Heineken Executive Summary

Heineken NV, the world¡¦s third largest brewer, has recently announced the introduction of a new product to the U.S. beer market dubbed the BeerTender.

This new home appliance is
designed to fit in the kitchen next to the espresso machine and to keep beer in a unique
recyclable four-liter keg cold, fresh and ready for draught for up to three weeks. The unit was
designed and crafted in conjunction with Krups, the well-known maker of upscale home appliances. The move is intended to capitalize on recent shifts in customer preference while benefiting Heineken¡¦s portfolio mix at the same time. In the U.S.A., half of Heineken consumption is on-trade compared to competitor¡¦s 25/75 on-trade to off-trade split. If successful,the move could increase both Heineken¡¦s market share and profit margins as well as enlarge offtrade consumption, which is more profitable and less subject to decline than on-trade in times of
economic downturn.

Every strategic move is subject to external forces and internal capabilities. This paper
identifies the following key success factors ultimately determining the outcome of Heineken¡¦s
initiative:
External environment. The U.S. beer market is strongly consolidated and mature.
Opportunities are mostly related to changes in demographics and customer preferences. Supply
chain management in this heavily regulated environment is of paramount importance.
Internal environment. Heineken¡¦s unique approach to the market is manifest through a
dominant vertical structure that utilizes a mixture of strong centralized policies and decentralized
decision-making. While a strong base of resources and well-developed capabilities combine to
give Heineken a competitive advantage, the company is challenged in responding to recent
preference changes in the U.S. market. The U.S. operating company has concentrated its efforts
in the Northeastern region with limited presence on the West coast.
Heineken¡¦s move is the correct response to the ongoing changes in the U.S. beer market.
To be successful, Heineken should implement the following recommendations:
Roll out the BeerTender on a nation-wide basis.
Introduce Amstel Light in BeerTender kegs.
Specifically target the middle-aged population.

Premium Regular,
21.3%
Premium Light,
34.1%
Popular Light, 10.1%
Popular Regular,
11.5%
Ale, 0.1%
Malt Liquor, 2.5%
Import, 11.3%
Dom. Specialties,
3.3%
Superpremium,
1.9%
Dry, 0.1%
Ice, 3.8%
Figure II.A.1: Market share of beer sorts
in the US market

II. EXTERNAL ANALYSIS
A. INDUSTRY DEFINITION
Heineken N.V. is a £á9,255 million global beer manufacturer that derives 25% of its
revenue from sales in the U.S. beer market. The $60 billion U.S. domestic market is usually
segmented by beer types: Premium, Popular, Light,
Imports, Domestic Specialties, and a number of
other specialties detailed in Figure II.A.13. Of the
1,465 US breweries operating in 2003 there were 19
large breweries, 20 regional breweries, 55 regional
specialty breweries, 385 microbreweries, and 986
brewpubs4. As mandated by the government, the
beer industry consists of three major groups: beer
brewers, distributors, and retailers, as detailed in
figure II.A.2.
Beer Manufacturer Distributor ¡E= bulletpoint
purchase beer from the producer

provide a local warehouse for
quick delivery to retailers

sell and market beer to retailers
in the territory

support the advertising/
promotion calendar of
breweries
¡E provide brewers with market
intelligence.
RReetatailielerr
¡E on-premise (bars, pubs, etc.)
¡E off-premise (stores, etc.)
¡E purchase beer from distributor
¡E store and display beer for
purchase
¡E support the advertising/
promotion calendar of
breweries
¡E provide distributors with
market intelligence.
¡E purchase ingredients (hops,
malt, yeast, water, etc.)
¡E produce and store beer
¡E package beer (in-house or
externally)
¡E sell and market beer to
wholesalers
¡E advertise and market beer
¡E develop new beer sorts
Figure II.A.2: Structure of the US beer market, players and their responsibilities.
B. FIVE FORCES ANALYSIS
1. LEVEL 3 ANALYSIS
Summarizing and ranking the impact of Porter¡¦s five forces on the U.S. domestic beer
market (see section VIII.B), it is concluded that the existing fierce rivalry and the high barriers to
entry effectively prevent any potential newcomer from entering the market at the national level.
The lack of significant supplier power and buyer power cannot fully counter these forces. In the
long run, the industry is seriously threatened by changes in demographics and consumer
preference. The level 3 analysis is summarized in Fig. II.B.1. Unfavorable (5).
Competitive Force Effect on Industry Rank
Rivalry Unfavorable, 5 1st
Threat of Entry Favorable, 1 2nd
Buyer Power Moderately unfavorable, 4 3rd
Threat of Substitutes Moderately unfavorable, 4 4th
Supplier Power Moderately unfavorable, 4 5th
Overall Unfavorable, 5
Competitive Force Effect on Industry Rank
Rivalry Unfavorable, 5 1st
Threat of Entry Favorable, 1 2nd
Buyer Power Moderately unfavorable, 4 3rd
Threat of Substitutes Moderately unfavorable, 4 4th
Supplier Power Moderately unfavorable, 4 5th
Overall Unfavorable, 5
Figure II.B.1: Summary of Level 3 Analysis

C. MACRO ENVIRONMENTAL FORCES ANALYSIS
1. GLOBAL
In 2000, the world consumed 1.1 billion gallons of beer, 22% of which were sold in
North America5. Beer sales continued to grow despite fears of slowdown due to economic
downturn in the U.S. and Western Europe in 2002 and 2003. The growth in global beer
consumption, however, continues to slow down and currently has a CAGR of less than 2%.6
Having surpassed the U.S. as the world¡¦s leading beer market in 2003, China accounts for 46%
of this growth. North and South America represent 30 %.7
While the overall global market is heavily fragmented, most national geographies are
strongly consolidated, with the exception of Germany and China8. Therefore, large brewers
increasingly try to expand their stagnating home bases through internationalization. Lately, they
have focused on Asia for consolidation opportunities. The very recent battle for control over the
Harbin brewery, China¡¦s largest beer manufacturer, pays tribute to that.9 10 11
2. SOCIAL & CULTURAL TRENDS
Over the past five years, the beer industry has been subjected to major social and
demographic trends, especially changes in the consumer behavior and preference. A recent
study12 surveying 1,300 current beer consumers found two major tendencies.

a) Consumers have reduced their beer consumption due to an increased sensitivity to
diet and health issues. More than 50% cited the desire to lose weight by reducing the intake of
carbohydrates. These respondents often switch to wine, malt-flavored alcoholic drinks
(sometimes also called FABs for flavored alcoholic beverages, malternatives, or FMBs for
flavored malt beverages), and other beverages, as discussed in section VIII.B.2.e. This trend is
in tune with the observation that more people consume wine in expectation of health benefits.
Refer to Figure II.C.2.1. This is in part based upon the well-known French Paradox that claims
an unhealthy nutritional lifestyle may be offset by daily intakes of red wine13. Scientific studies
have indeed shown that, in contrast to beer and spirits, moderate consumption of wine may
reduce the risk of cardiovascular and other mortalities.14 The global wine market has increased
substantially in the last decade with world consumption projected to increase to 2.8 billion cases
by 2010.15

b) Beer consumers tend to go out less. More than 20% of beer drinkers who have
reduced their beer consumption indicated they visit bars, clubs, restaurants less often, partially
motivated by the weak economy and other financial reasons. However, their demands for
novelty and sophistication have been increasing. If this trend continues, it will hurt the beer
industry, as 25% of sales originate from these channels. While the profit margins are relatively
low in comparison to other sales channels, the on-premise consumption is vital to brand building,
as it represents the biggest driver for customer preference16. As a result, the off-premise and onpremise
market shares are directly correlated.17 18

3. TECHNOLOGICAL
At the national level, the U.S. beer industry is mostly driven by economies of scale.
Technological innovations therefore address the improvement in production efficiency,
packaging, delivery systems, and market intelligence.
Beer consumers are very sensitive to the freshness of their beverage. Brewers have
responded in different ways. Anheuser-Busch prints the ¡§Born¡¨ date on the bottles to advertise
the freshness of its products. Kirin coats the interior of polyethylene terephthalate bottles (PT)
with a thin layer of diamond-like carbon to prevent the escape of carbon dioxide19. Guinness
encloses a small canister in each bottle to ensure slow release of carbon dioxide after opening the
bottle.

Another direction of technological development addresses beer transportation and market
intelligence. Some UK beer transporters began using RFIDs (Radio Frequency Identification) to
track content information and capture consumer preference data. This technology may not be
adopted in the US any time soon since consumer groups strongly oppose the disclosure of
personal information. RFIDs have become subject to legislation20. Thus, US brewers currently
only rely on supermarkets and other distribution channels for collection of customer preferences.

4. GOVERNMENTAL AND POLITICAL
The beer industry is subject to extensive government regulations regarding distribution,
labeling, advertising, credit, prices, container characteristics, alcoholic content, tax rates, and
waste assessments. Legislations are introduced and enforced at the state level but are subject to
federal regulations issued by the Bureau of Alcohol Tobacco and Firearms (ATF)21.
The government imposes a disproportional tax rate on beer with the intention to reduce
alcohol abuse. In 1991, the state excise tax doubled from $9 to $18 per barrel. Today, when
summarized across production, distribution and retail, the tax represents 44% of the beer retail
price22. Tax rates are determined at the state level and vary significantly from state to state23.
Approximately, the government collects $3.4 billion at the federal level, $1.9 billion at the states
level, and in addition $3.1 billion in sales taxes each year. In effect, the government makes seven
times more profit from beer taxes than all domestic brewers combined24.
State imposed pricing laws regulate the price allocation between brewers and
wholesalers. In New York State, for instance, a brewer must not raise prices for 180 days after a
price reduction. Also, if a price reduction is offered to one distributor, all other distributors in the state must receive the same benefit.25
The federal government also heavily regulates beer distribution. After prohibition ended
in 1933, the 21st Amendment resulted in the introduction of the ¡¥three-tier¡¦ distribution system.

Beer is only allowed to be passed from producers through distributors to retail outlets26. This
was done with the intention of reducing control of brewers over retailers and to ensure more
effective tax collection. In addition, it is illegal to transport beer across state lines, which has led to a heavily fragmented distribution network currently consisting of more than 2,700
independent players27. The uniqueness of this system is also one of the primary reasons for the
U.S. import beer market¡¦s profitability, as it presents a major barrier to entry28. Recently,
however, there have been lobbying efforts by larger retail chains, such as Costco, to bypass these
laws. These retailers seek to buy from producers directly, ¡¥warehouse beer at the state level¡¦ and
then distribute to their wholesale clubs29.
Internet and mail order sales of beer are also restricted under the 21st Amendment
including specific provisions that only allow licensed in-state retailers to distribute alcohol.30
Each state has different rules regarding marketing, importation and distribution of alcohol. Direct
interstates sales are prohibited in a number of states (AL, AZ, AR, DE, KS, ME, MA, MI, MS,
MT, NJ, NY, OH, OK, PA, SC, SD, TN, UT, VT, VA). In seven states (FL, GA, IN, KY, MD,
NC, TX), it is a felony offense for retailers and non-basic permit holders to sell alcohol directly
to consumers.31 The Supreme Court is currently reviewing the possible deregulation of interstate
wine trade.32 The ruling will affect future Internet and mail order beer distribution.
Beer companies are constantly battling for rights to advertise to specific demographic
audiences and are at the same time being under pressure to observe regulations preventing
underage drinking. The US law prohibits anyone below the age of 21 from alcohol consumption
and brewers from advertising to such demographics. The Federal Trade Commission ruled that
alcohol companies should not advertise to audiences comprised of more than 30 percent of
minors.33 Though contesting the existence of any scientific evidence that would link advertising
and underage drinking, beer companies have volunteered to curtail advertising to minors.
Nevertheless, two class action lawsuits have recently been filed against alcohol companies,
including Anheuser-Busch and SABMiller, for advertising FABs to demographic segments
consisting of minors.34
5. ETHICAL
Underage drinking is on the rise. A government-sponsored report estimated that the
social cost of underage drinking is about $53 billion annually35 with traffic accidents and violent crimes as the leading cost.

A Georgetown University study found that the average Internet traffic to beer company
websites consists of up to 60 percent minors36. The current ethical debate is about whether
brewing companies or parents are responsible for monitoring the web surfing patterns of minors
and policing purchases of alcoholic beverages. The beer industry refers to numerous studies
proving that parents have more influence over the youth’s drinking behavior than advertising.

