Beer: why drink will become more expensive in 2022 with the war in Ukraine

The most consumed alcoholic beverage by Brazilians, beer had the highest price increase in the country in seven years in 2021, according to the IBGE (Brazilian Institute of Geography and Statistics).

Beer consumed at home was on average 8.7% more expensive last year, while in bars and restaurants it rose 4.8%.

The two variations were the highest recorded in these products in the IPCA (Broad Consumer Price Index) since 2015.

The prospects for 2022 are not very encouraging, as the war between Russia and Ukraine puts pressure on global prices of barley and malt, beer ingredients.

The two countries account for 28% of global barley exports, and Russia is Brazil’s third largest supplier of malt.

As with fertilizers, Brazil is heavily dependent on imports in the brewing sector.

78% of the barley and 65% of the malt consumed in the country in 2021 came from abroad, according to data from Sindicerv (National Union of the Beer Industry).

Hops, the third central ingredient of beer, are practically 100% imported.

Although Uruguay and Argentina are the main suppliers of raw material for beer to Brazil, as well as wheat, the global rise in prices caused by the reduction in the world supply of cereals in the midst of the war tends to affect all buyers.

One positive point was the recent appreciation of the real against the dollar, as this helps to offset the pressure on commodity prices.

In addition, Ambev, the market leader with a 61.6% share in Brazil, says it has an average protection of 12 months against exchange rate or price changes for the main commodities that affect its cost of production.

But analysts estimate that smaller companies may have greater difficulty with any rise in costs, having to pass on increases to the consumer or have less profit.

The rise in prices is already quite noticeable on shelves and delivery apps, and consumers are adopting strategies to not run out of the drink.

According to a survey by Kantar, Brazilians have been exchanging brands considered high-end, such as Heineken, Stella Artois and Eisenbahn, for more popular — and cheaper — brands, such as Skol, Brahma, Schin and Itaipava, contrary to what had been happening for years. recent.

Highest inflation in seven years

According to Sindicerv, an entity that represents Ambev and Heineken (which produce almost 80% of the national beer), the rise in prices in 2021 reflected the increase in production chain costs, mainly electricity, fuels and commodities – the price of barley, for example, it rose with a smaller-than-expected crop in the United States.

“This made the United States buy barley from Mercosur countries, which naturally causes shortages for Brazil, which imports most of its barley from Argentina and Uruguay, increasing prices,” says Luiz Nicolaewsky, Sindicerv’s executive superintendent.

The industry representative also points out that the brewing sector has a fleet of 40,000 vehicles, so the 49% increase in fuel prices also hit manufacturers’ costs.

The rise in the dollar also weighed, which went from an average of BRL 3.94 in 2019, before the pandemic, to BRL 5.16 in 2020 and BRL 5.39 in 2021.

As Brazil imports most of the beer’s raw materials, this has significantly increased production costs.

In the case of hops, Nicolaewsky points out that the price also increased because of the multiplication of craft breweries in Brazil and in the world, which increased the demand for the sprout that gives the characteristic bitter taste of beer.

“Today, we have more than 1,300 breweries registered with the Ministry of Agriculture, so naturally the demand grows”, says Nicolaewsky.

Even with this explosion in the number of breweries, the three largest manufacturers —Ambev, Heineken and Petrópolis— still represent more than 90% of the national market, leaving all the others with only 8.4% of the market.

Inflation is not just a result of rising costs

Leonardo Alencar, chief agri, food and beverage analyst at XP Investimentos, points out that costs are not the only factor in beer inflation. Consumer behavior and companies’ pricing strategy also weigh.

The pandemic has changed consumption habits, with less demand for bars, restaurants, clubs and events, and an increase in consumption at home.

This helps explain why home-brewed beer inflation was nearly double that of out-of-home beer in 2021.

“Another relevant point is that the price of beer, in the past, was readjusted once or twice a year, except for occasional promotions. Nowadays, some breweries —Ambev mainly— have sales and delivery platforms, Bees and Zé Delivery , in which management is done in a more strategic way to generate more value”, highlights Alencar.

Bees is an Ambev platform intended for sale to small and medium-sized commercial enterprises, while Zé Delivery connects consumers to beer sellers in their region, who deliver the beverage already chilled.

