Carlsberg Malaysia to preserve margins despite rising costs

By MARK RAO / Pic By ISMAIL CHE RUS

Carlsberg Brewery Malaysia Bhd’s profit margins will be protected following the April price hike, but new industry developments, rising costs and contraband remain a threat to the business.

The brewer raised product prices by 3% to 6% for both distributors and retailers on April 1 this year on escalating malt and barley prices which are among the major cost items borne by the company.

Its MD Lars Lehmann (picture) said the price hike helps the company preserve its margins which are expected to be more or less unchanged in 2019.

“The major increase that we have seen in the last 12 months has been in malt and barley, which are the main ingredients in beer brewing,” he told the press after the company’s AGM in Kuala Lumpur yesterday.

“We are now in the situation where we have hedged all of our needs for malt and barley for the rest of 2019. We will not see any further increases in prices (this year).”

He said the company does not rule out cost surprises in the form of new government taxes and external developments, but this will be managed via prices increases or improved cost efficiency.

According to the brewer, malt prices increased 15% to 20% due to bad barley harvests in Europe and Australia, while glass bottle prices are up 4% year-on-year (YoY) in 2019. Utilities cost also rose 6.6% in July last year.

Malaysia and Singapore, the company’s largest markets, have the second-highest beer excise duties worldwide and further challenges are foreseen on new developments in the respective countries.

Singapore is expected to implement the European Free Trade Agreement in the third quarter of 2019, resulting in cheaper imports — including alcoholic beverages — being brought into the country.

Lehmann said this is a small negative for the company’s Singaporean business but that the company is taking steps to manage the new business environment.

“We are anticipating what products might be imported into Singapore and where we might face stiffer price competition,” he added.

“We will be taking steps on pricing ahead of that to make sure we stay competitive.”

According to Lehmann, this will cost the brewer marginally in terms of profit, but will not derail the momentum of its Singaporean business.

Singapore contributed to 28.7% or RM569.1 million of total group revenue in 2018.

The more unique challenge presents itself in Malaysia, the brewer’s largest revenue generator, following the smoking ban at all eateries and restaurants.

This reportedly affected consumption demand in food outlets that serve both food and alcohol.

“The smoking ban is not helping our industry and that is a bit of a new phenomenon this year that is also impacting consumption in outlets where there is food,” Lehmann said, adding that consumers’ confidence in both Malaysia and Singapore are relatively muted already.

Carlsberg Malaysia is also part of Confederation of Malaysia Brewers Bhd which is working with relevant authorities to clamp down on contraband beer in Malaysia which makes up about 25% of total consumption.

Despite the challenges, the brewer posted a strong showing for the fiscal year ended Dec 31, 2018 (FY18), with both net profit and turnover up at RM277.15 million (up 25.3% YoY) and RM1.98 billion (up 11.9%) respectively.

Malaysian operations and profit contributions from both Singapore and Sri Lanka bolstered the company’s performance that year.

This allowed the brewer to declare a total 100 sen dividend in respect to FY18, amounting to a 110.3% payout ratio from net profit — in line with its new dividend policy implemented back in February last year.

Chairman Datuk William Toh Ah Wah said the brewer is in an enviable position as both its mainstream and premium brands are growing strongly.

“Our mainstream brand is growing and our premium brand is also growing, so we are in a fantastic position where we get the best of both worlds,” he said.

The brewer’s flagship Carlsberg brand noted a 12% YoY volume growth in FY18, underpinned by its Green Label and Smooth Draught variants, and makes up about twothirds of its total volume.

Premium brands, namely Kronenbourg 1664 Blanc, Somersby, Connor’s and Asahi, noted a 20% volume growth that same year.

The company’s Brooklyn Lager brand, which grew 178% YoY in volume in FY18, is identified as a new revenue stream for the group alongside new craft systems and e-commerce.

Carlsberg Malaysia is also keen on doing more in the alcohol-free beverages segment which is expected to be in the area of malt-based drinks. This is in view of the perceived limited opportunity for classic non-alcoholic versions of Carlsberg in the Malaysian market.