Consumer watchdogs, on the other hand, have accused brewers of making their company
websites too minor-friendly.37 Specifically, they blame brewers for offering online content
particularly appealing to minors, such as interactive games (e.g. alien shoot-outs and beer bottle
tossing), custom music videos and interviews with pop stars. The debate regarding both issues is
still ongoing.
6. ECONOMIC (MACROECONOMIC) TRENDS
During the past three years the global economy has undergone one of its most severe
recessions. Surprisingly, there is no evidence indicating that people would consume less beer
during an economic downturn (though on-trade drinking declines in favor of off-trade). In fact, a
regression analysis covering the past 20 years could not find any correlation between the GDP
and the total domestic beer consumption38. Interestingly enough, the average annual beer price
increase of 2 -3% during that time frame did not have any negative impact on the consumption
either39. It has been established that the beer consumption only grows at half the growth rate of
personal disposable income40. In contrast to the overall market, the import beer segment, owing
to its much higher price point, tracks very closely the GDP and consumer expenditures.41
7. DEMOGRAPHIC TRENDS
Demographics represent the strongest macro-economic force affecting beer sales.
According to a recent study, approximately 40% of the U.S. population consumes beer on a
regular basis and more than 30% of beer drinkers are frequent beer shoppers. Their demographic
profile is strongly skewed toward young males (21-27 year-old) with low to moderate education
and moderate household income.42 This core segment represents 27% of the overall beer sales
and the highest per capita consumption with yearly intake of 66 gallons compared to the national
average of 33 gallons43. The growth of this segment (CAGR of 1.4%) is generally considered to
be the main driver for the US beer industry for the next decade, see Figures II.C.7.1 and II.C.7.2.
However, the U.S. population is aging. More than 31% of U.S. citizens will reach their 50¡¦s by
2005, compared to 26% in 1992. Consumers drink less beer as they age, 16 gallons per capita
by the time they are 50 years old44, mostly due to health and wellness concerns. Based upon its
current growth rate, the 50+ population will only make a moderate contribution to the beer
consumption increase in the next decade.
13
8. SUMMARY
Summarizing the past two sections, Porter¡¦s five forces and the macroeconomic trends,
the US beer market is moderately to strongly unfavorable to newcomers. The summary and
ranking is shown graphically in Fig. II.C.8. The strong rivalry in conjunction with the
unfavorable cultural and demographic trends makes the domestic beer market very unappealing.
The following section, on the other hand, will show that the incumbent firms that have perfected
their game can still prosper under these conditions.
Rank Favorable
Moderately
favorable Neutral
Moderately
Unfavorable Unfavorable
1
2
3
4
5
6
7
1
2
3
4
5
Impact
Technological
Rivalry
Barriers to Entry
Buyer Power
Supplier Power
Threat of Substitutes
Competitive
Environment General environment
Economic (Macroeconomic Trends)
Ethical
Governmental and Political
Global
Social & Cultural Trends
Demographic Trends
Rank Favorable
Moderately
favorable Neutral
Moderately
Unfavorable Unfavorable
1
2
3
4
5
6
7
1
2
3
4
5
Impact
Technological
Rivalry
Barriers to Entry
Buyer Power
Supplier Power
Threat of Substitutes
Competitive
Environment General environment
Economic (Macroeconomic Trends)
Ethical
Governmental and Political
Global
Social & Cultural Trends
Demographic Trends
Figure II.C.8: Summary and ranking of the macroeconomic and Porter¡¦s five forces
acting on the US beer market.
14
D. COMPETITOR ANALYSIS
Heineken has announced they are considering the rollout of the Beertender in the U.S.
market. Anheuser-Busch, SAB Miller and Coors dominate this market and are therefore the
focus of this analysis. Heineken is the second-ranked competitor in the import beer market
segment, which is dominated by Corona, the flagship product of the Mexican Modelo group
controlled by Anheuser-Busch. Labbatt, the Canadian-Belgian brewery, is number three.
SABMiller and Coors have recently expanded into the beer import market.
1. ANHEUSER-BUSCH, INC.
a. CORPORATE OVERVIEW AND PRODUCTS
Anheuser-Busch, Inc., is 100 percent owned by the holding company Anheuser-Busch
Companies, Inc. The company mostly
focuses on domestic beer sales, 75% of its
total revenue, 4% from international beer
sales, 15% from packaging, and 6% from
entertainment. George Schneider in
St.Louis, Missouri in 1852 founded its
predecessor, the Bavarian Brewery¡X
Carondelet. After changing ownership
several times within just two years, it was
acquired by Eberhard Anheuser in 1860.
Later, he jointly managed the brewery with his son-in-law, Adolphus Busch, and renamed it into
the Anheuser-Busch Brewing Association in 1879. Another landmark was reached in 1891,
when the company acquired the rights to the Budweiser name, its all-time best-selling product.
Having been a minor local player for most of its history, over the past 50 years Anheuser-Busch
(A-B) developed into the world¡¦s largest beer manufacturer. In the U.S., the company currently
commands a market share of 49% and 12.1% worldwide.45 In 2003, the company sold beer in
more than 80 countries46.
15
b. STRATEGY & POSITIONING
Corporate level strategies. At the corporate level, Anheuser-Busch pursues the
¡¥dominant vertical business¡¦ strategy47. All ratios (specialization, related and vertical) are well
above 70%. The company focuses mainly, but not exclusively, on beer production and is heavily
vertically integrated, which sets it apart from most of its main competitors.
Business level strategies. Anheuser-Busch¡¦s business strategy can be best described as a
hybrid between cost leadership and broad differentiation, see Fig. II.D.1.b.1. Benefiting from
its unmatched economy of scale, the company has the lowest cost structure in the industry. As
the company owns almost half of the domestic beer market, it obviously appeals to the mass
market. At the same time, A-B offers the most diversified product portfolio, ranging from the
budget-priced (Busch family) to premium (Budweiser product line) and super-premium brands
(Michelob family). The extensive product breadth spans from low-carb and regular to full and
specialty beers. Refer to fig. II.D.1.b.2.
Market share. As pointed out in the preceding section, the US beer market is heavily
consolidated. Anheuser-Busch commands a domestic market share of 49% when Miller and
Coors controls 19% and 11% respectively. This picture becomes even more dramatically in
favor of Anheuser-Busch when the pool of domestic profits is analyzed. A-B earns 66% of the
total available profits of the total U.S. market, whereas Miller only 15%, Coors 4%, and
Heineken 5%48.
c. RESOURCES
Capital. Anheuser-Busch has substantial capital reserves and cash flow volume. In the
year 2002, the company had a positive cash flow of close to $3B, of which $2B were spent on
outstanding stock purchases. The company invested $834m on capital expenditures alone. The
company plans to invest approximately $4.5 billion on technology improvements over the next
five years. This is intended ¡§to take advantage of growth and productivity improvement
opportunities for its beer, packaging, and entertainment operations.¡¨49
Diversification. Compared to its main competitors, A-B has a higher level of
diversification, as it also engages in the entertainment industry and owns, or at least controls,
major portions of the value chain, upstream as well as downstream.
16
d. CAPABILITIES
Distribution, exclusive wholesales relationships. Supply chain management is one of the
key success factors in the beer business. Its complexity has led to the development of the
popular ¡¥beer game¡¦50 that thousands of MBA students and executives have used for educational
purposes. In real life, Anheuser-Busch has gained significant distribution power through
building exclusive wholesaler relationships. Sixty-seven percent of A-B¡¦s domestic sales are
distributed through wholesalers that exclusively carry Anheuser-Busch products51. This
percentage is unrivaled in the industry and significantly higher than for any competitor (Coors
and SABMiller, 2%!52). A-B has introduced a program called ¡§Impact Selling¡¨ that
continuously educates wholesalers on effective sales methods of A-B¡¦s products.53 It is further
mandatory for distributors to maintain close communication ties with A-B. Consequently, 90%
of A-B distributors believe that this brewer delivers best-in-class service. In comparison, only
43% of all distributors claim the same for SABMiller and 48% for Coors.54 In addition, A-B
has taken advantage of the fact that the wholesale business is driven by consolidation, as
wholesalers tend to bond with strong brewers that can guarantee them sufficient sales volume.55
Consequently, the average A-B wholesaler has an operating income five times higher than Miller
or Coors distributors.56
At the retail level, A-B successfully follows a strategy that is entirely different from the
rest of the industry. Convenience stores are known to offer the highest profit margins. A-B sells
33% of its production through this channel and commands a market share of 61%. Interestingly,
A-B owns less than 50% of the overall market.
Innovation. A-B has an impressive track record of introducing product innovations.
Typically, the company focuses on product and brand developments that offer the highest profit
margins. The latest example is the introduction of Michelob Ultra, a premium low-carbohydrate
beer that took the market by storm. Within one year after its launch in late 2002, the new
product achieved an impressive 1.6% market share – the most successful product introduction
since Bud Light more than 20 years ago!
Commitment of management. Anheuser-Busch is led by a strong management team.
The executive staff has the highest retention rate in the beverage industry; on average its senior
managers have held their positions for more than ten years. The company¡¦s president, August A.
17
Busch III, representing the fourth generation of his family to lead the company, has been at the
helm for 28 years.57
Advertising. Anheuser-Busch spends the most on advertising in the beer industry. In the
year 2000, the company spent $400m on advertising58, more than its closest two competitors
(Coors and SABMiller) combined. Having the 40th largest budget of all U.S. companies59, A-B¡¦s
advertising represents 40% of the beer industry¡¦s overall spending of around $1 billion. A-B has
six advertising agencies under contract and is best known for its Super Bowl ads. Its media
campaigns reach the most universal demographics of all beer brewers and have the most
impact.60 Interestingly, A-B¡¦s large economy of scale advantage results in the industry¡¦s lowest
advertising spending per barrela, which is about 30% below industry average. In 2002, A-B
spent $3.32 per barrel, Miller $6.03, Coors $9.51, and Guinness a startling $14.71. Heineken
USA spends on average $14.44 per barrel, the second largest amount in the industry61.
Pricing Power. Assuming that costs are constant, a company can in principle increase its
profits by either increasing prices or sales volume. Over the past years, A-B has successfully
implemented annual price increases of 3-4% that are higher than the industry average of 2-3%62.
This is in line with a recent sensitivity analysis revealing that A-B gains twice as much profit
from price than from volume increases63. At the same time the company sports operational
profit margins of 23%, which is particularly high for a consumer goods company64. Both factors
combined represent a major competitive advantage in a mature market!
e. VALUE DRIVERS
Quality of Product and Services. Of all 600 companies analyzed in the 2004 survey of
the ¡§America’s Most Admired Companies¡¨ conducted by Fortune magazine, Anheuser-Busch
ranked first in the category ¡¥quality of products and services¡¦. The company also won the first
rank in the overall category ¡¥Beverage Industry¡¦. 65
Diversified Portfolio, Brand and Reputation. A-B offers an extensive product portfolio,
Fig. II.D.1.b.2. The company has been successful in addressing the whole product spectrum
ranging from high-priced super-premium beers, such as Michelob Ultra, to the low-priced
brands, such as Busch and Natural Light. A-B produces five of the ten best-selling beer brands in
the U.S.66 At the same time, A-B has developed superior skills in managing product life cycles.
a 1 Barrel represents 117.3 liters, 31 gallons, or 176 pints.
18
A review of the corresponding BCG matrix reveals that A-B has covered all three profitable
sectors of the matrix. Fig. II.D.1.e.1.
Delivery Due to its described distribution practices, A-B has a superior market presence
at the wholesale, retail and on-premise consumption levels. The latter represents the largest retail
channel with 25% of the overall market, in which A-B commands 40% market share. The very
profitable convenience store channel with 23% of the market, of which A-B holds 61%, follows
it.67
Technology During the past decade, A-B has heavily invested in its production facilities.
All 12 breweries are now considered to be state-of-the-art which has significant impact on both
the total output as well as the maintenance costs.68 The company also develops environmentally
friendly technologies, such as the Bio-Energy Recovery System that utilizes otherwise lost
methane originating from waste to heat boilers.69
Environmental and Community Policies A-B pursues a high-visibility environmentfriendly
policy. In recognition of its long history of environmental stewardship, the company
received the 18th Keep America Beautiful Vision for America award in 2003.70 The company has
established an internal ¡¥Environmental Management System¡¦ that establishes clear guidance on
how environmental considerations are incorporated into business decisions. Through its
subsidiary, the Busch Entertainment Companies, A-B maintains one of the world¡¦s largest
zoological collections in its 15 entertainment parks. Together with strong support of educational
media programs, the company is perceived as environmental friendly. In addition, the company
has spent $500m in the past 22 years on the education of the general public about alcohol
abuseb71.
f. COST DRIVERS
Economy of Scale. The company¡¦s sheer size plus the state-of the-art production
facilities make it the most-efficient player in the US beer market. Consequently, A-B has the
lowest cost for production72, transportation73, marketing74 and advertising75 per barrel.
Strategic upstream supply chain management. Anheuser-Busch has a strong grip on its
distribution system. The company gains significant strategic momentum from the upstream
vertical integration and partnering with several upstream suppliers. A-B owns three malt plants,
b Through support of the National Social Norms Resource Center, Anheuser-Busch claims to have reduced the
alcohol abuse rate at the Santa Clara University by 20% in 2002.
19
three rice mills and two hops farms. The company possesses most of its manufacturing and
packaging plants: eight can manufacturing plants, three can lid producers, one glass
manufacturing plant, one crown and closure liner material plant, and one aluminum can
recycling plant.
Plant locations The 12 domestic A-B plants are strategically placed in 11 states covering
most of the continental U.S. This has a significant impact on transportation costs. On average,
A-B ships a barrel less than a quarter mile whereas Coors ships it three miles, a major contributor
to the disparity in gross margins between the two competitors.c76
Market intelligence The beer industry¡¦s efficiency benchmark inched up another notch
when Anheuser-Busch in 2003 introduced the Internet-based resource BudNet. The intelligence
software gathers customer buying trends, competitors¡¦ position including discounts, placements
and volume, and eventually determines the exact time, place and reasons that a customer
purchases a specific bottle of beer.77 Information collected from BudNet helps Anheuser-Busch
to develop marketing strategies that target specific race, gender, age groups and monitor rivals¡¦
activities. It once again proves that brewers can no longer solely rely on improving their own
operational efficiencies but rather need to streamline and manage their supply chain through
optimization of partners¡¦ interfaces, such as capturing market intelligence and installing
information feedback mechanisms.
A graphical summary of the interaction between A-B¡¦s value and cost drivers is
presented in Fig. II.D.1.f.1.
g. STRENGTHS
Anheuser-Busch derives most of its market strength from its overwhelming scale and
scope economies. The ¡¥king of beers¡¦ uniquely transforms this strength into several unrivaled
competitive advantages, including cost efficiencies, exclusive relationships with many of its
wholesalers, a dominant presence at the retail level, advertising efficiency and pricing power.
h. CHALLENGES AND WEAKNESSES
A recent survey among retailers and wholesalers indicated the following primary
concerns78: a) Brand innovation. Distributors are concerned that A-B brands are beyond their
expected lifecycle. Rapid shifts in demographics and taste preferences may catch the company
c Miles-per-barrel have been calculated by dividing the total volume of sales per state by the distance to the nearest
plant.
20
off-guard. The company should therefore invest more resources in developing its high-end
position. b) A-B is growth limited because the company is operating above 95% production
capacity, which already presents seasonal challenges. Further growth in output would require
financing of an additional brewery, which the management reportedly is unwilling to support. c)
The overwhelming success of the past decades could potentially lead to complacency among AB¡¦s
employees and distributors. The management has already started to address this challenge.
2. SAB MILLER PLC
a. CORPORATE OVERVIEW AND PRODUCTS
SABMiller has brewing operations in more than 40 countries spanning four continents.
The company is the second largest brewer in the world by volume and one of the largest Coca-
Cola bottlers and distributors of Coke¡¦s carbonated soft drinks outside the U.S.79 The primary
brands in the U.S. markets are Miller Genuine Draft, Miller Lite, Foster¡¦s and Pilsner Urquell,
and Henry Weinhard¡¦s and Leinenkugel¡¦s. Other U.S. brands include Icehouse, Old English 800,
High Life, Milwaukee¡¦s Best, Mickey¡¦s Malt Liquor and a non-alcoholic beer called Sharp¡¦s. In
response to the low-carb diet frenzy in the U.S., the company teamed with Skyy Spirits to
successfully introduce Skyy Blue, a citrus FAB. . The new product is billed as an ultra-premium
malt beverage with a sophisticated image. A follow-on with an added touch of cranberry flavor
has been introduced recently as Skyy Sport.80
b. STRATEGY & POSITIONING
Corporate level strategies. The SABMiller corporate level strategy is a dominant linked
corporations strategy. The stated corporate level strategy is to ¡§optimize and expand its existing
positions through acquisition¡¨ and to ¡§seek value-adding opportunities to enhance its position as
a global brewer¡¨. 81 For example, SABMiller acquired Miller Brewing in 2002 as part of their
corporate level strategy to reduce risk through geographic and currency diversification.82 The
geographic separation of SABMiller operating companies keeps sharing of market and value
chain activities low. The specialization ratio is low when the geographic dispersion of the
company¡¦s separate businesses is taken into account. With this view, no single business has
dominance. This is verified by observing that SABMiller¡¦s largest turnover is generated in the
North American market at US$ 3,473 million out of a total worldwide turnover of US$ 9,112
million or only 38% of total turnover. The next largest is the South African turnover which is
21
only 25% of total turnover. The interrelatedness ratio and vertical ratio are also low for the
same reason of geographical separation, which inhibits value chain activity sharing and vertical
integration of processing activities.
Business level strategies. SABMiller business level strategy is to serve the mass markets
for beer and soft drinks with broad differentiation as perceived by consumers. Most of the
perceived differentiation is due to brand equity. Emphasis is placed on brand building through
packaging and promotion to hold or gain market share. This perceived differentiation at the
consumer level is observed in the current market as Miller Light has expanded share at the
expense of Bud Light through nothing more than new packaging and brand promotion as both
beers have remained unchanged83. The company¡¦s stated business strategy is to drive volume,
improve operational efficiency and grow its international premium beer brands, such as Pilsner
Urquell, in the U.S. market.
Market share. In 2000, Miller Brewing, then a subsidiary of Philip Morris84, held the
second largest market share in the U.S. beer market at 20.6%.
c. RESOURCES
Capital. As of March 2003, SABMiller had fixed assets of US$ 11,060 million and
current assets of US$ 1,819 million including US$ 559 million of cash in short term
investments.85 These ample resources enable them to make acquisitions in line with their
corporate level strategy and diversify currency and geographic risks.
Technology. SABMiller brewing and bottling technology is world class. Their Trenton,
N.J. facility is its largest brewing plant in the U.S. The plant has 1.4 million square feet of
production space. It regularly produces up to 21 different brews per day on nine lines with
capability to process 2,000 cans and 1,200 bottles per minute and 600 half-barrel kegs per hour.
The facility brews nearly every brand in the portfolio and ships to more than 100 distributors in
ten states. The facility is also a model of environmental excellence. Through aggressive
recycling, the plant produces very little actual waste products.86
Infrastructure. The acquisition of Miller Brewing from Philip Morris put SAB plc on the
map in North America with 9 breweries and the second largest total brewing capacity in the U.S.
The company has brewing capacity of 195,000 (hls 000s) in 122 breweries worldwide.
22
Diversification. Diversification in SABMillers portfolio is low. Overall, the company
primarily focuses on brewing and bottling of beer and soft drinks. The company owns hotel and
gaming properties in South Africa that represent only 2.3% of total revenues.
d. CAPABILITIES
Understanding consumer needs. SABMiller has a global perspective of customer needs.
Recent proof of their ability to understand customer needs is the climb in share of Miller Light
over rival Bud Light. The company foresaw the combination of converging customer taste and
the lowering of trade barriers could potentially accelerate the consolidation process of the beer
market. SABMiller is globally positioned to take advantage of this consolidation through its
global understanding of consumer needs.87
Innovation. SABMiller demonstrated its ability to innovate new products with the
successful launch of Skyy Blue and Skyy Sport in conjunction with Skyy Spirits. Skyy Blue
rapidly reached fourth88 in the FAB category, further exemplifying its ability to understand
customer needs.
Commitment of management. SABMiller management has demonstrated its continual
commitment to innovation, understanding of customer needs and the creation of shareholder
value. For instance, SABMiller successfully integrated the difficult acquisition of Miller
Brewing. The corporate practice aims to make value-adding acquisitions and to develop strong
brand equity89 while eliminating unprofitable volume90.
Supply chain management. Management reduced sales and distribution costs by more
than US$ 50 million by identifying synergies during the Miller Brewing acquisition.. The
company is upgrading the performance management systems across the organization,91 and is
leveraging its distribution platforms around the world to increase sales of its premium brands92.
Integration skills. The successful acquisition of the second largest brewing company in
North America is recent proof of SABMiller¡¦s integration skills. With operations in 40 countries,
most of which were integrated through acquisitions, the company has a long and successful
history of integration capability.
e. VALUE AND COST DRIVERS
A primary value driver of SABMiller is its brand recognition. The Miller Genuine Draft
and Miller Light brands, for example, have a long established brand equity that drives their
23
respective sales. The new brands such as Skyy Blue and Skyy Sport leverage some of their brand
recognition from being part of the Miller family. Another value driver is the quality of the
ingredients that produces favorable taste and characteristics of the beverages that customers
desire.
SABMiller is able to negotiate favorable distribution contracts with its wholesalers due to
its economies of scale. This results in huge cost savings in production and distribution.
f. STRENGTHS AND WEAKNESSES
SABMiller has strong brand leadership and it continues to develop new brands through
partnerships. The strategy of diversification across currencies and geography makes the company
relatively immune to regional changes in beer consumption, tastes, growth trends, and currency
fluctuations.
Various weaknesses in some world markets as described above have caused some
weakness for SABMiller in those geographies, which are too numerous to detail here. The reader
is referred to SABMiller¡¦s annual report for market-by-market analysis.93 The Miller Brewing
acquisition required significant management attention and a large investment on the part of
SABMiller that will continue to affect profitability over the next two to three years.94
3. COORS
a. CORPORATE OVERVIEW AND PRODUCTS
Aldoph Coors Company was founded in 1872. Coors was family owned until 1975 when
the company first became public. The Coors family continues to be involved in the company
with nine of its members working for the firm.95 All of Coors brewing and packing facilities are
currently U.S. based, having divested a brewery in Zaragoza, Spain in 2000.96 Its largest facility,
in Golden Colorado, has the ability to produce 20 million barrels of beer in a year and is
considered the largest brewing facility in the world.97 Other facilities include a packaging plant
in Virginia and another brewery in Tennessee. Coors focuses on the light beer market as the
Coors light brand makes up 75% of its brand portfolio.98 Coors positions the following brands in
the US market: Coors Light, Keystone Light, Original Coors, Killians and Zima.
24
b. STRATEGY & POSITIONING
Market share. Coors currently commands 11% of the U.S. beer market share behind
Miller Brewing and Anheuser-Busch. Mostly a regional player, Coors dominates smaller regions
such as Hawaii and Idaho.99 In 2001 Coors purchased Carling Brewing Co. for $1.7 billion.
Based in the UK, Carling provides Coors with 19% share of the UK market. Maintaining the
number two position against Scottish and Newcastle in this market will become a larger focus for
this company.100
Corporate level strategies. Coors¡¦ current corporate strategies focus on improving
operational efficiencies and expansion through acquisition. Coors seeks to grow its markets
regionally. This is evident through its Carling acquisition and its current regional appeal in the
U.S. All of Coors¡¦ revenues come from the sale and distribution of beer and malt beverages.
Following a dominant vertical structure, Coors has been following a more focused operations
strategy by divesting key businesses, such as ACX technologies- its packaging wing – to benefit
from market efficiencies.101
Business level strategies. As a focused differentiator, Coors concentrates on developing
and marketing its premium brands. These brands make up more than 85% percent of its product
portfolio.102 Coors marketing mix consists of mostly light beer positioned at the 21-35 year old
male demographic and its promotion is based on the ¡§good times, party¡¨ lifestyle. In 2002 Coors
became an official sponsor of the NFL and aggressively promoted its sponsorship. Advertising
consumes significant amount of resources for Coors. Marketing spending in 2000 was 23% of
revenue compared to 11% for both A-B and Miller. Its spending was poised to grow 3%
annually.103 On premise sales are an important part of the marketing mix, and Coors targets
wholesalers through close ties to top regional buyers. 104 While price is a concern for the younger
age group, Coors Original and Coors Light are considered premium beers, which garner a 30%
price premium in the market.105
c. RESOURCES
Capital. Coors has only $19.5 million in cash and short-term investments, which is
significantly lower than other competitors. Coors has been spending substantially more in the
areas of marketing, production and distribution. On a smaller scale, Coors must produce and sell
enough premium beer to compete with the two largest brewers in the U.S., A-B and Miller. Their
concentration of brewing and packaging resources in fewer locations puts them at a disadvantage
25
with regard to transportation costs. As well, costly packing options, such as glass, have a greater
appeal to their target market in the premium beer segment.106
Technology. Coors was the first beverage manufacturer to introduce aluminum cans in
1959. 107 In line with this technology, Coors initiated the first recycling programs by offering a
penny return on every can. Today, Coors strives to improve its recycling of packaging products
through its new bottling and packaging designs.108 As well, Coors¡¦ efforts to reduce the weight
of glass bottles provides transport savings and seventy-two million pounds of glass a year.109
Distribution. Coors has limited scale of distribution. It shares about 30% of its sales
volume with Miller through the channel. Coors benefits from the larger scale of Millers¡¦
distribution network that allows Coors greater access to under-developed regional markets.110 In
2001,, Coors struck a deal with Molson to market and distribute its brands in the U.S. This joint
venture allows Coors to expand its distribution capacity by 700 thousand barrels a year.111
Taking advantage of other partnerships, Coors recently outsourced the keg management of its
UK brewing business to TrenStar Inc.; a move that aims to relieve Coors UK of its keg and cask
inventories, provide better retail services to its on-trade customers and increase container
utilization. 112
d. CAPABILITIES
Marketing. In 2003, Coors invested in new database tools to assist their marketing
groups in channel marketing and campaign management.113 Coors¡¦ ability to manage and
leverage such a tool speaks to its capabilities in targeting the right market at the right time.
Innovation. Coors¡¦ latest introduction is a low-carbohydrate beer branded, Aspen Light,
which is an imitator in the market space for ¡§low-carb¡¨ alternative foods. Aspen Light is part of
the sustaining technologies for Coors. Leading the way for ¡§malternatives¡¨, Coors introduced
Zima in the early 1990¡¦s. Coors UK in the past year was responsible for two new innovations in
serving beer. The ¡§Ice Box¡¨ is a packaging technology that allows customers to turn their beer
box into a waterproof ice bucket for ease of portability. A waterproof coating to prevents
leakage.114 Coors also rolled out an on-trade invention called ¡§BARMAIDS¡¨,a ¡§special pipe
system¡¨ that can serve a pint of beer in just less than five seconds.115
Human Resources. Coors has a legacy of socially conservative leadership andhas
recently made great strides in affirmative action and competitive compensation policies. Honors
for Coors were recently given by Hispanic Magazine as one of the top US companies supporting
26
local Hispanic communities through recruitment policies and business contracts.116 The company
was ranked in the UK as one of the top one hundred companies to work for. Better than average
compensation and perks such as discounts on groceries and childcare were cited.117
e. VALUE AND COST DRIVERS
Coors is improving its brewing operations by investing in supply chain management
systems, joint ventures with packaging companies and plant upgrades. These investments
allowed Coors to improve its manufacturing costs by two dollars a barrel from 2002 to 2003.
Coors plans to continue this trend through the next four to five years to reduce costs per barrel by
four to five dollars.118 Higher value for Coors brands is driven by distribution and advertising.
Internet based systems, order management systems and database systems for targeted marketing
aim to improve channel distribution.119 (See Fig. II.D.3.e.1 )
f. STRENGTHS AND WEAKNESSES
Coors has never wavered in its dedication to maintain their access-based position in the
market. Its success has been attributed to latching onto a market trend toward health conscious
consumers and developing and executing a focused strategy. The company¡¦s weakness is in
establishing the correct cost basis for their strategy. Coors has the highest COGS per barrel
compared to its peers. This is mostly driven by the high transportation costs resulting from the
central location of Coors¡¦ production plants.120 It remains to be seen if Coors can execute in its
two main regional markets, the U.S. and the UK. Further growth may be limited unless the
company seeks global expansion. As of today, Coors is not participating in the fastest growing
global geography, China.
4. CORONA AND LABATT ¡V IMPORT COMPETITORS
a. CORPORATE OVERVIEW AND PRODUCTS
Corona beer, a brand of Grupo Modelo de Mexico, and Labatt, a brand of Labatt USA,
are the major import competitors to Heineken. In addition to the individual brands of Corona,
Grupo Modelo also owns Pacifico and Modelo Especial. Labatt USA has strong brands with
additional products such as Rolling Rock, and is the distributor of Tecate and Dos Equis. Both
companies participated in the beer industry consolidation. Anheuser Busch has increased
ownership of Grupo Modelo to 51% after an initial investment of 13% in 1993.121 While A-B has
27
controlling ownership, Grupo Modelo controls distribution of its beer within the U.S.122 In 1995,
Interbrew, the Belgium based international beer giant, purchased Labatt Canada and formed a
joint venture with FEMSA Cervesa to produce Labatt USA. Corona reached a major milestone in
1997 when it surpassed Heineken to become the #1 import beer in America.123 Labatt is a distant
third in the U.S. import beer market. While Corona remains firmly entrenched in the single
product business structure, Labatt USA has entered into the Ice Brewed. beer and malternative
markets.
By carefully measuring its product mix, Labatt USA is able to cover the gamut of
consumer beer tastes, with a much larger stable of differentiated beer labels. Corona focuses on
its core Mexican brands and enjoys strong sales growth in each brand. Because both companies
are foreign owned, it is difficult to break out the operating profit by brand within the U.S.
market. This is especially true in the case of Labatt USA, as they are a joint venture of Labatt
Canada and FEMSA, and Labatt Canada is a wholly owned subsidiary of Interbrew.
b. STRATEGY & POSITIONING
Corporate level strategies. The corporate level strategy of Labatt USA is dominant
linked, serving various niche markets throughout the country. Labatt¡¦s large portfolio of
specialty beers serves different niche markets with widely divergent geographic strengths.124
Grupo Modelo pursues a dominant linked strategy, however its limited brands serve only
smaller niche group. Both companies focus on the specialty beer market by controlling
manufacturing and distribution channels through vertical integration.
Business level strategies. Labatt USA¡¦s and Grupo Modelo¡¦s business strategies are
product differentiation. Both companies emphasize the quality of their products and their
abilities to satisfy customers.
Market share. In the overall U.S. market, Grupo Modelo controls 28% of the import beer
market with the vast majority of these sales coming from its Corona Brand.125 Labatt USA has a
14.2% market share with the majority of its sales coming from Beck¡¦s, Labatt, Bass, and Rolling
Rock.126
28
c. RESOURCES
Capital. Both Labatt USA and Grupo Modelo have access to large amounts of capital.
Interbrew currently has £á550 million in cash and cash equivalents and Grupo Modelo has
approximately $1.05 billion in cash and cash equivalents.
Technology. Both companies invest heavily in state-of-the-art manufacturing facilities
and research and development.
Infrastructure. In 1999, Labatt USA restructured to form four regional divisions that
each assume profit and loss responsibilities.127 Grupo Modelo has only recently expanded its
manufacturing facilities in the United States. International sales and marketing divisions are
responsible for brand and product development.
Diversification. Labatt USA is diversified within beer categories and within customer
and geographic segments. The Rolling Rock brand is centered toward the more blue-collar
working class on the East Coast, while its Bass and Lowenbrau brands target the same segments
as Corona. Most of Labatt USA¡¦s growth can be attributed to past acquisitions. In the future,
Interbrew will introduce other successful imports through its sales and distribution channel.
Grupo Modelo sells only five brands of beer in the U.S., and it has grown organically without
acquisition.
d. CAPABILITIES
Grupo Modelo. Building brand and managing the wholesaler relationship are Grupo
Modelo¡¦s greatest capabilities. After winning the right to use the Corona brand in key South
West states such as California and Arizona in 1957, Grupo Modelo has done an excellent job of
associating Corona with Mexican resorts and tropical locations. Managing the relationship also
allowed Grupo Modelo to prosper in the US. There have been instances when entire ciies ran ran
out of Corona even after prices were doubled.
Labatt USA. The strength of Labatt USA lies in its capabilities in innovating and
managing the supply and distribution channels. Labatt USA is able to meet different regional
demands than Corona because it has access to brands from its European owner, Interbrew, and
its Mexican owner, FEMSA.
29
e. VALUE AND COST DRIVERS
The primary value driver for Grupo Modelo and Labatt USA is their individual brand
equity. Corona has been a staple in Mexico since the early 1900s. Many of the brands in Labatt
USA¡¦s stable, such as Bass and Lowenbrau have been around for centuries.
Since Grupo Modelo focuses on only 5 brands with huge production volume, it is able to
exploit manufacturing and production scale and scope economies as cost drivers. Labatt USA
relies more on its regional brand strengths to take advantage of distribution efficiencies.
f. STRENGTHS AND WEAKNESSES
Labatt USA and Grupo Modelo enjoy strong brand leadership, while Labatt has
additional advantages due to its relationship with Interbrew and FEMSA that allows brand
expansion.
5. WILLINGNESS TO PAY FRAMEWORK AND VALUE CHAIN ANALYSIS
This framework analyzes the share of the economic contribution between buyers and
producers and the underlying cost and value drivers determining this distribution. In the case of
the beer industry, this analysis is complicated by the fact that the three-tier system demands at
least three different entities to participate in the value chain. Historically, beer manufacturers
have been very restrictive in releasing any details about profit margins and cost structures of
individual product lines. Unfortunately, this applies to Heineken in particular. The disclosure of
such data would compromise the brewers¡¦ competitive positions.
Three distinct segments of the U.S. beer market concentrating on the super-premium,
premium and popular beer segment that represent 13%, 55% and 23% of the overall market
respectively, were analyzed. As an example, three Anheuser-Busch brands are presented for
which conclusive data on the cost and profit distribution across the value chain are available128
This is shown in Fig. II.D.5.1. The consumer prices listed in this figure represent the average
