Beer war that never was
Ng Wai Mun 
Lehmann says over the course of 170 years, Carlsberg’s beer taste has been tweaked to cater for consumers’ changing taste

If investors were expecting a beer war of sorts in the near future between Heineken Malaysia Bhd and Carlsberg Brewery Malaysia Bhd, they may be in for a surprise.

Talk of a beer war intensified after the two breweries released their respective financial results for the financial year ended December 2017 on Feb 14. For Q4, Heineken recorded a 6% sales growth while rival Carlsberg’s sales declined by 1%.

Measured by total revenue, Carlsberg’s lower revenue growth in Q4 meant its market share had declined further to 41.2%. This would be the fourth consecutive year in which its share has fallen, based on Q4 revenue.

Carlsberg MD Lars Lehmann explains one would not get an accurate picture of the local beer market if he were to read Carlsberg’s overall revenue as a ratio of Heineken’s revenue.

“The marginal 1% decline in Q4FY17 revenue was due to a 12% decline in revenue from the Singapore operations. Revenue from the Malaysian operations in fact grew by 5.4%, almost at par with Heineken’s (6.1%) revenue growth,” he tells FocusM.

Carlsberg’s Singapore operations reported a 12% drop in revenue to RM139 mil in Q4 from RM158.5 mil a year ago. The lower revenue was mainly attributed to one-off trade offer adjustments.

Heineken’s revenue is derived strictly from its Malaysian operations while Carlsberg’s is from both its Malaysia and Singapore businesses.

While Heineken may be the market leader in terms of revenue, Carlsberg is claiming to be the market leader of the mainstream brands and also cider.

“The cider business has grown over the last two to three years,” says Lehmann. However, he did not provide a revenue contribution breakdown for its beer, cider and stout segments.

Heineken banks on innovation

Notwithstanding talk of a beer war, Heineken MD Hans Essaadi is pleased with the company’s good performance. “Heineken’s improved performance over the years can be attributed to innovation,” he tells FocusM

Essaadi remains cautiously optimistic on Heineken’s outlook given challenges in the external environment

He explains the company has been steadily increasing penetration through innovation with line extensions and limited edition offerings, all of which cater to ever-evolving consumer preferences. One of Heineken’s key innovations in 2017 which have paid off is the introduction of Apple Fox cider.

Heineken’s Q4FY17 revenue growth was attributed to, among others, the strong performance of the cider, which was introduced last August.

Stressing that Heineken is not at liberty to provide the cider’s revenue contribution nor breakdown of revenue by category, Essaadi nonetheless reveals cider is a fast-growing category with access to new customers who do not go for the taste of beer or stout. “This delivers incremental value to the business,” he adds.

He stresses the company has continuously been optimising its costs by leveraging on its global scale, improving processes and enhancing visibility.

A research manager says that even if there is a price war, it will be very difficult for Carlsberg to gain substantial share of the market from Heineken. He says this is due to Heineken’s much larger revenue base.

“Carlsberg’s revenue growth rate needs to exceed Heineken’s by five percentage points in order to gain just one additional percentage point of the market share,” he says.

He adds for an industry with a five-year compound annual growth rate (CAGR) of 6% with Heineken growing by about 6% and Carlsberg in the high 5% region, one is unlikely to see Carlsberg’s revenue outgrowing Heineken’s by five percentage points.

“Carlsberg has done very well to maintain its market share at between 32% and 33% (based on revenue from Malaysia operations only),” the research manager explains.

For Q4FY16 and Q4FY17, Carlsberg’s revenue from the Malaysia operations was RM270 mil and RM290 mil, respectively, compared to Heineken’s RM580 mil and RM610 mil.


Changing preferences

The research manager also believes there can’t be a beer war as it is all about taste preference. He dispels claims that consumers have slowly been turning away from Carlsberg as their taste preference has changed over time while the respective drinks’ tastes have remained unchanged.

Lehmann confirms that having been in operation for over 170 years, Carlsberg’s beer taste has been tweaked over time as and when the need arises to cater to changes in consumers’ tastes and preferences.

After experiencing sales growth of between 5% and 6%, Lehmann believes the company is comfortable with a 7% to 8% growth per annum over the next couple of years.

Elaborating on the premium over the organic population growth, Lehmann explains that Carlsberg intends to focus more on its premium brands such as Asahi, the renowned Japanese beer brand.


Contraband issue

Carlsberg is also aiming to gain a larger share of the market, according to Lehmann. He implies this will be at the expense of the illegal smuggled beer market. He had previously complimented the authorities for doing a good enforcement job in curbing the illegal beer market.

The authorities have been coming down hard on smuggling activities, seizing smuggled beer in the process.

Some observers suggest this is Lehmann’s diplomacy mode kicking in as there is no mention of Carlsberg inching into Heineken’s space. However, there is ample truth in his claims as both Carlsberg and Heineken have been enjoying mid to high single-digit growth.


CNY boost

Lehmann’s optimism on the company’s outlook also stems from the good sales in the run-up to the Chinese New Year festive period. Without revealing any numbers, he says: “In the run-up to the Chinese New Year, the sales this year are better than last year.”

He explains this is due to the timing of this year’s CNY which fell in the middle of February unlike last year when it fell at end-January.

It is generally accepted that consumers indulge in heavy spending at the end of each year due to various reasons such as festive seasons and/or school-going children’s related expenses. To have another festive season as early as January normally results in subdued spending.

While not providing specific breakdowns in terms of sales, Heineken’s Essaadi reveals that generally, CNY is an important season for the business. “We do see an uptick in sales during the period leading up to the festive season. Our team worked tirelessly during the recent festive season to deliver a massive campaign to consumers,” he says.

On the company’s outlook, Essaadi says: “Overall, we remain cautiously optimistic as challenges in the external environment persist. Notably, rising cost of living coupled with economic and political uncertainties during an election year are expected to impact consumer sentiment, which remains below the optimism threshold.”

He adds that Heineken will continue engaging the government on issues affecting the industry, notably contraband and effects of high excise duties on beer as compared to products such as wine and spirits that have significantly higher alcohol content.

“If the contraband issue is addressed effectively, it would be a win-win scenario for the government and industry in the form of additional revenue for both,” he says.

Taking on the Heineken name

Heineken Malaysia Bhd was previously known as Guinness Anchor Bhd before changing to its present name in April 2016. This followed Heineken NV’s acquisition of GAPL Pte Ltd in October 2015.

The brewer was incorporated in January 1964 and sought listing of its shares on the Malaysia Stock Exchange in 1965. In 1989, it merged with Malayan Breweries (Malaya) Sdn Bhd to broaden its product base.

The company’s principal shareholder is GAPL, which is based in Singapore. GAPL in turn is Heineken NV’s wholly-owned subsidiary. Heineken operates from its Sungei Way, Petaling Jaya, brewery which began operations in 1965.

Carlsberg Brewery Malaysia Bhd, part of the Carlsberg Group, was incorporated in 1969. Its Malaysia operations revolve around its sole production plant in Shah Alam, Selangor. This is complemented by 17 sales offices throughout the country.

The Shah Alam facility produces beers, stouts and cider to name a few, catering mainly for the domestic market. Some of its products are also exported to other Asian markets like Singapore and Hong Kong.

Carlsberg has 554 employees in Malaysia and 69 in Singapore. They are supported by over 1,000 sales promoters in Malaysia and 260 promoters in Singapore.

This article first appeared in Focus Malaysia Issue 278.