Fresh Cold Draught at Home

IDIS 619 Professor Tammy Madsen June 8, 2004 Eva Chan Alok Gupta Joachim Krueger Micki Mendez David Rowell Chris Wikoff
 2004

Santa Clara University

Team Heineken

Chris Wikoff

Micki Mendez

Alok Gupta

Joachim Krueger

David Rowell

Eva Chan

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“Beer is proof that God loves us and wants us to be happy.”1
- Benjamin Franklin

Returning home after World War I, American soldiers express their dissent over prohibition. By their absence, they were denied the opportunity to vote on the issue.2

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................................. 26 a.. 29 3 ................................................... 8 2................ Inc.............. Corporate Overview and Products...............TABLE OF CONTENTS I................................................................... 28 e......................................... 20 b. Strategy & Positioning..................................................................................................................... 12 8..................... A........................ 22 f............................................. Strengths and Weaknesses ..................... 7 FIVE FORCES ANALYSIS .................................. 13 D.................. Demographic Trends................................................................................ 19 h............................................................ 26 f............................... Capabilities .......... Resources .......................................................................................................................... MACRO ENVIRONMENTAL FORCES ANALYSIS ........................ Corporate Overview and Products.................................................................... Corporate Overview and Products......... Challenges and Weaknesses ........................................................................ 23 a...................................................................................... 14 a.......... Cost Drivers .............................. 25 e............................................................................................. 15 d........................................ 14 b............... 24 c.................................................................... 6 EXTERNAL ANALYSIS.................................................................................... 20 c.......................................................................... Strategy & Positioning.............. 11 6........ Capabilities .............................................................................. Technological .. Value and Cost Drivers ....................................... 7 1........ 28 d..................................................................................................... 22 e.......................................................... Value Drivers .............................. 9 4.................................................................. 14 1......... Value and Cost Drivers ................................................... 16 e................................................... Anheuser-Busch............................................................... 17 f................................................................................................................. Summary . 8 3........ Economic (Macroeconomic) Trends ........................... Strengths .............................. 26 4.......................................................................................................................................................................................................................... SAB Miller plc ....................................... 7 INDUSTRY DEFINITION ..................................................... 10 5........... 20 a............................................................................................................................................................. Global.................................................................................................................................................................................... 15 c....... Resources ........................... 24 d..................... 19 2...................................................................................................... B.............................................................................................................................. II........................................ 27 c.............................................. Level 3 Analysis ........................ 23 3....................... Strategy & Positioning................................................................................................................... Resources ............... Corona and Labatt – Import Competitors .................................................... 8 1..... EXECUTIVE SUMMARY ..... Governmental and Political ................................................................................... 12 7.............................................................................. 21 d.............................................................. Corporate Overview and Products................................................. COORS ............................... Ethical .......... Capabilities .......................... Strengths and Weaknesses ................................................... Strategy & Positioning................................................................................................................................. 23 b................................ 26 b.. COMPETITOR ANALYSIS ......................... 7 C.......................................................... Capabilities ............................................. Social & Cultural Trends .................................................................................. Resources ................................................................................................................................. Value and Cost Drivers .. 18 g.................

........................................................................................................................................ 61 SCENARIO ANALYSIS AND EFFECT ON VALUATION ......................................................... 43 1................................ ANALYSIS OF THE EFFECTIVENESS OF STRATEGY ............ 45 c.............................................................................. 59 IV................................................................. Organizational Structure.. Historical Performance and Key Ratios ......... 42 3.. 31 b....................... 32 c.......f.................. 53 b................................. 52 3......effect on strategic groups .................................................. 33 E.................................................................................. CONTROL................ Organization’s Values ............... VALUES ................................................................................................. STRATEGY/COMPETITIVE POSITION DEFINITION .................................................................................. 42 2.................................................................................. B.............................................. 40 BUSINESS DEFINITION / MISSION ............................................................................................................................................................. 43 D...... 29 5....... Related diversification .......................... 66 4 ................................................................................. 34 b..................................................................... 38 H. 58 7........................................ INTERNAL ANALYSIS ............... 35 c............................................. Strategic Groups in the Industry............................................................ 43 a............ Distribution of economic contribution........................................................................ 51 c... 30 a.................... Barriers to Imitation . 34 a................................................................. Functional Level ........................................................................................................................................... A.................... Broad And Focused differentiation............... Willingness to Pay Framework and Value chain analysis. 57 5....................................................................... 41 ORGANIZATIONAL STRUCTURE.............................. 47 e....................................................... 57 6........................ Porter’s diversification tests ..................................................................................................................... A...................... FAILURE ANALYSIS ....................................................................................... 63 OVERALL EFFECTIVENESS OF HEINEKEN’S STRATEGY ..................................................................................... 37 e................................................ 56 4.............................. 36 d. Value chain .................. 46 d.......... 48 f.. Strengths and Weaknesses ............. 37 G........................................ Position after the Strategic Move ..................................................................... SUMMARY OF EXTERNAL ANALYSIS .......................................... 39 III................ 49 a........... 44 b...................................................................................... Strategic Move – Partnership with Grope SEB............................................. Resources and Capabilities ........... Trends in the beer industry ....................... Controls used in monitoring employee behavior ............................. INTRA-INDUSTRY ANALYSIS ....................................................... Mobility Barriers ........................................... VRIO Analysis........... 53 a.......................... Role of Disruptive Technologies.............................................. Summary & Implications ................... Financial Strength and Size: ................................... Technology Strategy ................................................................ 37 F. Corporate Level.......................................................................................... 49 b....................................... 61 THE EFFECT OF THE STRATEGIC MOVE ON INDUSTRY CONDITIONS .... How do they perform relative to their industries? .................... 42 1.... 40 MANAGEMENT STYLE ............................. Strengths and Weaknesses ....................................................... B........................ Discounted Cash Flow Analysis . 29 6......................................................... Financial Analysis ......................................................................... C............................ 48 2...... C.............. Effect of strategic move on Strategy........... THREATS AND OPPORTUNITIES ANALYSIS ................................. Financial Positions of Competitors...................... Cost and Value drivers.....................................................