price per case (24 cans of 12 oz.) across the U.S. The relative price differences were confirmed
by our own proprietary local research129. It is apparent that consumer prices may vary by as
much as 50% across product lines, whereas the COGS per case is around $4 for all brands.
COGS is constant because the beer cost for all three products is only about $0.54 and product
independent cost items such as packaging and direct labor, $1.87 and $0.54 respectively,
contribute more than 50% to COGS.
30
A number of strategic implications can be derived from the distribution of incomes.
Resulting from the mandatory autonomy of the players in the value chain, brewers proportionally
share operational income gained from high-priced products with the distribution networks. As a
result, distributors¡¦ and retailers¡¦ income per product line may vary by as much as 500%,
depending on the product line. In addition, management of the product portfolio mix is critical at
every level of the supply chain based upon volume and profit margins. It presents a major
incentive to the wholesale and retail channel to promote the most profitable brands.
Over the past ten years, distributors¡¦ profits have been increasing 50% faster than those
of the brewers130. This is another indication of the power these value chain participants have.
Therefore, distribution access and control are key success factors in the U.S. beer market.
It is extremely difficult to quantify the buyer¡¦s surplus. It is determined by productspecific
factors, such as buyer¡¦s preference, brand recognition, and circumstantial factors, such
as place of consumption, packaging and delivery, seasonal and climatic conditions, etc. It is
apparent that buyers¡¦ surplus must be considerably higher than the purchasing price as the result
of the product¡¦s proven price inelasticity and independence of price-related macro-economic
forces as described in section II.C. In addition, surveys found that beer has the best price/value
ratio of all alcoholic drinks.131
A-B Coors
Grupo
Modelo Interbrew
Cash & s/t in (US$) 191,100 19,440 902,238 542,022
Sales (US$) 14,146,700 4,017,913 2,839,288 8,579,781
Net Income (US$) 2,075,900 174,657 319,782 615,104
FCF to Investors (US$) 1,296,809 389,296 -150,518 114,774
A-B Coors
Grupo
Modelo Interbrew
Cash & s/t in (US$) 191,100 19,440 902,238 542,022
Sales (US$) 14,146,700 4,017,913 2,839,288 8,579,781
Net Income (US$) 2,075,900 174,657 319,782 615,104
FCF to Investors (US$) 1,296,809 389,296 -150,518 114,774
Table II.D.5.1: Competitor¡¦s Cash, Sales, Earnings, and FCF
6. FINANCIAL POSITIONS OF COMPETITORS
Financial analysis of Heineken¡¦s major competitors set the industry benchmarks that are
later used to analyze Heineken¡¦s operational performance as well as industry profitability and
shareholder return. In addition, economies of scale and scope can be measured by analyzing
profit margins. Through the analysis of the following five areas, conclusions are made regarding
31
the financial strength and effectiveness of Anheuser-Busch, Coors, Grupo Modelo, and
Interbrew. d
a. FINANCIAL STRENGTH AND SIZE:
If cash is king, A-B is not the king of beers as both Grupo Modelo and Interbrew have
much larger cash positions. As discussed in a later section, A-B uses leverage rather than cash
for acquisitions. A-B does have, by far, the largest revenue, net income and free cash flow.
Grupo Modelo and Interbrew are the next closest in total revenue but have lower free cash flow
because of very large capital expenditures in attempts to improve operational efficiencies.
Coors¡¦ revenue ranks third, but FCF to investors was actually larger than Net Income due to
increased debt issuance. (See Table II.D.6.a.1.)
Profitability Measures 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003
Gross Margin 45.4% 45.9% 46.5% 42.9% 41.8% 41.4% 57.1% 58.9% 58.8% 60.3% 59.8% 60.8%
Net Profit Margin 13.4% 14.0% 14.7% 4.5% 4.6% 4.3% 11.9% 12.1% 11.7% 2.9% 7.8% 7.2%
Return on Net Operating Assets 19.7% 21.8% 23.6% 10.4% 10.2% 8.4% 10.7% 11.8% 11.5% 4.3% 8.4% 7.6%
Return on Equity 45.9% 56.0% 72.0% 13.3% 14.2% 14.4% 12.9% 13.4% 12.7% 4.1% 12.2% 10.7%
Growth Rates
Sales 4.7% 4.9% 4.3% 17.6% 20.8% 6.4% 18.7% 13.9% 12.7% 23.9% 8.5% 0.7%
Assets 3.3% 3.9% 4.0% 32.9% 51.1% -0.4% 17.9% 14.0% 12.3% 23.1% -0.9% -1.2%
Earnings 11.0% 10.2% 7.3% 21.3% 17.2% 8.0% 21.5% 15.2% 16.6% -99.8% -8.3% 8.1%
Operating Measures
Avg Inventory Holding Period 31.1 29.2 27.7 29.6 28.2 30.6 117.1 119.9 114.6 60.1 61.9 59.7
Avg Days to Collect Receivables 17.7 17.0 16.8 34.1 41.1 66.2 14.2 11.9 10.8 81.9 83.9 83.3
Avg Days to Pay Payables 49.8 48.9 50.3 51.1 50.7 52.1 21.7 22.0 22.0 106.5 108.9 105.3
Net Operating Asset Turnover 1.3 1.4 1.4 2.1 2.0 1.5 1.1 1.1 1.1 0.9 0.9 0.9
PP&E Turnover 1.6 1.6 1.7 3.1 3.1 2.8 1.1 1.1 1.1 1.9 2.0 2.1
Liquidity Measures
Current Ratio 0.9 0.9 0.9 1.2 1.0 1.0 4.8 4.6 4.5 0.9 0.7 0.9
Quick Ratio 0.4 0.5 0.5 0.8 0.7 0.7 2.7 2.7 2.8 0.7 0.6 0.7
EBIT Interest Coverage 8.2 8.4 8.5 31.6 32.8 5.1 -8.5 -10.9 -13.8 3.8 5.1 6.4
Leverage
Debt to Equity Ratio 1.8 2.1 2.7 0.5 0.8 1.0 0.0 0.0 0.0 0.9 0.7 0.7
CFO to Total Debt 0.5 0.5 0.4 1.8 1.5 0.4 n/a n/a n/a 0.3 0.3 0.3
Anheuser Busch Coors Grupo Modelo Interbrew
Profitability Measures 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003
Gross Margin 45.4% 45.9% 46.5% 42.9% 41.8% 41.4% 57.1% 58.9% 58.8% 60.3% 59.8% 60.8%
Net Profit Margin 13.4% 14.0% 14.7% 4.5% 4.6% 4.3% 11.9% 12.1% 11.7% 2.9% 7.8% 7.2%
Return on Net Operating Assets 19.7% 21.8% 23.6% 10.4% 10.2% 8.4% 10.7% 11.8% 11.5% 4.3% 8.4% 7.6%
Return on Equity 45.9% 56.0% 72.0% 13.3% 14.2% 14.4% 12.9% 13.4% 12.7% 4.1% 12.2% 10.7%
Growth Rates
Sales 4.7% 4.9% 4.3% 17.6% 20.8% 6.4% 18.7% 13.9% 12.7% 23.9% 8.5% 0.7%
Assets 3.3% 3.9% 4.0% 32.9% 51.1% -0.4% 17.9% 14.0% 12.3% 23.1% -0.9% -1.2%
Earnings 11.0% 10.2% 7.3% 21.3% 17.2% 8.0% 21.5% 15.2% 16.6% -99.8% -8.3% 8.1%
Operating Measures
Avg Inventory Holding Period 31.1 29.2 27.7 29.6 28.2 30.6 117.1 119.9 114.6 60.1 61.9 59.7
Avg Days to Collect Receivables 17.7 17.0 16.8 34.1 41.1 66.2 14.2 11.9 10.8 81.9 83.9 83.3
Avg Days to Pay Payables 49.8 48.9 50.3 51.1 50.7 52.1 21.7 22.0 22.0 106.5 108.9 105.3
Net Operating Asset Turnover 1.3 1.4 1.4 2.1 2.0 1.5 1.1 1.1 1.1 0.9 0.9 0.9
PP&E Turnover 1.6 1.6 1.7 3.1 3.1 2.8 1.1 1.1 1.1 1.9 2.0 2.1
Liquidity Measures
Current Ratio 0.9 0.9 0.9 1.2 1.0 1.0 4.8 4.6 4.5 0.9 0.7 0.9
Quick Ratio 0.4 0.5 0.5 0.8 0.7 0.7 2.7 2.7 2.8 0.7 0.6 0.7
EBIT Interest Coverage 8.2 8.4 8.5 31.6 32.8 5.1 -8.5 -10.9 -13.8 3.8 5.1 6.4
Leverage
Debt to Equity Ratio 1.8 2.1 2.7 0.5 0.8 1.0 0.0 0.0 0.0 0.9 0.7 0.7
CFO to Total Debt 0.5 0.5 0.4 1.8 1.5 0.4 n/a n/a n/a 0.3 0.3 0.3
Anheuser Busch Coors Grupo Modelo Interbrew
Table II.D.6.a.1: Financial ratios for Heineken¡¦s main competitors in the U.S. beer market. e
d The source of raw financial data is the Thompson Online and Thompson Research database accessed online at the
SCU Orradre Library, and 1998-2003 A-B, Grupo Modelo, Interbrew, and Coors Annual Reports.
32
b. HOW DO THEY PERFORM RELATIVE TO THEIR INDUSTRIES?
Profitability. Grupo Modelo and Interbrew have the strongest gross margins, which is to
be expected given their focus on the premium beer market. However, their performance falls
behind A-B in Net Profit Margin, Return on Net Operating Assets, and Return on Equity. This is
likely due to their relatively higher marketing expenses. In addition, Interbrew has been growing
by acquisitions. The lower ROE and ROA could likely be attributable to lower earnings due to
additional expense in developing the brands acquired in the late 1990¡¦s. Although Coors
maintains relative financial stability, it is the industry laggard in all profitability measures. A-B
leads all competitors in Net Profit Margin, Return on Net Operating Assets, and Return on
Equity. Even though the gross margins of A-B have improved, they remain nearly as low as
Coors. A-B generates much higher ROE due mostly to its leverage.
Growth rates. The sales growth rate leader over the last five years has been Interbrew
due to its numerous acquisitions, followed by Grupo Modelo due to the popularity of Corona,
Coors, followed by A-B. The Asset growth order is Coors, Interbrew, Grupo Modelo, and A-B.
However, all brewers suffered a rapid sales and asset growth decrease in the more recent periods.
Corona is the leader in earnings growth, followed by Coors, A-B, and Interbrew.
Operating efficiency. Historically, both Coors and A-B have performed similarly in
inventory holding period, vastly outperforming Interbrew and Grupo Modelo. A-B and Grupo
Modelo both have strong wholesaler relationships that allow the companies to keep average
receivables outstanding low. This is a key factor in their ability to outperform Coors and
Interbrew. Interbrew¡¦s poor performance is also due to different payment standards in Europe
and its broad diversification worldwide. This is measured by the average days to pay payables,
where Interbrew far outperforms the competitors by using its cash more effectively. Coors and
A-B are again near equals, while Grupo Modelo pays quickest of all. Grupo Modelo¡¦s fast
payment cycle is also likely due to regional standards, where suppliers require timely cash
infusion. Net operating asset turnover reflects operational efficiencies, and Interbrew takes the
lead, followed by Grupo Modelo, A-B, and Coors. PP&E turnover is lead by Grupo Modelo,
followed in order by A-B, Interbrew, and Coors.
e SABMiller¡¦s financial data is not included as the company changed ownership in 2002, and hence, no meaningful
financial comparison can be determined.
33
Liquidity. As mentioned before, Grupo Modelo¡¦s strong cash position translates to its
strong liquidity ratios and negative EBIT interest coverage, as its net interest expense is actually
interest income. Coors has the next strongest liquidity ratios with the exception of EBIT interest
coverage, as the recent financed acquisition of Carling Breweries has greatly reduced its ability
to cover interest expense. Due to A-B¡¦s leverage, its current and quick ratios are much lower.
However, because of its earning strength, A-B had higher EBIT interest coverage than Coors in
2003. Interbrew also financed a large portion of its acquisitions and also has low current, quick,
and EBIT interest coverage.
Leverage. Grupo Modelo has no debt and is therefore not leveraged. With the Carling
purchase, Coors¡¦ leverage increased noticeably. Interbrew¡¦s objective of returning to organic
growth has slowly allowed it to reduce leverage.132 A-B has the highest leverage ratio. Its
strong profitability and consistent earnings improvements cover the current debt, but it is not
likely to significantly increase the debt further.
c. SUMMARY & IMPLICATIONS
Financially, A-B is the strongest positioned competitor, with the highest revenue,
profitability and very strong operating efficiency. The only downside is its high leverage.
Interbrew is the next strongest competitor though its position is slipping as revenue growth is
slowing and its cash management in inventory, payment and collection needs improvements.
Grupo Modelo is the next due to its continual robust revenue growth, large cash balance, and
strong profitability, but it could improve operational performance. Coors is the weakest
competitor although it enjoys greater revenues than Grupo Modelo. Coors has the weakest gross
margins though they have semi-strong operating measures. In comparison to its closest U.S.
competitor, A-B enjoys nearly 3.5 times the revenue.
This analysis implies that while A-B is the strongest competitor, it has little ability to
enhance its leverage during the continuing consolidation phase in the beer industry. However,
given its strong revenue and earnings, this period should pass quickly. Interbrew, while enjoying
strong gross margins due to the price of its beer, needs to work diligently on increasing revenue
and improving operational efficiencies. Grupo Modelo is in the best position to fuel growth
through acquisition, though it may also be a takeover target given its large cash balance, earnings
successes and large growth potential. Coors is the biggest gamble given its recent acquisition of
Carling. While the acquisition has not put it in a financially risky position, the change of focus
34
from running a domestically oriented company to that of an international company could impede
its ability to improve operational efficiencies that are needed to improve profitability.
E. INTRA-INDUSTRY ANALYSIS
a. STRATEGIC GROUPS IN THE INDUSTRY
Strategic groups are characterized by having two or more competitive characteristics that
uniquely differentiate them from each other133. In the case of the U.S. beer industry, these
distinctions are scope in distribution versus price and product differentiation. The competitive
forces underlying the corresponding mobility barriers are product differentiation (taste, local
attributes, etc.) on one hand and economy of scale, marketing effectiveness and distribution
power on the other. There are four strategic groups in the U.S. beer industry, as shown in Fig.
II.E.a.1. Only the craft beer industry is discussed because it is the fastest growing.
Craft-Beer Industry. Craft beers differ from standard beers in flavor and brewing
style134. Craft beer producers tend to use higher quality ingredients resulting in more full-body
products with a higher degree of flavor and freshness. These companies also offer a strong local
affiliation, supported by the fact that they are often the only local brand. As consumers become
more demanding and sophisticated, the craft beer industry has recently experienced an annual
growth of 40%, see Fig. II.E.c.1135. The industry is using the same three-tier distribution system
as the large national mass producers.
This strategic group can be further differentiated into microbreweries (less than 15,000
barrels per year), regional specialty breweries (15,000 and 1,000,000 barrels per year), and
contract brewing companies (businesses that market and sell beers that are produced by other
contracted breweries). This craft beer group owns 3.2% of the U.S. beer market and within the
craft beer market its CR5 is 52.7%136, details are shown in Fig. II.E.a.2.
Brewpubs: Restaurants and breweries that sell at least 50% of their production for onpremise
consumption. While being different from other beer groups, this group¡¦s revenue is too
small to have any significance at the national level.
Regional brewers. Brewers that employ high-volume processes and restrict product
distribution to a limited number of states. Coors is a prime example for this group.
National and import beer brewers. Mass producers, such as most companies analyzed in
this paper, compete on economies of scope and scale. Their strategies call for low cost
35
ingredients and large volume manufacturing processes that limit full-flavor products. The value
and cost drivers governing this group have been detailed in section II.D.
US manufacturers
Importers
Portfolio width High Medium Medium Low Low
Brand Power High High High High Low
Product Innovation Medium Medium Medium High Low
Production Efficiency High High Medium Low Low
Purchasing Power High High Medium Low Low
Distribution power High High Medium Medium None
Advertising and
Marketing High High Medium Medium Low
Vertical integration High High Medium Low None
Local affiliation Low Low Medium High High
Strategic Group
Budweiser
group
Heineken
group
Coors
group
Samuel
Adams
group
Gordon
Biersch
group
Mass manufacturers Regional
breweries
Craft Beer
Industry
Brewpubs
Table II.E.1: Characteristics of strategic groups in the U.S. brewing industry
b. MOBILITY BARRIERS
The following cost and value drivers characterize the four groups and effectively prevent
players from switching or expanding into other groups:
Economy of scale: a) Production. Mass manufacturers focus on large-throughput
processes that are incompatible with high product quality and distinct flavor. Smaller brewers
and craft brewers in particular, cannot compete on costs due to limited volume production. b)
Purchasing: Small batch sizes and high quality ingredient requirements reduce the bargaining
power of craft brewers with suppliers. c) Distribution: Though they are offered higher profit
margins, distributors are not interested in the volume craft brewers can guarantee. Mass
manufacturers use high-volume guarantees to their advantage. d) Advertising: Having access to
national mass media, mass producers are able to reduce the amount of ad dollars spent per barrel
sold, a scale-economy.
Economy of scope: a) Marketing and Advertising: Mass manufacturers gain
substantial scope advantages by building and capitalizing on their national brand image, and
36
supporting a wide breadth of product lines137. On the other hand, these companies lack the craftbrewed
market image, which is important to a growing number of beer drinkers.
Incumbents in the mass-manufacturing segment will use any combination of these drivers
to erect mobility barriers with the intent to restrict other competitors from entering their territory.
Consequently, only very few craft beer breweries have succeeded in expanding their scope in
distribution. For example, Sierra Nevada Brewing Company started off as a microbrewery in
1979138 and became the ninth largest domestic brewery in just 20 years139. Another even better
example of success is the Boston Beer Company that was founded in 1985 as a microbrewery.140
By 2000 it had grown into the sixth largest beer manufacturer in the U.S.141
c. TRENDS IN THE BEER INDUSTRY – EFFECT ON STRATEGIC GROUPS
The major beer manufacturers have not been caught off-guard by the craft beer
revolution, see Fig. II.E.c.1. Though the craft beer market is still relatively small, Anheuser-
Busch in the early 1990¡¦s felt threatened by the potential that its main strategic advantage (scale
economies) might be undermined by the evolving taste of a growing segment that prefers craft
beers. The company employed a combination of blocking, shaping and absorption strategies to
contain the evolution of craft brewers.142 Though not intended to change its current product
offerings, the company first set up its own ¡¥Specialty Brewing Group¡¦; its only purpose was to
offer alternative craft brews to distributors. As this value chain element is extremely viable to
the beer industry, A-B tried to block access for craft beer competitors by offering large cash
incentives to distributors to exclusively carry A-B products. This activity eventually led to an
(unsuccessful) investigation by the U.S. Justice Department in 2001. Since this strategy worked
only temporarily, A-B then decided to shape the craft beer industry by acquiring microbreweries
and then nationally expanding their operations through large cash infusions. Lastly, A-B started
to absorb the craft beer movement by flooding the market with a flurry of new A-B craft beer
brandsf with the goal to capture 50% of the market segment.143 Though giving up on the
economy of scale advantage, these highly specialized in-house manufactured brands were at least
benefiting from A-B¡¦s scope economies, such as sales and marketing. The verdict is still out on
whether Anheuser-Busch will eventually succeed with this strategy, is still out. It demonstrates
how fiercely incumbents will react if newcomers try to change the rules of the game.
f Including such obscure brands as the exclusively in Texas sold ¡¥Ziegenbock¡¦ line (German word for male goat).
37
The past twenty years have also seen some cross-elasticity between the mass and craft
beer segments. It has been argued that the tremendous success of the craft beer industry has
directly benefited the import beer market144, as it alerted consumers to the existence of full-flavor
beer alternatives.
d. POSITION AFTER THE STRATEGIC MOVE
While the proposed strategic move of Heineken will certainly not revolutionize the beer
industry in the short-run, it will introduce a new dimension to the performance matrix that
current market players have not yet addressed. Details are discussed in section IV.A.
e. ROLE OF DISRUPTIVE TECHNOLOGIES
The history of Beer brewing technology is thousands of years old. While production
methods have certainly been perfected in recent history, none of them would qualify as being
disruptive within the framework first introduced by Clayton Christensen145. The same applies to
the product developments that as revolutionary as consumers might have perceived them, always
were extensions of existing products lines and would therefore fall into the category of
¡¥sustaining product development¡¦. The Heineken BeerTender, as part of a novel delivery and
storage solution, may be a disruptive technology, as discussed in section IV.A.
F. FAILURE ANALYSIS
Over the past twenty years the U.S. beer market has been relatively stable with Anheuser-
Busch holding the leading spot. In the 50¡¦s and 60¡¦s of the past century, Schlitz and Pabst were
among the leading companies. Several strategic mistakes forced these two rivals to lose their
market leadership and eventually their independence.146 The beer industry overall is a very
slowly moving business. This reflects both corporate conduct as well as consumer preferences.
Drastic changes in the marketing mix therefore may result in rapid damage to the brand and the
market position, as the two following stories describe.
Schlitz correctly identified operational and economic efficiency to be the keys to success.
Instead of optimizing its operations, the company tried to reduce costs by substituting traditional
hops with a less expensive ingredient – corn syrup (decrease C). It simultaneously attempted to
widen profit margins by increasing price (increase P). These tactics backfired, causing the
Schlitz market share to slip by over 7% in just two years. The most damaging change occurred
38
when Chill-garde was added to increase the product¡¦s shelf life (decrease C). Schlitz overlooked
the fact that Chill-garde reacts adversely with other brewing ingredients resulting in a milky
appearance (decrease V). Customers revolted and the reputation of Schlitz was eventually fully
destroyed by the mid-70¡¦s. Finally, Schlitz had to be sold to Stroh in 1982, with less than 8%
market share remaining.147 148
Pabst shared a similar fate when the company also changed the ingredients for their
product lines in order to reduce production costs. Customers noticed the difference and started to
abandon the brand. Pabst was eventually bought by the Mill Valley based S&P holding
company in 1985149 and is now again the nation¡¦s fourth largest beer brewer. Anheuser-Busch,
on the other hand, continued to take a very conservative approach to its portfolio management,
which has been regarded as the main reason for the company¡¦s prime market position during the
past forty years.150
The lesson learned in this regard is that Schlitz and Pabst tried to boost profit by cutting
corners in order to become cost leaders (decreasing V, thus increasing overall V-C). Such tactics
can only work if the value perceived by consumers remains constant or increases. Unfortunately,
customers in both cases soon recognized the deteriorating quality (decreasing V) and eventually
abandoned the respective brands. The success of Anheuser-Busch (maintain V) and the failure
of Schlitz and Pabst prove one more time that beer-drinkers are more taste than price sensitive.
Brewers can only improve profitability (V-C) by optimizing operational efficiencies (lower C).
It is mandatory to preserve product quality catering to customer preferences (increase V).
G. THREATS AND OPPORTUNITIES ANALYSIS
The landscape of the beer industry has changed in the past decade as the US consumers
have adopted several diet trends. Light beer was the fad of the 90¡¦s and Atkins inspired low
carbohydrate diet ignited the latest low-carb beer trend. Anheuser-Busch introduced Michelob
Ultra in 2002 and immediately captured 2.6% of premium beer market share.151 Rolling Rock
released Rock Green Light that sold one million cases in the first three months.152 More lowcarb
beers will enter the crowded market this year; hence, Heineken can potentially face market
share erosion in the absence of new light product introductions.
39
Heineken currently focuses on three flagship products – Heineken, Amstel and its light
version Amstel Light. Heineken can potentially leverage its brand and launch an ultra low-carb
version of Amstel or a different brand altogether to take advantage of this diet craze. Heineken
can also introduce a low-carb beer in Europe where Michelob Ultra has not gained a foothold.153
Other than the competitive forces mentioned in the preceding sections, the U.S. Supreme
Court might potentially create the largest industry shakeup. There is a complex set of regulations
that govern alcohol sales. It is currently illegal to ship alcohol across state lines and brewers
cannot sell alcohol directly to consumers in most states.154 Recently, Michigan and 36 other
states requested the Supreme Court to reaffirm the state rights to regulate alcohol sales and
resolve conflicts among federal courts involving the interpretation of the 21st Amendment as
some circuit courts upheld restrictions on direct alcohol shipments while some courts did not.155
Although the Supreme Court was asked to consider Internet and direct wine distribution, beer
delivery can also be affected. If interstate beer shipments are allowed, then brewers that have
exclusive licenses with current distributors will have huge competitive advantage over brewers
that have limited market access. Large wholesalers would be expected to consolidate further
under these conditions.
H. SUMMARY OF EXTERNAL ANALYSIS
Counting among the most profitable markets in the world, the U.S. beer industry is
strongly consolidated and mature. Market share positions are relatively stable and vigorously
defended. As economies of scale and scope are the main business drivers, the rules of the game
are efficiencies in production, marketing, market intelligence, advertising, transportation, and
distribution.
This analysis shows that any market share expansion must not be based upon the above
value and cost drivers, as they are already maxed out. In addition, incumbents have substantial
monetary and scale economy driven leverage to protect their turfs. Rather, any strategic move
will most likely have to capitalize on the two strongest macroeconomic forces, demographics
changes and emerging cultural trends, that dominant players are either not able or not willing to
meet. The craft beer revolution provides evidence that such a move can indeed be very
successful but will most likely result in retaliation by the incumbents if perceived as a threat. In
any event, efficient distribution and cooperation of the very powerful supply chain parties will
40
remain a key success factor determining the outcome of any strategic move. The most important
factor, however, is that the customer perceived product quality has to remain untouched.
III. INTERNAL ANALYSIS
A. BUSINESS DEFINITION / MISSION
Heineken is a global beer producer headquartered in Amsterdam, Netherlands. It is one
of the largest brewers in the world and with the widest global presence compared to all
international counterparts. Heineken operates in over 170 countries and employs over 61,000
people. In 2003, sales of Heineken were £á9.255 billion, with 105 million hectoliters of beer
brewed in more than 65 countries.
The Heineken Group manufactured 154 brands of beer in 2003, with Heineken and
Amstel as the leading premium brands and Heineken holding premium positioning in every
country in which it was marketed. Heineken and Amstel sales are ranked number one and three
in the European market, respectively. Other leading national brands include Cruzcampo, Moretti
and Tiger, the largest Asian brand. Heineken also produces specialty beers, light beers and
alcohol-free beers worldwide and soft drinks in Europe.156 157
Heineken strives to achieve global market penetration and preserve its independence
through a three tier administrative structure that allows the Heineken family to control Heineken
Holding N.V., which in turn controls Heineken NV. These relationships are diagramed in Fig.
Fig. III.C.1.2. The company¡¦s long-term success is guided by its strategy and three core
principles.
Strategic goals and objectives of Heineken:158 Become one of the world largest and
financially best-performing brewing company.
¡E Build a strong portfolio of beer brands with the Heineken brand as the leading
international premium beer.
¡E Maintain strong local market positions, a good sales mix and an efficient cost
structure. Distribute Heineken with other local strong brands.
¡E Fulfill its corporate social responsibility with regard to policies on alcohol abuse,
social and environmental issues.
41
Worldwide success driven by 3 corporate principles:
¡E Product Quality
¡E Understanding the diversity of regional and national markets
¡E Relevant Communication (to local operating companies)
In line with the corporate strategy and principles, Heineken announced the
implementation of the ¡§Take Heineken to the Next Level¡¨ project in 2002. 159 The goal is to
provide a framework in the pursuit of sustainable growth. The project aims to improve operation
excellence, establish good distribution networks and build strong brands in each country. This
program is especially important in developing uniform professionalism throughout the regional
operating companies that were added to Heineken by acquisition. Heineken takes advantage of
its size and brand equity to ¡§Heinekenize¡¨ the acquired companies.
B. MANAGEMENT STYLE
Gerard Adriaan Heineken founded Heineken in 1864. Since then, three generations of
the Heineken family have been overseeing the company¡¦s strategic focus. After the death of
Alfred H. Heineken in January of 2002, Karel Vuursteen, a ¡§Freddie¡¨ loyalist was unseated as
the executive chairman after just five months, and Anthony Ruys, a 57-year-old former Unilever
executive was promoted to the chief executive position.160
Ruys immediately began to stir things up. Competition in the beer industry continued to
intensify and Heineken was too complacent in its historic path of slow and steady growth. Ruys
and his management team, which on average is 10 years younger than the board had been under
Vuuresteen,161 used tough tactics to shake up the long established play-it-safe culture and began
to explore new market potential. Ruys initiated the ¡§Take Heineken to the Next Level¡¨ project
and shifted Heineken¡¦s focus toward the 21-27 year-old demographic and new customers
through deployment of new marketing tactics. Heineken focused much of its innovation on
packaging in order to target previously untapped markets. Ruys spent over $3 billion to acquire
over a dozen companies in 2002. The biggest acquisition was Austrian brewer BBAG. As a
result of this acquisition, Heineken became the biggest brewer in seven Eastern Europe
countries.162
42
C. ORGANIZATIONAL STRUCTURE, CONTROL, VALUES
1. ORGANIZATIONAL STRUCTURE
The executive board of Heineken NV established a four-part framework to manage the
decentralized company:163
1) Operating companies – major subsidiaries with an autonomous decisionmaking
structure.
2) Clusters – smaller operating companies that are grouped by region and report to
the Amsterdam headquarters.
3) Policy and Control – corporate administrative functions that are shared across
all operating companies.
4) Facilities and Support Staff – Heineken Technical Services oversee brewery
construction, modernization and expansion.
See Fig. III.C.1.2 for a high level view of the Heineken structure and its resources and
capabilities.
Ownership Structure: Heineken NV, Heineken Holding NV and its subsidiaries form the
Heineken company. As shown in Fig. III.C.1.2 L¡¦Arche Holding S.A., solely owned by the
Heineken family, owns 50.005% of Heineken Holding NV and Heineken Holding NV owns a
50.005% interest in Heineken NV164. Heineken NV and Heineken Holding NV are traded on the
Euronext exchange in Amsterdam.
The executive board of Heineken NV is responsible for developing Heineken¡¦s strategy
and policies. The management board of Heineken Holding NV is tasked with long-term
continuity, independence and stability of Heineken NV.
2. CONTROLS USED IN MONITORING EMPLOYEE BEHAVIOR
Heineken NV develops standards for corporate brand expansion while each operating
company specifies its local business objectives. In order to align employee goals with the
corporate strategy, employee performance is monitored and measured with respect to the level of
contribution to improvement of operational efficiencies and marketing, sales and distribution
objectives.
Developing and retaining talented management is a top priority in the ¡§Take Heineken to
the Next Level¡¨ initiative. Heineken provides managers with easily accessible learning platforms
to enhance marketing, finance and leadership expertise. The ¡§Heineken University¡¨ and e43
Learning system promotes the development of management capabilities through the sharing of
best practices and proprietary knowledge.165 166
3. ORGANIZATION¡¦S VALUES
Heineken embraces three core values and executes a set of strict business principles.167
Respect: Heineken respects individuals, society and the environment. The company
follows local regulations and advocates responsible alcohol consumption. The company also
implements environmental protection programs to address water consumption, management and
waste issues.
Enjoyment: Heineken sponsors arts, sports, music and other commercial events to
enhance social enjoyment.
Passion for Quality: Heineken utilizes rigorous processes to ensure the best beer quality.
The company follows an uncompromising brewing practice using their age-old brewing recipe,
adopts social responsibilities such as avoiding advertisements to minors, and retains employees
through continuous development.
Business Principles: Heineken embraces and supports 15 global social accountability
programs, including anti-corruption, child labor, employee representation, sexual harassment and
non-discrimination. All operating companies are required to develop and maintain these
programs in their regional territories.
D. STRATEGY/COMPETITIVE POSITION DEFINITION
1. CORPORATE LEVEL
Since 1992, Heineken has been enjoying EPS growth of 15% (CAGR). It has been
estimated, that 7% of the earnings growth was organic and 8% was from acquisitions.168 In fact,
Heineken is regarded as one of the most aggressive global corporate acquirers and has
established core capabilities for identifying appropriate take-over candidates169. An estimated
distribution of earnings across the geographies Heineken is serving is presented in Fig. III.D.1.2.
It is the company¡¦s declared corporate strategic goal to pursue the following key elements:170
¡E To improve margins by increasing the proportion of premium and specialty
brands in the mix.
¡E To reinforce and expand its position in profitable markets.
44
¡E To build up new positions in attractive growth markets with the aim of being
market leader, or the leader in the premium segment, in that market.
¡E To further improve cost structures.
Depending on the circumstances of the respective geography, Heineken will either take
the dominant position with a market share goal of greater than35% in a high-volume market such
as Poland, France, and Italy, or build a leadership position in a high-value low-volume market
segment such as the import premium beer segment in the U.S.171
Figure III.D.1.a.2: Heineken¡¦s organizational structure
a. RELATED DIVERSIFICATION
Based upon the classification first introduced by Richard Rumelt,172 Heineken can be best
described as a dominant vertical corporation. As shown in Fig. III.D.1.1, seventy-nine percent
of Heineken¡¦s business is based on beer production. The remaining business lines are in wine,
spirits and soft drinks. The company is strongly vertically integrated upstream, a key success
factor of the corporate strategy. Whenever allowed by local laws, Heineken seeks forward
integration through the acquisition of local distributors with the intention to expand its
geographic reach173. Since all business lines are in the beverage industry, the ratio of relatedness
Executive
Board
Executive
Board
Policy & Control
¡E Marketing
¡E Production
¡E Finance
¡E Human Resources
¡E IT systems
¡E Communication
¡E Legal
Policy & Control
¡E Marketing
¡E Production
¡E Finance
¡E Human Resources
¡E IT systems
¡E Communication
¡E Legal
Facilities & Support
¡E Technical Services
¡E Security
¡E Company Secretary
¡E Personal Draft System
Facilities & Support
¡E Technical Services
¡E Security
¡E Company Secretary
¡E Personal Draft System
Operating Companies
¡E Heineken, Netherlands
¡E Sogebra, France
¡E Heineken Italia
¡E Vrumona, Holland
¡E Athenlan Brewery,Greece
¡E Heineken Espana
¡E Export
¡E Heineken USA
¡E Zywiec SA, Poland
Operating Companies
¡E Heineken, Netherlands
¡E Sogebra, France
¡E Heineken Italia
¡E Vrumona, Holland
¡E Athenlan Brewery,Greece
¡E Heineken Espana
¡E Export
¡E Heineken USA
¡E Zywiec SA, Poland
Clusters
¡E Latin America
¡E Caribbean /
Central America
¡E Africa / Middle East
¡E Asia Pacific
¡E Other Europe
Clusters
¡E Latin America
¡E Caribbean /
Central America
¡E Africa / Middle East
¡E Asia Pacific
¡E Other Europe
45
is relatively high. The various operating companies and clusters strongly rely on shared
corporate resources, such as IT, marketing and finance as summarized in Fig. III.D.1.a.2.
b. PORTER¡¦S DIVERSIFICATION TESTS
Heineken has made an impressive number of
international acquisitions over the last ten years.
These recent acquisitions, which are listed in Fig.
III.D.b.1, fit seamlessly into Heineken¡¦s longstanding
M&A tradition that extends from the 1930s.
Heineken believes it can best enter a new geography
when a) there are ¡§attractive¡¨ beer markets, b) ¡§the
end game is close,¡¨ c) two players have at least 66%
of the market; and d) there is very strong volume
growth174. When Heineken enters a new country, it
follows a well¡Vproven pattern of business practices
that are sketched out in the preceding figure. First, the company makes a series of targeted
acquisitions aimed at building a critical mass of brands, production, distribution, and
management assets. It then replaces some of the local management with seasoned Heineken
managers. Based upon the company¡¦s century-old experience with efficient high-volume beer
brewing, the new leadership reduces costs through building scale economies. The increasing
profit is reinvested in further building of local brands. When a local brand has achieved a
dominant market position, the generated cash is used to continue to develop the Heineken brand.
This practice can be seen as a textbook example of Porter¡¦s diversification tests175. For
example, when analyzing a possible acquisition, Heineken screens the target for compatibility
and potential synergies with its current operations, which is exemplary of Porter¡¦s fourth
diversification test – Pursuing diversification opportunities that allow shared activities. To
qualify as an acquisition target, a local or regional operator needs to have the potential to serve as
a platform for developing Heineken¡¦s own premium brands, using its existing volumes and
distribution. If a newly acquired asset doesn¡¦t match this corporate diversification strategy,
Heineken will sell or close it and take the restructuring charge, even if the asset is profitable.176
It is difficult to apply Porter¡¦s better-off test and the industry attractiveness test.
Heineken historically has been very restrictive in disclosing detailed financial breakdowns. This
46
makes it very hard to judge specific recent mergers. It can be concluded, however, that most
acquired companies have been successfully integrated since the Heineken¡¦s overall ROA has
remained consistently at about 20%, during the past five years.
c. BROAD AND FOCUSED DIFFERENTIATION
Developing the business strategy is the responsibility of local operating company
management. Local management is expected to implement business objectives within the
boundaries established by the Executive Board. This corporate level influence over the operating
companies has created similarity in systems and processes between the localized companies177.
Exchange of best-practice marketing and other strategic expertise is disseminated through
