Heineken Earnings: Consumers Finally Show Signs of Pushing Back on Price Increases

Heineken’s HEIA second-quarter results gave one of the first indications that consumers are beginning to buckle under the pressure of price increases, with volume and revenue growth moderately below our forecasts. Cost controls and some benefits in below-the-line items meant that operating profit and earnings per share were in line with our estimates, however, and we are retaining our EUR 96 per share fair value estimate and our narrow moat rating. Heineken’s weakness was primarily driven by markets such as Vietnam, in which it has significant share, so while this is not necessarily a precursor to a disappointing second quarter across the consumer staples sector, it is a reminder that consumers cannot continue indefinitely to absorb the significant cumulative price increases they have faced for several quarters. With the Producer Price Index now in retreat in many countries, we expect the inflation being passed through to consumers will soon peak, but sector market valuations are pricing in volume rebounds in the second half of the year that may not come to fruition.

Although earnings were in line with our expectations, we believe the market’s negative reaction to the report was caused by the volume weakness and management’s tempering of full-year guidance of operating profit growth in the mid single digits. Consolidated beverage volume fell by 5.4% year over year in the first half, and this accelerated to 7.3% in the second quarter. The Asia Pacific region was the primary cause of the volume miss, with volume down 13.1% and 15.3% in the first half and second quarter, respectively. Several important markets in Southeast Asia, notably Vietnam and Cambodia, suffered volume decline in the teen percentages. The recovery of these export-driven markets will likely depend on consumption demand in developed markets, which we believe has now become an even more important metric for the rest of the year.