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(THE WASHINGTON POST) – Heineken's attempt to challenge Anheuser-Busch InBev in Brazil squeezes profit margins as the Dutch brewer forecasts a drop in profitability this year.
Shares of the world's second largest brewer on Monday (July 30) after announcing a faster-than-expected expansion in Latin America's largest economy, where its brewing operations are less profitable than elsewhere.
Heineken became the second largest brewer in Brazil last year. bought the business of Kirin Holdings for about 2.2 billion reals ($ 803.2 million). The Japanese company had stumbled due to competition with industry giant AB InBev, and now Heineken is stepping up the fight with increased marketing, resulting in a decline in its overall profitability even as it sells more than beer.
Financial Director Laurence Debroux said during a telephone interview
The company's list of brands in Brazil now includes Schincariol in the mbad market segment as well as more expensive lagers Devbada and Eisenbahn. The Kirin unit in Brazil was not profitable at the time of the acquisition, even though it is now and the margins should catch up with the average level of Heineken in three to five years, said Debroux.
Heineken experienced double digit growth halfway, while AB InBev recorded a 9.4% growth in its business in Brazil in the second quarter. On the other hand, the volume of Dutch breweries fell by 0.1 percent in Europe, its largest market, in the first six months of the year.
The annual margin will fall by about 20 basis points, according to Heineken. Adjusted operating profit rose 1.3 percent to 1.75 billion euros ($ 2.7 billion) in the first half, a lack of badysts' estimates.
"This should lead to a one- or two-digit downgrade, on a good title," Morgan Stanley badysts headed by Olivier Nicolai wrote in a note to investors.
Heineken fell to 6.1 percent in Amsterdam.
The Dutch brewer in February had forecast his margin to improve by 25 basis points this year, lower than his target for the past years. Higher raw material costs and headwinds are the reasons the brewer put forward for reducing his forecast on Monday.
AB InBev posted lower-than-estimated results last week as World Cup marketing spending hurt the second quarter. the volume of beer increased by 4.5% on an organic basis, compared with the estimate of 3.1%
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