............ 99 a............................................................... VII. 114 d............................... Implementation of one short term recommendation .............................. Rivalry..... Level 2 Analysis ................................... BEER MARKET.............................................................. Threat of Suppliers / Power of Suppliers.. 98 ANALYSIS OF PORTER’S FIVE FORCES IN THE U....................... Rivalry........................................................ Threat of Buyers / Buyer Power .. Threat of Entry / Barriers to Entry ..................... Threat of Buyers / Buyer Power ............... Threat of Substitutes ........... 67 3 SHORT TERM AND 3 LONG TERM RECOMMENDATIONS ................................................ 99 b............................................................................................................................ TABLES AND EXHIBITS .............................................................................. 119 A...................................................... BEERTENDER SURVEY .... 67 1........................... 69 1........ 68 B....................................................................................................................................................................... 112 2.... 118 C....... Threat of Substitutes ..... 69 2.......... 73 VIII........................................................... APPENDIX ........................................................................................... 102 c..................V...................... 99 1.................................................................... 98 ORIGINAL ARTICLE IN THE WALL STREET JOURNAL ......................................................... A.................................. Threat of Suppliers / Power of Suppliers............................................................................................................................................................. 117 f....... Role of Complements.......................... 104 d.. STRATEGY IMPLEMENTATION.......................... 115 e.................................................................. Short Term Recommendations................... Level 1 Analysis .................................................................................................... RECOMMENDATIONS.......... 112 f.................. 113 c................................ 113 a.............. B.............. Long Term Recommendations ........................................................................ Role of Complements.......... 5 ......................................................................... 107 e.................................................................................... 72 VI.......... 71 CONCLUSIONS .. 113 b.....................................................................................S......... Implementation of one long term recommendation..................................................................... Threat of Entry / Barriers to Entry ........................................................................................................................................................ 67 2.

Introduce Amstel Light in BeerTender kegs. the company is challenged in responding to recent preference changes in the U. The U. the well-known maker of upscale home appliances. If successful. Every strategic move is subject to external forces and internal capabilities. The unit was designed and crafted in conjunction with Krups. operating company has concentrated its efforts in the Northeastern region with limited presence on the West coast.S. While a strong base of resources and well-developed capabilities combine to give Heineken a competitive advantage. Heineken should implement the following recommendations: • • • Roll out the BeerTender on a nation-wide basis. the world’s third largest brewer. the move could increase both Heineken’s market share and profit margins as well as enlarge offtrade consumption. Heineken’s move is the correct response to the ongoing changes in the U. Specifically target the middle-aged population..S. Opportunities are mostly related to changes in demographics and customer preferences. beer market is strongly consolidated and mature. This paper identifies the following key success factors ultimately determining the outcome of Heineken’s initiative: External environment. EXECUTIVE SUMMARY Heineken NV.S. 6 .S. To be successful.A. beer market. half of Heineken consumption is on-trade compared to competitor’s 25/75 on-trade to off-trade split. fresh and ready for draught for up to three weeks. beer market dubbed the BeerTender. In the U. 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.S. Internal environment. The move is intended to capitalize on recent shifts in customer preference while benefiting Heineken’s portfolio mix at the same time. Supply chain management in this heavily regulated environment is of paramount importance.S. The U. 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. has recently announced the introduction of a new product to the U.I. which is more profitable and less subject to decline than on-trade in times of economic downturn. market.

II. EXTERNAL ANALYSIS
A. INDUSTRY DEFINITION Heineken N.V. is a €9,255 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
Malt Liquor, 2.5% Dry, 0.1% Ale, 0.1% Import, 11.3%

segmented by beer types: Premium, Popular, Light,
Premium Regular, 21.3%

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

Ice, 3.8% Superpremium, 1.9% Dom. Specialties, 3.3% Popular Light, 10.1%

Popular Regular, 11.5%

Premium Light, 34.1%

Figure II.A.1: Market share of beer sorts in the US market

figure II.A.2.

Beer manufacturer Beer manufacturer

Distributor Distributor

Retailer Retailer

• purchase ingredients (hops, malt, yeast, water, etc.) • produce and store beer • package beer (in-house or externally) • sell and market beer to wholesalers • advertise and market beer • develop new beer sorts

• 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 • provide brewers with market intelligence.

• on-premise (bars, pubs, etc.) • off-premise (stores, etc.) • purchase beer from distributor • store and display beer for purchase • support the advertising/ promotion calendar of breweries • provide distributors with market intelligence.

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 7

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 Competitive Force
Rivalry Rivalry Threat of Entry Threat of Entry Buyer Power Buyer Power Threat of Substitutes Threat of Substitutes Supplier Power Supplier Power

Effect on Industry Effect on Industry
Unfavorable, 5 Unfavorable, 5 Favorable, 1 Favorable, 1 Moderately unfavorable, 4 Moderately unfavorable, 4 Moderately unfavorable, 4 Moderately unfavorable, 4 Moderately unfavorable, 4 Moderately unfavorable, 4

Rank Rank
1 st 1 nd 2 nd 2 rd 3 rd 3 th 4 th 4 th 5 th 5
st

Overall Overall

Unfavorable, 55 Unfavorable,

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.

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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 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.
18

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Another direction of technological development addresses beer transportation and market intelligence. the 21st Amendment resulted in the introduction of the ‘three-tier’ distribution system. when summarized across production. Today. the government collects $3. distribution and retail. import beer market’s profitability.700 independent players27. In addition. as it presents a major barrier to entry28. Thus. Tax rates are determined at the state level and vary significantly from state to state23.S. Recently. $1. and waste assessments. Approximately.9 billion at the states level. In effect. the tax represents 44% of the beer retail price22. the government makes seven times more profit from beer taxes than all domestic brewers combined24. The government imposes a disproportional tax rate on beer with the intention to reduce alcohol abuse. After prohibition ended in 1933. 10 . the state excise tax doubled from $9 to $18 per barrel.4 billion at the federal level. tax rates. Some UK beer transporters began using RFIDs (Radio Frequency Identification) to track content information and capture consumer preference data. US brewers currently only rely on supermarkets and other distribution channels for collection of customer preferences. if a price reduction is offered to one distributor. credit. 4. which has led to a heavily fragmented distribution network currently consisting of more than 2. Also. RFIDs have become subject to legislation20. This was done with the intention of reducing control of brewers over retailers and to ensure more effective tax collection. for instance. This technology may not be adopted in the US any time soon since consumer groups strongly oppose the disclosure of personal information. labeling.25 The federal government also heavily regulates beer distribution. container characteristics. The uniqueness of this system is also one of the primary reasons for the U. it is illegal to transport beer across state lines. GOVERNMENTAL AND POLITICAL The beer industry is subject to extensive government regulations regarding distribution. prices. In New York State. 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. In 1991. all other distributors in the state must receive the same benefit. State imposed pricing laws regulate the price allocation between brewers and wholesalers.1 billion in sales taxes each year. and in addition $3. a brewer must not raise prices for 180 days after a price reduction. alcoholic content. Beer is only allowed to be passed from producers through distributors to retail outlets26. advertising.