Heineken University.178
At the corporate level, Heineken views itself as a single-product company since 90% of
corporate turnover is from the sale of beer179. The Heineken brand made up 20.3% of 2003 sales
and was produced in 29 countries, more than any other of the company¡¦s brands. The Amstel
brand comprised 10.1% of 2003 sales with Amstel production in 20 countries. The remaining
69.6% of 2003 sales were divided among the company¡¦s 152 other regional brands. Most of the
remaining brands are brewed in only one of the 170 countries in which Heineken operates and
were added to the company¡¦s portfolio through acquisition.
At the business level of the regional operating companies, two strategies are employed; 1)
broad differentiation through multiple strong local brands to open distribution channels, and 2)
focused differentiation of the Heineken and Amstel brands to drive sales growth. This is shown
in the generic business level framework of Fig. III.D.2.c.1. More focus is put on differentiation
of the Heineken brand than on any other. The regional operations utilize a focused differentiation
strategy closely tied to the strong Heineken brand equity, which is recognized as the main growth
driver.180 This dual strategy deployment at the business level serves the corporate policy of
balancing growth through acquisition with organic growth.181 It is also inline with the corporate
goal of maintaining profitable and strong local market positions through strong local brands with
Heineken at the helm as the leading premium beer.182
47
Figure III.D.2.c.1: Business Level Strategy
d. COST AND VALUE DRIVERS
Cost drivers. Heineken¡¦s most effective cost driver is economies of scope. Operating in
hundreds of countries, Heineken has gained a strong market position in a greater number of
geographies than any other brewer. This large presence has driven Heineken to greater
economies of scale through consolidation of its regional brewing resources into larger and more
efficient brewing facilities as well as through greater efficiencies in its marketing and
communications. A key example of this interplay of scope and scale is that most of the
company¡¦s beer for export is brewed in the Netherlands.183 Already benefiting from large-scale
economies, a recent major reorganization in its Dutch brewing facilities has further reduced
production costs. In the past year, the Euro has seen a record exchange rate with respect to the
dollar. Heineken¡¦s cost reductions in its major export operations have allowed the company to
recoup some of the exchange value loss.
The company also is able to leverage its scope by sharing lessons learned in improvement
of production costs and value drivers across regional operating companies through the Heineken
University and e-learning programs. In addition, the company enjoys economies of scope in the
centralized development and maintenance of its guidelines for branding, packaging and
promotional style. Similarly, the company develops and supports global benchmarking programs
48
for optimizing marketing, sales and distribution, which are all implemented at the local level by
regional operations.
A summary of Heineken¡¦s cost and value drivers can be found in Fig. III.D.2.d.1
Value drivers. Heineken has three main value drivers, packaging, marketing, and
communication (or AMP, advertising, marketing and promotion). In countries outside the U.S.,
beer drinking is associated more with quantity than quality. AMP drivers are used to persuade
beer drinkers to trade up from the lower-cost brands to premium Heineken and Amstel brands for
image and lifestyle reasons184. In the U.S., the Heineken brand offerings are all premium priced
and these AMP drivers are used to sustain this premium value image.
e. DISTRIBUTION OF ECONOMIC CONTRIBUTION
Heineken spent 12.2% of net sales on AMP in 2003185 compared to 13.5% in 2000186. All
other operation costs were 74.6% of turnover in 2003187. This gave Heineken another year of
double digit operating profit of 13.2%. Spending on AMP is closely monitored by some analysts
in the recognition that consumers need to be given a reason to either trade up or continue to pay
premium prices for a product that otherwise can be indistinguishable from competitors.188
f. BARRIERS TO IMITATION
Heineken takes advantage of resources and capabilities to help distinguish its brands and
expand its competitive industry position by preventing imitation and increasing customer
retention. Heineken impedes competitor imitation by utilizing learning economies, which
establish causal ambiguity and social complexity. The company also utilizes property rights
protection such as patents for its unique packaging innovations. Heineken¡¦s long history of
achieving and maintaining premium positioning worldwide has endowed the company with
many valuable lessons that can not be easily imitated. The company continues to keep the
learning costs high for competitors through its institution of the ¡§Taking Heineken to the Next
Level¡¨ project, created to bring greater professionalism throughout the ranks. The project
enables the company to more accurately assess and compare their performance metrics and
¡§exchange best practice marketing techniques¡¨ among operating groups in order to learn about
and share the most effective working methods.189 The company instituted the Heineken
University five years back to ¡§promote the development, sharing, dissemination and use of
49
strategic expertise that can be applied in practice immediately¡¨.190 E-learning is held on a regular
basis to supplement the immediate dissemination of corporate expertise. The many years of
learning have evolved the company into a highly efficient organization that continues to put
emphasis on continually educating itself for future growth and strength. Heineken further
stretches its learning cost advantage through R&D efforts over the entire supply chain from new
and improved strains of barley and hops to new product and packaging developments.191 For all
of these reasons, causal ambiguity is very high. With respect to the new BeerTender innovation
and its other innovations, Heineken and its suppliers have filed patents to protect their
investments by slowing down or preventing competitor imitation.192
Heineken increases customer
retention through its reputation and brand
value. The company recognizes that
management of the brand and the
corporate reputation is of the highest
importance. It is the Heineken brand and
reputation that customers value as it
emotes the proper level of trust and cachet
when served among friends, at events and other on-premise venues. Heineken creates and
maintains corporate level guidelines for brand style, brand value, and brand development.193
New marketing approaches are continually explored in order to drive a valuable perception of the
brand. A successful promotion of the brand was achieved in 2002 with a new stylish aluminum
bottle developed for exclusive clubs and venues194.
2. FUNCTIONAL LEVEL
Heineken¡¦s resources and capabilities combine to support the firm¡¦s business level
strategy as both a broad differentiator in its regional markets and a focused differentiator in its
import and premium markets. The company has established an operating structure that supports
capability-building activities and gives the company a strong competitive advantage.
a. RESOURCES AND CAPABILITIES
Resources. Heineken NV is the third largest brewer in the world and has over 110
breweries on four continents.195 Its brand portfolio is extensive and brand recognition is strong,
50
particularly in those regions, such as the U.S., where their Heineken and Amstel import products
are their main offerings. Heineken has increased marketing and sales resources within the U.S.
in order to grow its presence outside the Northeastern region where 40% of its sales volume is
concentrated.196 A reorganization of the sales team in the U.S. last year repositioned Heineken to
take advantage of its strong presence in the ¡§off-trade¡¨ (same as off-premise) sector. With
greater focus on the convenience store segment, Heineken was able to leverage several new
packaging introductions such as the new ¡§keg can¡¨ that replaces the familiar beer can cylinder
with a keg shaped version.197 Heineken¡¦s centralized research and development resources
provide innovation sharing across operating companies and are a cornerstone of the company¡¦s
technology strategy. Heineken¡¦s Technical Services group is the core support for all of
Heineken¡¦s brewing operations and this group supports the company with development of new
packaging innovations and partnerships.
Heineken¡¦s worldwide distribution channels are one of Heineken¡¦s most valuable
resources. Integrating this valuable resource in Europe has helped Heineken to achieve
¡§comprehensive coverage¡¨ across the continent.198 In North America alone Heineken has over
450 distributors.199 In order to better utilize its distribution network, Heineken USA uses a
unique demand planning and system called HOPS (Heineken Operations Planning System).
HOPS went through a major upgrade in 1999 when Logility Inc. supplied Heineken with
¡§packaged applications¡¨ to make HOPS Internet based. Combining Heineken¡¦s process and
Logility¡¦s software, Heineken was able to reduce errors in distributor forecasting by 15% and cut
lead times by 50%.200
Along with providing efficient channels in each market, Heineken is able to leverage key
contractual outsourcing arrangements to reduce costs and provide value added services through
their distribution network. In 2002, Heineken USA established a relationship with Satellite
Logistics to improve the management of kegs in the channel for draft beer. Heineken reduced its
costs of cooperage management by outsourcing this activity and improved its service levels to
distributors. Before the arrangement with Satellite Logistics was established, Heineken
distributors had been consistently disappointed by the heavy costs of storing empty Heineken
kegs until they could be exported in ¡§full lots¡¨ back to the Netherlands for refilling.201
Capabilities. Heineken¡¦s operating structure allows it to leverage expertise in R&D,
marketing, purchasing, production, human resources and finance over all operating
51
companies that map to its global footprint. Heineken has a unique method for codifying and
sharing expertise in these functional areas. Its information systems play a pivotal role in
corporate communications. In the past year it transitioned these functions to the corporate
intranet. Heineken refers to these systems as a ¡§virtual corporate office.¡¨202 Heineken¡¦s ability to
utilize these systems effectively is evident in the success of its acquisition strategy. As new
companies come under the policies and procedures of Heineken¡¦s core functions, the synergies
of each acquisition are realized. Since 1995, all of Heineken¡¦s acquisitions have returned their
cost of capital.203 A testament of Heineken¡¦s skill will be the successful integration of Austria¡¦s
BBAG, one of their largest acquisitions. In order to ensure future success, Heineken recently
established a separate mergers and acquisitions department. The department was staffed with
knowledgeable individuals from operating companies and other corporate functional
departments.204
Heineken bridges its operations through its branding strategy. Branding is a core
capability for Heineken. In each region, Heineken strives for a profitable mix of its local brands
and its international brands.205 This applies mostly to European operations where the company
inherited brands through brewing, distribution agreements and acquisitions. Heineken¡¦s
resources within each regional operating company play the biggest role in making decisions
about the marketing mix. Each regional company utilizes this decentralized decision making to
develop targeted advertising, sponsorships and promotions. In larger regional markets, such as
the U.S., this decentralized authority extends to exporting and distribution functions.206
b. VALUE CHAIN
Heineken is organized strategically to optimize its activities. Centralized functional areas
bring together the expertise needed to run a business efficiently while a decentralized marketing
mix allows for the proper execution of Heineken¡¦s business plans. Each activity Heineken
engages in helps support their capabilities.
Heineken¡¦s technology strategy encompasses supplier, customer and institutional
(consortium and university) collaboration as well as in house R&D staff. The company has been
active in research and development throughout the value chain.207 As mentioned previously
Heineken has utilized its technical expertise to develop new strains of barley and hops, to
implement new quality systems and to invent new product and packaging technologies.
Heineken currently has one of the most advanced inspection systems to detect broken glass or
52
other ¡§foreign particles¡¨ in already filled bottles.208 Heineken Technical Services contracted
with Insight Systems in 2002 to develop this inspection technology
The company¡¦s technology activities have established Heineken as a world leader in
brewing operations. This leadership position supports the partnerships Heineken will establish to
continue its global expansion. The beginning of this year marked the start of a very important
partnership within the China region. Heineken¡¦s Chinese operating company, Heineken Asia
Pacific Brewers, will take a 21% stake in Guangdong Brewery Holdings and will start to produce
its first ¡§China-made brew¡¨ by the end of 2004. Currently the company imports its Heineken
brand to China through its operating company, and hopes to provide its trademark ¡§premium¡¨
beer as a complement to Guangdong¡¦s Kingway ¡§popular¡¨ brand.209 Guangdong Brewery hopes
to leverage this partnership to extend its distribution channels throughout China, eventually
increase market share and benefit from the ¡§consolidation of operations between the two¡¨
companies.210
Along with partnering activities and brand expansion, the activity of garnering ¡§brand
equity¡¨ is important to Heineken. The company realizes that following trends in the market, such
as demographics and tastes, can help to expand its customer base. Inquires, such as consumer
surveys are used to monitor preferences in the market.211 Market research over the past three
years has pushed Heineken in a new direction regarding its target markets. Globally, Heineken
rolled out its ¡§Beacon¡¨ program in 2002, which seeks to ¡§tap into the younger consumer¡¨.212
This program is particularly relevant in the U.S. market where the majority of beer is consumed
by the 21-30 year-old demographic. Heineken has been seeking to ¡§keep its brand relevant¡¨ for
this generation. As president of Heineken USA, Frans van der Minne is able to pull from a pool
of marketing tools available to him from Heineken¡¦s centralized marketing resources such as
¡§Thirst¡¨ or create his own locally targeted sponsorships such as Latin-American concerts.213
For a more detailed description of Heineken¡¦s value chain, see Fig. III.D.2.b.1.
c. VRIO ANALYSIS
The summation of Heineken¡¦s resources, capabilities and activities gives the company a
sustained competitive advantage in the global beer industry. While Heineken¡¦s resources are
abundant, it is the unique way Heineken utilizes these resources that allow it to maintain high
performance levels. Of particular importance are the company¡¦s capabilities in branding,
partnering, innovation and information systems. All of these capabilities provide barriers to
53
imitation as previously discussed. A graphic presentation of the VRIO is shown in Fig.s
III.D.2.c.1 and III.D.2.c.2.
3. FINANCIAL ANALYSIS
In order to understand the financial health of Heineken, two analyses were performed.
First, a comprehensive analysis of Heineken¡¦s historical financial and operational performance
using trends in the company¡¦s financial statements, key ratios and stock performance from 1999
to 2003 were examined. Second, a company valuation was calculated using the discounted cash
flow method and a share value sensitivity analysis was performed to measure changes in cost of
capital and growth rates.g
a. HISTORICAL PERFORMANCE AND KEY RATIOS
Income Statement. The following analysis refers to Fig. III.D.3.a.1 which shows the
Restated Income Statement, the Common Size Income Statement and the Year-over-Year
Growth of Income Statement Items, and the trend graphs shown in Fig. III.D.3.a.2.
¡E Sales: From 1999 to 2003 sales increased by an average of 11.2% (CAGR of 10.0%).
Heineken¡¦s increasing revenue is due to the increasing market share of import beer as a
percentage of total beer consumption and the company¡¦s increased international scope.
¡E COGS: Declined as a percentage of sales between 1999 and 2003 from 51.0% to 48.1%, with
a low of 46.7% in 2002. The overall decrease in COGS as a percentage of revenue is due to
investments in manufacturing equipment and economies of scale.
¡E SGA Expense: Increased yearly as a percentage of revenue between 1998 and 2003 from
29.1% to 32.7% due to increases in management expenses and advertising costs above
revenue gains.
¡E Net Income: Increased in absolute value between 1998 and 1999 by £á282M (10.9% CAGR).
As a percentage of sales (net profit margin), net income has increased by an average of 8.9%.
This is due largely to the increased revenues and decreased COGS as a percentage of sales.
g The source of raw financial data is the Thompson Online and Thompson Research database accessed online at the
SCU Orradre Library, and 1998-2003 Heineken Annual Reports.
54
Balance Sheet. The following discussion refers to Fig. III.D.3.a.3, which shows the
Restated Balance Sheet, Common Size Balance Sheet and Year-to-Year Growth of Balance
Sheet Items, and the trend graphs shown in Fig. III.D.3.a.4 as well.
¡E Net Receivables: Increased steadily in absolute value but have trended slightly up and ended
down to 12.7% and as a percentage of total assets. Given the increase in revenue, Heineken
has done a good job of managing its receivables.
¡E Inventories: Increasing in absolute value, with trend slightly upwards as percentage of total
assets, ending down at 7.7% in 2003. While sales have increased steadily, Heineken has
steadily learned to manage its inventory balances.
¡E Property, Plant & Equipment: Nearly doubling since 1998 in absolute value, net PP&E has
decreased nearly 5%. Given the increase in other asset items due to the firm¡¦s profitability,
this is expected.
¡E Accounts Payable: Increasing in absolute value, slightly trending upward as a percentage of
total assets, but decreasing in 2003.
¡E Long-Term Debt: Increasing steadily in absolute value and as a percentage of total assets
during the five-year period. The most substantial increase was in the current period as
Heineken partially financed its $2B acquisition of BBAG.
Shareholders¡¦ Equity. See Fig. III.D.3.a.3 and Fig. III.D.3.a.4.
¡E Total Shareholders¡¦ Equity: Increasing from £á2,650M in 1999 to £á3,167M in 2002.
¡E Retained Earnings: Increasing in absolute value since 1999 but with some variation.
Earnings per Share Growth: Generally increasing but at a decreasing rate from 1999 to 2003.
Statement of Cash Flows. The following discussion refers to Fig. III.D.3.a.5, the
Statement of Cash Flows.
¡E Cash Flow from Operations: Increasing steadily during a five year period, with the exception
of 2000, when there was a large increase in taxes payable due to a change in accounting
policy.
¡E Cash Flow from Investments: Cash flow used by investing activities peaked at £á2,853M in
2003 due to goodwill associated with the BBAG acquisition. Heineken has also been steadily
investing in its manufacturing plants, especially in Nigeria and Vietnam.
55
¡E Cash Flow from Financing: From 1999-2002 cash flow from financing activities remained
relatively stable as debt and dividends remained relatively stable. In 2003, the BBAG
acquisition was financed partially by an increase in debt, increasing cash from financing.
Performance of Business Segments. As almost all Heineken¡¦s revenue is from beer,
segmentation analysis is only performed by geographical elements.
Performance of different geographies: Geographical and tabular financials are shown in
Exhibit III.D.3.a.6.
Heineken¡¦s Volume, Revenues, and Operating Profit are heavily concentrated in Western
Europe. While Europe consumes 49% of the Heineken¡¦s volume, this represents 63% of the
revenues, but only 48% of the Operating Profit. The Americas, however, consume only 12% of
the volume, but provide 14% of the Revenues, and 29% of the Operating Profit. Central and
Eastern Europe consume 19% of the volume, providing 11% of the revenue, but only yielding
7% of the operating profit. Africa yields much more even volume, revenue and profit, with 12%,
8%, and 12% respectively. Asia-Pacific is the smallest market with only 8% of the volume, 4%
of the revenues, and 4% of the operating profit. This analysis shows that Heineken¡¦s heart is tied
to Europe, but the Americas provide significant operating profit.
Key ratios. Fig. III.D.3.a.7 illustrates the key ratios for the period 1999 to 2003.
¡E Profitability: Net profit margin has remained steadfast during the five-year period at
approximately 9%, though slipping to 8.6% in 2003. Return on equity has also remained
relatively strong at approximately 20%, although down to 16.5% in 2003. Return on net
operating assets has improved in the last 3 years to 8.4% over the five-year average of 4.3%
though slipping in 2003 to 7.6%.
¡E Liquidity: The current ratio has been held steady during the
period at 1.2. The quick ratio improved slightly in 2003, rising
to 1.0. EBIT interest coverage lowered to 6.8 from an average
of 8.6 following the purchase of BBAG. Overall, Heineken has
improved their liquidity slightly, but has also reduced their
ability to pay interest to some extent.
56
¡E Leverage: The debt/equity and Cash Flow from Operations to total debt ratios have
deteriorated between 1999 and 2003. Heineken has increased their leverage to the industry
average, though it is still leveraged less than A-B. They have chosen debt and cash to
finance acquisitions and operational improvements rather than issuing additional shares.
¡E Operating Efficiency: Compared to industry averages and competitors, Heineken scores well
in all operating efficiency measures, with the exception of Inventory Holding Period.
Stock performance. Heineken¡¦s stock price has declined from £á24.81/share to
£á23.68/share in the past five years. This decline is mostly due to the overall stock market decline
beginning in 2000. Adjusted to Heineken¡¦s stock price and not including fluctuations in
currency, the chart in Fig. III.D.3.a.8 illustrates that while Heineken has outperformed the
Amsterdam stock index, they have underperformed in comparison to A-B and only slightly in
comparison to Coors.
Conclusion ¡V historical financials and ratios. Analysis of Heineken¡¦s historical financial
data and key ratios shows that the company has performed soundly. The company has steadily
increased revenues and earnings, more efficiently increased leverage and sound operating
measures, though weakness in the overall stock market has not recognized this progress.
b. DISCOUNTED CASH FLOW ANALYSIS
A discounted cash flow analysis was performed to determine Heineken¡¦s intrinsic stock
value to determine a fair valuation without outside influences. The calculations are shown in
Exhibit III.D.3.a.9. and details of the analysis are discussed in the following paragraphs.
WACC Calculation. WACC is calculated by weighting equity costs using the Capital
Asset Pricing Model and the effective interest rate for Heineken, which results in a rate of
5.55%.
Valuation of Heineken. Firm valuation is estimated using the discounted cash flow
method based on financial projections for the next 5 years (2004-2008). By categorizing the
income statement into the major components, Revenue, COGs, SG&A expense, and
Depreciation and Amortization and ¡§Other¡¨ expenses, historical rates were used to determine
future values for each component, resulting in Net Income. The terminal valuation was
calculated by estimating Heineken¡¦s future performance given the beer industry¡¦s average
growth rate and the WACC estimate.
57
Heineken¡¦s intrinsic share value is therefore £á24.57 per share. Given that the current
share price is £á29.25 (AMS 5/31/2004)214, it is concluded that Heineken is currently slightly
overvalued by the market.
Value per share sensitivity analysis. Sensitivity analysis by varying growth rate (g)
between 4% and 6% and the WACC between 4% and 7% shows that because the current WACC
and growth rate are very close, the calculated value per share ranges dramatically. This is a
weakness of the model.
4. STRENGTHS AND WEAKNESSES
Strengths: In summary, Heineken has strengths in branding, product and packaging
innovation, educating employees, sharing expertise throughout the company and distribution.
Weaknesses: Heineken¡¦s business strategy may prevent it from following key trends in
certain markets. In the U.S., Heineken is not strongly positioned in the ¡§low-carb¡¨ market and is
not seeking ¡§malternative¡¨ partnerships or proprietary product lines. This points to limitations in
the company¡¦s strategy and its commitment to follow the established strategy rather than cater to
fads that could improve short-term profits. The company¡¦s import position creates risk since
import beers are highly sensitive to economic conditions.215
Heineken lacks channel strength and equal presence in all regions of the U.S. For
instance, Heineken is strongly positioned in the North East U.S. region that is already dominated
by import beers that have a penetration of 15-20%.216 In other regions where imports have more
growth potential from smaller share levels, Heineken has a weaker presence. Higher logistics
costs inherent in the import position, such as the maintenance of higher inventories and higher
transportation costs are another source of competitive weakness for the import segment of the
company¡¦s portfolio.
5. TECHNOLOGY STRATEGY
Heineken¡¦s technology strategy described in the previous sections is relevant to its
corporate and business level strategies. Heineken¡¦s move into marketing and distributing the
BeerTender appliance can be seen as a diversification move in an industry where a dominant
vertical structure is prominent and effective.
Heineken¡¦s policies regarding a centralized R&D structure complement its dual business
strategies by allowing each regional operating company the ability to leverage each others
58
knowledge about packaging and brewing technologies. This regional knowledge is funneled
through the corporate resources in order to build value for the consumer and to provide cost
benefits to all brewing facilities. Implementing sufficient quality control is of particular
relevance when Heineken seeks new brewing partnerships. This activity recently prompted
Heineken to invest over five million dollars in Lion Nathon¡¦s brewing facilities in Australia
where operations did not initially meet Heineken¡¦s standards.217
6. STRATEGIC MOVE ¡V PARTNERSHIP WITH GROPE SEB
The BeerTender is a good example of Heineken¡¦s technology strategy at work. The
partnership between France¡¦s Groupe SEB and Heineken in co-developing this technology is a
testament to Heineken¡¦s ability to collaborate with other large international companies. By
effectively utilizing Heineken¡¦s central R&D resources, operating companies can utilize the
BeerTender innovation to drive value in their local markets. This activity both complements and
is consistent with the firm¡¦s differentiation strategy.
Background. Groupe SEB is a world leader in small domestic appliances.218 With its
presence in almost as many countries (120) as Heineken, Group SEB employs fifteen thousand
people worldwide and carries a broad portfolio of branded products.219 In 2002 Groupe SEB
purchased the failing operations of competitor, Moulinex. In the deal, Moulinex sold off its food
preparation and brunch line businesses, which included four of Moulinex¡¦s 26 subsidiaries.220
The four operations sold to SEB were Krups GmbH, Moulinex Espana, Vistar SA and Krups
North America. With this purchase, Groupe SEB¡¦s market share increased to 15% of the global
market in small appliance sales.221
SEB Strategy. Groupe SEB¡¦s strategic objectives focus on becoming ¡§the world
reference in small domestic equipment.¡¨ Consistent with Heineken¡¦s view on technological
superiority providing greater value, Groupe SEB focuses on providing value through innovation
at the optimal ¡§price-performance ratio¡¨.222 The company is dedicated to building competencies
in product development. In order to execute on this objective, Groupe SEB co-developed
software in 2002 to implement a ¡§product features¡¨ modeling tool. This system helps Groupe
SEB determine which product features are most relevant for customers and, in turn, are worth
more in the market.223 As of last year, Groupe SEB employed 400 people and spent 1.8% of
revenues on R&D.224 Innovation metrics are important to the firm. Management measures the
59
¡§rate of new products¡¨ and ¡§patent performance.¡¨ Each year the firm files about 50 to 70
patents.225
The company¡¦s supporting activities include customer support, coordinating productive
and flexible manufacturing and maintaining a broad portfolio of products. Support services
offered by SEB include call centers, Internet sites, a ¡§Customer Welcome Centre¡¨ in France, and
exhibition centers in Brazil.226 In order to improve the quality of customer support, the company
upgraded its call center software last year. New CRM software will allow better processing and
control of calls.227 SEB¡¦s supply chain processes have been enhanced with ¡§order-driven
production.¡¨ This change was implemented to get away from sales driven forecasts and improve
supply targets.228 Improving efficiencies in production is of particular benefit to SEB given that
it produces 80% of all of the products it sells.229 These products include cookware, food and
beverage preparation appliances, linen care products, personal care devices, and floor care
products. Groupe SEB strives to offer a complete choice of small appliances in ¡§every market
segment and all potential consumer targets.¡¨230
Strategic Sourcing Framework: Both Groupe SEB and Heineken have core capabilities
in R&D. Heineken¡¦s motivations for partnering with Groupe SEB to develop the BeerTender
were probably driven from its lack of technological expertise in small appliances. Heineken has
no resources to produce such appliances even if they could invent such a device. The fact that
Heineken, in developing this beer-dispensing product, would have to source it from an appliance
manufacturer, gives relevance to the strategic sourcing framework.231 As suggested, it was
Heineken¡¦s lack of capabilities that outweighed its need to control development and
manufacturing. Supply is a major strategic issue for Heineken given the innovative nature of the
product. The unknown elements of demand increase the risks of supply and gives Heineken
motivation to devise well thought out penetration plans for the product. While not impossible, it
is highly improbable that Heineken will ever expand its capabilities to include BeerTender
production.
7. EFFECT OF STRATEGIC MOVE ON STRATEGY
The BeerTender innovation complements the focused differentiation of the business level
strategy on the Heineken brand. It is expected to increase net sales margins in the take-home
segment232. Consumers are willing to pay the same or more per unit volume for the freshness of
60
draught beer and the cachet of the pouring ritual. The BeerTender¡¦s four-liter keg is recyclable
and the direct packaging cost is less than bottles or cans. This innovation will foster Heineken
brand recognition and loyalty, and improve off-trade consumption, which is especially important
to brewers during economic downturns when on-trade consumption declines.
The BeerTender introduction brings new challenges at the business level in terms of
distribution logistics, marketing, and communication. The largest challenge is getting the
consumer mated up with a BeerTender and the new four-liter kegs since one component of the
dispensing system does not make sense without the availability of the other. As the BeerTender
is targeted to grow the take-home market and the consumption of Heineken by the maturing
demographic, new emphasis on these market segments will be required. The local operations in
each country in which the BeerTender is introduced will need to develop efficient avenues for
communicating the value of the innovation and how the consumer should make arrangements for
acquisition of the appliance and the new keg refills.
Heineken has not announced any provisions for the distribution of Heineken¡¦s local and
regional brands in the unique four-liter kegs. This means that the introduction of the BeerTender
will not complement the broad differentiator strategy at the business level. The importance of
consumer demand for choice at the wholesale level233 and the current high demand for premium
light beers in the U.S. market234 is well understood in the industry. This may be cause for
Heineken to consider the release of the new kegs in its more popular local and regional brands
and at least Amstel Light in the U.S. in the new kegs.
61
IV. ANALYSIS OF THE EFFECTIVENESS OF STRATEGY
A. THE EFFECT OF THE STRATEGIC MOVE ON INDUSTRY
CONDITIONS
The overwhelming success of the craft beer revolution (see section II.E.) and external
analysis show that a product featuring a new competitive dimension can succeed in market
expansion in the mature and highly competitive beer market. U.S. beer consumers have become
increasingly demanding in their beer drinking experience during the past ten years. The
dimensions of taste, freshness, and venue of consumption, occasion, and sophistication take on
new competitive significance moving forward in the drive to capture and hold market shares.
With its new overall delivery, storage, and enjoyment enhancing characteristics, the
BeerTender addresses this paradigm shift by serving the demographic that appreciates import
beer. Compared to other beer segments and the population in general, these beer drinkers tend to
have higher education levels and higher incomes as shown in Fig. IV.A.1.
The BeerTender presents a disruptive process, rather than a technology, that goes beyond
the appliance itself. It possesses of number of attributes that are not currently offered by other
beer market players:
¡E Ability to drink fresh draught beer at home. Demographic research235 shows that this
attribute is one of the key value drivers for beer consumption.
¡E Novel packaging solution. This feature is becoming more important in the perception of
the quality of the beer.236
¡E New storage solution. Beer bottles will no longer take up space in the kitchen fridge, as
the beer is now stored in a stand-alone appliance.
¡E Reduction of waste. The environmentally friendly population will appreciate that beer
no longer comes in disposable containers but in returnable and reusable kegs.
This novel beer enjoyment process satisfies the three criteria set forth by Clayton
Christensen237 for disruptive technology as shown in Fig. IV.A.2 :
62
Consumption at home
On-premise consumption
time
satisfaction
Convenience/choice/portability
Atmosphere/choice/freshness
Novelty/styling/
freshness/sophistication BeerTender
Figure IV.A.2: Schematics of the disruptive potential of the BeerTender technology, based upon
customer perceived value drivers.
Better performance in some respect: Only advanced thermo-electric technology
development can produce relatively inexpensive countertop home appliances, such as the
BeerTender. Current refrigeration technologies are larger, heavier, noisier, and produce external
heat.238 Only the BeerTender offers the solution.
Although this device has additional attributes such as, style and novelty, only a small
group will be interested in buying the BeerTender in the beginning. Based on survey results,
between 1% and 9% of the combined super premium, microbrewery, and import beer market will
purchase this appliance.
Worse performance in most other respects: The majority of beer drinkers may find
the BeerTender initially very limiting: limited brand choices, lack of on-premise atmosphere, and
under developed keg delivery and return systems.
Pace of innovation is higher than for sustaining technology developments: Given the
maturity of the current normal beer drinking experience, it is highly likely that the evolution of
the BeerTender technology will outpace current cooling and storage solutions. Budweiser has
already developed a new canning process that preserves draught freshness.239 Guinness released
a new bottle featuring a ¡§Rocket Widget¡¨ to form the beer head.240 The superior technology of
the BeerTender will undoubtedly encourage competitors to further develop imitating or
63
substitute solutions for improving freshness and experience and for avoiding Heineken and
Groupe SEB patents on BeerTender technology.
B. SCENARIO ANALYSIS AND EFFECT ON VALUATION
The previous financial valuation does not take into account the rollout of the BeerTender.
The calculations used to validate any potential increase in market value from the BeerTender
include an estimate of the market size, market penetration by segment, savings from bottling
costs, and estimates of the wholesale price for new sales. Detailed calculations of the following
Scenario Analysis are provided in Fig. III.D.3.a.10 and BeerTender Survey results in the
appendix furnish supporting material.
In order to calculate the potential market size, a multiplier must be established between
the BeerTender Survey results and the real market. The survey shows that most respondents have
an affinity for import and premium beer. Multiplying the total U.S. beer volume by the fraction
of the market imports and premium beers represent (11.4% and 7.6% respectively), an estimate
of beer volume market is calculated to be 535.37 million cases.241
The BeerTender survey provides (see section VIII.C) an initial demand forecast by
segment. This demand is then used to calculate the initial penetration. For the following years a
constant growth of 4% is assumed, which is used to compute Heineken¡¦s valuation under three
different scenarios.
The results of the survey separated the BeerTender market into four segments. Each was
labeled by their intrinsic habits; Heineken Insiders, Heineken Majority, Novelty Seekers, and
Home Bodies.
Heineken Insiders drink only Heineken at home, and therefore it is estimated that the
product of their demand and market size will result in cannibalized Heineken sales from bottles
and cans to BeerTender kegs. For all brands, except for Heineken, 25% is consumed on-trade
and 75% off-trade. The Heineken split is 50/50242. Assuming the same on-/off-trade split, the
Heineken Majority consumes 50% of their beer at home. Therefore, the BeerTender will
cannibalize 50% of the off-trade can and bottle consumption. Novelty seekers will convert to
Heineken for the novelty of the BeerTender. It is assumed that they will drink approximately
75% at home243, assuming the non-Heineken on-/off-trade split of 25/75. Home Bodies, like the
Novelty Seekers, represent converts, the difference being they consume all their beer at home.
64
Novelty Seekers and Hoem Bodies represent incremental market share growth in Heineken¡¦s
favor.
The wholesale price of beer in the U.S. market was calculated using margins for each
player in the distribution chain, which were determined through primary research.244 The
BeerTender kegs provide beer to the consumer without some of the costs of bottling and canning.
The costs involved in bottling and canning include, sterilization, filling, labeling, and packaging.
Cost savings were estimated by using the bottling cost of $1.87 per case for A-B (discussed in
the willingness to pay section of the external analysis) and multiplying by 20%, assuming
sterilization and refilling costs are only 20% of the normal bottling process. In addition to cost
savings in cannibalized consumption, Heineken will benefit from a lower cost of goods on
incremental revenue. A margin analysis showing the calculations is provided in Fig.
III.D.3.a.10.
