for more premium brands. That’s somewhere Heineken has an advantage, boasting a stable that includes Amstel, Birra Moretti and, of course, Heineken. These have helped the group deliver fairly healthy operating margins in the past although these are still some way behind its bigger rival, AB InBev, which makes brands like Corona and Budweiser.
The group is carrying more debt than is ideal, which may reduce new CEO Dolf van den Brink’s room for manoeuvre. Long-term strategies will likely be on the backburner at the moment as the group tackles the more pressing challenges of Covid-19. But once the virus has been brought under control around the world we expect Heineken to recover and keep trying to lift its profit margins closer to AB InBev’s.
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