The US law prohibits anyone below the age of 21 from alcohol consumption and brewers from advertising to such demographics. ETHICAL Underage drinking is on the rise. ‘warehouse beer at the state level’ and then distribute to their wholesale clubs29. 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. NJ. UT. OK. The beer industry refers to numerous studies proving that parents have more influence over the youth's drinking behavior than advertising. including Anheuser-Busch and SABMiller. TN. The Federal Trade Commission ruled that alcohol companies should not advertise to audiences comprised of more than 30 percent of minors. 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 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.31 The Supreme Court is currently reviewing the possible deregulation of interstate wine trade. it is a felony offense for retailers and non-basic permit holders to sell alcohol directly to consumers. ME. NC. Nevertheless. SC. importation and distribution of alcohol. 11 . AZ. beer companies have volunteered to curtail advertising to minors. Direct interstates sales are prohibited in a number of states (AL. VT. KS. MA. These retailers seek to buy from producers directly. for advertising FABs to demographic segments consisting of minors. to bypass these laws. OH. MS.34 5. In seven states (FL. there have been lobbying efforts by larger retail chains. MD. two class action lawsuits have recently been filed against alcohol companies.32 The ruling will affect future Internet and mail order beer distribution. VA). PA.30 Each state has different rules regarding marketing. KY. MT. IN. MI. A Georgetown University study found that the average Internet traffic to beer company websites consists of up to 60 percent minors36. TX).33 Though contesting the existence of any scientific evidence that would link advertising and underage drinking. such as Costco.however. GA. DE. AR. 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. NY. SD.

37 Specifically. approximately 40% of the U.7. they blame brewers for offering online content particularly appealing to minors. on the other hand. tracks very closely the GDP and consumer expenditures. Interestingly enough.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 gallons43.7. More than 31% of U. 6. the average annual beer price increase of 2 -3% during that time frame did not have any negative impact on the consumption either39. citizens will reach their 50’s by 2005. Based upon its current growth rate.C. 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). the 50+ population will only make a moderate contribution to the beer consumption increase in the next decade. such as interactive games (e. owing to its much higher price point. The growth of this segment (CAGR of 1. population is aging. custom music videos and interviews with pop stars. 12 .Consumer watchdogs. a regression analysis covering the past 20 years could not find any correlation between the GDP and the total domestic beer consumption38. In fact. Surprisingly. According to a recent study.S. compared to 26% in 1992. However. mostly due to health and wellness concerns.S. see Figures II. the import beer segment.g.41 7. population consumes beer on a regular basis and more than 30% of beer drinkers are frequent beer shoppers. DEMOGRAPHIC TRENDS Demographics represent the strongest macro-economic force affecting beer sales. Their demographic profile is strongly skewed toward young males (21-27 year-old) with low to moderate education and moderate household income. ECONOMIC (MACROECONOMIC) TRENDS During the past three years the global economy has undergone one of its most severe recessions. alien shoot-outs and beer bottle tossing). It has been established that the beer consumption only grows at half the growth rate of personal disposable income40. have accused brewers of making their company websites too minor-friendly. In contrast to the overall market.4%) is generally considered to be the main driver for the US beer industry for the next decade. 16 gallons per capita by the time they are 50 years old44.S.2.1 and II. The debate regarding both issues is still ongoing. Consumers drink less beer as they age.C. the U.

the US beer market is moderately to strongly unfavorable to newcomers. The following section.8: Summary and ranking of the macroeconomic and Porter’s five forces acting on the US beer market. Porter’s five forces and the macroeconomic trends.8. The strong rivalry in conjunction with the unfavorable cultural and demographic trends makes the domestic beer market very unappealing. will show that the incumbent firms that have perfected their game can still prosper under these conditions. Impact Impact Neutral Neutral Demographic Trends Demographic Trends Social & Cultural Trends Social & Cultural Trends Global Global Governmental and Political Governmental and Political Ethical Ethical Economic (Macroeconomic Trends) Economic (Macroeconomic Trends) Technological Technological Rivalry Rivalry Barriers to Entry Barriers to Entry Buyer Power Buyer Power Supplier Power Supplier Power Threat of Substitutes Threat of Substitutes Rank Rank 1 1 2 2 3 3 4 4 5 5 6 6 7 7 1 1 2 2 3 3 4 4 5 5 Favorable Favorable Moderately Moderately favorable favorable Moderately Moderately Unfavorable Unfavorable Unfavorable Unfavorable Competitive General environment Competitive Environment General environment Environment Figure II. SUMMARY Summarizing the past two sections.C. The summary and ranking is shown graphically in Fig.C. II.8. on the other hand. 13 .

when the company acquired the rights to the Budweiser name. predecessor. the Carondelet. 75% of its total revenue. Missouri in 1852 founded its After changing ownership several times within just two years. Labbatt.. over the past 50 years Anheuser-Busch (A-B) developed into the world’s largest beer manufacturer. the company currently commands a market share of 49% and 12. Another landmark was reached in 1891. 4% from international beer sales. he jointly managed the brewery with his son-in-law.S. INC. Having been a minor local player for most of its history.Louis. SABMiller and Coors have recently expanded into the beer import market.45 In 2003. Later.D. SAB Miller and Coors dominate this market and are therefore the focus of this analysis. Anheuser-Busch. George Schneider in Bavarian Brewery— St. Inc. and 6% from entertainment. it was acquired by Eberhard Anheuser in 1860. 14 . market. The company mostly focuses on domestic beer sales. the flagship product of the Mexican Modelo group controlled by Anheuser-Busch. is 100 percent owned by the holding company Anheuser-Busch Companies. CORPORATE OVERVIEW AND PRODUCTS Anheuser-Busch. the Canadian-Belgian brewery. Inc.. the company sold beer in more than 80 countries46. ANHEUSER-BUSCH. which is dominated by Corona. 1. a. Adolphus Busch. its all-time best-selling product. Heineken is the second-ranked competitor in the import beer market segment.1% worldwide. COMPETITOR ANALYSIS Heineken has announced they are considering the rollout of the Beertender in the U. and renamed it into the Anheuser-Busch Brewing Association in 1879. In the U. 15% from packaging. is number three.S.

