A Glass Half-Full for Heineken

Dutch brewer is slowly lifting margins, though Carlsberg has tougher job

Megabrew -- ABInBev's $104 billion takeover of SABMiller -- hasn't even gone through yet, but it's already shaking up the beer glass.

Thanks to ruthless cost-cutting, ABInBev's estimated 2015 operating margin is a best-in-class 31.9 percent. SABMiller is second at 20.3 percent because of its dominant market positions, according to Bloomberg Intelligence consensus forecasts. That means the other two of the big four brewers, Heineken, with a 16.5 percent reported operating margin and Carlsberg at 12.9 per cent in 2015, are having to up their game.


Operating margins for big-four brewers in 2015

Source: Company filings, Bloomberg Intelligence


That's being made harder by bearded hipsters in developed markets preferring craft breweries, and turbulence in emerging markets.

Nevertheless, Heineken appears to be headed (slowly) in the right direction. Its operating margin improved by 0.46 percentage points in 2015, excluding disposals. That's down to the company better promoting its Heineken brand, which sells at a 30-50 percent premium to standard beers, tight cost control, and stronger margin growth in Asia.

The Dutch brewer forecasts another year of expansion, expecting to add 0.4 percentage points to its operating margin this year. That looks feasible, given its track record, despite what it describes as "an increasingly challenging external environment."

For Denmark's Carlsberg, any improvement might take longer to ferment.

New chief executive Cees 't Hart is taking radical action to address its cost base, made even more necessary by the collapse in demand in eastern Europe. He's identified cost savings of 1.5-2 billion Krone ($230-$300 million), at least 17 percent of last year's operating profit, by 2018.

But it's paying a heavy price for the savings. It wrote off 10 billion Krone last year for the cost of its restructuring, including cutting 2,000 jobs and closing breweries and taking an axe to the value of its brands.

Despite such radical action, Carlsberg expects just low single-digit organic operating profit growth this year. That's better than the 7 percent decline in 2015, but explains why it trades at a slight discount to European peers at 18.5 times the next 12 months' earnings. It's possible the gap might narrow if cost-cutting delivers, though much depends on a new strategy to be unveiled next month.

Heady Brew

Bloomberg data

Heineken, by contrast, sits at a slight premium to the sector -- though still well below ABInBev. Its modest margin expansion in a stubbornly difficult market justifies that. The shares in both the Dutch and Danish brewers have done relatively well of late. But the looming hulk of Megabrew means it's right that valuations don't get too frothy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andrea Felsted in London at afelsted@bloomberg.net

    To contact the editor responsible for this story:
    James Boxell at jboxell@bloomberg.net

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