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Will DCSL’s Heineken Lanka acquisition challenge Lion Brewery?

Lion Brewery could face competition following the Distilleries Company of Sri Lanka (DCSL) acquisition of Heineken’s Sri Lankan subsidiary, according to analysts.

In a recent statement, an analyst from financial research agency Fitch Ratings said: “Heineken is a distant second in Sri Lanka’s beer market for now, but we believe DCSL has the industry know-how, market access and financial strength to elevate Heineken’s operations to a level that could weigh on Lion’s market share.”

The agency predicted that, with an expansion funded by the new spirits giant, within a few years Heineken Lanka could dominate the beer sector in the Sri Lankan market.

The analyst admitted: “We believe a large capacity expansion at Heineken Lanka would be required to compete effectively with Lion. We estimate the expansion will require significant capital outlay and at least two-to-three years to complete. We believe DCSL has the financial strength to fund the expansion, with its annual free cash flow, excluding dividends, averaging LKR10 billion-LKR12 billion (£24.3m-£29.1m). DCSL, as the largest spirits manufacturer in the country, already has extensive market access covering all forms of retail channels, providing easy market penetration compared with a new entrant.”

Fitch Ratings also highlighted how the success of each of the beer companies also came down to external factors such as the limitations each faced when it came to marketing within Sri Lanka.

The analyst cited by Newswire, stated: “We expect DCSL to face near-term challenges in terms of brand building given the complete ban on media advertising on alcoholic beverages by the government. Lion already has a very strong brand presence in the market compared with Heineken due to the greater mass-market appeal of its products, with cheaper pricing and customisation to local preferences.”

Despite this, according to the analyst, Lion Brewery is still a resilient company and could defend its market share with a more “aggressive” pricing strategy and explained: “Lion’s ability to withstand competitive pressure is also supported by its strong rating headroom…we believe this provides Lion with the flexibility to be more aggressive with its pricing strategy to defend its market share in an increasingly competitive environment.”

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