major portions of the value chain. but not exclusively. see Fig.b.2. on beer production and is heavily vertically integrated. related and vertical) are well above 70%. A-B earns 66% of the total available profits of the total U. 15 . and entertainment operations. or at least controls.D. In the year 2002. as it also engages in the entertainment industry and owns. packaging. upstream as well as downstream. Coors 4%. of which $2B were spent on outstanding stock purchases. RESOURCES Capital. A-B offers the most diversified product portfolio. which sets it apart from most of its main competitors.S.1.D. Business level strategies. Compared to its main competitors. All ratios (specialization. c. Anheuser-Busch’s business strategy can be best described as a hybrid between cost leadership and broad differentiation. This is intended “to take advantage of growth and productivity improvement opportunities for its beer.b. II. A-B has a higher level of diversification. As pointed out in the preceding section. As the company owns almost half of the domestic beer market. the company had a positive cash flow of close to $3B. it obviously appeals to the mass market. At the corporate level.1. Benefiting from its unmatched economy of scale. The company plans to invest approximately $4. the company has the lowest cost structure in the industry. The company focuses mainly.1. market. At the same time. STRATEGY & POSITIONING Corporate level strategies. The extensive product breadth spans from low-carb and regular to full and specialty beers. Anheuser-Busch pursues the ‘dominant vertical business’ strategy47.b. Market share. whereas Miller only 15%. and Heineken 5%48.”49 Diversification. ranging from the budget-priced (Busch family) to premium (Budweiser product line) and super-premium brands (Michelob family). Refer to fig. The company invested $834m on capital expenditures alone. This picture becomes even more dramatically in favor of Anheuser-Busch when the pool of domestic profits is analyzed. Anheuser-Busch has substantial capital reserves and cash flow volume. II. the US beer market is heavily consolidated.5 billion on technology improvements over the next five years. Anheuser-Busch commands a domestic market share of 49% when Miller and Coors controls 19% and 11% respectively.

and SABMiller. on average its senior managers have held their positions for more than ten years. Sixty-seven percent of A-B’s domestic sales are distributed through wholesalers that exclusively carry Anheuser-Busch products51. The executive staff has the highest retention rate in the beverage industry. Interestingly.56 At the retail level. Supply chain management is one of the key success factors in the beer business. Convenience stores are known to offer the highest profit margins. 90% of A-B distributors believe that this brewer delivers best-in-class service. Innovation. Typically. Anheuser-Busch has gained significant distribution power through This building exclusive wholesaler relationships. percentage is unrivaled in the industry and significantly higher than for any competitor (Coors A-B has introduced a program called “Impact Selling” that continuously educates wholesalers on effective sales methods of A-B’s products. Anheuser-Busch is led by a strong management team. only 43% of all distributors claim the same for SABMiller and 48% for Coors. 2%!52). A-B has an impressive track record of introducing product innovations. the average A-B wholesaler has an operating income five times higher than Miller or Coors distributors.6% market share . Consequently. August A. CAPABILITIES Distribution.55 Consequently. the company focuses on product and brand developments that offer the highest profit margins. In comparison. the new product achieved an impressive 1.d.54 In addition. A-B owns less than 50% of the overall market. A-B sells 33% of its production through this channel and commands a market share of 61%. In real life. exclusive wholesales relationships.53 It is further mandatory for distributors to maintain close communication ties with A-B. A-B has taken advantage of the fact that the wholesale business is driven by consolidation.the most successful product introduction since Bud Light more than 20 years ago! Commitment of management. 16 . The company’s president. a premium low-carbohydrate beer that took the market by storm. The latest example is the introduction of Michelob Ultra. A-B successfully follows a strategy that is entirely different from the rest of the industry. 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. Within one year after its launch in late 2002. as wholesalers tend to bond with strong brewers that can guarantee them sufficient sales volume.

D. such as Busch and Natural Light. Heineken USA spends on average $14. At the same time the company sports operational profit margins of 23%. In 2002. companies59.32 per barrel.2. the company spent $400m on advertising58.S.1. A-B spent $3. 65 Diversified Portfolio. A-B offers an extensive product portfolio. A-B’s advertising represents 40% of the beer industry’s overall spending of around $1 billion. such as Michelob Ultra.03.S. Assuming that costs are constant.60 Interestingly. Anheuser-Busch spends the most on advertising in the beer industry. or 176 pints. In the year 2000. 31 gallons. Both factors combined represent a major competitive advantage in a mature market! e. has been at the helm for 28 years. Having the 40th largest budget of all U. II. A-B produces five of the ten best-selling beer brands in the U. Coors $9. which is particularly high for a consumer goods company64. The company has been successful in addressing the whole product spectrum ranging from high-priced super-premium beers. a company can in principle increase its profits by either increasing prices or sales volume. Pricing Power.51. Of all 600 companies analyzed in the 2004 survey of the “America's Most Admired Companies” conducted by Fortune magazine. A-B’s large economy of scale advantage results in the industry’s lowest advertising spending per barrela. a 1 Barrel represents 117.66 At the same time.57 Advertising. Miller $6. which is about 30% below industry average. to the low-priced brands. A-B has developed superior skills in managing product life cycles. Its media campaigns reach the most universal demographics of all beer brewers and have the most impact. and Guinness a startling $14. Brand and Reputation. A-B has successfully implemented annual price increases of 3-4% that are higher than the industry average of 2-3%62.Busch III. Anheuser-Busch ranked first in the category ‘quality of products and services’. representing the fourth generation of his family to lead the company. The company also won the first rank in the overall category ‘Beverage Industry’.44 per barrel.71. Over the past years. more than its closest two competitors (Coors and SABMiller) combined.b. This is in line with a recent sensitivity analysis revealing that A-B gains twice as much profit from price than from volume increases63. VALUE DRIVERS Quality of Product and Services. 17 . the second largest amount in the industry61. A-B has six advertising agencies under contract and is best known for its Super Bowl ads. Fig.3 liters.

II.68 The company also develops environmentally friendly technologies. The company gains significant strategic momentum from the upstream vertical integration and partnering with several upstream suppliers. Fig. Consequently. in which A-B commands 40% market share.67 Technology During the past decade.1. b 18 . COST DRIVERS Economy of Scale. In recognition of its long history of environmental stewardship. follows it. A-B has a superior market presence at the wholesale. Through support of the National Social Norms Resource Center. such as the Bio-Energy Recovery System that utilizes otherwise lost methane originating from waste to heat boilers.70 The company has established an internal ‘Environmental Management System’ that establishes clear guidance on how environmental considerations are incorporated into business decisions. transportation73. Strategic upstream supply chain management. A-B maintains one of the world’s largest zoological collections in its 15 entertainment parks.A review of the corresponding BCG matrix reveals that A-B has covered all three profitable sectors of the matrix.69 Environmental and Community Policies A-B pursues a high-visibility environmentfriendly policy. In addition. Through its subsidiary. 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.e. the company has spent $500m in the past 22 years on the education of the general public about alcohol abuseb71. A-B owns three malt plants. Anheuser-Busch has a strong grip on its distribution system. of which A-B holds 61%. The company’s sheer size plus the state-of the-art production facilities make it the most-efficient player in the US beer market. the company is perceived as environmental friendly.1. A-B has heavily invested in its production facilities. Anheuser-Busch claims to have reduced the alcohol abuse rate at the Santa Clara University by 20% in 2002. marketing74 and advertising75 per barrel. the Busch Entertainment Companies. The latter represents the largest retail channel with 25% of the overall market. f. A-B has the lowest cost for production72. Delivery Due to its described distribution practices. the company received the 18th Keep America Beautiful Vision for America award in 2003. The very profitable convenience store channel with 23% of the market. Together with strong support of educational media programs.D. retail and on-premise consumption levels.

