An employee walks past the Heineken logo at Heineken’s brewery in Jacarei, Brazil, in June 2018. Picture: REUTERS
An employee walks past the Heineken logo at Heineken’s brewery in Jacarei, Brazil, in June 2018. Picture: REUTERS

London — Heineken’s attempt to challenge Anheuser-Busch InBev in Brazil is squeezing the Dutch brewer’s profit margin.

The world’s second-largest brewer on Monday forecast a drop in profitability this year as it expands more quickly than expected in Latin America’s biggest economy, where its beer business is less profitable than elsewhere.

The shares fell as much as 5.6% in Amsterdam, the most in almost three years.

Heineken became Brazil’s second-biggest brewer last year when it bought Kirin’s business there for about 2.2-billion real ($590m).

The Japanese company had stumbled amid competition with industry giant AB InBev, and now Heineken is stepping up the fight with increased marketing, causing a decline in its overall profitability even as it sells more beer.

"We weren’t expecting these products to accelerate so fast in the first year," chief financial officer Laurence Debroux said.

The company’s roster of brands in Brazil now includes Schincariol in the mass-market segment as well as more expensive Devassa and Eisenbahn lagers.

Kirin’s Brazilian unit was not profitable at the time of the acquisition, though it is now and margins should catch up to Heineken’s average level in three to five years, Debroux said.

"This should lead to a low- to mid-single-digit downgrade, on a stock which had performed well," Morgan Stanley analysts led by Olivier Nicolai wrote in a note to investors.

The full-year margin would shrink by about 20 basis points, Heineken said, also pointing to currency headwinds.

Adjusted operating profit rose 1.3% to €1.75bn in the first half, missing analysts’ estimates.

Heineken had forecast its margin to improve by 25 basis points this year in February, lower than its target for past years.

Higher raw material costs and a currency headwind are also reasons the brewer gave for cutting its forecast on Monday.

AB InBev reported earnings below estimates last week as marketing spending on the soccer World Cup hurt second-quarter profit growth.

Heineken’s beer volume rose 4.5% on an organic basis, compared with the estimate of 3.1%.