Through them, sellers are now able to readjust the beer more often throughout the year and in a regionalized way.

“I even venture to say that the real high in the price of beer was greater than the indicators captured on account of this greater dynamism of pricing”, says the XP analyst.

“Instead of having a single price list and going up for the whole country, in a year like 2021, with a dynamic very favorable to agribusiness, the company can choose, for example, to raise prices more outside the capitals. Inflation indicators better capture the dynamics of capitals.”

Price pressure in 2022

Beer prices in 2022, amid a general rise in commodities due to the war in Ukraine, are expected to continue to rise, according to the XP analyst and the brewers union.

The pressure is high, but it can be partly mitigated by the exchange rate and affect large and smaller companies in different ways.

Ambev estimates a high cost per hectoliter (100 liters) of 16% to 19% in 2022. Last year, the increase was 17.4%.

The estimate was made by the company before the outbreak of the war in Ukraine, but the brewery told BBC News Brazil that the projections are maintained, due to its 12-month cost protection policy.

Ambev declined an interview request and said it would not comment on this report.

Heineken, on the other hand, even before the war, projected a growth in costs per hectoliter of around 15% in 2022, due to the increase in commodity, energy and freight prices.

“We will offset these input cost increases through pricing, which can lead to lower beer consumption,” Harold van den Broek, the group’s chief financial officer, said in a comment on results in February.

The war in Ukraine adds pressure to this scenario in the perception of the largest companies in the sector.

Brazil is the third largest beer producing market in the world, behind China and the United States, with 151.9 million hectoliters of beer in 2020, according to data from the BarthHaas Hop Report 2020/2021, used as a reference by Sindicerv.

At the raw materials end, Russia and Ukraine are giants, accounting together for 28% of global barley exports by volume and 24% by value.

The two countries also have significant volumes of foreign sales of malt, made from roasting the sprouted sprouts of barley or other cereals. Russia is the third largest supplier of malt to Brazil.

As commodity prices fluctuate globally and the US must continue to compete for Mercosur barley and malt, cost pressure affects Brazil.

“The cost of beer in the world has gone up, all breweries are being impacted by this”, observes Leonardo Alencar, from XP.

“But the region where the cost is lower is here in Brazil and the more verticalized breweries [que controlam todas as etapas do processo produtivo], like Ambev, suffer less from rising costs. It will be able to decide between not raising prices so much and gaining market share or protecting its margins. Other companies, such as artisanal ones, will suffer from the same cost pressure without the same structure.”

How consumers respond to inflation

Consumer behavior affects price dynamics and vice versa, because advancing inflation changes beer consumption.

“There is a migration from high-end beers to popular beers, so the amount of times consumers drink beers like Heineken, Budweiser and Stella Artois has decreased and there has been an increase in other cheaper brands”, notes Hudson Romano, senior manager. consumption outside Kantar’s home.

Also according to the analyst, although the Brazilian beer market has been gaining new consumers, the frequency of purchase has fallen by half.

“Due to the increase in prices, the consumer continues to drink, but instead of drinking three times a week, he drinks once and a half. This decrease in consumption is a problem for the industry.”

One of the responses has been the launch of new brands. Ambev, for example, invests in an intermediate segment between high-end and popular beers, with brands such as Brahma Duplo Malt and Spaten.

“Beer consumption is closely linked to GDP growth [Produto Interno Bruto]”, observes Alencar, from XP. “In a year in which we will have less growth, there is an effect of this in the consumption of beer.”

“Inflationary pressure takes away purchasing power, and we stop consuming a more expensive product for an intermediary. Or we exchange an intermediary for a cheaper one. This favors beer over other alcoholic beverages, because it is cheaper, and popular beers and intermediaries”, he observes.

Analysts also assess that the place of consumption must follow the change in the job market. In other words, if previously people worked and drank more outside the home, now the trend is towards work and hybrid consumption, with more beer being drunk at home.

“Young people are going out, but they’re going less to bars and clubs and more to friends’ houses and public places,” says Kantar’s Romano.

“We are still in the pandemic, but with a much greater freedom than in 2020, we are putting our foot in the water and we are sinking more and more, until we can swim again. But as long as it is not 100% safe, people will continue to preserving.”