Having gathered the market size, potential demand by segment, estimated cost savings,
wholesale prices, and margins, an estimate of the BeerTender¡¦s financial impact can be
calculated. For each segment, the demand is multiplied by the market size and by the appropriate
percentage of cannibalization or conversion to determine the total amount of cases that each
segment will consume through the BeerTender. While the unit volume associated with the
BeerTender is not represented in cases, it is convenient to do this analysis in terms of case
volume; this concession has no effect on the final result, as it is only a unit measure with a
constant conversion.
For the cannibalized case sales, the savings are computed as the product of savings per
case multiplied by total cases. The savings translate to a direct pre-tax net income increase. For
converted sales, revenue is calculated as the product of the wholesale price multiplied by total
cases, multiplied by the BeerTender keg margin. The result is a pre-tax increase in net income to
Heineken using the assumption that marketing expenses are a relatively consistent expense.
In order to calculate the effect on Heineken¡¦s market value, these numbers are added to
the original DCF valuation with additional assumptions. Assuming a 2004 Christmas rollout of
the BeerTender, it was estimated that increased spending during this time period would allow
Heineken to realize 25% of annual sales potential during this season.
Scenario 1 ¡V Latent Demand. In the base scenario, the results of the BeerTender
Survey¡¦s ¡§latent demand¡¨ were used as the demand in the market place. Using the scenario
65
analysis model shown in Scenario 1 of Exhibit III.D.3.a.9 and I Exhibit III.D.3.a.10., the
calculations determine that £á3.04 million in savings will be achieved and £á1.46 million in profits
will be earned from new sales. Using the DCF analysis, the net effect is an increase in stock price
of around 0.5%.
Scenario 2 ¡V Achieve Promotional Goals. The second scenario assumes that Heineken
uses its marketing and communications strength to create awareness of the BeerTender¡¦s novelty
and style by one standard deviation; a measure that is consistent with the marketing assumptions
in the survey analysis. The scenario model results indicate that cost savings will yield £á9.14
million and £á13.45 million in profits from new sales. This yields an increase of 3.2% in share
price as shown in Scenario 2 of Fig. III.D.3.a.9 and I Fig. III.D.3.a.10.
Scenario 3 ¡V Choice and Increased Beer Price. The most optimistic scenario assumes
that Heineken introduces the ¡§Around the World in 80 days¡¨ promotion as outlined in the
recommendations. This promotion brings choice to the consumers, and the company increases
the price 15% per keg, which yields approximately 8% more per case wholesale. Based upon the
survey results, cost savings will be £á17.5 million and net income from new revenues to £á48.6
million. This generates an increase in share price of 7.8% as shown in Fig. III.D.3.a.9 and Fig.
III.D.3.a.10 in for Scenario 3.
Conclusion ¡V Valuation. Table IV.B below summarizes the variation in value per share
calculated for the different scenarios evaluated. The results of the various scenario analyses are
positive for the implementation of the BeerTender, indicating that Heineken should introduce the
BeerTender, increase market awareness, introduce choice and charge more 15% more per
volume at retail for the BeerTender keg in order to maximize shareholder value.
Table IV.B: Summary of Valuation Scenarios
Results £á/Share % Change
Base Case – (w/o Beer Tender) £á 24.57
Scenario 1 – (Beer Tender & Latent Demand) £á 24.70 0.5%
Scenario 2 – (w/Beer Tender & Hit Promotional Goals) £á 25.35 3.2%
Scenario 3 – (w/Beer Tender & Choices & Price ¡ô) £á 26.49 7.8%
66
C. OVERALL EFFECTIVENESS OF HEINEKEN¡¦S STRATEGY
Sales of BeerTender in the U.S. complements Heineken¡¦s focused differentiation strategy
by offering a unique beer drinking experience. Heineken USA will offer its premium brand,
Heineken, in the new four-liter keg to enhance brand image. Heineken¡¦s presence in the U.S.
market is improved by positioning the BeerTender toward the older demographics and the offpremise
seegment. Older beer drinkers with more easily disposable income can more easily
afford the BeerTender. These drinkers (35-49 years old) are estimated to comprise 35% of the
beer drinking population by 2005. While the beer consumption growth in this age group is not as
high as the 21 to 27 year old group, it will remain the largest consumption group over the next
five years.245
While its import positioning allows the company to earn higher than average profits, it
also exposes the company to greater risk during periods of economic downturn. This strategic
weakness is highlighted by the fact that Heineken¡¦s split of on-premise sales to off-premise sales
is 50-50. Generally, the on-premise is the most sensitive sector that is most heavily influenced
by the economy, and the off-premise sector garners higher profits for the brewer. Most U.S.
brewers maintain a 25 to 75 split between their on-premise and off-premise sales respectively to
maintain a healthy channel mix.246 The introduction of BeerTender will attract off-premise
customers to enjoy Heineken, thus improving profits and sheltering the company from negative
macroeconomic factors.
67
V. RECOMMENDATIONS
A. 3 SHORT TERM AND 3 LONG TERM RECOMMENDATIONS
1. SHORT TERM RECOMMENDATIONS
The preceding analyses lead to the following short-term (one year) recommendations:
1) Nationwide U.S. Rollout of BeerTender.
As the introduction of the BeerTender is in-line with the strategic goals of Heineken, the
first recommendation is that the company should launch its introduction in the U.S. at the
nationwide level. There are three primary reasons for recommending a nationwide rollout versus
a regional rollout.
First, a nationwide rollout gives a first mover advantage immediately by erecting a
formidable barrier to entry for competitor¡¦s imitations and substitutes. Most consumers who are
charmed by the benefits of the BeerTender are not likely to make a similar near-term purchase.
Second, the resources Heineken and Groupe SEB need for a nationwide rollout are
almost already in place. Heineken is responsible for the production and distribution of the
BeerTender kegs.247 Therefore, the company need only reserve shelf space for the new kegs at
each of its ten regional warehouses where they can remain empty until demanded at the retail
level. A rollout nationwide will actually serve to simplify the logistics of supplying those
consumers that purchase the BeerTender in one location and then move to another. The required
number of kegs can be filled by the requesting retailer¡¦s Heineken wholesaler and from there
delivered to the consumer through the retail outlet to meet spot demand. Heineken has existing
marketing and promotional resources at the national level. As previously indicated, the
BeerTender is intended to target the upscale and affluent consumers who tend to be older than
the 21-27 year old population that Heineken is currently addressing. In order to position the
BeerTender, Heineken must create focused advertising and promotional collateral with this
demographic difference in mind.
Groupe SEB is responsible for the production, marketing and future development of the
BeerTender appliances. The BeerTender will carry the Krups brand. The Krups distribution
network in the U.S is already established to serve the more mature and upscale consumer. Krups
68
is very selective in choosing distribution outlets as it only considers high-end stores such as
Macy¡¦s, Amazon, Bed Bath and Beyond, SmartMall and Cooking.com.248
Third, it is easily understood that all beer wholesalers and mass market retailers are
volume driven. A nationwide rollout will attract the attention and support of both the alcoholic
beverage channel and the national appliance retailers that carry Krups brand appliances.
2) Introduce Amstel Light in BeerTender kegs. Americans are increasingly health
conscious and are susceptible to following health fads capriciously. The current American health
craze is centered on low carbohydrate diets. As previously discussed in the external analysis,
these diets are driving demand for more light beers. Making Amstel Light available in
BeerTender kegs will cater to the light beer consumers and potentially increase demand for the
BeerTender and other Heineken brands.
3) Introduce Tapvat in the U.S. Market. The Tapvat is a disposable five-liter keg with a
built in tap for off-premise consumption. The BeerTender survey shows that the $300 price tag
of the BeerTender is a deterrent to much of the market that would otherwise enjoy fresh cold
draught beer at home (see section VIII.C.). The Tapvat does not have the same cachet or
refrigeration features of the BeerTender. Its lower price makes it a good introduction for the cost
conscious consumer to the benefits of draught at home. As the drinking habits of these
consumers are established around Heineken and their financial means grow, it follows that they
will eventually desire to trade up to the BeerTender appliance.
2. LONG TERM RECOMMENDATIONS
The preceding analyses lead to the following long-term (greater than one year)
recommendations:
1) Introduce an Around the World in 80 Days Promotion. This promotion concept is
called the ¡§World Passport of Draught Beers¡¨. This is a mail-order program that gives the
consumer the opportunity to sample a four-liter selection of beer from a different country and
region every 16 days. The consumer completes one world tour every 80 days. Each tour begins
in Holland with a four-liter keg of Heineken to keep the Heineken brand at the forefront of the
promotion. The world traveler then receives a different beer from a different region and country
every 16 days so that the world tour is completed with Heineken and four other Heineken
company brands from around the globe in 80 days. Figure V.A.1.2.1 shows four possible world
69
tours. With so many countries and brands to choose from, 23 complete tours can be completed
without repeating a single brand.
2) Implement market precision forecasting system
While Anheuser-Busch gathers customer information with BudNet, Heineken should
build a similar data mining system to forecast customer demand and streamline its supply chain.
The ¡§HeinekenNet¡¨ should link with the HOPS system to deliver the kegs, cans and bottles to
wholesalers worldwide. The software should also have intelligent capabilities that can predict
seasonal demand and automatically send Heineken shipments to wholesalers ahead of the
demand.
In addition, HeinekenNet should monitor regional preferences and offer targeted
promotions. For example, music fans can be rewarded by free music downloads; or a surfer who
lives in Miami Beach can receive a free beach chair when six BeerTender kegs are purchased.
3) Build the next generation of BeerTender
Early adaptors and enthusiasts might prefer to have individualized BeerTenders to set
themselves apart once the traditional BeerTender becomes widely adopted. It is proposed that
Heineken builds new differentiating models of the appliance to reinvigorate the demand. Two
examples are 1) a new DuoTender that can hold two kegs of beer, Heineken and Amstel.
Consumers will enjoy the experience of operating a mini-pub in their own homes. 2) The
traditional BeerTender can be given a makeover, with different color schemes.
B. STRATEGY IMPLEMENTATION
1. IMPLEMENTATION OF ONE SHORT TERM RECOMMENDATION
In the short term, Heineken needs to ensure the full adoption nationwide of the
BeerTender through the implementation of the following steps:
Distribution. Prior to introducing the American public to the BeerTender, Heineken
needs to prepare the distribution channel for the rollout. The Heineken warehouse distribution
system needs to be set up to handle the kegs and their return for refilling. A sufficient number of
kegs needs to be put in the Heineken distribution warehouses to meet initial demand. This lesson
was learned during the first month of rollout in Holland where the demand exceeded the supply
to such an extent that Heineken had to suspend all promotion in order to lessen the demand.249
The preparation of the warehouses needs to be synchronized with the filling of the Krups supply
70
channel with BeerTenders. It is important that the initial momentum of the rollout is sustained
through a sufficient availability of BeerTenders.
Timing. The best timing for the rollout of the BeerTender is the Christmas selling season.
This incorporates the all-important Thanksgiving holiday. If these plans are not already in place
for December 2004, plans for the rollout prior to the beginning of summer in 2005 should be
initiated immediately.
Advertising. Since novelty and styling are the key value drivers for the BeerTender,
communication of these features should be emphasized. The advertising should leverage the
existing product placement of Heineken¡¦s current advertisements and demonstrate the novelty of
fresh cold draught at home and the unique and elegant styling of the BeerTender. One proposal
for the effective leveraging is the placement of a colorful brochure in the packaging of Heineken
12 and 24 packs. The brochure should direct the consumer to retailers that carry the Krups
branded products. The costs of advertising should be shared between Krups and Heineken since
both companies benefit from the commercial success of the BeerTender.
New advertising placements should be made in media that target the middle-aged
demographic. The message needs to emphasize the novelty, styling and convenience of the
BeerTender appliance and sophisticated enjoyment of fresh cold draught at home.
Control. The rollout performance of the BeerTender and kegs needs to be closely
monitored through the distribution network. If volumes are below expectations than price
promotions such as rebates on the BeerTender should be offered. The price elasticity was found
through the analysis of the BeerTender survey to be between two and six. This means that price
promotions will increase revenue, volume and awareness simultaneously. Promotion can be
decreased if demand outstrips supply as it did in the Netherlands.
R&D efforts to target on-the-go segment. The younger demographic, aged 21 to 27
generally likes to bring beer to house parties or tail-gate parties, or camping trips. Heineken
could capture the interest of this segment, even at the high price point, with a portable version of
the BeerTender. Research and development efforts to ruggedize the BeerTender, much like the
Jeep portable boom box, should be initiated, the source of power being the automotive cigarette
lighter. This will continue to keep momentum of the rollout going and grow demand through the
product life cycle.
71
2. IMPLEMENTATION OF ONE LONG TERM RECOMMENDATION
Introduce an Around the World in 80 Days Promotion. Up to this point in time,
Heineken has made no indication that other brands are slotted for introduction in the unique fourliter
BeerTender keg. This, of course, makes sense in that the business level strategy is to
continue the focused differentiation of the growth driving Heineken brand in order to gain more
of the off-trade sales, which are more insulated from economic downturns and provide higher
margins than the on-trade. The survey results point clearly to beer selection as a key value driver
of the BeerTender. In the short run before competitors are able to overcome the isolating factors
set up by Heineken and finally imitate the BeerTender concept, this strategy may work by
making inroads into the homes of Heineken brand loyalist. In the long run, competitors will find
ways to imitate the BeerTender function, creating competitive choice for consumers that will
challenge Heinekens lead.
For competitors, choice is more of a problem. Heineken has a portfolio of 154 brands,
including Heineken and Amstel, produced in all corners of the world. Only a small number of
these are imported into the U.S. It is recommended that Heineken seize this first mover
opportunity to capture more off-trade share by promoting a selection of its more popular brands
through the BeerTender. It would seem that even a fraction of 154 brands is more than enough to
capture the interests of the most avid beer enthusiast who enjoys the pouring ritual cachet and
freshness of draught beer at home. With a large enough selection from its portfolio of beers,
Heineken probably can capture most if not all of the beer consumption of the BeerTender
owners.
The traveler is issued a ¡§Heineken World Passport¡¨ at the beginning of his or her world
tour. The passport contains a number of world tours that can be completed in succession. The
world traveler receives a colorful sticker depicting the logo of each new country brand as it is
received. The passport stamp is placed into the traveler¡¦s world beer passport to show the status
of each tour and to provide the owner of the passport with a visual record for admiring and
sharing with other enthusiasts. The promotion can be augmented with prizes by awarding points
for each completion of a world tour. These points can be submitted for a small prize at the
completion of each tour or accumulated for larger and larger prizes depending on the number of
points accumulated.
72
BeerTender kegs can be shipped through an agreement with BevMo (Beverages and
More) which has “brick and mortar” stores in all 50 states. Per government regulations, this
presence allows BevMo to ship alcoholic beverages within each state from local stores and
warehouses. BevMo is already a Heineken retailer and its position as a specialty liquor store is
consistent with respondent¡¦s preferences for purchasing the BeerTender. Per the BeerTender
survey 80% of survey participants wanted to purchase this appliance and the kegs from a
specialty store such as BevMo.
VI. CONCLUSIONS
From innovations in hops and barley to operational management and efficient production,
brand development, marketing and promotion, aluminum bottles and keg cans and cold fresh
draught at home with the BeerTender, Heineken is truly a global beer industry leader and a
strong innovator at all levels of the value chain. The BeerTender provides the company with a
new tool to foster the premium image of the Heineken brand and to grow its off-trade share.
Heineken¡¦s BeerTender gives beer drinking new cachet and fresh draught taste with a ritual like
experience that is fun and enjoyable at home. This new concept in packaging may be the answer
to how Heineken can penetrate the aging boomer demographic and even reverse the beer
industries loss to wine and spirits substitutes. The company can expect to increase its share of the
off-trade and improve its free cash flow for up to a 7.8% increase in share price only one year
after introduction in the U.S. market. It appears competitors will be caught totally off guard
without any foreseeable or equal response for some time to come. Heineken needs to take full
advantage of its first mover advantage to firmly establish its leadership position in the draught at
home market that it will soon introduce to the U.S. and other parts of the world to every
Heineken beer drinker¡¦s delight.
73
VII. TABLES AND EXHIBITS
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Response of Regular Alcohol Drinkers
Tastes great
Healthy to drink
occasionally
High quality
Too expensive
Good value
Fun to drink
Sophisticated
Good to drink at a bar
Good to drink at home
Good to drink with
meals
Good to drink at a
party
For younger people
For older people
Beer
Wine
Malternatives
Figure II.C.2.1: Category image among alcohol drinkers who have consumed alcohol in the
past seven days.250
0%
5%
10%
15%
20%
25%
30%
35%
40%
Percentage of beer drinkers in age group
21-27 28-34 35-49 50+
Age groups
1997
1998
1999
2000
2005E
2010E
Figure II.C.7.1: Share of beer consumption across age groups in the U.S. beer market.251
74
-15%
-10%
-5%
0%
5%
10%
15%
20%
5 year growth rate [%]
Total
0-20 Yrs.
20-29 Yrs.
30-39 Yrs
40-49 Yrs
50 and above
1996
2001
2006
2011
Figure II.C.7.2: Growth rate of the US age groups. Given numbers reflect the growth rate over
5 years, not the CAGR.252
Figure II.D.1.b.1: Comparison of the business level strategies employed by the beer
manufacturers analyzed in this study.
Low Cost uniqueness perceived
by customer
Mass
market
Niche
markets
AAnnhheeuusseerr–BBuusscchh
SSAABB M Milillelerr
Heineken,
N.V.
Heineken,
N.V.
Heineken
U.S.A.
Heineken
U.S.A.
Adolph
Coors Co.
Adolph
Coors Co.
Labbatt
USA
Labbatt
USA
Grupo
Modelo
Grupo
Modelo
75
Anheuser-Busch Portfolio 2002
Michelob (1%)
Michelob Light (3%)
Michelob Ultra (0%)
Other (6%)
Budweiser 32%
Bud Light 36% Busch 7%
Bacardi Silver 1%
Busch Light 6%
Natural Light 8%
Figure II.D.1.b.2: Anheuser-Busch¡¦s portfolio in 2002.
market growth
low high
market share
high low
+100%
$ 2.05
6.0%
Growth rate
Profit margins
Portfolio share
-3%
$1.66
32%
+9%
$1.66
36%
+2.0%
$0.66
6%
-3%
$0.66
7%
+1.5%
$ ?
8%
Legend:
Figure II.D.1.e.1: Anheuser-Busch¡¦s product portfolio presented in the BCG matrix. Note,
given shares present the percentage within the Anheuser-Busch portfolio, not the total market
share. Anheuser-Busch owns approximately 50% of the total US Beer market. 253
76
Inbound logistics
¡E Vertical integration
3 malt plans
1 Rice mill
8 can packaging plants
3 can lid manufacturing
plants
1 Glass manufacturing
plant
1 Crown and cork plant
1 Alu can recycle plant
(world¡¦s largest)
Operations
¡E 12 production facilities
covering continental US.
¡E All plants are state-of-theart
¡E Minimal freight costs
¡E Operating at 96% capacity
¡E Economy of scale (A-B is
the most cost-effective
player)
¡E Higher leverage in the
distribution channel
Outbound logistics
¡E 67% of production is sold
through exclusive
wholesalers (increasing!)
¡E 80% of wholesalers
exclusively sell A-B
¡E A-B owns 13 wholesalers
¡E Highly efficient interaction
with downstream supply
chain
¡E Ability to instantaneously
react to changes in consumer
patterns.
Marketing & Sales
¡E Largest ad and promotion
budget of all beer producers
($650 million)
¡E Lowest advertising/barrel
costs of all beer companies
¡E Ad campaigns have highest
impact on target group.
¡E Budweiser ad campaign
well known.
¡E Leading market share
position in all retail channels
(prime player in
convenience stores that earn
the highest margins)
¡E Strong reputation among
wholesalers
¡E Broadest portfolio of all
US beer manufacturers
Financial and org. structure
Human Resources
Technology Development
Procurement
¡E Development of new brands (Michelob Ultra and World Select)
¡E Dev. of super-premium low carbonhydrate beer
¡E Busch Agricultural Resources, Inc., (BARI) researches and develops brewing ingredients
¡E Strong management team with years of specific industry experience (Busch family: 1 1/2 centuries!)
¡E Very disciplined portfolio management
¡E Clear vision and execution of international expansion strategy
¡E Strong emphasis on execution, high operational efficiency
Cost
Value
¡E Impact selling: Continuous education of sales force and distributors (considered to be best-of-class)
¡E BudNet: IT-based market intelligence system
¡E Highest net profit margins in the industry
¡E Lowest average days to collect receivables
¡E Strong cash flow with lowest cost structure in the industry
Figure II.D.1.f.1: A selection of value and cost drivers contributing to Anheuser-Busch¡¦s value
chain.
Inbound logistics
¡E Packaging technologies
contributed by Owens –
Brockway
¡E Secures contracts for vital
inputs to its brewing
operations ¡V ex: barley
Operations
¡E Asset Care ¡V forecasted
maintenance program for
brewing facilities
¡EPreventative maintenance
programs ¡V outsourced
¡ECompleted two year project
on plant upgrade with Ball
Corporation
¡ECreated virtual laboratories
to increase productivity and
improve quality control
Outbound logistics
¡E New system allow for
distributors to gain control
of their orders to improve
tracking and delivery
¡EShared distribution system
with Miller
¡EPartnership with Molsen for
distribution of its beer in the
US
¡EOutsourcing of keg
ownership/management ¡V
partnership with TrenStar
Inc
¡EISO tank containers used
for international transport ¡V
equipped with refrigeration
units
Marketing & Sales
¡E Introduction of Aspen Edge
¡V low carbohydrate beer
offering
¡ERepositioning of Zima in the
¡§malternative¡¨ product
segment
¡EStrong light beer brand ¡V
Coors Light
¡EInvestment in three types of
advertising media ¡V
traditional advertising,
product news, ¡§close-tomarket¡¨
promotion
¡ETIPS training for customers
¡V how to become responsible
servers
¡EDatabase systems for
targeting and positioning
Financial and Org. structure
Human Resources
Technology Development
Procurement
¡E Improved dispense technology ¡V pint can be served at two degree¡¦s above freezing
¡E Updated supply chain management systems
¡E Ciber system for best practices in governance to meet requirements of Sarbanes-Oxley Act
¡E Ice bucket box transforms into cooler for outdoor events/parties
¡E Good cash flow with improving cost structure
¡E Aggressive debt reduction ¡V reduced by 1/3 in just two years
¡E Higher than average advertising expenditures
¡E Reorganization of US sales and marketing groups
— Cost Drivers
Legend:
— Value Drivers
¡EClose partnerships with suppliers ¡V Ball Corp 50/50 venture to secure supply of cans
¡V Graphic Packaging supplies most paperboard products, was once a
fully-owned subsidiary
¡EUtilizes e-procurement initiatives for indirect suppliers ¡V ¡§ERIC¡¨
¡E Strong culture where employees are recognized for every achievement of the organization
¡E People at the core of their strategic plan ¡V good benefits!
¡E Diversity programs for hiring and maintaining minority workers
¡E Promote social responsibility in employee practices ¡V hired taxis for everyone at Co. parties
Figure II.D.3.e.1: A selection of value and cost drivers contributing to Adolph Coors¡¦ value
chain.
77
Figure II.D.5.1: Value chain and willingness to pay analysis for three different Anheuser-Busch product lines. All numerical data are taken from
reference254 and are averaged across the US market. These products represent three different market segments and are intended to show the
profit distribution across the value chain
$4.17 $4.17 $3.97
$1.23 $1.23
$0.53
$1.43 $1.43
$1.43
$0.54 $0.54
$0.54
$0.87 $0.77
$0.56
$0.39 $0.35
$0.28
$0.67 $0.59
$0.42
$0.95 $0.83
$0.56
$2.10
$2.10
$2.10
$2.05
$1.66
$0.65
$1.71
$0.75
$0.41
$1.40
$0.98
$0.23
COGS
SG&A
Excise tax
State tax & freight
Delivery
Warehousing
Pre-sell
SG&A
Anheuser-Busch Wholesale Retail
Operating
Income
Anheuser-Busch
Wholesale
Retail Costs
SG&A
$17.51
$15.40
$11.68
Retail price (excl. sales tax)
P-C:
Firms¡¦ surplus
V-P:
Buyers¡¦ surplus
¡E High quality
ingredients
¡E Full body flavor
¡E Brand image
¡E Low-carb (light
version)
Ultra-Premium
(Michelob)
Premium
(Budweiser)
Popular
(Busch)
¡E Freshness
¡E ¡¥Male image¡¦
¡E Brand image
¡E ¡¥Hey, it is beer!¡¦
78
Figure II.E.a.1: Strategic groups in the US beer industry: Brewpubs, Craft Brewers, Regional
Brewers, and Mass Manufacturers (from left to right). Size of circles does not scale with
revenue.
Figure II.E.a.2: Market share of the leading microbrewers in the US craft beer industry255
New Belgium
Brewing
5.0%
F.X.Matt
Brewing C.
4.7%
Redhock Ale
Brewery
4.4%
Boston Beer
Co.
24.9%
Jacob
Leinenkugel
Brewing Co.
6.7%
Sierra Nevada
Brewing C.
11.1%
Spoetzl
Brewing Co.
5.0%
Others
36.2%
Low Medium High
Anheuser
Busch
Miller
Corona
Heineken
Pabst
Stroh¡¦s
Coors
Craft
brewers
Local Regional National Global
Price, product differentiation
Customer sophistication
Distribution
Brew pubs Guiness
Labatt
79
0
5,000
10,000
15,000
20,000
25,000
(000’s of 2.25 Gallon Cases)
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Figure II.E.c.1: Annual production of craft beer industry. Visible is the strong ramp during the
early- and mid-nineties plus the leveling-off beginning in 1998. As discussed in the text, counter
actions taken by the mass beer manufacturers have contributed to the slowdown in the pas six
years. For discussion, see text.
80
Figure IV.A.1: Selected geographical and demographical data of the US import beer market. Underlying data have been taken from
reference256
0
10,000
20,000
30,000
40,000
50,000
60,000
(000’s of 2.25 Gallon Cases)
California
New York
Florida
Illinois
Pennsylvania
Texas
New Jersey
Massachusetts
Michigan
Virginia
Ohio
Arizona
Georgia
North Carolina
Colorado
Nevada
Maryland
Washington
Connecticut
Wisconsin
Top 20 States for Imported Beer
0%
5%
10%
15%
20%
25%
30%
35%
40%
by Beer Category
Graduate
Degree
Attended
Graduate
School
Graduated
College
Attended
College
Graduated
High School
Attended
High School
Regular beer
Non-Alcoholic beer
Micro/Specialty Beer
Imported beer
Population
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
(000’s of 2.25 Gallon Cases)
Los Angeles, CA
New York, NY
Chicago, IL
Philadelphia, PA
Boston area, MA
Nassau-Suffolk, NY
Phoenix, AZ
Las Vegas, NV
Washington, DC
Orange Couny, CA
Detroit, MI
San Diego, CA
Riverside, CA
Houston, TX
Oakland, CA
Tampa, FL
Dallas, TX
Atlanta, GA
San Francisco, CA
Miami, FL
Top 20 Metropolitan Areas for Imported Beer
0%
10%
20%
30%
40%
50%
60%
Income Distribution of Consumers
by Beer Category
$75,000 &
over
$60,000 –
$74,999
$50,000 –
$59,999
$40,000 –
$49,999
$30,000 –
$39,999
$20,000 –
$29,999
Under
$20,000
Regular beer
Non-Alcoholic beer
Micro/Specialty Beer
Imported beer
Population
81
L¡¦Arche Holding SA
Heineken Holding NV
Ensure Heineken NV¡¦s
Steady growth and long term continuity
Heineken NV-Manage
Operation and Develop
Strategies
¡§Take Heineken to the Next Level¡¨ ¡VImprove
operation efficiency, build good distribution and
strong brand
R&DPackaging,
IT,
Distribution,etc.
Heineken
University
E-Learning
Policy and Control:
Marketing, Production, Finance,
HR,IT,Legal
Facilities and Support Staff:
Technical Services, Security,
Administrators
Operating
Companies
Operating
Companies
Cluster-
Small
OCs
Operating
Companies
Operating
Companies
Operating
Companies
Local Management makes local decisions, under corporate guidelines
3-tier Admin
Structure
Supervisory Board
of Heineken NV
supervises the
Executive Board
Information Flow to Heineken NV
Figure III.C.1.1: Summary of Heineken structure and its resources and capabilities
L¡¦Arche Holding S.A. Heineken Holding
NV Heineken NV
50.005% 50.005%
Figure III.C.1.2: Ownership Structure of Heineken
82
Wine and spirits
7%
Beer
79%
Others
3%
Soft drinks
11%
Figure III.D.1.a.1: Relative contributions of Heineken¡¦s businesses to the company¡¦s overall
revenue
Greece
9%
France
16%
Spain
6%
Other
7%
Africa
4%
Asia
5%
Italy
4%
Netherlands
10%
Poland
13%
USA
26%
Figure III.D.1.1: Heineken¡¦s profit broken down by geographies
83
Figure III.D.b.1: Heineken¡¦s M&A history from 1927 to 2004
Date Name Country Stake
1927 Brasserie Leopold Belgium
1931 Malayan Breweries (now APB) Singapore 50.00%
1933 First exports to USA USA
1935 Angola
1935 Egypt
1935 Morocco
1935 Dutch East Indies
1935 French Indochina
1935 Belgian Congo
1935 Palestine
1941 ABC Brewery Singapore
1946 Nigerian Breweries Nigeria under 50%
1951 Vrumona soft drinks Netherlands 50.00%
1955 South Pacific Brewery Papua New Guinea
Mouterij Albert Belgium 50.00%
1960 Cisalpina Italy 6.00%
1962 Brasseries Lorraine Martinique
1967 Multi Bintang Indonesia
1968 Amstel Netherlands
Surinam
Curacao
Jordan
Lebanon
Greece
Madagascar
1971 Interbra Central Africa
1972 Alsacienne de Brasserie France over 50%
1974 Grande Brasserie New Caledonia
1974 National Brewing Company Trinidad
1980 Mouterij Ruisbroek Belgium
1982 Bralima Central Africa over 50%
1982 Brewery De Ridder Netherlands over 50%
1983 Murphy’s Ireland
1983 Kaiser Brazil 14.20%
1984 UDB and Pelforth France 51.00%
1984 El Aguila Spain 36.70%
1984 Quilmes Argentina 15.00%
1984 Commonwealth Breweries Bahamas 48.00%
1984 Cerveceria Bohemia Dominican Republic 8.50%
1984 Brasserie Nationale d’Haiti Haiti 10.50%
1984 Internationale Brasserie Cameroon 34.00%
1984 Brasseries et Limonaderies Burundi over 50%
1985 Breweries of Greece Greece
1985 Brasseries de Bourbon Reunion 51.00%
1988 Shanghai Mila China
1989 Royal Brand Netherlands
1991 VMCo Import Company USA
1991 Dominion Breweries New Zealand
1991 Komaromi Sorgyar Hungary 50.30%
1994 Withdrawal from Dutch spirits Netherlands
Mar-94 Zywiec Breweries Poland 24.9% 35
Mar-94 Komaromi Sorgyar Hungary 100.0% 34
Apr-94 Calanda Haldengut Switzerland 93.0% 57
Aug-94 El Aguila Spain 64.3% 64
Sep-94 Hainan Brewery China 80.0% 54
Oct-94 Cambodia Brewery Cambodia 80.0% 20
Oct-94 Zagorka Brewery Bulgaria 80.0% 17
Feb-95 Interbrew Italia Italy 100.0% 34
Mar-95 Myanmar Brewery Myanmar 60.0% 39
Aug-95 Multi Bintang Indonesia 75.9% 57
Oct-95 Zlaty Bazant Slovakia 66.0% N/A
Dec-95 Zywiec Breweries Poland 31.8% N/A
Feb-96 Fischer Group France 54.4% N/A
Feb-96 Groupe Saint-Arnould France 66.0% N/A
Feb-96 Birra Moretti Italy 100.0% N/A
Jun-96 Hatay Brewery Vietnam 55.0% 190
Jul-96 Withdrawal Burma Myanmar 60.0% NLG 87m
Jul-96 Moerdijk Netherlands 33.5% 59
Oct-96 Nigerian Breweries Nigeria 15.0% N/A
Oct-96 Kumasi Breweries Ghana 25.0%
Jun-97 ABC Brewery Ghana 90.0% N/A
Nov-97 El Aguila Spain increase to 71.33% N/A
Jan-98 Karsay Nitra Czech 49.0% N/A
Mar-98 Zywiec Breweries Poland 50.0% 50
May-98 Zywiec Breweries Poland 75.0% 70
Jun-98 Merger Zywiec & BrewPole Poland 50.0% 45
Oct-98 Pivara Skopje Macedonia 25.0% N/A
May-99 Calanda-Haldengut Switzerland extra 15% 13
Sep-99 Tempo Israel 17.8%
Dec-99 Martiner and Gemer Slovakia 51.0%
Jan-00 Cruzcampo Spain 98.7%
Jan-00 DB NZ 41.6% 60
Dec-00 Nigerian Breweries Nigeria now 54.2%
Feb-01 BrauHolding Int. Germany 49.9%
Feb-02 Bravo Int. Russia 100.0% 445
Price of stake
Date Company Country % Stake [Mio NLG]
84
Feature
Exploited by
organization ?
Competitive
Implication
Economic
Performance
Yes/
No ? Explanation
Yes/
No ? Explanation
Yes/
No ? Explanation
Yes/
No ? Explanation Reference
Distribution depots
serving wholesalers
Yes
10 company-owned
distribution depots
strategically placed across
the continental US, holding
stock for wholesalers for
further distribution. Reduces
inventory levels from 6
weeks down to only 10 days!
Increases Working capital.
Reduces lead time from
production in Holland to
consumption in the US from
80 down to 45 days.
No
In terms of comprabable
resources, A-B, Miller and
Coors combined have a
broader distribution channel
in N.A. then Heineken USA.
While these companies may
have some hubs designed to
service their wholesale
partners these companies
also have regional brewing
facilities that serve the same
purpose.
No
Can be copied by any
importer at any time without
any further restrictions
Yes
In 1999, Heineken started to
fully exploit this strategy. In
response to a Anheuser-
Busch marketing campaign
stressing the freshness of
their products. Parity. Above normal
Holland, Andrew, Matthew
Jordan, and Jamie Norman,
Heineken: Bottling up growth,
ABN-AMRO CROSS INDUSTRY
COMPARISONS, VALUATION
ISSUES, 7 February 2002, p.28.
International
orientation
Yes
As Heineken has a very
small home base market, the
company has developed a
long-standing tradition(more
than hundred years) in
exploring and exploiting
international growth
opportunities. Its main
competitor, Anheuser-Busch,
mostly focused on its
domestic market. It was not
until 1981 that the company
started international
operations.
Yes Other competitors such as
Interbrew and Ambev have
the same kind of global
strategy, but they can not
duplicate Heineken’s longstanding
presence,
particularly in the European
markets.
Yes This advantage mostly
consists of long-term
intangible assets, that are
very difficult to observe or
copy. Tangible assets
include brand, people skills,
and relationships. Path
dependence.
Yes
Yes, most of Heineken’s
growth comes from
international operations.
Sustained
competitive
Advantage Above normal
Gibbs, Mike, Nigel Parson, and
James Wheatcroft, Heineken,
Initiation of coverage, WestLB
Panmure, 8 February 2000, p.14.
Brand Recognition &
Capabiltities
Yes
Heineken is sold into more
than 170 countries. In only
two geographies (UK and
Netherlands), it is not priced
and marketed as a premium
brand. On average, its price
is 18% above standard
brands.
Yes
While other there are other
brewers that are larger in
size than Heineken, A-B and
Interbrew. A-B’s core brand,
Budwieser is dominated by
US sales. As well Interbrew
does not have a global
brand.
Yes
Heineken’s capabiltites in
branding and its ability to
leverage competnecies in
marketing and advertising
resources allows it to benefit
from th e social complexity
these capabiltiies have
created.
Yes
Heineken fully exploits this
strategy.
Sustained
competitive
advantage Above normal
Gibbs, Mike, Nigel Parson, and
James Wheatcroft,
Heineken,Initiation of coverage,
WestLB Panmure, 8 February
2000, p.32.
Heineken’s “Virtual
Corporat Office”
Yes
In (or close to ) its home
market, Heineken develops
innovations in techniques
and technologies addressing
purchasing, production,
distribution, logistics, and
packaging. Acquired
knowledge will be shared
across all geographies using
a company-proprietary online
information system.
Yes
Systems at other companies
may be comprable in
functionality, but the value is
in the processes supported
by the systems.
Yes
While the implementation of
the IT system should not
present any technical
challenge, the underlying
corporate mindset and
culture may be difficult to
copy by any competitor
inexperienced with
international operations.
Social complexity.
Yes
Heineken fully exploits this
strategy.
Sustained
competitive
advantage Above normal
Gibbs, Mike, Nigel Parson, and
James Wheatcroft,
Heineken,Initiation of coverage,
WestLB Panmure, 8 February
2000, p.47.
Valuable ?
Costly to imitate
?
Rare ?
Figure III.D.2.c.1: VRIO analysis for Heineken, part I. When possible, Heineken USA specific drivers are listed.
85
Feature
Exploited
by
organizatio
n ?
Competitive
Implication
Economic
Performanc
e
Yes/
No ? Explanation
Yes/
No ? Explanation
Yes/
No ? Explanation
Yes/
No ? Explanation Reference
‘Heinekenization’
Yes
Heineken has a longstanding
track record of
successfully acquiring capitalweak
domestic companies.
The company will then
impose its management and
production processes.
Taking advantage of
economy of scale, Heineken
will use the re-invest the
gained profits to build the
brand and expand its market
position in the respective
country.
Yes
Our research indicated that
Heineken has perfected this
business procedure through
decades of learning and
practice.
Yes
The high learning costs
involved in these processes
will effectively slow down
competitors attempting to
copy this strategy.
Yes
Heineken has been
exploiting this practice for
many decades.
Sustained
competitive
advantage. Above normal
Gibbs, Mike, Nigel Parson, and
James Wheatcroft,
Heineken,Initiation of coverage,
WestLB Panmure, 8 February
2000, p.27.
HOPS (Heineken
Operational Planning
System)
Yes
Heineken USA has
introduced an online
interactive IT system
allowing real-time
forecasting,
replenishment, and ordering
interaction with 450
distributors. Order cycle
times came down from three
months to
four weeks, forecasting
errors went down by 15%,
and sakles went up by 20%
No
Though Heineken was the
first US beer manufacturer in
1995 to utilize this new
technology, competitors
meanwhile have installed
their own technology.
No
Other competitors have
already implemented their
own IT systems.
Yes
Heineken USA fully relies on
this tool. Parity. Normal
https://www.businessweek.com/ads
ections/chain/2.1/logility.html
Brewing Operations
Yes
With 110 breweries in 60
countries Heineken is the
thrid largest brewer in the
world. The consistancy in
brewing processes and
quality across all brewing
operations has given
Heineken a reputation for
excellence in brewing which
creates value for customers.
No
Interbrew and Ambev have
recently announced a
potential merger that would
make the combined
company the largest brewer
in the world with 14% total
market share worldwide.
No While most breweries do not
have the economies of scale
Heineken does, it is possible
for its competitors to amass
the similarly scaled brewing
operations.
Yes
Heineken fully utilizes its
brewing resoures Parity. Normal
Heineken 2003 Annual Report
“A-B may have to relinqish
‘world’s largest brewer’ title.” St.
Louis Business Journal [online]. 3
Mar 2004 [cited 5 June 2004]

