Heineken has promised to raise revenue and cut costs, but investors in the world’s second-largest brewer say more drastic measures, including factory closures, may be needed to get business back to normal.
The company’s CEO, Dolf van den Brink, at the helm of the €39 billion brewery since 2020, faces two main challenges, according to investors and analysts: achieving greater efficiency and, at the same time, reviving production volume growth, which was showing signs of slowing.
While all brewers have struggled to boost sales, the Dutch maker of Amstel and Tiger beers has frustrated some investors with its shaky performance and lagging behind its biggest competitor, Anheuser-Busch InBev. In terms of efficiency, some regions have higher fixed costs and larger surface area occupied by breweries.
“Investors want this company to do well, but they need to start seeing positive results,” said Ryann Dean, an analyst at Aylett & Co. Fund Managers, a Heineken investor.
Dean said Heineken’s updated strategy, presented at an investor event in October, was welcomed but the brewer needed to prove it could deliver on it.
Heineken said the response to its updated strategy has been positive.
“The focus has now shifted to execution and delivery, which is exactly what our investors expect from us,” a spokesperson said.
“SHOW US THE SAVINGS,” investors say
The last few years have been difficult for beer. The sector’s valuations collapsed following the increase in prices, driven by sharp increases in production costs, which affected sales volumes, and also due to the reduction in alcohol consumption by some consumers.
Heineken shares are currently trading at around 13.5 times expected earnings, well below 2021 highs of more than 28 times.
In the alcoholic beverages sector, investors have welcomed moves to reduce costs and increase profit margins as sales come under pressure.
Heineken lags behind its rivals in terms of fixed costs to revenue, said Tomas Pinto, head of international equities at BestInver, one of Heineken’s 30 largest shareholders. He added that improving efficiency is key.
Heineken has promised to generate gross cost savings of up to 500 million euros per year by 2030.
The company aims to achieve annual revenue growth by focusing on 17 high-potential markets and five global brands.
Heineken must demonstrate to investors that its savings promises boost profitability, after more than 3 billion euros invested since 2021 appear to have had little impact, said Javier Gonzalez Lastra, an analyst at Berenberg.
Heineken’s chief financial officer, Harold van den Broek, said that about 25% of the company’s historic savings have been passed on to profits and that this percentage is expected to increase under the current program.
This reassured Tomás Pinto. But both he and Gonzalez Lastra said that in low-growth markets like Europe, investors want to see concrete efforts to reduce costs, such as closing breweries.
THE VOLUMES ARE QUESTION MARKS
Chief executive van den Brink ruled out a radical overhaul of Heineken’s presence in the beer market and highlighted growth prospects in countries such as Italy and France. However, increasing sales volume in these regions, where the population is ageing, will be a challenge, said Laurence Whyatt, an analyst at Barclays.
Heineken should have an easier path to selling more beer in emerging markets like Latin America, but uncertainty about when that growth will happen is keeping some investors away.
Van den Brink said that once short-term challenges related to difficult economic conditions and political turmoil are overcome, the beer industry is expected to see volume growth of around 1% per year, with Heineken exceeding that threshold.
But he couldn’t say when growth would return.
Harsharan Mann, global equity analyst at Aviva Investors, another Heineken shareholder, said investors want to know whether the company has any prospect of stabilizing and ultimately growing volumes.
“This concern about when the decline in sales volume will end is definitely a factor influencing market sentiment,” Mann said.
Source: Terra
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