Heineken’s challenge of AB InBev in Brazil hurts profits

Heineken’s attempt to challenge Anheuser-Busch InBev in Brazil is squeezing profit margins, with the Dutch brewer forecasting a decline in profitability this year.

Shares of the world’s second-largest brewer on Monday fell the most in almost three years after it said it was expanding more quickly than expected in Latin America’s biggest economy, where its beer business is less profitable than elsewhere.

Heineken became Brazil’s second-biggest brewer last year when it bought Kirin Holdings’s business there for about $590 million. The Japanese company had stumbled amid competition with industry giant AB InBev, and now Heineken is stepping up the fight with increased marketing, causing a decline in its overall profitability even as it sells more beer.

“We weren’t expecting these products to accelerate so fast in the first year,” Chief Financial Officer Laurence Debroux said in a phone interview.

The company’s roster of brands in Brazil now includes Schincariol in the mass-market segment as well as more expensive Devassa and Eisenbahn lagers. Kirin’s Brazil unit wasn’t profitable at the time of acquisition, though it is now and margins should catch up to Heineken’s average level in three to five years, Debroux said.

Heineken had double-digit volume growth in Brazil in the first half, while AB InBev reported 9.4 percent revenue growth in Brazil in the second quarter. By contrast, the Dutch brewer’s volume slipped 0.1 percent in Europe, its largest market, in the first six months of the year.

The full-year margin will shrink about 20 basis points, Heineken said, also pointing to currency headwinds. Adjusted operating profit rose 1.3 percent to $2 billion in the first half, missing analysts’ estimates.