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Malaysia. Costly beer next year?

Carlsberg Malaysia Brewery Bhd doesn't expect an excise duty hike for the beer industry this year, but warned that it may have to raise product prices next year on the back of skyrocketing raw material costs.

The price of barley in particular, a key raw material for the brewer, is expected to rise by between 35 per cent and 40 per cent next year, managing director Soren Ravn said.

The industry also saw natural gas go up by 28 per cent and power tariffs by 8.3 per cent from May to July.

"With raw material prices continuing to go up, we're sitting on a bomb next year," he told reporters here yesterday after its roundtable dialogue on the challenges of doing business in a rising cost environment with other leaders of the food and beverage industry.

Brewers here last raised beer prices in May, by about 3 per cent, to reflect higher raw material costs.

"(Another price increase) seems to be likely next year with the way things are moving now. The only price increase we could imagine this year would be in the unlikely event that there'll be a duty increase," Ravn said.

He doesn't think there'll be a duty hike as he believes the government understands that the non-intended effects of a hike - like an increase in smuggled goods and the tendency by consumers to shift towards products with higher alcoholic content - causes the government to lose potential tax revenue.

A duty hike would also be "counter-productive" for the Economic Transformation Programme, which counts tourism as a key element to boost the country's competitiveness, he said.

Analyst Vincent Khoo, who is also head of research at UOB Kay Hian Research, said the probability of a hike is higher this year given that the industry was given a respite from any hikes in the last five years, but he tends to agree with Ravn that it is "unlikely" to happen.

"This is because duties here are already among the highest in the world and the government isn't likely to want to burden the people further (with high prices), especially as we near a general election. It won't help the tourism industry either," he told Business Times.

Brewers raise beer prices every time there is an excise duty hike. In the last few years, consumption of beer and stout in Malaysia has been on a decline due to the relatively high prices.

Ravn expects consumption to grow by a "low single-digit" percentage this year as compared to Singapore, which is expected to grow twice as fast.

The impact of the higher costs on Carlsberg's earnings this year will be minor as it has already done all its hedging on raw materials a year ago.

"This year, we feel comfortable to deliver according to our targets," Ravn said, adding that the company had yet to hedge for next year.

Meanwhile, he said the company would continue to focus more on the profitable and growing premium beer segment, which currently constitutes about a tenth of its revenue, but growing fast. It has over 20 premium brands which include Kronenbourg 1664, Asahi and Hoegaarden.

Deputy managing director Datuk Chin Voon Loong said brewers in Malaysia have put in a proposal for the government to at least maintain the current level of excise duty for beer, introduce a less complicated and fairer tax structure for alcoholic products, and keep alcohol import duty at current levels.

On the tax reform, Chin said the government has acknowledged that that the current system is complicated and has started looking into it. Any changes, however, won't happen so soon as it will be done on a transitional basis, he said.

7 Sep. 2011

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