three rice mills and two hops farms. The company possesses most of its manufacturing and packaging plants: eight can manufacturing plants. a major contributor to the disparity in gross margins between the two competitors. including cost efficiencies. one crown and closure liner material plant. one glass manufacturing plant. STRENGTHS Anheuser-Busch derives most of its market strength from its overwhelming scale and scope economies. gender.77 Information collected from BudNet helps Anheuser-Busch to develop marketing strategies that target specific race. place and reasons that a customer purchases a specific bottle of beer. placements and volume. The intelligence software gathers customer buying trends. three can lid producers. 19 . g. exclusive relationships with many of its wholesalers. h.1. 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. competitors’ position including discounts. a dominant presence at the retail level. A-B ships a barrel less than a quarter mile whereas Coors ships it three miles.S. age groups and monitor rivals’ activities. CHALLENGES AND WEAKNESSES A recent survey among retailers and wholesalers indicated the following primary concerns78: a) Brand innovation. On average. such as capturing market intelligence and installing information feedback mechanisms. The ‘king of beers’ uniquely transforms this strength into several unrivaled competitive advantages. Plant locations The 12 domestic A-B plants are strategically placed in 11 states covering most of the continental U. A graphical summary of the interaction between A-B’s value and cost drivers is presented in Fig. 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. II.f. and eventually determines the exact time.1. Distributors are concerned that A-B brands are beyond their expected lifecycle. and one aluminum can recycling plant.D. advertising efficiency and pricing power. This has a significant impact on transportation costs.c76 Market intelligence The beer industry’s efficiency benchmark inched up another notch when Anheuser-Busch in 2003 introduced the Internet-based resource BudNet.

SABMiller acquired Miller Brewing in 2002 as part of their corporate level strategy to reduce risk through geographic and currency diversification. Other U. The next largest is the South African turnover which is 20 .82 The geographic separation of SABMiller operating companies keeps sharing of market and value chain activities low.473 million out of a total worldwide turnover of US$ 9. The company is the second largest brewer in the world by volume and one of the largest CocaCola bottlers and distributors of Coke’s carbonated soft drinks outside the U. The SABMiller corporate level strategy is a dominant linked corporations strategy. The management has already started to address this challenge. STRATEGY & POSITIONING Corporate level strategies.79 The primary brands in the U.S.112 million or only 38% of total turnover.S. 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”. a citrus FAB. and Henry Weinhard’s and Leinenkugel’s. CORPORATE OVERVIEW AND PRODUCTS SABMiller has brewing operations in more than 40 countries spanning four continents. SAB MILLER PLC a. This is verified by observing that SABMiller’s largest turnover is generated in the North American market at US$ 3. Further growth in output would require financing of an additional brewery. The specialization ratio is low when the geographic dispersion of the company’s separate businesses is taken into account.S. Miller Lite. c) The overwhelming success of the past decades could potentially lead to complacency among AB’s employees and distributors. The new product is billed as an ultra-premium malt beverage with a sophisticated image. Mickey’s Malt Liquor and a non-alcoholic beer called Sharp’s. b) A-B is growth limited because the company is operating above 95% production capacity. Milwaukee’s Best.. which already presents seasonal challenges. brands include Icehouse.S. 81 For example. the company teamed with Skyy Spirits to successfully introduce Skyy Blue. no single business has dominance. In response to the low-carb diet frenzy in the U. Foster’s and Pilsner Urquell. With this view. markets are Miller Genuine Draft. which the management reportedly is unwilling to support.off-guard. Old English 800. .80 b. 2. High Life. The company should therefore invest more resources in developing its high-end position. A follow-on with an added touch of cranberry flavor has been introduced recently as Skyy Sport.

Market share.S. held the second largest market share in the U.85 These ample resources enable them to make acquisitions in line with their corporate level strategy and diversify currency and geographic risks.S. As of March 2003. It regularly produces up to 21 different brews per day on nine lines with capability to process 2. The facility brews nearly every brand in the portfolio and ships to more than 100 distributors in ten states.S. In 2000. RESOURCES Capital. improve operational efficiency and grow its international premium beer brands.200 bottles per minute and 600 half-barrel kegs per hour. market. Miller Brewing.only 25% of total turnover. The company has brewing capacity of 195. facility is its largest brewing plant in the U.060 million and current assets of US$ 1.000 cans and 1.S.000 (hls 000s) in 122 breweries worldwide. beer market at 20. The company’s stated business strategy is to drive volume. Technology. Through aggressive recycling. The interrelatedness ratio and vertical ratio are also low for the same reason of geographical separation.819 million including US$ 559 million of cash in short term investments. in the U. SABMiller brewing and bottling technology is world class. the plant produces very little actual waste products. The facility is also a model of environmental excellence. 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 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.J. N.86 Infrastructure. Most of the perceived differentiation is due to brand equity.6%. then a subsidiary of Philip Morris84. c. SABMiller business level strategy is to serve the mass markets for beer and soft drinks with broad differentiation as perceived by consumers.4 million square feet of production space. Business level strategies. The plant has 1. such as Pilsner Urquell. Their Trenton. 21 . SABMiller had fixed assets of US$ 11. which inhibits value chain activity sharing and vertical integration of processing activities. Emphasis is placed on brand building through packaging and promotion to hold or gain market share.

The successful acquisition of the second largest brewing company in North America is recent proof of SABMiller’s integration skills. The company is upgrading the performance management systems across the organization. Integration skills.3% of total revenues. With operations in 40 countries. have a long established brand equity that drives their 22 . the company has a long and successful history of integration capability. SABMiller successfully integrated the difficult acquisition of Miller Brewing. most of which were integrated through acquisitions. Diversification in SABMillers portfolio is low. The Miller Genuine Draft and Miller Light brands. The corporate practice aims to make value-adding acquisitions and to develop strong brand equity89 while eliminating unprofitable volume90. 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. Skyy Blue rapidly reached fourth88 in the FAB category.Diversification. Supply chain management. SABMiller is globally positioned to take advantage of this consolidation through its global understanding of consumer needs. understanding of customer needs and the creation of shareholder value.91 and is leveraging its distribution platforms around the world to increase sales of its premium brands92.. For instance. further exemplifying its ability to understand customer needs. The company owns hotel and gaming properties in South Africa that represent only 2. e. Commitment of management. SABMiller demonstrated its ability to innovate new products with the successful launch of Skyy Blue and Skyy Sport in conjunction with Skyy Spirits. for example. VALUE AND COST DRIVERS A primary value driver of SABMiller is its brand recognition.87 Innovation. Management reduced sales and distribution costs by more than US$ 50 million by identifying synergies during the Miller Brewing acquisition. d. SABMiller has a global perspective of customer needs. CAPABILITIES Understanding consumer needs. the company primarily focuses on brewing and bottling of beer and soft drinks. SABMiller management has demonstrated its continual commitment to innovation. Recent proof of their ability to understand customer needs is the climb in share of Miller Light over rival Bud Light. Overall.