Strategic
Partnerships
Yes Given Heineken’s size and
abilities in brewing,
distiribution, branding and
systems, the company has
been able to command the
attention from many other
companies through
partnerships.
Yes Establishing partnerships in
the indsutry is not rare.
Heineken’s partners are
leveraged in unique and
strategic ways in order to
provide greater value to the
company, customers and
suppliers.
Yes
In partnerships with foreign
brewers, Heineken is able to
create value through
strategic alliances for not
only itself, but for other
companies. It’s partners are
able to capitalize on the
causal ambiguities and
social complexity Heineken
has established; specifically
in sharing quality processes
and capabitlities.
Yes
Heineken utilizes its partners
strategically.
Sustained
competitive
advantage. Above normal
Valuable ?
Rare ?
Costly to
imitate ?
Figure III.D.2.c.2: VRIO analysis for Heineken, part II. When possible, Heineken USA specific drivers are listed.
86
Figure III.D.2.b.1: A selection of value and cost drivers contributing to Heineken¡¦ value chain.
Supply
¡EP urchasing power¡V largest brewer in Europe and world ¡¦ s 3 rd largest
¡E HOPS system ¡V demand planning in the US
R & D
¡E Programs span the
supply chain
¡E Has close ties to research institutes and
universities
¡E Heineken Technical
Services
Infrastructur
Human
Technology
Procuremen
¡E Local management under corporate guideline¡Vsb randing, distribution, production efficiencies ¡E M&A division created in 2002
¡E Close partnerships with importers in US mark-et> ownership of Star Brand Imports
¡E Centralized support department¡Vs Finance, Human Resources, R&D, Production, Marketing ¡E Access to 4B euros in financing
¡E HR programs ¡V Heineken University
¡E Emphasis on ¡§ young minds¡¨ given the appointment of Ruys, CEO
¡EH eineken Partner Network¡V network of expatriate partners around the world
¡EH eineken CSR programs¡V Corp. Social Responsibility
Brewing &
¡E 110 breweries around
the world
¡ENew production
facilities in China in
2004 to service the
world largest beer
market
¡EQuality systems for
glass packaging –
Biotrace contamination
testing
Marketing/Brand
¡E Brand portfolio mix
¡V optimized for
profitability
¡E Programs to increase
brand equity ¡VBeacon,
¡§ Thirst¡¨, Music
downloads
¡E 13% of sales spent on
advertising in the US
market
¡E Increased sales force
in the US ¡V expanding
market presence
Distributio
¡E Network of 450
distributors in the US
¡EPenetration of the
channel ¡V 77% (v A-B at 80%)
¡EOut-of-house resource for cooperage ¡V
Kegspediter
¡E Improved Hops & Barley
¡EI nsight filled- bottle inspection system-sdetection technology for glass/foreign particles in bottles
¡E Corporate communications system¡Vs online resources from Tridion/Blast Radius
¡E BeerTender, Tapvat, Aluminum bottles
¡EC lose relationships with supply partner¡Vs Rexam bottle manufacturing divestment, continued sole source
¡EC entral/Joint purchasing¡V to leverage buying power
–Value Drivers
–Cost Drivers
87
Exhibit III.D.3.a.1: Restated 5-Year Income Statement for Years Ended July 31
1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003
Revenue 6,164,400 7,014,000 7,937,000 9,011,000 9,255,000 100.0% 100.0% 100.0% 100.0% 100.0% 13.0% 13.8% 13.2% 13.5% 2.7%
Cost of Goods Sold (3,141,200) (3,395,000) (3,775,000) (4,196,000) (4,453,506) 51.0% 48.4% 47.6% 46.6% 48.1% 10.5% 8.1% 11.2% 11.2% 6.1%
Gross Profit 3,023,200 3,619,000 4,162,000 4,815,000 4,801,494 49.0% 51.6% 52.4% 53.4% 51.9% 15.9% 19.7% 15.0% 15.7% -0.3%
SG&A Expense (1,796,200) (2,230,000) (2,561,000) (3,047,000) (3,026,494) 29.1% 31.8% 32.3% 33.8% 32.7% 13.9% 24.2% 14.8% 19.0% -0.7%
EBITDA 1,227,000 1,389,000 1,601,000 1,768,000 1,775,000 19.9% 19.8% 20.2% 19.6% 19.2% 18.9% 13.2% 15.3% 10.4% 0.4%
Deprec./Amort (355,200) (414,000) (454,000) (486,000) (553,000) 5.8% 5.9% 5.7% 5.4% 6.0% 4.5% 16.6% 9.7% 7.0% 13.8%
EBIT 871,800 975,000 1,147,000 1,282,000 1,222,000 14.1% 13.9% 14.5% 14.2% 13.2% 26.0% 11.8% 17.6% 11.8% -4.7%
Interest Expense (80,100) (109,000) (118,000) (146,000) (180,000) 1.3% 1.6% 1.5% 1.6% 1.9% 50.5% 36.1% 8.3% 23.7% 23.3%
Non-Oper Income 17,500 48,000 70,000 85,000 141,000 0.3% 0.7% 0.9% 0.9% 1.5% -67.0% 174.3% 45.8% 21.4% 65.9%
EBT 809,200 914,000 1,099,000 1,221,000 1,183,000 13.1% 13.0% 13.8% 13.6% 12.8% 17.0% 13.0% 20.2% 11.1% -3.1%
Income Taxes (264,800) (277,000) (327,000) (364,000) (319,000) 4.3% 3.9% 4.1% 4.0% 3.4% 12.7% 4.6% 18.1% 11.3% -12.4%
Min Int in Earnings (28,000) (16,000) (57,000) (62,000) (66,000) 0.5% 0.2% 0.7% 0.7% 0.7% 132.9% -42.9% 256.3% 8.8% 6.5%
Other Income (Loss) 0 0 0 0 0 0.0% 0.0% 0.0% 0.0% 0.0% n/a n/a n/a n/a n/a
NI before Ext. Items 516,400 621,000 715,000 795,000 798,000 8.4% 8.9% 9.0% 8.8% 8.6% 16.1% 20.3% 15.1% 11.2% 0.4%
Ext. Items & Disc. Ops. 0 0 52,000 0 0 0.0% 0.0% 0.7% 0.0% 0.0% n/a n/a n/a -100.0% n/a
NI avail to common 516,400 621,000 767,000 795,000 798,000 8.4% 8.9% 9.7% 8.8% 8.6% 16.1% 20.3% 23.5% 3.7% 0.4%
Restated Income Statement Common Size Income Statement Income Statement Analysis
(000) (% of Sales) (CY over PY % Change)
88
Exhibit III.D.3.a.2: Income Statement Trend Graphs
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
1999 2000 2001 2002 2003
Revenue
COGS
SG&A
Net Income
Income Statement Items
(£á 000)
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
1999 2000 2001 2002 2003
Revenue
COGS
SG&A
Net Income
Income Statement Items
(% Growth Year Over Year)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
1999 2000 2001 2002 2003
COGS
SG&A
Other Exp
NI
Income Statement Items
as % of Revenue
89
Exhibit III.D.3.a.3: Restated Balance Sheet as of 12/31
Assets (MS) 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
Cash & Equivalents 1,207 824 1,175 778 1,416 20.1% 13.1% 16.3% 10.0% 13.0% 27.4% -31.8% 42.6% -33.8% 82.0%
Net Receivables 791 900 1,042 1,110 1,379 13.1% 14.3% 14.4% 14.3% 12.7% 14.4% 13.8% 15.8% 6.5% 24.2%
Inventories 490 550 692 765 834 8.1% 8.7% 9.6% 9.8% 7.7% 8.5% 12.2% 25.8% 10.5% 9.0%
Other Current Assets 112 124 150 160 0 1.9% 2.0% 2.1% 2.1% 0.0% 33.3% 11.2% 21.0% 6.7% -100.0%
Total Current Assets 2,600 2,398 3,059 2,813 3,629 43.2% 38.1% 42.4% 36.2% 33.3% 19.5% -7.8% 27.6% -8.0% 29.0%
Prop Plant Eq-Gross 7,316 8,052 9,017 9,897 10,980 121.6% 128.0% 124.9% 127.2% 100.8% 12.9% 10.1% 12.0% 9.8% 10.9%
Accum Depreciation 4,321 4,776 5,403 5,803 5,985 71.8% 75.9% 74.9% 74.6% 54.9% 12.6% 10.5% 13.1% 7.4% 3.1%
Net PP&E 2,995 3,276 3,614 4,094 4,995 49.8% 52.1% 50.1% 52.6% 45.8% 13.3% 9.4% 10.3% 13.3% 22.0%
Other Investments 233 336 348 423 1,122 3.9% 5.3% 4.8% 5.4% 10.3% -0.3% 44.4% 3.6% 21.6% 165.2%
Other Non-Current Assets 189 279 196 451 1,151 3.1% 4.4% 2.7% 5.8% 10.6% -26.3% 47.6% -29.7% 130.1% 155.2%
Total Assets 6,017 6,289 7,217 7,781 10,897 100.0% 100.0% 100.0% 100.0% 100.0% 13.4% 4.5% 14.8% 7.8% 40.0%
Liabilities (000’S)
Accounts Payable 457 529 620 629 745 7.6% 8.4% 8.6% 8.1% 6.8% 11.1% 15.7% 17.2% 1.5% 18.4%
S/T Debt & Curr L/T Debt 323 232 329 778 853 5.4% 3.7% 4.6% 10.0% 7.8% 49.9% -28.1% 41.8% 136.5% 9.6%
Dividends Payable 87 78 107 105 16 1.4% 1.2% 1.5% 1.3% 0.1% 48.6% -10.1% 37.2% -1.9% -84.8%
Other Current Liab 993 1,053 1,179 1,137 1,296 16.5% 16.7% 16.3% 14.6% 11.9% 28.1% 6.1% 12.0% -3.6% 14.0%
Tot Cur Liabilities 1,860 1,892 2,235 2,649 2,910 30.9% 30.1% 31.0% 34.0% 26.7% 27.4% 1.7% 18.1% 18.5% 9.9%
Long Term Debt 449 901 781 1,215 2,721 7.5% 14.3% 10.8% 15.6% 25.0% -6.6% 100.8% -13.3% 55.6% 124.0%
Prov Risks/Charges 475 664 668 600 982 7.9% 10.6% 9.3% 7.7% 9.0% 3.3% 39.7% 0.6% -10.2% 63.7%
Minority Interest 248 124 381 393 732 4.1% 2.0% 5.3% 5.1% 6.7% -3.1% -50.0% 207.3% 3.1% 86.3%
Def Tax & Other Liab 336 312 394 381 385 5.6% 5.0% 5.5% 4.9% 3.5% 6.9% -7.2% 26.3% -3.3% 1.0%
Total Liabilities 3,368 3,893 4,459 5,238 7,730 56.0% 61.9% 61.8% 67.3% 70.9% 14.9% 20.8% 8.2% 18.8% 44.4%
Equity (000’S)
Equity Reserves 31 0 0 0 0 0.5% 0.0% 0.0% 0.0% 0.0% -16.8% -100.0% n/a n/a n/a
Common Stock/Ord Cap 712 711 784 784 784 11.8% 11.3% 10.9% 10.1% 7.2% 0.0% -0.1% 10.3% 0.0% 0.0%
Retained Earnings 1,907 1,685 1,974 1,759 2,383 31.7% 26.8% 27.4% 22.6% 21.9% 20.1% -11.6% 17.2% -10.9% 35.5%
Common Shldrs Equity 2,650 2,396 2,758 2,543 3,167 44.0% 38.1% 38.2% 32.7% 29.1% 11.8% -13.0% 24.6% -6.5% 32.8%
Total Liabilities & Equity 6,017 6,289 7,217 7,781 10,897 100.0% 100.0% 100.0% 100.0% 100.0% 13.4% 4.5% 14.8% 7.8% 40.0%
Common Size Balance Sheet
as a % of Total Assets
Balance Sheet Analysis
(CY over PY % Change)
Restated Balance Sheet as of 12/31
(£á M)
90
Exhibit III.D.3.a.4: Trends in Heineken¡¦s Balance Sheet.
Year over Year % Increase/Decrease
-20%
-10%
0%
10%
20%
30%
40%
50%
1999 2000 2001 2002 2003
Total Current Assets
Total Assets
Tot Cur Liabilities
Total Liabilities
Balance Sheet Trends
Year over Year % Increase/Decrease
0
500
1,000
1,500
2,000
2,500
3,000
1999 2000 2001 2002 2003
£á M
Common Stock/Ord Cap
Retained Earnings
Equity Items Trend
0
1,000
2,000
3,000
4,000
5,000
6,000
1999 2000 2001 2002 2003
£á M
Net Receivables
Inventories
Net PP&E
Accounts Payable
Long Term Debt
Balance Sheet Trends
£á M
91
Fiscal Year 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
Operating:
Net Income 516,400 621,000 767,000 795,000 798,000
+Depreciation & Amortization 355,200 414,000 454,000 486,000 553,000
+Increase in Deferred Taxes 22,004 17,300 44,000 25,000 4,000
+Increase in Other Liabilities 14,823 147,100 42,000 (106,000) 382,000
+Increase in Minority Interest (14,295) (155,200) 257,000 12,000 339,000
+Preferred Dividends 0 0 0 0 0
=Funds From Operations 894,132 1,044,200 1,564,000 1,212,000 2,076,000
-Increase in Receivables (99,427) (109,000) (142,000) (68,000) (269,000)
-Increase in Inventory (38,348) (59,800) (142,000) (73,000) (69,000)
-Increase in Other Current Assets (27,879) (12,500) (26,000) (10,000) 160,000
+Increase in Accounts Payable 45,767 71,700 91,000 9,000 116,000
+Increase in Taxes Payable 68,038 (289,200) 0 0 0
+Increase in Other Curr. Liabilities 178,255 340,500 155,000 (44,000) 70,000
=Cash From Operations 1,020,538 985,900 1,500,000 1,026,000 2,084,000
Investing:
-Capital Expenditures (707,803) (694,600) (792,000) (966,000) (1,454,000)
-Increase in Investments 68,176 (193,300) 84,000 (304,000) (287,000)
-Purchases of Intangibles 0 0 (13,000) (26,000) (1,112,000)
=Cash From Investing (639,627) (887,900) (721,000) (1,296,000) (2,853,000)
Financing:
+Increase in Debt 75,398 361,900 (23,000) 883,000 1,581,000
-Divide nds Paid on Preferred 0 0 0 0 0
+Increase in Pref. Stock 0 0 0 0 0
-Dividends Paid on Common 614,100 (842,800) (478,000) (1,010,000) (174,000)
+/-Net Issuance of Common Stock 9 (500) 73,000 0 0
+/-Clean Surplus Plug (Ignore) (810,973) (1,456,900) (1,127,500) (1,010,000) (174,000)
=Cash From Financing (121,466) (481,400) (428,000) (127,000) 1,407,000
Net Change in Cash 259,445 (383,400) 351,000 (397,000) 638,000
+ Beginning Cash Balance 947,955 1,207,400 824,000 1,175,000 778,000
= Ending Cash Balance 1,207,400 824,000 1,175,000 778,000 1,416,000
Cash Flow Analysis
Exhibit III.D.3.a.5: Statement of Cash Flows (given in 1000 £á)
92
2002 2003
Asia 7 ,240 7 ,715
Africa 9 ,559 1 1,671
Americas 7 ,587 1 1,484
Cent/East Eur 1 4,188 1 8,906
W. Eur 4 6,275 4 9,191
Total 8 4,848 9 8,968
2002 2003
Asia 4 50 4 10
Africa 7 53 7 69
Americas 1 ,251 1 ,317
Cent/East Eur 8 26 1 ,005
W. Eur 5 ,731 5 ,755
Total 9 ,011 9 ,255
2002 2003
Asia 4 7 4 8
Africa 1 88 1 49
Americas 4 16 3 58
Cent/East Eur 7 8 8 3
W. Eur 5 53 5 84
Total 1 ,282 1 ,222
Beer Volumes
Operating Profit
Revenues 2003 Revenues
W. Eur
62%
Americas
14%
Africa
8%
Asia
4%
Cent/East
Europe
11%
2003 Operating Profit
Cent/East
Europe
7%
Asia
4%
Africa
12%
Americas
29%
W. Eur
48%
2003 Beer Volume
Cent/East
Europe
19%
Asia
8%
Africa
12%
Americas
12%
W. Eur
50%
Exhibit III.D.3.a.6: Statement of Cash Flows (given in 1000 £á)
93
Exhibit III.D.a.7: Heineken Financial Ratio Comparison
Ind Avg
Profitability Measures 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003 2003
Gross Margin 45.4% 45.9% 46.5% 42.9% 41.8% 41.4% 57.1% 58.9% 58.8% 60.3% 59.8% 60.8% 51.7% 52.6% 51.9% 51.7%
Net Profit Margin 13.4% 14.0% 14.7% 4.5% 4.6% 4.3% 11.9% 12.1% 11.7% 2.9% 7.8% 7.2% 8.9% 9.0% 8.6% 9.0%
Return on Net Operating Assets 19.7% 21.8% 23.6% 10.4% 10.2% 8.4% 10.7% 11.8% 11.5% 4.3% 8.4% 7.6% 4.3% 8.4% 7.6% 5.4%
Return on Equity 45.9% 56.0% 72.0% 13.3% 14.2% 14.4% 12.9% 13.4% 12.7% 4.1% 12.2% 10.7% 19.8% 20.3% 16.5% 17.2%
Growth Rates
Sales 4.7% 4.9% 4.3% 17.6% 20.8% 6.4% 18.7% 13.9% 12.7% 23.9% 8.5% 0.7% 11.2% 9.8% 2.7% 10.7%
Assets 3.3% 3.9% 4.0% 32.9% 51.1% -0.4% 17.9% 14.0% 12.3% 23.1% -0.9% -1.2% 16.1% 20.9% 40.0% 15.8%
Earnings 11.0% 10.2% 7.3% 21.3% 17.2% 8.0% 21.5% 15.2% 16.6% -99.8% -8.3% 8.1% 12.6% 8.9% 0.4% 3.4%
Operating Measures
Avg Inventory Holding Period 31.1 29.2 27.7 29.6 28.2 30.6 117.1 119.9 114.6 60.1 61.9 59.7 59.9 63.0 65.5 43.5
Avg Days to Collect Receivables 17.7 17.0 16.8 34.1 41.1 66.2 14.2 11.9 10.8 81.9 83.9 83.3 45.0 45.8 49.1 53.7
Avg Days to Pay Payables 49.8 48.9 50.3 51.1 50.7 52.1 21.7 22.0 22.0 106.5 108.9 105.3 55.1 56.7 57.2 57.2
Net Operating Asset Turnover 1.3 1.4 1.4 2.1 2.0 1.5 1.1 1.1 1.1 0.9 0.9 0.9 2.0 2.0 1.6 0.6
PP&E Turnover 1.6 1.6 1.7 3.1 3.1 2.8 1.1 1.1 1.1 1.9 2.0 2.1 2.2 2.2 2.0 2.0
Liquidity Measures
Current Ratio 0.9 0.9 0.9 1.2 1.0 1.0 4.8 4.6 4.5 0.9 0.7 0.9 1.3 1.2 1.2 1.7
Quick Ratio 0.4 0.5 0.5 0.8 0.7 0.7 2.7 2.7 2.8 0.7 0.6 0.7 0.9 0.9 1.0 0.6
EBIT Interest Coverage 8.2 8.4 8.5 31.6 32.8 5.1 -8.5 -10.9 -13.8 3.8 5.1 6.4 9.0 8.4 6.8 4.3
Leverage
Debt to Equity Ratio 1.8 2.1 2.7 0.5 0.8 1.0 0.0 0.0 0.0 0.9 0.7 0.7 0.6 0.8 1.1 0.9
CFO to Total Debt 0.5 0.5 0.4 1.8 1.5 0.4 n/a n/a n/a 0.3 0.3 0.3 1.0 0.9 0.7 0.7
Anheuser Busch Coors Grupo Modelo Interbrew Heineken
94
Exhibit III.D.3.a.8: Heineken¡¦s stock price performance in the past five years
£á 10
£á 15
£á 20
£á 25
£á 30
£á 35
£á 40
£á 45
Jan-99
Mar-99
May-99
Jul-99
Sep-99
Nov-99
Jan-00
Mar-00
May-00
Jul-00
Sep-00
Nov-00
Jan-01
Mar-01
May-01
Jul-01
Sep-01
Nov-01
Jan-02
Mar-02
May-02
Jul-02
Sep-02
Nov-02
Jan-03
Mar-03
May-03
Jul-03
Sep-03
Nov-03
Jan-04
Mar-04
May-04
£á/Share
Heineken
Coors
BUD
S&P500
Netherland Mkt
Market Performance
95
CAPM Calculation k = E(r D )=rf + (B x [E(rm)-rf]) = rf + (B x [Mkt Risk Premium])
Assumptions Term Amount
Perpetual Growth Rate g = 5.00%
Beta B = 0.15
Risk Free Rate rf = 4.75%
Expected Market Return (High) rm = 11.6%
2003 2003 Weight
7.50% 3,167 53.8%
5.29% 2,721 46.2%
5,888
WACC Calculation WACC Weight
Sensitivity
Analysis WACC @ 4% WACC @ 6% WACC @ 7%
Market Risk Premium 6.85% growth = 4% £á 13.64 £á 5.12 £á 4.00
CAPM = k 5.78% growth = 4.5% -£á 25.29 £á 9.48 £á 6.01
Effective Interest (Avg Cost of Debt) 5.29% 46% growth = 6% -£á 5.82 n/a £á 14.02
WACC (Using Weights) 5.55%
Base Case
(w/o Beer Tender) (M £á) 2002 2003 2004 2005 2006 2007 2008
Revenue (5% Growth) 9,011.0 9 ,255.0 9,717.8 10,203.6 1 0,713.8 1 1,249.5 1 1,812.0
COGS (51.9% GM) ( 4,196.0) ( 4,453.5) ( 4,664.5) (4,897.7) (5,142.6) (5,399.8) (5,669.8)
SG&A Expense (33% of Rev) ( 3,047.0) ( 3,026.5) ( 3,206.9) (3,367.2) (3,535.6) (3,712.3) (3,898.0)
Depreciation & Amortization (6% of Rev) ( 486.0) ( 553.0) ( 583.1) (612.2) (642.8) (675.0) (708.7)
Other (5% of Rev) ( 487.0) (424.0) (485.9) (510.2) (535.7) (562.5) (590.6)
NI available to Common Shareholders 795.0 7 98.0 777.4 816.3 8 57.1 9 00.0 9 45.0 1 80,055
NPV £á 96,296
# Shrs 391,980,000 £á/Shares £á 24.57
Scenario 1 – w/Beer Tender
(Latent Demand Only) (M £á) 2002 2003 2004 2005 2006 2007 2008
Base NI Available to Shareholders 795.0 7 98.0 777.42 816.29 8 57.11 8 99.96 9 44.96
New Revenues from Beer Tender 0.37 1.46 1 .52 1 .58 1 .64
Reduced COGs 0.76 3.04 3.16 3 .29 3 .42
NI available to Common Shareholders 795 7 98 778.5 820.8 8 61.8 9 04.8 9 50.0 1 81,020
NPV £á 96,809
# Shrs 391,980,000 £á/Shares £á 24.70
Scenario 2 – w/Beer Tender
(Hit Promotional Goals) (M £á) 2002 2003 2004 2005 2006 2007 2008
Base NI Available to Shareholders 795.0 7 98.0 778.55 820.79 8 61.79 9 04.83 9 50.02
New Revenues from Beer Tender 3.36 13.45 1 3.98 1 4.54 1 5.13
Reduced COGs 2.29 9.14 9.51 9 .89 1 0.28
NI available to Common Shareholders 795 7 98 784 843 8 85 9 29 9 75 1 85,861
NPV £á 99,386
# Shrs 391,980,000 £á/Shares £á 25.35
Projected
Scenario 3 – w/Beer Tender
(w/Choices and Price ¡ô) (M £á)
2002 2003 2004 2005 2006 2007 2008
Base NI Available to Shareholders 795.0 7 98.0 777.42 816.29 8 57.11 8 99.96 9 44.96
New Revenues from Beer Tender 12.15 48.60 5 0.54 5 2.56 5 4.67
Reduced COGs 4.38 17.51 18.21 1 8.93 1 9.69
NI available to Common Shareholders 795 7 98 794 882 9 26 9 71 1 ,019 1 94,223
NPV £á 103,836
# Shrs 391,980,000 £á/Shares £á 26.49
£á/Share % Change
£á 24.57
£á 24.70 0.5%
£á 25.35 3.2%
£á 26.49 7.8%
Scenario 1 – (Beer Tender & Latent Demand)
Base Case – (w/o Beer Tender)
Weight
54%
Prior Periods
Proforma DCF Scenario Valuation Analysis
Equity
Debt
Effective Interest Rate
Discounted Cost @ 29.5% Effective Tax Rate
Calculated S&P 500 Return from 12/31/02 – Present
Projected
Terminal
Value
Prior Periods
Total Debt & Equity
Cost of Debt
How Determined
Estimate of large established firm
Provided by Factiva from 2003 data (06/02/04)
10 Yr Treasury Bill Yield from www.finance.yahoo.com (06/04/04)
Scenario 3 – (w/Beer Tender & Choices & Price ¡ô)
Results
Projected
Projected
Terminal
Value
Prior Periods
Terminal
Value
Prior Periods
Terminal
Value
Scenario 2 – (w/Beer Tender & Hit Promotional Goals)
Exhibit III.D.3.a.9: Heineken Valuation Analysis
96
Exhibit III.D.3.a.10: BeerTender Scenario Analysis
Distribution
Level COGS Margin REV
Import Market 11.4% 321,000,000 Mfg $ 7.88 27% $ 10.80
Super Prem/Micro Beer 7.6% 214,370,000 Wholesaler $ 10.80 25% $ 14.40
Estimated Cases in Market = 535,370,000 Store $ 14.40 25% $ 19.20
Taxes $ 19.20 40% $ 32.00
Current Proposed
Wholesale
$/Case Initial Price
Scen#3 Increased
Price
Packaging Costs $1.87 $0.00 Retail Price $32.00 $34.50
Refill Handling Chgs $0.00 $0.37 Markup 66% 66%
Total Savings/Case = $1.87 $0.37 Whlsle Price $ 10.80 $11.64
Net Savings with Beer Tender = $1.50
Selling Wholesale Price $US/Case $10.80 $10.80
Old Cost @ 27% Margin $7.88 $6.39
New Profit/Case $2.92 $4.41 New Rev =
Operating Margin 27.0% 40.9%
Scenario#1
% Will Buy
Beer Tenders
% Cannibalized
Heineken
Drinkers
New Heineken
Sales
Heinken Insiders (100% Home Drinkers) 0.61% 100% 0
Heinken Majority (50% Home Drinkers) 0.19% 50% 0
Novelty Seekers (75% Home Drinkers) 0.06% 75% 240,917
Home Bodies (100% Home Drinkers) 0.07% 100% 374,759
615,676
$10.80 Selling Price
$6,649,295 = Total Revenue
40.9% x Profit Margin
$2,716,360 = Net Profit Increase (new Sales)
£á 2,215,628
£á 1,462,315
Scenario#2
% Will Buy
Beer Tenders
% Cannibalized
Heineken
Drinkers
New Heineken
Sales
Heinken Insiders (100% Home Drinkers) 1.85% 100% 0
Heinken Majority (50% Home Drinkers) 0.54% 50% 0
Novelty Seekers (75% Home Drinkers) 0.41% 75% 1,646,263
Home Bodies (100% Home Drinkers) 0.75% 100% 4,015,275
5,661,538
$10.80 Selling Price
$61,144,608 = Total Revenue
Euro conversion @ £á1.226/US$ = 40.9% x Profit Margin
$24,978,705 = Net Profit Increase (new Sales)
£á 20,374,147
£á 13,446,937
`
Scenario#3
% Will Buy
Beer Tenders
% Cannibalized
Heineken
Drinkers
New Heineken
Sales
Heinken Insiders (100% Home Drinkers) 3.49% 100% 0
Heinken Majority (50% Home Drinkers) 1.14% 50% 0
Novelty Seekers (75% Home Drinkers) 1.38% 75% 5,541,080
Home Bodies (100% Home Drinkers) 2.51% 100% 13,437,787
18,978,867
$11.64 Selling Price
$220,985,177 = Total Revenue
Euro conversion @ £á1.226/US$ = 40.9% x Profit Margin
$90,276,537 = Net Profit Increase (new Sales)
£á 73,635,022
£á 48,599,115
£á 17,505,121
= After Tax @ 34% (£á)
= After Tax @ 34% (£á)
After Tax @ 34% (£á) = £á 9,140,605
= After Tax @ 34% (£á)
Total Cost Savings =
Beer Tender w/Choices and Price Increase
= Euro conversion @ £á1.226/US$
Latent Demand Only (No Marketing)
Assuming Achieve Promotional Goals
= Euro conversion @ £á1.226/US$
Total Cases
Cost Savings/Case x
Cases
Cannibalized from
Cans to BT
3,265,757
508,602
Euro conversion @ £á1.226/US$ =
After Tax @ 34% (£á) =
$/Case Estimate of Selling Price to Wholesaler
Total Cost Savings =
Lower mfg costs due to reduced bottling costs, offset
partially by refill handling
New incremental revenue from Beer Tender usage
Savings =
Margin Analysis
Estimate of the Beer Tender Market Size
Total Beer Market = 2,824,710,000 Cases/Year
Estimate of Cost Savings/Case
00
= Euro conversion @ £á1.226/US$
Total Cases
Cost Savings/Case x
Total Cases
Cost Savings/Case x
$1.50
$16,979,367
£á 13,849,402
Total Cost Savings =
After Tax @ 34% (£á) =
£á 3,039,682
1,445,499
3,774,359
$1.50
$5,646,440
£á 4,605,579
11,349,844
£á 26,522,911
$32,517,089
Cases
Cannibalized from
Cans to BT
9,904,345
Beer Tender Scenario Analysis
0
21,736,022
$1.50
Cases
Cannibalized from
Cans to BT
18,684,413
3,051,6090
00
97
Example of Four World Tours
Tour Brand Country Region
Heineken Holland Europe
“33” Export France Europe
974 Reunion Africa
ABC Stout Cambodia Asia/Pacific
1
Amstel Bright Netherlands Antilles Americas
Heineken Holland Europe
Affigem Belgium Europe
Almaza Lebanon Africa
Anchor Draft Vietnam Asia/Pacific
2
Bavaria Brazil Americas
Heineken Holland Europe
Aszok Hungary Europe
Amstel Malta Nigeria Africa
Aoke China Asia/Pacific
3
Coral Netherlands Antilles Americas
Heineken Holland Europe
Cruzcampo Spain Europe
Maccabee Egypt Africa
Export Gold New Zealand Asia/Pacific
4
Panama Panama Americas
Figure V.A.1.2.1: Example of Four World Tours
98
VIII. APPENDIX
A. ORIGINAL ARTICLE IN THE WALL STREET JOURNAL
Heineken Promotes Draft Beer at Home
By Dan Bilefsky
392 words
13 February 2004
The Wall Street Journal
B2
English
(Copyright (c) 2004, Dow Jones & Company, Inc.)
Heineken NV, the brewer that boasts it introduced Europe’s first bottled and canned beer, is launching a
home appliance that it hopes will do for beer what the coffee machine did for coffee.
Heineken said it teamed up with Groupe SEB SA, the French maker of the Krups coffee machine, to
design the device — dubbed the BeerTender — that looks like an espresso maker and comes with a fourliter
replaceable keg. The device serves draft beer and keeps it chilled for as long as five weeks. The
Dutch brewer plans to launch the machine in the Netherlands in March and then will likely introduce it
across Europe and the U.S. The BeerTender will retail for 249 euros ($319) — roughly the same price as
an upmarket home espresso maker.
However, the likelihood of beer-guzzling couch potatoes giving up their beer cans in favor of a would-be
espresso machine for beer was greeted with skepticism by beer analysts. They said the launch of the
machine underlined the desperation of global brewers to sell more beer at a time when beer consumption
is falling on both sides of the Atlantic.
“It’s hard to believe people would want to drink beer out of a machine that looks like an espresso maker
and is too expensive, but I can see it becoming hip among the beer-obsessed,” said Nicole van Putten,
beer analyst at Fortis Bank in Amsterdam. She said that in the U.S. the machine would have trouble
unseating the ubiquitous keg, which has become a feature at American house parties and barbecues and
comes in increasingly compact sizes.
Manel Vrijenhoek, a Heineken spokeswoman, said the BeerTender was meant to be a more-sophisticated
alternative to the keg, which tends to be associated with American-style fraternity parties. She said inhouse
studies have shown that more than 70% of consumers want to drink draft beer at home.
Heineken wants to tap into the growing trend of beer drinkers eschewing the bar in favor of downing a
glass of beer in their living rooms.
Heineken, which was the first foreign brewer to export beer to the U.S. after the end of Prohibition, said it
was too early to tell how much the machine would contribute to sales.
Document J000000020040213e02d00011
99
0.14
0.16
0.18
0.20
0.22
0.24
0.26
0.28
0.30
0.32
0.34
1990 1992 1994 1996 1998 2000 2002
Year
Herfindahl index
perfect
competition
Oligopoly
Figure VIII.B.1.a.1: Herfindahl index for the US Beer
industry. Calculations are based on data are taken from
reference given in the text.
B. ANALYSIS OF PORTER¡¦S FIVE FORCES IN THE U.S. BEER MARKET
1. LEVEL 1 ANALYSIS
This section presents a Level 1 analysis of the U.S. beer industry analyzing the strength
and degree of threat of each factor underlying each of Porter¡¦s five forces.
a. RIVALRY
Number of competitors, their size and power. Though there are countless players in the
U.S. beer market ranging from multi-billion global corporations over regional manufacturers
down to local brewpubs, their size and power is very unevenly distributed. In fact, the U.S. beer
market is one the most highly concentrated in the world. It is dominated by the Anheuser-Busch
Companies that command a market share of 49%, followed by SAB Miller (21%) and Coors
(11%). The CR4, commonly used to measure the concentration of an industry, is well above
80%257. The Herfindahl index, a more accurate measure, has been continuously growing over
the past more than ten years, Fig.
VIII.B.1.a.1258. Its current value of
0.293%2 indicates a strict
oligopoly. Markets with an index
above 0.18 to 0.20 are generally
considered to be oligopolistic.
Another indication of the
fierceness of the competition is that
four of the top ten players in 1980
have meanwhile been bought over
by their competitors. It is therefore
not with any surprise that on a
global scale market concentrations have generally been found to directly relate to profits per unit
earned in the respective geography, fig. VIII.B.1.a..2. The U.S. beer market counts among the
most profitable global entities, which together with its dominant size makes its incumbents the
most powerful global players. Unfavorable (5).
100
0
50,000
100,000
150,000
200,000
250,000
1940 1950 1960 1970 1980 1990 2000 2010
Year
US consumption [mill. of barrels]
0
10
20
30
40
50
60
70
80
90
100
gallons / adult
Individual consumption
Total consumption
Figure VIII.B.1.a.3: US domestic beer total and average individual
consumption over the past 50 years. Calculations are based upon
data provided in [Conway 2001].
Australia
Ireland
Greece
Netherlands
UK Unites States South Africa
Belgium Mexico Canada
France
Italy
Spain
Brazil
Argentina
0
5
10
15
20
25
65% 70% 75% 80% 85% 90% 95% 100% 105%
Market concentration CR3
Profit per barrel [US$]
Figure VIII.B.1.a.2: Profit per barrel vs. market
concentration for the world¡¦s 15 most profitable beer markets.
Industry growth. The
total beer market has been
stagnating over the past twenty
years. While it has been
expanding till the 80¡¦s with an
average growth rate of 4%,
changes in the demography and
reductions in the individual
consumption have since then led
to an average overall growth rate
of below 1%, Fig. VIII.B.1.a.3. 259
Certain markets segments, such
as the import beer market that Heineken is playing in, still grow at an annual rate of 8%260, see
figure VIII.B.1.a.4. The overall import beer market share of around 10%, however, is too small to
make a significant impact on the total market. Moderately favorable (2).
Fixed versus
variable costs. From an
operational point of view,
beer brewing is a relatively
simple business that has a
disproportional high
amount of fixed costs and is
consequently mostly driven
by economy of scale. As
most major players are
competing on costs with
transportation being a
major factor, they aim to
build large brewing capacities in strategically chosen locations. If a new entrant to the market
were to play at the national level, he would be facing substantial capital equipment investments
by the order of $100M per location (only considering brewery plants and equipment). Further,
101
80%
82%
84%
86%
88%
90%
92%
94%
96%
98%
100%
1975 1980 1985 1990 1995 2000 2005 2010 2015
Year
Market share (domestic beer) [%]
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Market share (imported beer) [%]
domestic
Imports
Figure VIII.B.1.a.4: Domestic and import beer market share over
the past 25 years
beer sales are largely driven
by brand image and
advertising. Therefore,
companies spend a
tremendous amount of
financial resources on
marketing, brand building,
advertising and promotion
to build critical momentum,
which needs to be
considered fixed costs as
well. Favorable (1).
