UK: Consumers expected to face beer prices increase next year

British consumers are expected to feel the pinch next year as prices increase on goods by up to 4 per cent - with beer firms facing a double problem amid increasing costs of barley, sugar, aluminium and transportation, The Mail Online reported on August 3.

Concerns are mounting over the impact of price rises on cash-strapped households, with the National Institute of Economic and Social Research think tank warning that consumer price inflation will hit 3.9 per cent in early 2022.

The national average price of a pint of draught lager in Britain is £3.87 according to the latest Office for National Statistics data - which is up 11p on July last year and an increase of 17p on the same month two years ago.

And the price of a pint would go up by 15p to £4.02 in 2022 if this is in line with the NIESR's figure, with beverage analyst Trevor Stirling warning the 'inflationary environment will be much higher next year' for alcohol retailers.

Heineken, which produces Europe's best-selling lager along with Tiger, Sol, Moretti and Amstel beers, has warned rising costs will start affecting the Dutch brewer in the second half of this year and have a 'material effect' in 2022.

Its Belgium-based rival Anheuser-Busch InBev, the world's largest brewer whose brands include Budweiser, Beck's and Corona, has also said it expects narrower margins with costs for cans and transport already curbing profits.

The NIESR estimate of 3.9 per cent would be almost double the Bank of England's inflation target, but its experts added that the figure should fall back to 2 per cent the year after if the central bank begins to raise interest rates.

A 3.9 per cent increase would see a sliced white loaf go up by 4p to £1.10 from the current ONS average of £1.06, while bananas would go up 3p per kg from 79p to 82p, and a pint of milk would increase by 2p from 42p to 44p.

Meanwhile butter would go up by 7p from £1.73 to £1.80 for a 250g block, while eggs would rise by 8p from £2.12 to £2.20 for a large dozen of free range, and beef mince would go up by 23p per kg from £6.02 to £6.25.

The British Retail Consortium has warned recent falls in food prices, down 0.4 per cent overall in July year-on-year, may not last because retailers face higher costs for shipping, haulage and petrol, as well as frictions from Brexit.

John O'Connell, chief executive of the TaxPayers' Alliance consumer group, told MailOnline today: 'Rising inflation could act as a stealth tax on unsuspecting consumers. Taxpayers were already feeling the pandemic pinch but will feel it even more now the chancellor has frozen income tax thresholds.'

He added: 'Instead of freezing the thresholds, the Treasury should link them to inflation or wage growth.'

Heineken and AB InBev were both referring to their worldwide market in their latest updates, with British industry sources pointing out that the global businesses as a whole do not necessarily reflect the situation for the UK arms.

More than 80 per cent of the beer made in Britain is drunk in this country, where producers make use of the abundant stocks and supplies of key ingredients such as malt and hops, for which the UK is a net exporter.

On August 2, Heineken became the latest drinks giant to post soaring sales amid the reopening of pubs and bars following pandemic lockdown measures, but did warn it could be impacted by higher inflationary pressures.

William Ryder, equity analyst at Hargreaves Lansdown, told MailOnline today that there are 'three broad possibilities' in terms of what could happen to the price of beer at Heineken.

The first would be that cost increases 'are the result of temporary Covid disruption and soon return to normal'. He said: 'In this scenario I'd expect brewers and their supply chains to absorb most of the excess costs, and very little is likely to be passed on to consumers.'

The second would be that cost increases are the result of Covid disruption but do not return to normal in the medium term. Mr Ryder said: 'In this case we'd expect price increases to get passed on to consumers eventually, but how much and how quickly will vary depending on local market conditions and local brand strength.'

The third would be that cost increases are the result of a more general sustained underlying inflation. He said: 'A period of sustained inflation would be generally disruptive, and not just for pubs and brewers. However, it's not clear how much the real price of beer would increase in the medium term – it probably would by some amount, but it would mostly be the nominal price that's increasing.'

Mr Ryder added: 'However, we know Heineken is planning to adopt an 'assertive' pricing strategy. This indicates that Heineken thinks its brands are strong enough to pass on rising costs in most markets without impacting volumes too much.

'I suspect that the trend towards premiumisation has influenced this strategy. One of the biggest trends in beverages over the last few years has been a tendency for customers to buy fewer but higher quality drinks.

'This is good news for margins if you have premium brands in the portfolio, so most of the major brewers and distillers have been tripping over themselves to take advantage of this. Part of cultivating a premium brand means setting a premium price – rational or not many consumers take cues about quality from the price they're being charged. Hence the old Stella Artois advertising line – 'Reassuringly Expensive'.'

In its update on August 2, Heineken said net revenues rose by 14.1 per cent to €9.97billion (£8.5 billion) for the six months to June.

It said its organic operating profits - those generated from within the company - more than doubled over the period. However, it still expects its results for the full financial year 2021 to be below trading from 2019.

Heineken highlighted that it expects significant volatility in some regions during the rest of the year as restrictions continue to impact performance.