tastes. which are too numerous to detail here. CORPORATE OVERVIEW AND PRODUCTS Aldoph Coors Company was founded in 1872. Original Coors. COORS a. has the ability to produce 20 million barrels of beer in a year and is considered the largest brewing facility in the world. Coors focuses on the light beer market as the Coors light brand makes up 75% of its brand portfolio.95 All of Coors brewing and packing facilities are currently U. Various weaknesses in some world markets as described above have caused some weakness for SABMiller in those geographies.respective sales. Spain in 2000. 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. The reader is referred to SABMiller’s annual report for market-by-market analysis. based. Killians and Zima. Coors was family owned until 1975 when the company first became public. STRENGTHS AND WEAKNESSES SABMiller has strong brand leadership and it continues to develop new brands through partnerships. The new brands such as Skyy Blue and Skyy Sport leverage some of their brand recognition from being part of the Miller family.94 3.97 Other facilities include a packaging plant in Virginia and another brewery in Tennessee. growth trends. having divested a brewery in Zaragoza.96 Its largest facility. 23 . The strategy of diversification across currencies and geography makes the company relatively immune to regional changes in beer consumption. and currency fluctuations.98 Coors positions the following brands in the US market: Coors Light. Another value driver is the quality of the ingredients that produces favorable taste and characteristics of the beverages that customers desire. The Coors family continues to be involved in the company with nine of its members working for the firm. in Golden Colorado.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.S. Keystone Light.

Coors dominates smaller regions such as Hawaii and Idaho. This is evident through its Carling acquisition and its current regional appeal in the U. which garner a 30% price premium in the market. Coors seeks to grow its markets regionally. Coors has been following a more focused operations strategy by divesting key businesses. Advertising consumes significant amount of resources for Coors. which is significantly lower than other competitors. Coors currently commands 11% of the U. Coors must produce and sell enough premium beer to compete with the two largest brewers in the U.S.its packaging wing . Following a dominant vertical structure. such as ACX technologies.99 In 2001 Coors purchased Carling Brewing Co. Based in the UK. On a smaller scale.100 Corporate level strategies. STRATEGY & POSITIONING Market share.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. Coors’ current corporate strategies focus on improving operational efficiencies and expansion through acquisition. beer market share behind Miller Brewing and Anheuser-Busch. RESOURCES Capital.b. Maintaining the number two position against Scottish and Newcastle in this market will become a larger focus for this company. Their concentration of brewing and packaging resources in fewer locations puts them at a disadvantage 24 . Carling provides Coors with 19% share of the UK market. Coors concentrates on developing and marketing its premium brands. Mostly a regional player. Coors has been spending substantially more in the areas of marketing.to benefit from market efficiencies. Coors has only $19. Its spending was poised to grow 3% annually. A-B and Miller.S. In 2002 Coors became an official sponsor of the NFL and aggressively promoted its sponsorship.S.7 billion.. Coors Original and Coors Light are considered premium beers. for $1. All of Coors’ revenues come from the sale and distribution of beer and malt beverages. 104 While price is a concern for the younger age group.101 Business level strategies.103 On premise sales are an important part of the marketing mix. As a focused differentiator. and Coors targets wholesalers through close ties to top regional buyers.105 c. These brands make up more than 85% percent of its product portfolio.5 million in cash and short-term investments. Marketing spending in 2000 was 23% of revenue compared to 11% for both A-B and Miller. production and distribution. party” lifestyle.

. Coors has a legacy of socially conservative leadership andhas recently made great strides in affirmative action and competitive compensation policies. Coors initiated the first recycling programs by offering a penny return on every can. This joint venture allows Coors to expand its distribution capacity by 700 thousand barrels a year. 112 d. Coors benefits from the larger scale of Millers’ distribution network that allows Coors greater access to under-developed regional markets. provide better retail services to its on-trade customers and increase container utilization. such as glass.106 Technology. The “Ice Box” is a packaging technology that allows customers to turn their beer box into a waterproof ice bucket for ease of portability.113 Coors’ ability to manage and leverage such a tool speaks to its capabilities in targeting the right market at the right time. Coors introduced Zima in the early 1990’s. Aspen Light. Coors was the first beverage manufacturer to introduce aluminum cans in 1959. Innovation.with regard to transportation costs. Coors struck a deal with Molson to market and distribute its brands in the U.S. Leading the way for “malternatives”.111 Taking advantage of other partnerships.114 Coors also rolled out an on-trade invention called “BARMAIDS”.. CAPABILITIES Marketing.110 In 2001. It shares about 30% of its sales volume with Miller through the channel. a move that aims to relieve Coors UK of its keg and cask inventories.a “special pipe system” that can serve a pint of beer in just less than five seconds. 107 In line with this technology. Coors UK in the past year was responsible for two new innovations in serving beer. A waterproof coating to prevents leakage. Coors’ latest introduction is a low-carbohydrate beer branded. costly packing options. As well. have a greater appeal to their target market in the premium beer segment. Today.109 Distribution. In 2003. Coors invested in new database tools to assist their marketing groups in channel marketing and campaign management. Coors has limited scale of distribution. Aspen Light is part of the sustaining technologies for Coors. Coors recently outsourced the keg management of its UK brewing business to TrenStar Inc.115 Human Resources.108 As well. Honors for Coors were recently given by Hispanic Magazine as one of the top US companies supporting 25 . Coors’ efforts to reduce the weight of glass bottles provides transport savings and seventy-two million pounds of glass a year. Coors strives to improve its recycling of packaging products through its new bottling and packaging designs. which is an imitator in the market space for “low-carb” alternative foods.

