The fizz is back in the profits of the world’s biggest brewers as bars and restaurants in many parts of the world reopen with the easing of COVID restrictions, but rampant inflation in everything from barley to aluminum could put a squeeze on their margins through this year and the next.

Carlsberg is the latest big brewer to report a recovery in its business after a rough year in which the pandemic forced the closure of pubs, clubs, and hotels in many countries and even led South Africa and Thailand to temporarily ban alcohol sales.

Carlsberg said August 18 its revenues grew by 10% in the first half to just under $5 billion, while net profit rose 6% from a year earlier, and it forecast that operating profit for the whole of 2021 would grow by between 8% and 11%, higher than the previous 5% to 10% target.

The figures were ahead of comparable results for the first half of 2019, before the pandemic struck, Carlsberg said, and it reported strong business in China, the world’s biggest beer market.

Carlsberg’s recovery—and that of its competitors—cannot be chalked up only to the reopening of the world’s hospitality sector, however. Carlsberg and its rivals, global leader Anheuser-Busch InBev and No. 2 brewer Heineken, have had to be nimble to adapt to a locked-down world, rapidly expanding their online channels, both business-to-business and direct-to-consumer.

With drinkers buying more beer from supermarkets and less on a night out, the brewing giants have had to produce more beer in cans instead of barrels. To meet demand from a more health-conscious public, they have also rapidly stepped up sales of low- and no-alcohol beers and are diversifying into alternatives, such as hard seltzer, flavored alcoholic fizzy water that has been a hit in the United States and elsewhere.

At the same time, all three brewers are pushing ahead with their efforts to encourage drinkers to switch to higher-quality, more profitable brands.

In its latest report, Carlsberg said sales of alcohol-free brews grew 26% by volume. And AB InBev’s “Beyond Beer” business, which sells hard seltzers and canned wines and cocktails, grew revenue by 45% in the second quarter, delivering 20% higher profits glass-for-glass than traditional beer.

Uneven recovery

The beer world’s recovery has been an uneven one, driven by both COVID news and long-term trends.

Beer sales in Western Europe were boosted in June and early July when the reopening of bars and pubs in many countries coincided with the European soccer championship.

But Carlsberg CEO Cees ’t Hart said COVID-related uncertainty persisted, with Southeast Asian nations such as Vietnam, Indonesia, and Thailand hit hard by the Delta variant, causing high numbers of infections and death in countries with low vaccination rates.

“Although we see a gradual return to a more normal environment in markets across Europe, other markets, particularly in Asia, remain subject to severe restrictions due to new waves of the infection,” he said.

The brewers have a different problem in the U.S., where beer drinking had been declining for several years even before the arrival of COVID-19, while wine and spirits consumption rose. That trend continued during the pandemic: Alcohol sales rose 2% by volume in 2020, the biggest increase since 2002, according to drinks market analyst IWSR. U.S. spirits sales rose nearly 5% by volume last year, but beer sales fell nearly 3%.

Inflation on the horizon

With the pandemic’s effects on beer consumption largely in the rearview mirror, the largest cloud on the horizon is inflation.

Carlsberg chief financial officer Heine Dalsgaard told analysts the company would face a significantly greater challenge next year from increased costs for inputs such as barley, aluminum to make cans, and oil used to make plastic packaging.

Cans were in short supply in many markets, he said, and there were squeezes on transportation, such as a lack of truck drivers in the U.K.

Hedging will likely protect brewers from the full impact of cost increases this year, but the input price increases could bite in 2022 unless brewers can pass on the extra costs to consumers or save money elsewhere.

Dalsgaard said Carlsberg would aim to recoup increased costs by extracting higher revenues from its beer, either through price hikes or by selling more higher-priced products.

AB InBev and Heineken also complained of cost pressures when they released their latest earnings updates in the past few weeks.

Heineken said higher commodity costs would start to affect the company in the second half of this year and would have a “material impact” in 2022. CEO Dolf van den Brink said that while his firm’s hedged positions and long-term contracts with suppliers sheltered it from part of the price increases for now, commodity price inflation “will particularly impact us next year.”

Van den Brink noted that high inflation did not just affect the grain used to make beer.

“It’s across almost any commodity type; you see double-digit increases in the spot prices. It’s in road transportation, it’s in ocean freight, it’s in aluminum, it’s in plastic, it’s in sugar—no matter the commodity type, there’s very fast inflation happening,” he said in an interview with CNBC this month.

Heineken said that owing to inflation it expected its operating profit margin to be lower in the second half of 2021 compared with the same period last year. It also said that full-year financial results would remain below those of 2019.

Despite the caution, Heineken beat analysts’ expectations in the first half, with a 10% increase in beer sales by volume and a doubling of operating profit to 1.63 billion euros ($1.9 billion).

At AB InBev, which makes Budweiser, Stella Artois, and Corona, second-quarter revenues rose 27% to $13.5 billion, pulling ahead of pre-pandemic levels, while core earnings rose 31% to $4.85 billion. But the results fell short of analysts’ expectations, and the brewer said that its core profit in the U.S. fell slightly in the second quarter as it absorbed higher costs caused by a tighter supply chain.

Carlsberg shares have recovered all their 2020 losses and now trade about 3% higher than their pre-pandemic January 2020 peak. Heineken shares are still about 10% down from their 2020 highs, while AB InBev’s are down a hefty 30% from the start of 2020.