The complexity and unpredictability in cost reduction efforts have been illustrated this week by global beer manufacturer, Heineken. It has declared in its latest earnings call an unexpected rise of $167m (£137m GPB/150m euros) in raw materials spending.
According to Heineken’s CFO, Laurence Debroux, this amounts to cost inflation of 5.6% per hectolitre of beer. She added that the manufacturer expects these costs to subside during H2 2019 but anticipates there will still be a mid-single-digit cost rise for the year as a whole. Ms Debroux said: “We’ll continue to mitigate this by driving productivity and cost efficiencies in our operations.” Effectively, that’s a declaration that the company’s procurement pros will be prioritising cost reduction, supplier relationship management, and strategic sourcing initiatives. The raw material in question was aluminium, which has been subject to volatile price fluctuations. Heineken had hedged against this problem last year but was less successful in 2019.
Debroux explained that the company’s 2018 had been locked in but that they had tumbled again this year. She added that the firm’s hedges should turn out better in the second half of 2019 but not sufficiently enough to prevent a cost rise for the year. Heineken buys Brazilian aluminium in US dollars, but currency exchanges exacerbated costs as Brazilian reals have been tumbling.
The cost of aluminium has exercised procurement pros in beer manufacturing for several quarters now. Molson Coors Brewing Co, for example, recently accused aluminium suppliers of “manipulative business practices” citing increased prices caused by tariffs on imported Mexican and Canadian aluminium, which the suppliers then failed to lower when the tariffs were removed. Company VP, Pete Coors, said: “Aluminium suppliers and traders are taking advantage of the pricing umbrella that the tariffs put in place. Because tariffs boost prices for part of the industry, the remaining un-tariffed firms are under less competitive pressure to keep their prices low.”