Coors plans to continue this trend through the next four to five years to reduce costs per barrel by four to five dollars.117 e. order management systems and database systems for targeted marketing aim to improve channel distribution.116 The company was ranked in the UK as one of the top one hundred companies to work for. a brand of Grupo Modelo de Mexico.D. Labatt USA has strong brands with additional products such as Rolling Rock. joint ventures with packaging companies and plant upgrades. STRENGTHS AND WEAKNESSES Coors has never wavered in its dedication to maintain their access-based position in the market. Internet based systems. and is the distributor of Tecate and Dos Equis. China. Both companies participated in the beer industry consolidation.121 While A-B has 26 .3. and Labatt. Anheuser Busch has increased ownership of Grupo Modelo to 51% after an initial investment of 13% in 1993. and the UK.local Hispanic communities through recruitment policies and business contracts. VALUE AND COST DRIVERS Coors is improving its brewing operations by investing in supply chain management systems.1 ) f. Its success has been attributed to latching onto a market trend toward health conscious consumers and developing and executing a focused strategy.S.e. CORPORATE OVERVIEW AND PRODUCTS Corona beer. This is mostly driven by the high transportation costs resulting from the central location of Coors’ production plants. The company’s weakness is in establishing the correct cost basis for their strategy. As of today. Coors is not participating in the fastest growing global geography. are the major import competitors to Heineken. These investments allowed Coors to improve its manufacturing costs by two dollars a barrel from 2002 to 2003. the U. Coors has the highest COGS per barrel compared to its peers. II. Grupo Modelo also owns Pacifico and Modelo Especial. CORONA AND LABATT – IMPORT COMPETITORS a. Further growth may be limited unless the company seeks global expansion. 4.120 It remains to be seen if Coors can execute in its two main regional markets.118 Higher value for Coors brands is driven by distribution and advertising.119 (See Fig. a brand of Labatt USA. Better than average compensation and perks such as discounts on groceries and childcare were cited. In addition to the individual brands of Corona.

By carefully measuring its product mix. market. In the overall U. Grupo Modelo controls distribution of its beer within the U.S. import beer market. This is especially true in the case of Labatt USA. Because both companies are foreign owned.controlling ownership. Both companies emphasize the quality of their products and their abilities to satisfy customers. purchased Labatt Canada and formed a joint venture with FEMSA Cervesa to produce Labatt USA.125 Labatt USA has a 14. it is difficult to break out the operating profit by brand within the U. serving various niche markets throughout the country. Labatt USA is able to cover the gamut of consumer beer tastes. however its limited brands serve only smaller niche group. STRATEGY & POSITIONING Corporate level strategies. and Rolling Rock. the Belgium based international beer giant. as they are a joint venture of Labatt Canada and FEMSA.122 In 1995. While Corona remains firmly entrenched in the single product business structure. Labatt’s large portfolio of specialty beers serves different niche markets with widely divergent geographic strengths. b. Business level strategies.2% market share with the majority of its sales coming from Beck’s.S. Labatt. and Labatt Canada is a wholly owned subsidiary of Interbrew.126 27 . Corona reached a major milestone in 1997 when it surpassed Heineken to become the #1 import beer in America.124 Grupo Modelo pursues a dominant linked strategy. with a much larger stable of differentiated beer labels. market. Labatt USA’s and Grupo Modelo’s business strategies are product differentiation. The corporate level strategy of Labatt USA is dominant linked.S. Bass. Market share. Grupo Modelo controls 28% of the import beer market with the vast majority of these sales coming from its Corona Brand. Both companies focus on the specialty beer market by controlling manufacturing and distribution channels through vertical integration. Labatt USA has entered into the Ice Brewed™ beer and malternative markets. Corona focuses on its core Mexican brands and enjoys strong sales growth in each brand.S.123 Labatt is a distant third in the U. Interbrew.

FEMSA. Technology. Building brand and managing the wholesaler relationship are Grupo Modelo’s greatest capabilities. Diversification.. Labatt USA is diversified within beer categories and within customer and geographic segments. CAPABILITIES Grupo Modelo. The strength of Labatt USA lies in its capabilities in innovating and managing the supply and distribution channels. The Rolling Rock brand is centered toward the more blue-collar working class on the East Coast.05 billion in cash and cash equivalents. There have been instances when entire ciies ran ran out of Corona even after prices were doubled. In 1999. Interbrew currently has €550 million in cash and cash equivalents and Grupo Modelo has approximately $1. Interbrew. Most of Labatt USA’s growth can be attributed to past acquisitions. d. Interbrew will introduce other successful imports through its sales and distribution channel. Both companies invest heavily in state-of-the-art manufacturing facilities and research and development. 28 . Labatt USA.c. Managing the relationship also allowed Grupo Modelo to prosper in the US. Grupo Modelo sells only five brands of beer in the U. and it has grown organically without acquisition.127 Grupo Modelo has only recently expanded its manufacturing facilities in the United States. Grupo Modelo has done an excellent job of associating Corona with Mexican resorts and tropical locations. and its Mexican owner. while its Bass and Lowenbrau brands target the same segments as Corona. Labatt USA is able to meet different regional demands than Corona because it has access to brands from its European owner. RESOURCES Capital. Infrastructure. Labatt USA restructured to form four regional divisions that each assume profit and loss responsibilities. After winning the right to use the Corona brand in key South West states such as California and Arizona in 1957. In the future.S. International sales and marketing divisions are responsible for brand and product development. Both Labatt USA and Grupo Modelo have access to large amounts of capital.

The consumer prices listed in this figure represent the average price per case (24 cans of 12 oz. As an example. beer manufacturers have been very restrictive in releasing any details about profit margins and cost structures of individual product lines. Corona has been a staple in Mexico since the early 1900s. 55% and 23% of the overall market respectively. f.54 and product independent cost items such as packaging and direct labor.54 respectively. It is apparent that consumer prices may vary by as much as 50% across product lines. Since Grupo Modelo focuses on only 5 brands with huge production volume.5. The disclosure of such data would compromise the brewers’ competitive positions. 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.1. STRENGTHS AND WEAKNESSES Labatt USA and Grupo Modelo enjoy strong brand leadership. this analysis is complicated by the fact that the three-tier system demands at least three different entities to participate in the value chain. COGS is constant because the beer cost for all three products is only about $0. VALUE AND COST DRIVERS The primary value driver for Grupo Modelo and Labatt USA is their individual brand equity. 5. $1. 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. 29 .D. Unfortunately. it is able to exploit manufacturing and production scale and scope economies as cost drivers.e. Three distinct segments of the U.87 and $0. were analyzed. while Labatt has additional advantages due to its relationship with Interbrew and FEMSA that allows brand expansion. In the case of the beer industry. beer market concentrating on the super-premium. The relative price differences were confirmed by our own proprietary local research129. Many of the brands in Labatt USA’s stable. this applies to Heineken in particular.S. such as Bass and Lowenbrau have been around for centuries. whereas the COGS per case is around $4 for all brands. Historically.) across the U. Labatt USA relies more on its regional brand strengths to take advantage of distribution efficiencies. II. contribute more than 50% to COGS.S. premium and popular beer segment that represent 13%.

