FILE PHOTO: Heineken beers are seen on a production line at the Heineken brewery in Jacarei, Brazil
INTERNATIONAL - Heineken's attempt to challenge Anheuser-Busch (AB) 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 fell the most in almost three years yesterday 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’ business there for about 2.2billion real (R7.8bn). 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,” said chief financial officer Laurence Debroux.

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 was not profitable at the time of acquisition, though it is now, Debroux said.

Heineken had double-digit volume growth in Brazil in the first half, while AB InBev reported 9.4percent revenue growth in Brazil in the second quarter. By contrast, the Dutch brewer’s volume slipped 0.1percent 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 1.3percent to 1.75bn in the first half, missing analysts’ estimates.

“This should lead to a low- to mid-single-digit downgrade, on a stock which had performed well,” Morgan Stanley analysts led by Olivier Nicolai wrote in a note to investors.

Heineken fell as much as 6.1percent in Amsterdam. The Dutch brewer in February had forecast its margin to improve by 25basis points this year, lower than its target for past years. Higher raw material costs and a currency headwind are also reasons the brewer gave for cutting its forecast yesterday.

AB InBev reported earnings below estimates last week as marketing spending on the soccer World Cup hurt second-quarter profit growth.

Heineken’s beer volume rose 4.5percent on an organic basis, compared with the estimate of 3.1percent. 

- BLOOMBERG