Beer differentiation and switching costs. Beer types can be differentiated into many
different categories and nuances, among others taste, degree of bitterness, alcohol percentage,
calorie content, etc. In addition, some beer drinkers prefer locally brewed over nationwide
distributed brands. While the product is apparently vastly differentiated, the associated
quantifiable switching costs from the consumer perspective are negligible. Moderately
unfavorable (4).
Capacity is normally augmented in large increments. In principle, beer can be produced,
packaged and shipped in any chosen quantity. Unfavorable (5).
Competitor diversity. The three biggest domestic players, Anheuser-Busch, SAB Miller,
and Coors, publicly state and pursue very similar strategies261 262 263. These can be best
summarized by:
¡E Grow volume and profitability.
¡E Enhance market position by targeted acquisitions.
¡E Expand into international geographies (specifically China).
Moderately favorable (2).
High strategic stakes. The beer market is of major strategic importance to the biggest
players. While Anheuser-Busch also relies on revenue derived from packing and entertainment
parks operations (combined 20% of the total revenue), beer production is still the company¡¦s
main focus. Coors and SAB Miller solely produce beer. For this reason, every strategic move in
102
the market place will be closely monitored and its impact on the companies¡¦ strategies will be
evaluated in great detail. Favorable (1).
Exit barriers. Specialized assets and fixed costs of exit represent the largest exit barriers.
Brewery equipment is highly specialized and cannot be converted to be used for any other
production purpose. If a large-scale producer were to exit the market place, he would therefore
only be able to obsolete his production equipment. Moderately unfavorable (4).
b. THREAT OF ENTRY / BARRIERS TO ENTRY
Economies of scale. Anyone can enter the beer brewing and canning business with a
rather insignificant investment and even gain a local following of devoted consumers. For
instance, canning equipment capable of 25 cases per hour with two operators can be leased for as
little as $250 per month264. Economies of scale in the three areas of production, advertising and
distribution are the most significant factors for successful competition at the national level. Of
these three, the most significant scale factor is realized in advertising since larger producers
spread this spending over a larger market share and product portfolio than smaller brewers265.
Advertising per volume unit can vary by a factor of ten.266 The threat of entry due to the
relatively high cost of promoting the brand through advertising per hectoliter for a new entrant is
therefore low. Favorable (1).
Product differentiation. Product differentiation in the brewing industry is accomplished
in four ways; (1) taste, (2) price, (3) reputation or brand building, (4) packaging. Of these, taste,
price and brand are the most important. The consumer, of course, determines taste. All other
factors being equal, the consumer will choose the brand that has the most satisfying taste.
Packaging is sometime used to promote the brand, especially in the case of the super premium
category. For example, Heineken introduced a ¡§keg¡¨ can, which is a keg shaped can that
distinctly differentiates its appearance among all of the other brands on the shelf. As mentioned
in the previous sections, advertising and promotion are very expensive but they are the primary
ways of developing brand image and reputation. These expenses cut heavily into the delivered
product cost and subtract from the profit margin. Therefore, product differentiation presents the
same barrier to new entry and it ranks low. Favorable (1).
Capital requirements. As mentioned earlier, very little initial capital is required to
become a beer producer. In order to make significant inroads in the beer business, however, very
large amounts of sustained capital are required, especially in marketing and advertising costs.
103
For example, Heineken spent $100M on its media advertising and sponsorships in 1999267. The
threat of entry due to the difficulty of new entrants accessing raising the capital necessary to
promote their brand image is therefore low. Favorable (1).
Access to distribution channels. Access to distribution channels can be a excessive
barrier in this industry, as it is heavily regulated by the government (see section II.C.4). Since
wholesalers can choose to not carry products that produce insufficient revenues, some have made
exclusive agreements with large incumbents. The larger brewers, on the other hand, can exercise
substantial influence over wholesalers by offering them increased profit margins to exclusively
distribute their brands. As covered in section II.D.1, Anheuser-Busch has almost perfected this
practice.268
Only the top two or three brands within a category as determined by retailer demand
draw the attention of the best wholesalers. This makes the second best wholesalers in each state
even more important for the other players. Fledgling brands can ¡¥buy¡¨ the attention of
wholesalers in order to improve their presence. This practice makes it more difficult for the
smaller brewers to produce profits.269
As the U.S. wholesalers have been steadily consolidating, the third and fourth largest
wholesalers still allow the smaller share brands to penetrate the market. For brands that cannot
attract the attention of even these wholesalers, the threat of marginalization is high.
The threat of entry due to the difficulty of new entrants accessing the distribution
channels is therefore low or favorable (1).
Cost disadvantages independent of scale. Wholesalers are most interested in distributing
brands that are in high demand at the retail level.270 Just like their preference for Coke Classic,
people have acquired a taste for specific brands of beer. This preference in significant numbers
of people can only be developed over a long period of presence in the marketplace, which can
only be replaced at huge advertising and promotion expense. Empirical evidence for this is that
Heineken is the largest selling premium brand in the U.S. market. Heineken was the first non-
American beer brewer to reenter the U.S. market after Prohibition, unloading its first shipment in
port Hoboken only three days after it ended. It continued to develop its brand name recognition
by opening The Heineken Pavilion at the 1939 World Exhibition in New York City.271 The threat
of entry due to the cost of brand image development required to equal or surpass competitors that
have had a long history with beer drinkers is low. Favorable (1).
104
Government policy. The brewing industry is subject to extensive and comprehensive
federal, state, and local government regulations, see II.C.4. This makes it difficult and costly to
pursue growth throughout the entire domestic market. Favorable (1).
Expected retaliation. Since there is generally little diversification in the brewing
industry, it remains a high stakes game. Incumbents will vigorously protect their brand image,
reputation and market shares against new entrants. With the slowdown of the domestic beer
consumption, the threat of retaliation to a new entrant is increasing. This could take the form of
increased advertising and promotion or price reductions by brands that are feeling threatened by
the new entrant. Favorable (1).
c. THREAT OF SUPPLIERS / POWER OF SUPPLIERS
The four principle supplier categories in the beer industry are raw materials, brewing
equipment providers, packaging materials, and labor. Fig. VIII.B.1.c.1 below provides a synopsis
of supplier factors and figure VIII.B.1.c.2 graphically shows the supplier interaction process.
Fig. VIII.B.1.c.1: Summary of supplier power factors
The first area of analysis is the raw materials suppliers. The five ingredients required to
make beer are grain (usually barley), water, hops, and yeast.272
Supplier industry structure. Nearly all of the raw materials essential for beer
manufacturing are commodity items sold by a multitude of different producers, with the
exception of yeast, which is cultured individually at each company from strains as old as the
brewer¡¦s existence. Supplier power is therefore low and favorable to the beer industry (1).
Raw Materials
Brewing
Equipment
Providers
Packaging
Materials Labor Forces
Supplier industry structure 1, favorable 3, neutral 3, neutral 5, unfavorable
Substitutes for suppliers¡¦
product 5, unfavorable 5, unfavorable 2, moderately
favorable 5, unfavorable
Brewing industry¡¦s
importance to suppliers
2, moderately
favorable
4, moderately
unfavorable 1, favorable 4, moderately
unfavorable
Level of differentiation of
suppliers¡¦ product
4, moderately
unfavorable 3, neutral 2, moderately
favorable 3, neutral
Suppliers¡¦ threat of forward
integration 1, favorable 1, favorable 1, favorable 1, favorable
Supplier Power Factors
Categories of
analysis
Raw Materials
Brewing
Equipment
Providers
Packaging
Materials Labor Forces
Supplier industry structure 1, favorable 3, neutral 3, neutral 5, unfavorable
Substitutes for suppliers¡¦
product 5, unfavorable 5, unfavorable 2, moderately
favorable 5, unfavorable
Brewing industry¡¦s
importance to suppliers
2, moderately
favorable
4, moderately
unfavorable 1, favorable 4, moderately
unfavorable
Level of differentiation of
suppliers¡¦ product
4, moderately
unfavorable 3, neutral 2, moderately
favorable 3, neutral
Suppliers¡¦ threat of forward
integration 1, favorable 1, favorable 1, favorable 1, favorable
Supplier Power Factors
Categories of
analysis
105
Substitutes for suppliers¡¦ product. Because beer manufacturers strive for consistent taste,
there are no real substitutes for the principle ingredients. This results in a high supplier power
rating, which is unfavorable to the beer industry (5).
Brewing industry¡¦s importance to suppliers. Of the three supplied raw materials, hops is
the only material that is chiefly grown for beer production, and it is one of the most important as
it used to balance the natural sweetness with an herbal aroma and bitterness.273 Barley,
especially malted barley, is also mainly grown for beer production, though it has secondary uses
as cattle feed.274 As a result, supplier power is favorable to the beer industry (2).
Level of differentiation of suppliers¡¦ product. Since hops provide aroma, this ingredient
has the most potential supplier product
differentiation, but other important
distinctions can be made by freshness and
taste with respect to barley as well. As a
result, supplier power is moderately
unfavorable to the beer industry (4).
Suppliers¡¦ threat of forward
integration. There is little threat that raw
material suppliers will enter the beer
manufacturing industry and consequently
supplier power is weak (1).
The second major suppliers to the beer
industry are the brewing capital equipment
manufacturers. These manufacturers provide
filtration equipment to cleanse incoming
water, mills for processing the grain, large mash tuns and brew kettles to produce the beer,
filtration equipment to remove final impurities before bottling, and process control hard and
software.
Supplier industry structure. Some equipment is highly specialized and only a few
suppliers exist, while other production equipment is supplied by multiple manufacturers or can
be designed and built by plant engineers. Given this disparity, supplier power is rated as neutral
to the beer industry (3).
Beer Making Process and Supplier Integration
Water Barley Hops
¡§Wort¡¨
1st Fermentation
2nd Fermentation
Yeast
Brewing
Process
Malting
Figure VIII.B.1.c.2: Beer supplier
interaction process.
106
Substitutes for suppliers¡¦ product. Industrial equipment is essential in the mass
production environment of a major brewery, and only some items can be built in house with
economic feasibility. Therefore, supplier power is rated high and is unfavorable to the beer
industry (5).
Brewing industry¡¦s importance to suppliers. While not exact matches, most equipment
used in the brewing industry is similar to equipment used in other food processing industries
though there are specific niche providers. As a result, this mix is generally weighted unfavorable
to the beer industry (4).
Level of differentiation of suppliers¡¦ product. There is a greater level of differentiation
among more specialized equipment manufacturers, but in general differentiation is found in
service and support activities. Therefore, supplier power is rated neutral (3).
Suppliers¡¦ threat of forward integration. There is little possibility that the suppliers will
expand into beer production, and as a result forward integration is rated low (1).
The third area of supplier analysis is packaging materials, which include glass bottles,
aluminum cans, in which beer is packaged for sale, and pallets, boxes, and labels.
Supplier industry structure. Ball Corporation, Crown Cork and Seal, Metal Container
Corporation and Rexam Beverage Cans America are among the many companies that supply
aluminum cans, glass bottles (Owens-Brockway Glass Container Corp, Anchor Glass Container
Corp., Ball-Foster Glass Container Corp.), and other packaging materials to the beer industry275
276. The larger companies are suppliers throughout the food industry, while the smaller suppliers
tend to focus on the beer industry. Neutral (3).
Substitutes for suppliers¡¦ product. The only viable substitute for the glass and bottle
industry is the developing market for plastic bottles. This potentially represents a formidable
threat. Moderately favorable (2).
Brewing industry¡¦s importance to suppliers. The brewing industry represented
approximately 34% of the aluminum can market from 1995-1999 and approximately 44% of the
glass container market. As a result of the brewing industry¡¦s dominance in the market, supplier
power related to this issue is rated low, or favorable to the brewing industry (1).277
Level of differentiation of suppliers¡¦ product. As packaging materials are commodity
products, there is little opportunity for product differentiation outside of proximity to brewing
107
facilities due to the switching costs of additional freight. Therefore, supplier power related to
differentiation is rated moderately low (2).
Suppliers¡¦ threat of forward integration. There is little possibility that packaging
suppliers will expand into beer production, and as a result forward integration is rated low (1).
The fourth and final grouping of suppliers is labor power. Of the top 3 beer
manufacturers, only Coors is not fully unionized, although the company does have some
subsidiaries and even plants within the U.S. that do have union representation.
Supplier industry structure. The predominant union in the U.S. domestic market278 is the
Teamsters Union. In Europe, unions are typically organized within country boundaries, though
this may change as the European Union strategy grows. Because of the dominance of these two
labor unions, supplier power due to industry structure is rated high (5).
Substitutes for suppliers¡¦ product. While non-union labor exists, it would be a
formidable challenge to overcome the entrenched labor unions. Even Coors eventually allowed
the Teamsters access to their plants to end a boycott. Due to the lack of substitutes, supplier
power due to lack of substitutes is rated high (5).
Industry¡¦s importance to suppliers. The Teamsters Union represents 1.4 million
employees and is the most diverse union in the U.S. and represents many different trade groups,
which also generally true of labor unions in Europe279. Although the beer industry represents an
important segment for the Teamsters, their diversification allows for substantial power, and
therefore supplier strength is rated moderately unfavorable to the beer industry (4).
Level of differentiation of suppliers¡¦ product. There is little differentiation in the quality
of employee¡¦s among various unions, though trade unions typically represent trades with
specialized skills and work experience. Therefore, this issue is rated moderate (3).
Suppliers¡¦ threat of forward integration. There is little possibility that the labor forces
will develop their own beer producing firms, and as a result forward integration is rated low (1).
d. THREAT OF BUYERS / BUYER POWER
The beer market in the United States, as with other alcoholic beverage industries such as
wine and spirits, is heavily regulated. As described in section II.C.4, distribution is regulated by
the three-tier system.280 There are three types of buyers in the beer industry; licensed
wholesalers, retailers and the consumer.
108
Wholesalers, while faced with industry consolidation, still remain powerful buyers due
to the regulatory environment of the US alcoholic beverage market, see section on
macroeconomic forces.
Buyer industry structure. The number of beer wholesalers has been decreasing over the
past thirty years. Today there are still over 2500 regional beer distributorships down from over
5000 thirty years ago. In the midst of this consolidation two distinct groups of beer wholesalers
has emerged; the independent multi-brand distributor and the exclusive partner. Brewers such as
A-B have found exclusive deals to their benefit and larger suppliers such as A-B have been
purchasing stakes in larger regional US distributors.281 These factors make the structure of the
industry moderately favorable (2)
Products represent significant portion of buyer¡¦s costs. Given the trend for more
exclusive distribution, more and more wholesalers are looking to make beer a sole source of
income. As a result, buyer power is strengthened by this fact alone and is unfavorable to the beer
industry (5).
Products are standard or undifferentiated. Differentiation for wholesalers is marked by
the profit potential of branded beers. Imports and premium beers have commanded significant
profits for wholesalers, earning 50% more per case than domestic beers in 2003.282 Given only
two categories of profit potential, domestic/non-premium and import/premium beers, the market
does not seem to be differentiated from a profit perspective. The result is moderately unfavorable
(3) for the industry.
Few switching costs. Exclusive wholesalers face higher switching costs than independent
multi-brand distributors. Contracts with brewer bind the ability of the wholesalers to expand their
portfolios through exclusivity and ¡§share the selves¡¨ clauses. While it would be costly for
wholesalers to switch to other brewer¡¦s brands it is equally hard for brewers to cut ties with a
particular distributor. ¡§Franchise termination laws¡¨ in the U.S. protects wholesalers from the
whims of brewers and gives wholesalers grants to specific regional territories.283 The trade-off of
switching costs for both brewer and wholesaler signifies a moderately favorable situation in
terms of buyer power (2).
Buyers earn low profits. Insulated from threat of termination, wholesalers typically mark
up beer 18% to 20%284. The advent of exclusivity and brewers purchasing stakes in their US
distributor counters the effect on mark-ups by lowering the number of negotiation points for
109
wholesalers. However, this trend would have little effect on the majority of regional players
licensed to sell exclusively in particular regions. As a result, buyer power is relatively low on this
point exclusively and moderately favorable for the industry (3).
Buyers pose credible threat of backward integration. Backward integration is not a
threat in this industry as a whole. Wholesalers, if at all, are threatened by forward integration by
brewers. Wholesalers do not have the technological competencies for brewing beer and it is
unlikely that they would buy them. As a determinate of buyer power this factor is favorable for
the beer industry (1).
Industry¡¦s product unimportant to the ¡§quality¡¨ of the buyer¡¦s products or services.
The quality of beer is an important factor in the resale channel. Without a quality product,
wholesalers would find it hard to market and sell their services no matter the mark-up. This fact,
points to a favorable effect for the beer industry in minimizing the power of the buyer (1).
Retailers, as a group, are much more diverse than their channel counterparts, the
wholesalers. There are seven major groups of beer retailers: on-premise restaurants and bars,
convenience stores, supermarkets, liquor stores, drug stores, large concessions and wholesale
clubs.
Buyer industry structure. The number of on-premise establishments was about 300,000
nationwide in 2002. This buyer segment has consistently made up 25% of the volume of beer
sales over the past five years. In addition, this segment made up approximately 48% of dollar
beer sales. Convenience stores and supermarkets run a close second and third in terms of volume
sales at 23% and 20% respectively (2003).285 While the retail segment is diverse the profit
potential is not; on-premise resellers accounted for about 80% of the profits in the segment last
year. Although the on-premise segment is large and dominates profits, there is a benefit to the
beer industry in the diversity of on premise retailers. The structure points a moderately favorable
effect on retailer power (2).
Products represent significant portion of buyer¡¦s costs. Analyzing different retailers,
some have more potential to be sensitive to prices given their cost structure. For example, beer
dominates on premise sales making up 52% of all alcoholic beverage sales in 2002.286
Products are standard or undifferentiated. Retailers are concerned with both profit
potential and consumer preferences. In the consumer market there are many beer choices, but
110
distinct profit opportunities between brands is not apparent. Retailers seek to make their beer
buying choices based on their market¡¦s preferences and are more influenced by the
differentiators that brewers create in the market. Diversity in the beer market and customer¡¦s
preferences makes retailers less price sensitive and therefore differentiation becomes a
moderately favorable for the beer industry in terms of buying power (2).
Few switching costs. Retailers, given their inability to gain direct access to brewers as a
point of distribution, are at a disadvantage when trying to switch between beer wholesalers. In
most states, wholesalers are given exclusive rights to a region and choice is limited for the
retailer.287 If retailers are bound by customer preference and preference is extremely diverse,
choosing not to engage with a particular beer wholesaler in the area would be costly. This factor
weakens buyer power and is favorable for the industry (1).
Buyers earn low profits. The largest retail sector, on-premise, generally makes about
80% gross margins on beer sales. The largest growth retailers, wholesale clubs, such as Costco,
earn about 10% gross margins on beer. In 2003, wholesale clubs beer sales grew by 16%. While
on-premise beer profits dominate the market, profits will continue to be an unimportant factor in
retail price sensitivity and therefore a moderately favorable factor for the beer industry (2).
Buyers pose credible threat of backward integration. One current trend in on-premise
beer retailing is the brew pub. Brewers, such as Gordon Biersch, fall into this category and are a
specific example of backward integration in the market. Considering the cost for brew pubs to
market and sell their products off-premise is quite large ($300 revenue/per keg for sales on
premise versus $80 revenue/per keg for sales off premise)288 the threat of large scale backward
integration is small. This fact has a favorable effect on buyer power on the beer industry (2).
Industry¡¦s product unimportant to the ¡§quality¡¨ of the buyer¡¦s products or services.
The quality of the beer is determined by brewers and is perceived by the customer in the same
way. Restaurants have the potential for bad customer perception if beer is served poorly. As well
supermarkets run the risk of poor customer perception if they sell very old inventories of beer.
While both retailers want to sell quality beer ¡V beer does not have a great impact of the quality of
their service. This factor is moderately unfavorable because it increases retailer price sensitivity
(4).
The third groups of buyers are consumers. Consumers purchase beer for personal
consumption from beer retailers.
111
Buyer industry structure. Consumers are very diverse in the beer preferences. This
fragmented market is favorable to the beer industry as many different types of beer buyers dilute
the concentration of power (1).
Products represent significant portion of buyer¡¦s costs. Beer does consume a greater
portion of a consumer¡¦s beverage costs given the heavy taxation. Forty-four percent of the cost
of a bottle of beer is attributed to taxes on alcoholic beverages289. Consumers with larger
disposable incomes are less price-sensitive in their beer choices, while those with little
disposable income are more price-sensitive. Since half of all beer is consumed by the 21-34 year
old demographic segment290 and income potential during this period of life is limited, beer costs
do become a factor in consumer price sensitivity. The impact is moderately unfavorable for the
industry (3).
Products are standard or undifferentiated. Differentiation in the consumer market is
marked by taste and preference. There were over 3,000 different brands distributed in the US in
2002.291 These brands fall into larger categories of premium light, premium regular, imports,
craft and budget. Beer is extremely differentiated in the U.S. market and this fact is favorable for
the industry (1).
Few switching costs. Switching cost for consumers can be analyzed from a
differentiation and cost perspective. While the actual monetary cost to switch brands is
practically zero, differentiators may cause preference and increase ¡§mental¡¨ switching costs.
Overall switching costs are moderately favorable for the industry as differentiation plays a big
role in consumer preferences (2).
Buyers earn low profits. This idea of profits is not applicable to this group of buyers.
Buyers pose credible threat of backward integration. While consumers can brew beer in
their own homes, they can not make a profitable enough to compete on a national level. This
factor is insignificant and favorable for the industry (1).
Industry¡¦s product unimportant to the ¡§quality¡¨ of the buyer¡¦s products or services.
Although consumers do not produce their own products, they are still interested in beer quality.
The beer industry mirrored this concern with some brewers instituting ¡§freshness dating¡¨ on all
bottles and cans in the late 90¡¦s. This fact is generally favorable for the industry in terms of
buyer power (1).
112
e. THREAT OF SUBSTITUTES
Number of substitutes. Threat of substitutes (4)
In addition to over a hundred different beer labels to choose from, consumers can also
purchase wine, malt-flavored alcoholic drinks (sometimes also called flavored alcoholic
beverages, FABs), distilled spirits and also non-alcoholic drinks. The beer industry is facing a
fierce competition from the wine and other malt-flavored alcoholic drinks in particular, as they
target the same demographic group.
Wine drinking has become part of the American culture. The coming of age of the baby
boomer generation fueled the growth of the wine industry. More importantly, the ¡§millennial
generation” with members of the leading edge in their early 20s, has even a bigger appetite for
wine than previous generations.292 In fact, the year 2003 has seen a 32% gain in core wine
consumer population. Consequently, the wine consumption hit a new all-time high of 2.68
gallons per capita.293 Of particular relevance to Heineken is that the import beer sector has been
found to be much more affected by this trend than the domestic one.294
FABs were first introduced to the U.S. market in 2001 and became an instant hit.
Smirnoff Ice, the dominant supplier of FABs, grew from zero to over 25 million cases and sales
approached two percent of the beer industry in its first full year of distribution.295 In 2003, for
the first time in 30 years, the volume of spirits was larger than that of beer and wine. 296 This