The firm also said it expects 'headwinds in input costs' in the second half of the year and will 'be assertive on pricing' and look at cost management to address this.

However it said margin pressure is likely to 'intensify' in the second half of the year and the start of 2022.

Trevor Stirling, beverage analyst at Bernstein in London, told how he expected consensus earnings estimates for this year to rise, adding: 'The inflationary environment will be much higher next year. How much can they recover in pricing?'

Speaking about the prospect of a rise in beer prices, Mr Stirling told MailOnline: 'There are many things driving this, but the biggest single factor by far is the price of aluminium.

'Aluminium prices have really rocketed this year – the middle of last year, in the aftermath of the market panic, the price of aluminium fell to $1,400 a tonne. Today it's running a $2,600 a tonne, so it's almost doubled in a year.

'Aluminium is a major component of cans, and cans are a major packaging cost for the brewers. That would apply to soft drink manufacturers as well. You would expect Coca-Cola and Pepsi would be trying to pass through as well.

'The second thing is grain prices. This is a little more uncertain as the harvest is coming on, but we're probably looking at about a 20 per cent increase in the price of malt and barley this year.

'Logistics costs are going up as nobody can find drivers, there's a massive shortage of HGV drivers.

He added: 'Most of the brewers hedge their raw materials and commodities 12 months out, so the aluminium they will use next year they've bought this year, and this year's was bought last year when it was relatively cheap.

'Normally what brewers do is they'll get through Christmas and normally will take price increases at the start of next year, that's what you can expect.

'In the UK though it's doubly difficult for brewers because not only do you have the big supermarkets who are chains but probably 60 per cent of pubs are chains and that's unique in the world, and they will probably be resisting price increases as well.'

Dolf van den Brink, chief executive and chairman of Heineken, said: 'We are pleased to report a strong set of results for the first half year, whilst the pandemic continues to impact the world and our business.

'Yet there is reason for caution too. Firstly, Covid-19 remains a factor, with the biggest impact currently in key markets in Asia and Africa.

'Secondly, we see a rise in commodity costs, which, at current levels, will start affecting us in the second half of this year and have a material effect in 2022.'

Heineken sold almost 10 per cent more beer in the first half than a year ago and Mr Van den Brink said the firm would seek to be 'assertive' on pricing, having achieved nearly 10 per cent higher prices per hectolitre of beer in the Americas and Africa/Middle East in the first half.

He added that Vietnam, a top three market for Heineken, was a concern, with lockdowns imposed in its strongholds in cities and the south of the country. Elsewhere, the company's Malaysia brewery is shut and reduced tourism is hitting Indonesian sales.

Heineken did sound a word of caution on margins and cost inflation. This is starting to become a pattern across a few industries, although it's still not clear how much is temporary Covid disruption and how much is genuine underlying inflation.

'Either way, Heineken is adopting an 'assertive' pricing strategy, but nonetheless expects margins to come under pressure. This is something to watch, and in an inflationary environment brand strength will be more important than ever.

'Heineken also added called out the driver shortage here in the UK. This is undoubtedly disruptive for the group, but in our view it should sort itself out over time.

'There's no fundamental, long term shortage of drivers in this country, it will just take some time for the market to adjust and new drivers to get qualified, and compensation may need to rise to attract new hires.

'We don't think this will be a long term source of problems for Heineken.'

Anheuser-Busch InBev reported a sharp increase in its second-quarter core profit last Thursday, above expectations, as Covid-19 restrictions eased in many of its markets.

A year on from its worst pandemic-hit quarter in most of its markets, the company said earnings before interest, tax, depreciation and amortisation (EBITDA) rose 31 per cent on a like-for-like basis to £3.5billion, against consensus expectations for a 19 per cent increase.

Britain's economy has been recovering rapidly this year after suffering its biggest economic slump in more than 300 years in 2020 due to the pandemic.

But a sharp rise in oil prices and bottlenecks in supply chains have pushed up inflation in Britain and most other Western economies, with the National Institute of Economic and Social Research (NIESR) forecast on UK inflation suggesting it is on course to hit its highest level since late 2011.

NIESR deputy director Hande Kucuk said: 'To prevent a possible dislodging of inflation expectations, the MPC (Monetary Policy Committee) should prepare the ground for normalising its monetary policy stance, and this involves clearly communicating how Bank Rate and asset purchases and will be adjusted in response to higher inflation.'

The Bank of England's MPC should emphasise that policy tightening would be gradual, to avoid a sudden tightening of financing conditions that could derail recovery, she added.

NIESR said unemployment was likely to rise by 150,000 to 5.4 per cent of the workforce after the furlough programme stopped at the end of September.

The BoE will set out new growth and inflation forecasts on Thursday, and many economists expect it to update guidance about when it might consider beginning to reverse quantitative easing bond purchases.

The BoE's last full set of forecasts in May predicted inflation would peak at 2.5 per cent at the end of this year, but in June it revised this higher to see a peak of more than 3 per cent.

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