Heineken raised its prices by 12 per cent on average in the first quarter of this year © Dreamstime

Few beverage industries are as ubiquitous as beer and have such a vast infrastructure to support its supply and distribution. In recent years brewers have come under intense pressure, initially from the pandemic, where lockdowns cut off customers from bars and restaurants. More recently, soaring inflation has swollen the input costs of everything from barley to cans and bottles.

Dutch brewer Heineken has responded by raising prices for customers, the company told shareholders at results this week. On average, prices climbed 12 per cent higher in the first three months of this year compared with the same time last year. Those were “unlike anything the industry has ever experienced”, says Trevor Stirling, an analyst at Bernstein, a stockbroker.

Naturally, consumers have cut back on Heineken beers as a result. Heineken sales volumes were 3 per cent lower over the same period, about as much as analysts expected. Its quarterly results also reveal the idiosyncrasies of different beer markets.

Developing economies are important to Heineken, because beer sales are closely correlated to economic growth. These markets though can also be volatile, as its results illustrated, though not necessarily due to price increases.

As an example, in Nigeria volumes fell by a quarter. Africa’s largest economy accounts for about a quarter of Heineken’s sales on the continent. A botched rollout of new Nigerian banknotes in February resulted in a brief economic shock. This partly explains why the brewer’s Africa, Middle East and eastern Europe unit’s volumes (nearly a fifth of total) dropped nearly 9 per cent, much more than expected.

Lex chart showing:Heineken volumes and economic growth

Asia-Pacific volumes had an even bigger fall, more than a tenth. The blame fell on its Vietnam business where local inventories built up for the Lunar New Year celebrations were overstocked, diminishing later demand.

The positive surprises came in developed markets. The resilience of consumers in Europe was notable. Despite prices rising by almost 14 per cent, volumes fell just 1 per cent. Fears of a severe economic contraction this year are easing: low unemployment means less need to cut back on staples such as beer. Developed Europe accounts for more than 30 per cent of Heineken’s volume.

That steadiness has prompted investors to buy brewers’ shares, which have outperformed the broader market since the start of the year. Heineken’s share price is up 15 per cent since January. At a valuation of 18 times forward earnings, Heineken trades cheaply, close to the bottom of the five-year range. If profits this year can continue to beat expectations Heineken should continue to attract buyers.

Lex chart showing the Share price to forward earnings ratio of Heineken,  Carlsberg and Anheuser-Busch InBev

That looks realistic. Heineken profit margins remain below pre-pandemic levels despite significant cost cutting efforts since then. A strategy to encourage consumers towards premium brands should support profit margins as average selling prices nudge upward.

Combine that with the potential for input cost pressures to abate — energy and grain prices are already falling year on year — with steady sales volumes, and shareholders should have a good reason to toast Heineken.

Goldman Sachs: GreenSky thinking

Mergers and acquisitions are the bread and butter of Goldman Sachs’ earnings. But a deal market in the doldrums has left its executives and shareholders short on calories.

The investment bank said on Tuesday that its overall first-quarter revenues and profits fell 5 per cent and 18 per cent, respectively, year on year. A record-setting 2021 for Wall Street dealmakers seems a distant memory, after advisory revenue fell 27 per cent.

Goldman’s own ambitions have withered, too. Chief executive David Solomon admitted that GreenSky, a consumer lender that it acquired for $2.2bn just a year ago, might not fit into the bank after all.

No surprise, really. Goldman has already conceded that its consumer lending push — named Marcus — misfired. Goldman had hoped to build an upscale online retail bank. On the day came word that it had sold $1bn of consumer loans that the unit had originated.

Goldman is trying to reset its business but its traditional strengths, in everything from advising corporate clients to securities trading, remain under pressure. Revenues from fixed income — including bonds trading and sales — fell by almost a fifth.

The bank also confirmed what Wall Street rivals have all said recently. Loan growth and lending profits have not suffered from either an economic slowdown or the implosion at regional banks such as Silicon Valley Bank.

In this sense, Goldman’s original foray into consumer banking makes more sense, given how lucrative servicing individual Americans can be. Goldman itself has not completely abandoned this area. It announced a new high interest rate savings account product for customers who used the credit card that it markets with Apple.

Despite some unsettled businesses, Goldman reported a healthy return on equity of nearly 12 per cent. This ratio of net profits as a percentage of shareholders equity is a typical measure of bank profitability. Goldman also generated meaningful asset management fees, while income from equity investments has rebounded after last year’s decline in asset values.

Goldman has not benefited from wobbles in the banking sector. Its own consumer assets will be sold at fire sale prices. Yes, mergers and IPOs will eventually resume, enabling Goldman to reassert its dominance. But wasting resources on the GreenSky acquisition almost certainly contributed to the sharp job cuts at Goldman.

Perhaps the remaining investment bankers there will have learned some lessons. If so, they can offer more humility in their advice to clients about M&A’s impact on buyers.


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