success is the direct result of the change in consumer taste preference. Demand for sweeter taste
than beer offers has led to the evolution of FABs.297 The leading brands in this category are
Smirnoff Ice, SKYY Blue, Bacardi Silver, Stolichnaya Citrona and Mike’s hard lemonade.
FABs appeal to consumers who occasionally drink beer, but also consume mixed drinks and are
looking for something new. In fact, half of the new FAB consumers have switched from beer.
Price performance of substitutes.
Compared to all mentioned substitutes, beer has the best price/value ratio. A recent
survey among 1300 participants indicated that 73% agreed with this statement. 51% thought the
same of wine, but only 29% of FABs and 25% of spirits298.
f. ROLE OF COMPLEMENTS
According to Gordon Walker299 complementary products are characterized by
systematically positively correlated demand and creation of a reciprocal expansion of demand.
While there are a number of products and services that either promote the consumption of beer
113
(sports games, concerts, etc.) or are a required part of the overall experience (bottles, cans, kegs,
etc.), none of these fulfills both of Walker¡¦s criteria. There no complements for beer. Neutral
(3).
2. LEVEL 2 ANALYSIS
a. RIVALRY
The structure of the U.S. beer market is very much in favor of its incumbents. Its
oligopolistic concentration together with the fierce competition effectively blocks any potential
newcomer from entering at the national scale. Every challenger would face serious hurdles in
establishing an effective marketing and distribution infrastructure. In addition, the economy of
scale together with the market¡¦s huge profitability provides the dominant players with sufficient
financial leverage to immediately retaliate against any perceived threat. This unfriendly scenario
and the slow overall growth rate make the U.S. beer market extremely unattractive to potential
entrants.
Rivalry Overall Rating:
Factors affecting rivalry Effects on Industry Strength Rank
Number of competitors, their
size and power Favorable 1 1
Industry growth rate Moderately favorable 2 2
Fixed versus variable costs Favorable 1 3
Product lacks differentiation or
switching costs Moderately unfavorable 4 6
Capacity is augmented in large
increments Unfavorable 5 8
Competitors are diverse in
strategy Moderately favorable 2 5
High strategic stakes Favorable 1 4
Exit barriers are high Moderately unfavorable 4 7
Rivalry Overall Rating: Favorable (1)
Factors affecting rivalry Effects on Industry Strength Rank
Number of competitors, their
size and power Favorable 1 1
Industry growth rate Moderately favorable 2 2
Fixed versus variable costs Favorable 1 3
Product lacks differentiation or
switching costs Moderately unfavorable 4 6
Capacity is augmented in large
increments Unfavorable 5 8
Competitors are diverse in
strategy Moderately favorable 2 5
High strategic stakes Favorable 1 4
Exit barriers are high Moderately unfavorable 4 7
Favorable (1)
b. THREAT OF ENTRY / BARRIERS TO ENTRY
There are perhaps few technologies better understood than brewing beer and anyone can
start the process in their own home. Common logic would tell us that it would be easy for new
entrants if they only have a delectable formula. Even great recipes are not the key to entry. Beers
114
are differentiated by brand and image development that takes years to achieve for which no
substitute is available. New entrants have little relative volume and little relative clout with the
government mandated and regulated distribution system. With little diversification among
incumbents, it is a high stakes game that incumbents will vigorously protect.
Barriers to Entry Overall Rating:
Barriers to Entry Factors Effects on Industry Strength Rank
Economies of scale Favorable 1 6
Product differentiation Favorable 1 1
Cost disadvantages
independent of scale Unfavorable 1 7
Capital requirements Favorable 1 5
Access to distribution channels Favorable 1 2
Expected retaliation Favorable 1 3
Governmental barriers Favorable 1 4
Barriers to Entry Overall Rating: Favorable (1)
Barriers to Entry Factors Effects on Industry Strength Rank
Economies of scale Favorable 1 6
Product differentiation Favorable 1 1
Cost disadvantages
independent of scale Unfavorable 1 7
Capital requirements Favorable 1 5
Access to distribution channels Favorable 1 2
Expected retaliation Favorable 1 3
Governmental barriers Favorable 1 4
Favorable (1)
c. THREAT OF SUPPLIERS / POWER OF SUPPLIERS
Because of the predominance of unionized labor, Labor Forces represent the most
significant threat of supplier power. Raw material and packaging providers also represent
significant threats of supplier power, but because of the large number of providers, their
significance is not as great as that of labor. Brewing equipment providers are positioned as the
least likely threat of supplier power, mostly by virtue of the current overcapacity in the industry
and declining growth rate in beer consumption. Brewers are less inclined to need additional
equipment and once installed, as the machinery has a long life span. Based on our analysis of the
industry, our conclusion is that ¡§supplier power¡¨ represents a moderately unfavorable
competitive force to the beer industry. Moderately unfavorable (4).
115
Score Rank Score Rank Score Rank Score Rank
Supplier industry structure 1 4th 3 3rd 3 1st 5 1st
Substitutes for suppliers¡¦
product 5 1st 5 1st 2 4th 5 2nd
Brewing industry¡¦s
importance to suppliers 2 3rd 4 2nd 1 3rd 4 3rd
Level of differentiation of
suppliers¡¦ product 4 2nd 3 4th 2 2nd 3 4th
Suppliers¡¦ threat of forward
integration 1 5th 1 5th 1 5th 1 5th
2nd 4th 3rd 1st
Supplier Power Factors
Categories of
analysis
Overall Rating: moderately unfavorable (4)
Supplier Rank:
Raw Materials
Brewing
Equipment
Providers
Packaging
Materials Labor Forces
Score Rank Score Rank Score Rank Score Rank
Supplier industry structure 1 4th 3 3rd 3 1st 5 1st
Substitutes for suppliers¡¦
product 5 1st 5 1st 2 4th 5 2nd
Brewing industry¡¦s
importance to suppliers 2 3rd 4 2nd 1 3rd 4 3rd
Level of differentiation of
suppliers¡¦ product 4 2nd 3 4th 2 2nd 3 4th
Suppliers¡¦ threat of forward
integration 1 5th 1 5th 1 5th 1 5th
2nd 4th 3rd 1st
Supplier Power Factors
Categories of
analysis
Overall Rating: moderately unfavorable (4)
Supplier Rank:
Raw Materials
Brewing
Equipment
Providers
Packaging
Materials Labor Forces
d. THREAT OF BUYERS / BUYER POWER
While differentiation (favorable) becomes a more prominent factor in buyer power the
farther down the chain of distribution, quality, strategic importance and the structure of the
channel as a whole has a strong affect on the industry. Important factors for buyer power in the
wholesaler sector and retail sector differ from the consumer sector in terms of those items that
represent efficient movement of beer inventories through the channel. Competition in the
channel is inhibited by exclusive wholesaling agreements and wholesalers’ regional licenses. It is
extremely difficult for brewers to gain access to these channels in the U.S. The threat of channel
buyers is strong, while branding in the consumer market helps to decrease the overall threat of
the group as a whole. The effects of the aforementioned factors are moderately unfavorable. (4)
116
Buyer Power Overall Rating
Buyer’s Factors Effects on Industry Strength Rank
Wholesalers
Is the product differentiated? Moderately Favorable 2 8
Does the buyer earn low
profits? Moderately Favorable 3 6
Is the product important to the
buyers’ product quality? Favorable 1 7
Is the product a significant
portion of buyer’s costs? Unfavorable 5 4
Size and concentration of buyer
groups Moderately Favorable 2 3
Are there switching costs? Moderately Favorable 2 5
% volume sold to the buyer Unfavorable 5 2
Is the buyer strategically
important to the firm? Unfavorable 5 1
Does a threat of backward
vertical integration exist? Favorable 1 9
Retailer
Is the product differentiated? Moderately Favorable 2 1
Does the buyer earn low
profits? Moderately Favorable 2 8
Is the product important to the
buyers’ product quality? Moderately Unfavorable 4 9
Is the product a significant
portion of buyer’s costs? Moderately Favorable 3 7
Size and concentration of buyer
groups Favorable 1 4
Are there switching costs? Favorable 1 5
% volume sold to the buyer Unfavorable 5 6
Is the buyer strategically
important to the firm? Unfavorable 5 3
Does a threat of backward
vertical integration exist? Moderately Favorable 2 2
Buyer Power Overall Rating Moderately Unfavorable (4)
Buyer’s Factors Effects on Industry Strength Rank
Wholesalers
Is the product differentiated? Moderately Favorable 2 8
Does the buyer earn low
profits? Moderately Favorable 3 6
Is the product important to the
buyers’ product quality? Favorable 1 7
Is the product a significant
portion of buyer’s costs? Unfavorable 5 4
Size and concentration of buyer
groups Moderately Favorable 2 3
Are there switching costs? Moderately Favorable 2 5
% volume sold to the buyer Unfavorable 5 2
Is the buyer strategically
important to the firm? Unfavorable 5 1
Does a threat of backward
vertical integration exist? Favorable 1 9
Retailer
Is the product differentiated? Moderately Favorable 2 1
Does the buyer earn low
profits? Moderately Favorable 2 8
Is the product important to the
buyers’ product quality? Moderately Unfavorable 4 9
Is the product a significant
portion of buyer’s costs? Moderately Favorable 3 7
Size and concentration of buyer
groups Favorable 1 4
Are there switching costs? Favorable 1 5
% volume sold to the buyer Unfavorable 5 6
Is the buyer strategically
important to the firm? Unfavorable 5 3
Does a threat of backward
vertical integration exist? Moderately Favorable 2 2
Moderately Unfavorable (4)
117
Buyer Power Overall Rating
Buyer’s Factors Effects on Industry Strength Rank
Consumers
Is the product differentiated? Favorable 1 1
Does the buyer earn low
profits? N/A
Is the product important to the
buyers’ product quality? N/A
Is the product a significant
portion of buyer’s costs? Moderately Unfavorable 4 3
Size and concentration of buyer
groups Favorable 1 5
Are there switching costs? Moderately Favorable 2 2
% volume sold to the buyer Favorable 1 6
Is the buyer strategically
important to the firm? Unfavorable 5 4
Does a threat of backward
vertical integration exist? Favorable 1 7
Buyer Power Overall Rating Moderately Unfavorable (4)
Buyer’s Factors Effects on Industry Strength Rank
Consumers
Is the product differentiated? Favorable 1 1
Does the buyer earn low
profits? N/A
Is the product important to the
buyers’ product quality? N/A
Is the product a significant
portion of buyer’s costs? Moderately Unfavorable 4 3
Size and concentration of buyer
groups Favorable 1 5
Are there switching costs? Moderately Favorable 2 2
% volume sold to the buyer Favorable 1 6
Is the buyer strategically
important to the firm? Unfavorable 5 4
Does a threat of backward
vertical integration exist? Favorable 1 7
Moderately Unfavorable (4)
e. THREAT OF SUBSTITUTES
Level 2: The threat of substitutes is moderately high. There are numerous alcoholic
beverage substitutes available with minimal switching costs. Emerging demographics prefer
wine and FABs over beer. Consequently, the beer industry has started to lose market share to
these beverages. Moderately Unfavorable (4).
Substitutes Overall Ranking
Factors increasing the
effects of substitutes Effects on Industry Strength Rank
Do buyers have high
propensity to substitute? Moderately Unfavorable 4 1
Is the price performance of
substitutes high? Neutral 3 2
Moderately Unfavorable
(4)
Substitutes Overall Ranking
Factors increasing the
effects of substitutes Effects on Industry Strength Rank
Do buyers have high
propensity to substitute? Moderately Unfavorable 4 1
Is the price performance of
substitutes high? Neutral 3 2
Moderately Unfavorable
(4)
118
f. ROLE OF COMPLEMENTS
There are no products or services that qualify as complements for beer.
119
C. BEERTENDER SURVEY
A survey was conducted to determine the latent demand, demographics and value drivers
for the BeerTender. The survey was designed so that the respondents were only required to
answer relevant questions. Figures VIII.C.1.a,b,c show the survey questions and a summary of
the results. There was a drawing for a case of beer offered as an incentive to fill out the survey.
There were 239 respondents from across the United States in an age group of 25-35 years.
Questions 11 and 12 served the purpose of defining the brand preference. There was a
strong showing for Sierra Nevada, Samuel Adams, and Guinness, Heineken, Corona, and Bass,
indicating the respondents were represented in the premium, microbrewery, and imported
segments of the beer market.300
Questions 8 and 9 asked respondents to enter their favorite beers in the listed categories.
Without brand prompts, the following were the brand preferences in rank order:
Domestic Imported
Sierra Nevada, Samuel Adams, Budweiser,
Gordon Biersch, Anchor Steam*, Coors*,
Miller*
Heineken, Guinness, Corona
* Indicates a much lesser showing
Interestingly, the promoted response was in agreement with unprompted response. This
implies that brand preference is important to the beer consumer, which is corroborated in the
secondary research301. It should be noted that the beer selection in questions 11 and 12 were
chosen to represent beers with a national reach and large socio-economic distribution.
Question 17 asked respondents for how much they were willing to pay for a appliance
with BeerTender functionality. A linear regression was devised to estimate the value drivers for
the BeerTender-like appliance, assuming that the willingness to pay for the appliance is
proportional to the perceived overall value. After combining all variables, a simple model
estimated the value drivers of a BeerTender-like appliance. Figure VIII.C.2 shows the model
and the basic statistics. The nonlinear term associated with the choice of beer magnifies its
effect. The model shows that Beer drinkers who have brand preference will pay more than those
who do not.
120
Although the coefficients of Figure VIII.C.2 have a better than 3% significance, this
model only explains about 40% of the variance. Some of the price data was entered in integers
and the regression analysis could only assume continuously varying data. The larger issue is that
there are missing variables such as geography and brand preferences. No other significance could
be determined except for Heineken as shown in Fig. VIII.C.2. Issues of co-linearity and nonuniqueness
also complicated the regression analysis. Most variance of the model lies in the
residuals of the regression that explains the willingness to pay. Another complication is the nonlinear
term in the regression. Hence, a Monte Carlo analysis was used to determine market
demand. Basically this entails forming a data set of synthetic customers that follow the model in
Fig. VIII.C.2 and performing a statistical analysis on them.
The basic assumptions are:
¡E There are categorical variables that separate the sample into 4 segments. Their
proportions are described as follows:
o Heineken Insiders. This group enjoys Heineken, does not frequent
nightclubs, and is willing to pay maximum value for the appliance.
o Heineken Majority. This group enjoys Heineken and frequents
nightclubs. The perceived value of the convenience of having draught
beer at home is not as important.
o Novelty Seekers. This group does not drink Heineken and frequents
nightclubs. Since this group does not have Heineken brand preference and
does not drink at home, only novelty and style are considered.
o Home Bodies. This group does not drink Heineken and does not frequent
nightclubs. This group is willing to buy the appliance solely for the
convenience of having draught beer at home.
¡E It is assumed the synthetic data is normally distributed and the mean and standard
deviation match the survey data.
¡E It is assumed the synthetic coefficients (Fig. VIII.C.2) are normally distributed
and the mean and standard deviation match the regression model.
121
¡E It is assumed the distribution of the willingness to pay of the synthetic customers
is normal. The threshold value that determines the willing to pay is $300.
¡E N = 200
¡E Figure VIII.C.3 summarizes of the process.
The last information of the model shows the difference between the BeerTender and the
BeerTender-like appliance. The BeerTender only dispenses Heineken, so choice isn¡¦t part of the
model, whereas the BeerTender-like appliance offers a choice of beers. Table VIII.C.1 and Table
VIII.C.2 show the results of this simulation.
Table VIII.C.1 Latent demand for a $300 BeerTender-like (choice of beer included) Appliance
% of survey
population that wants
to buy appliance by
segment
% of segment that is
willing to buy the
appliance at $300 as
projected by
simulation
% of survey
population willing to
buy appliance by
segment
Heineken Insiders 8.37% 29.04% 2.43%
Heineken Majority 3.77% 19.94% 0.75%
Novelty Seekers 6.28% 11.95% 0.75%
Home Bodies 7.95% 18.26% 1.45%
Total 5.38%
Table VIII.C.2 Latent demand for a $300 BeerTender Appliance
% of survey
population that wants
to buy appliance by
segment
% of segment that is
willing to buy the
appliance at $300 as
projected by
simulation
% of survey
population willing to
buy appliance by
segment
Heineken Insiders 8.37% 7.30% 0.61%
Heineken Majority 3.77% 5.00% 0.19%
Novelty Seekers 6.28% 0.96% 0.06%
Home Bodies 7.95% 0.88% 0.07%
Total 0.93%
Several interesting factors were observed in this survey. First, Heineken drinkers, who
want to purchase BeerTenders, are over represented in the selected survey population. This can
122
be explained by the fact that import beer drinkers have higher disposable incomes302. Second,
choice of beer is an important value driver. The survey population is not as sure about novelty
and style as value drivers, as the standard deviation of choice of beers is less than half of the total
sample value whereas the standard deviation and mean are about equal for style and novelty. In
other words, this survey population prefers beer choice over style and novelty.
Heineken has distinctive capabilities in marketing and communications. During the
rollout of the BeerTender, Heineken should promote style and novelty in order to achieve the
same of awareness as choice. Table VIII.C.3 and Table VIII.C.4 summarize the results from this
simulation.
Table VIII.C.3 Demand for a $300 BeerTender-like (choices included) Appliance after
successful Promotion Program
% of survey
population that
wants to buy
appliance by segment
% of segment that is
willing to buy the
appliance at $300 as
projected by
simulation
% of survey
population willing to
buy appliance by
segment
Heineken Insiders 8.37% 41.70% 3.49%
Heineken Majority 3.77% 30.35% 1.14%
Novelty Seekers 6.28% 22.00% 1.38%
Home Bodies 7.95% 31.51% 2.51%
Total 8.52%
Table VIII.C.4 Demand for a $300 BeerTender Appliance After Successful Promotion
Program
% of survey
population that wants
to buy appliance by
segment
% of segment that is
willing to buy the
appliance at $300 as
projected by
simulation
% of survey
population willing to
buy appliance by
segment
Heineken Insiders 8.37% 22.13% 1.85%
Heineken Majority 3.77% 14.41% 0.54%
Novelty Seekers 6.28% 6.50% 0.41%
Home Bodies 7.95% 9.45% 0.75%
Total 3.55%
123
The same model can simulate the demand function at several price points so that the price
elasticity can be computed. The model yields a price elasticity between 2 and 6 depending on
the effectiveness of marketing. If marketing is ineffective, the elasticity is closer to 6 and price
promotions will be required to inflate demand.
124
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percentage of responses
night club
sporting event
restaurant
tavern/bar/pub
home
social activity
(picnic, party,
friends place,
etc.)
Q7: Where do you most like to drink beer?
(Check all that apply.)
0%
10%
20%
30%
40%
50%
60%
70%
Percentage of responses
Meister Brau
Old English 800
Natural Light
King Cobra
Mickey’s Big Mouth
Michelob
Rolling Rock
Miller
Coors
Budweiser
Pyramid
Samuel Adams
Sierra Nevada
Q11: Domestic brands of beer that you buy
(Check all that apply.)
Figure VIII.C.1.a: Responses to selected questions of the BeerTender survey.
125
Figure VIII.C.1.b: Responses to selected questions of the BeerTender survey.
0%
10%
20%
30%
40%
50%
60%
Percentage of responses
Molson
Labbat’s
Lowenbrau
Tecate
Tsing Tao
Kiran
Beck’s
Pilsner Urquelle
Asahi
Foster’s
Spaten
Amstel
Dos Equis
Sapporo
Heineken
Bass
Corona
Guinness
Q12: Imported brands of beer that you buy
(Check all that apply.)
0%
5%
10%
15%
20%
25%
30%
35%
Percentage of responses
freshness price convenience sophistication packaging
Q14: Importance of various beer attributes
(Check all that apply.)
126
Figure VIII.C.1.c: Responses to selected questions of the BeerTender survey.
0%
5%
10%
15%
20%
25%
30%
35%
Percentage of responses
novelty/
coolness
choice of beer size/capacity price styling
Q16: Importance of attributes of a
countertop draught beer appliance
(Check all that apply.)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Percentage of responses
hardware
store
grocery
store
department liquor store
store
novelty
store (like
Sharper
Image)
wholesale
warehouse
(like
Costco)
specialty
store (like
Beverages
and More)
Q18: Where would like to buy this
countertop draught beer appliance?
(Check all that apply.)
127
Figure VIII.C.2. Regression Model
The model explains the willingness to pay for a BeerTender-like appliance and captures 40% of
the variance.
¡EPay $89.02 if respondent
does not go to night clubs (Q7)
¡ESTD of $39.65
¡EP value of 2.9%
¡EPay $57.18 for initial interest
(Q15)
¡ESTD of $41.58
¡EP value of 2.9%
¡EPay $4.04 for every point
respondent values styling (Q16)
¡ESTD of $1.81
¡EP value of 3.4%
¡EPay $2.66 for every point
respondent values novelty (Q16)
¡ESTD of $1.18
¡EP value of 2.8%
This value drive is applicable for
Heineken drinkers only (Q12).
¡EPay $0.042 for every point squared
respondent values choice (Q16)
¡ESTD of $0.01
¡EP value of 0.006%
128
Fig. VIII.C.3: Summary of Monte Carlo Simulation
The length of each row of arrows represents the willingness to pay of a synthetic customer as computed by the model. The statistics
are performed on these synthetic customers to compute demand. This distribution is assumed to be normal.
.
.
N=200
.
.
$300
Won¡¦t buy Will buy
129
End Notes
1 Cool Quotes Collection [online]. [cited 6 June 2004]. .
2 The Beer History Library. [online]. [cited 6 June 2004].
.
3 Conway, Andrew, Christopher O¡¦Donnel, and Jennie Rubinshteyn. 2001; US Beer: Brand-Building, Scale and
Profitability; Morgan Stanley Dean Witter Equity Research North America, 28 June 2001, p.11.
4 Association of Brewers reports Craft Beer Production grows 3.4%, Association of Brewers [online], Boulder,
Colorado USA, Last updated on April 5th 2004, [cited on May 29th 2004].
.
5 Conway, Arthur J., Christopher O¡¦Donnell, CFA. 2001. ¡§US Beer: Brand-Building , Scale, and Profitability.¡¨
Morgan Stanley Dean Witter Industry Overview Comment, 28 June 2001, p.45.
6 Conway, Arthur J., Christopher O¡¦Donnell, CFA. 2001. ¡§US Beer: Brand-Building, Scale, and Profitability.¡¨
Morgan Stanley Dean Witter Industry Overview Comment, 28 June 2001, p.45.
7 The growth of the International Beer Market. [online]. February 1998. [cited 7 May 2004].
.
8 Gibbs, Mike, Nigel Parson, and James Wheatcroft, Heineken. 2000. Initiation of coverage, WestLB Panmure, 8
February 2000, p.13.
9 Anheuser Will Make Rival Offer For Harbin ¡V FT, The Wall Street Journal online edition, Dow Jones Newswire, 5
May 2004, [online], [cited on 13 May 2004]. .
10 SABMiller Launches Bid For Harbin Brewery, The Wall Street Journal, 5 May 2004. p.B4.
11 Harbin Rejects SABMiller’s Offer To Make Competing Bid, The Wall Street Journal online edition, [online] 5
May 2004, [cited on 13 May 2004]. .
12 Pecoriello, William, Alexandra Oldroyd, Lore Serra, Martin Yule, David Decker, Sonya Ghobrial, Robert
Wertheimer, Hao Hong, and Brett Cooper. 2004. State of the US Beer (and Wine and Spirits) Consumer,
Conference call on Thursday January 22nd 2004. MorganStanley Equity Research North America. 22 January 2004.
pp. 1ff.
13 Williams, N., and A.N.Howard. The French Paradox. Smit-Gordon and Company Limited.
14 Holmgren, Elizabeth. 60minutes revisits French Paradox. [online]. [cited 7 May 2004]. Available from Internet:
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15 Changing Shapes of Global Drinks Market. [online]. 1 November 2003. [cited 7 May 2004]. .
16 Adams Beer Handbook 2003, Adams Beverage Group, p.3.
17 Conway, Arthur J., Christopher O¡¦Donnell, CFA. 2001. ¡§US Beer: Brand-Building , Scale, and Profitability.¡¨
Morgan Stanley Dean Witter Industry Overview Comment, 28 June 2001, p.26.
18 Adams Beer Handbook 2003. Adams Beverage Group, p.3.
19 Japan¡¦s Kirin to Transfer Beer Bottle Technology to San Miguel. [online]. 19 March 2004. [cited 7 May 2004].
.
20 Kuchinskas, Susan, California Crackdown on RFID, Internetnews.com, April 30, 2004, [online], [cited on May
12th 2004]. .
21 Goldemmer, Ted. The Brewer¡¦s Handbook. The Complete Book by brewing beer. [online]. [cited 7 May 2004].
.
22 Levy, Caroline, Niki Modi, and Kaumil Gajrawala. 2003. Anheuser-Busch: Pulling away from the pack, UBS
Warburg Global Equity Research, 7 April 2003, p.15.
23 Federation of Tax Administrators. [online]. [cited on 18 May 2004].
.
24 The Beer Institute Online, Government affairs, Federal Excise Tax. [online]. [cited on 18 May 2004].
.
25 Pecoriello, Bill, Javier Escalante, Brett Cooper, Alexandra Oldroyd, and Russel Moore. 2002. Implications of the
SAB/Miller Deal, MorganStanley Equity Research North America, Beverages, 29 May 2002, p.7.
26 Herzog, Bonnie, and Kate McShane. 2004., Anheuser-Busch (BUD), Citigroup Smith Barney, Equity Research:
United States Beverages, January 26, 2004, p.14.
130
27 Levy, Caroline, Niki Modi, and Kaumil Gajrawala. 2003. Semi-Annual Beer Distributor Survey, UBS Warburg
Global Equity Research, 9 October 2003, p.50.
28 Bevan, Nick, Graeme Eadie, Geof Collyer, Mark Purdy, and Marc Greenberg. 2001. US Import Beer Market;
Deutsche Bank Global Equity Research; 19 October 2001, p.19.
29 Herzog, Bonnie, and Kate McShane, Anheuser-Busch (BUD), Citigroup Smith Barney, Equity Research: United
States Beverages, 26 January 2004, p.18.
30 21st Amendment, [online], [cited 31 May 2004].
.
31 State law regarding direct shipment [online]. [cited 31 May 2004].
.
32 Greenberger, Robert. Justices to Review Issue of Shipping Alcohol Interstate Wall Street Journal 25 May 2004.
33FTC Reports on Industry Efforts to Avoid Promoting Alcohol to Underage Consumers. 10 September 1999
[online]. [cited 10 May 2004]. .
34 The Week; Beer Makers Target Youth, Suit Charges. Advertising Age. [online] Vol. 75, no. 6 9 February 2004
[cited 7 May 2004] Available from: Factiva, Santa Clara University
35 Costs of Underage Drinking, U.S. Department of Justice, Office of Justice Programs, Office of Juvenile Justice
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104 Aldoph Coors Company Annual Report. 2003, p. 30.
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199 Hill, Sidney, Jr. ¡§A Net Gain.¡¨ Manufacturing Systems, Nov 1999, pp. 34-35
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207 Heineken Annual Report [online]. 2003. p.16.
208 ¡§Heineken adds two advanced filled bottle inspectors.¡¨ Beverage Industry, 1 Jul 2002, p. 70.
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237 Christensen, Clayton M. 2000. ¡§The Innovator¡¦s Dilemma.¡¨, HarperBusiness, ISBN 0-06-662069-4
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244 Interview with Ron Liles, former VP of Sales for Donoughy Sales, 27 May 2003.
245 Conway, Andrew, ¡§Christopher O¡¦Donnel, and Jennie Rubinshteyn. ¡§US Beer: Brand-Building, Scale and
Profitability.¡¨ Morgan Stanley Dean Witter Equity Research North America, June 28, 2001, p. 13
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Morgan Stanley Dean Witter Industry Overview Comment, 28 June 2001, p. 13.
252 Conway, Arthur J., Christopher O¡¦Donnell, CFA. 2001. ¡§US Beer: Brand-Building , Scale, and Profitability.¡¨
Morgan Stanley Dean Witter Industry Overview Comment, 28 June 2001, p. 13.
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