913 4. 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.075.913 174.A number of strategic implications can be derived from the distribution of incomes.900 2.104 319. It is determined by productspecific factors.288 8.900 1. beer market.782 615.579.075. This is another indication of the power these value chain participants have. It presents a major incentive to the wholesale and retail channel to promote the most profitable brands. etc.700 14.518 114.S.839. distributors’ and retailers’ income per product line may vary by as much as 500%.017.782 615. distribution access and control are key success factors in the U. Sales.C.100 14. such as buyer’s preference.839. Through the analysis of the following five areas.022 902. brewers proportionally share operational income gained from high-priced products with the distribution networks.809 1.781 2.518 114. surveys found that beer has the best price/value ratio of all alcoholic drinks.017. Earnings. Over the past ten years. In addition. packaging and delivery.774 Cash & s/t in (US$) Cash & s/t in (US$) Sales (US$) Sales (US$) Net Income (US$) Net Income (US$) FCF to Investors (US$) FCF to Investors (US$) Table II. 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.131 A-B A-B 191. distributors’ profits have been increasing 50% faster than those of the brewers130.D.238 542.700 2. conclusions are made regarding 30 .100 191.657 174. As a result.296.781 319.146. such as place of consumption.579. Therefore.774 -150.104 -150.5.296.296 Grupo Grupo Modelo Interbrew Modelo Interbrew 902. brand recognition.1: Competitor’s Cash.238 542.296 389.288 8.022 2.809 Coors Coors 19.657 389.146.440 19. and FCF 6. economies of scale and scope can be measured by analyzing profit margins. In addition. Resulting from the mandatory autonomy of the players in the value chain. management of the product portfolio mix is critical at every level of the supply chain based upon volume and profit margins. In addition. and circumstantial factors. seasonal and climatic conditions. It is extremely difficult to quantify the buyer’s surplus. depending on the product line.440 4.

1 29.4 1.5 1.3% 8.7% 4.8 0.1 21.9% 51.4 0.1% 11.7 22.1% -0.3% 14.8 1.8 1.8 0.1 50.7 0.4% 18.6 28.6 32.4% 45.0% 10.0% 21.9% 56.0 1.8% 11.2 30.4% 10. Grupo Modelo.6% 10.5 4.0 0.6% -99.5 1. As discussed in a later section.7 59.2% 16.1 61.6 28.1 3.0 1.3 0.4% 10.5 0.5 0.9% 4.7% 4.5% 42.6 5.7 17.4 1.5% 42.4% 57.1 1.6 0.3% 23.8 1.6% 4.7% 45.7 0.7 22.5 8.D.5 0.6 60.7 17.3% 8.7 29.2% 7.9 0.9 50.2% 10.7% 23.7 5.0 n/a n/a 0.4 2.3 0. Coors.8% -8.9 83.8 0.0 0.6 117.7 0.7% 2.1% -0.1: Financial ratios for Heineken’s main competitors in the U.0% 14.4% 17.0% 13.2% 3.3% 23.9% 4.9% 56.0 Avg Days to Pay Payables 49.3% 17.7% 23.4% 7.9% 13.1% -0.7 0.2 30.0 0.3 83.0 0.5% 15.7% 13.2 1.8 -8.0 16.7 83.1 2.4% 12.S.9 114.7 52.4% 17.9 0.5% 4.0 1.4% 12.4 6.6 4.9 0.1 Liquidity Measures Liquidity Measures Current Ratio Current Ratio Quick Ratio Quick Ratio EBIT Interest Coverage EBIT Interest Coverage Leverage Leverage Debt to Equity Ratio Debt to Equity Ratio CFO to Total Debt CFO to Total Debt 0.9 10.0 n/a n/a Table II.9 2.1 21.) Profitability Measures Profitability Measures Gross Margin Gross Margin Net Profit Margin Net Profit Margin Return on Net Operating Assets Return on Net Operating Assets Return on Equity Return on Equity Sales Sales Assets Assets Earnings Earnings Grow th Rates Grow th Rates Anheuser Busch Coors Grupo Modelo Interbrew Anheuser Busch Coors Grupo Modelo Interbrew 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 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003 5 Yr 3 Yr 2003 45.6.4 0.9% 46.4 0.8 0. A-B does have.5% 4.2 1.9 0.7% 3.9 50.8 4. d a.4% 14.9% 58.4 8.5 -10.9% 41.0% 72.4 8.3% 21.9 0.7 0.8 31.1 2.8 48.8% 13.7 29.0 1.3 1.5 8.4% 12.9% 46.1 0.8 1.1% 12.9 0.8 34.5% 0.3% 8. e d The source of raw financial data is the Thompson Online and Thompson Research database accessed online at the SCU Orradre Library.4% 12.9 0.3% 3.2% 8.8 0.2 11.9% 13.1 1.2 11.4% 10.9 Avg Days to Pay Payables 49.1 2.9 0.0% 32. the largest revenue.9% 12.6% 19.8 81.1 119.7% 4.9 Avg Days to Collect Receivables 17.9% 12.6 4.5 1.5% 4.3 0.0% 12.5 8.3% 21.3 51.1 66.1 PP&E Turnover 1.4% 14.3% 14.1 66.5 0.5% 4.0 n/a n/a 0.1 0.9 -13. and Interbrew.8 3. Interbrew.9 0.5% 15.9% 7.3% 17.7% 13.1 1.a.9 Avg Days to Collect Receivables 17.3 0.0% 10.8 1.1 2.2 1.1 1.6% 4.6 117.4% 57.8% 6.5 0. but FCF to investors was actually larger than Net Income due to increased debt issuance.1 0.8% 11.2 27.9% -1.8% -8.1 Net Operating Asset Turnover 1.0% 13.8% 41.7 6.9 10. (See Table II.8 2.6% 20.8% 7.9 1.8 34.7 0.7 2.2% 14.2 14.9 0.3 105.6% 10.8% 7.2% 14.6 60.9 2.3% 3.6 1.4% 45.6% 20.5 0.7 0.1 2.2% 11.3 105.7 2.0 16.4 0.2% 8.7 0.7 31.3% 11.0 Net Operating Asset Turnover 1. beer market.9% 8.2% 10.9 0.4 1.0% 21.0% 12.6 32.9% 7.8% 60.9 22.5 2.9% 12.8% 60.5 0.2% 8.7% 4.9 2.3 59.4 2.3% 17.1 2.1 61.1 PP&E Turnover 1.7 2.2% 7.8% 41.1 5.2 14.7% 4.2 8.9 22.4% 10.1.5 -10.9% 58.1 1.6 1.0 106.1 41.8 -8.9% 41.8 4.a.6% 45. net income and free cash flow.8% 60.6 1.4% 18.0 0.1 50.7 0.8 48.9% 12.9 0.3 1.5 108.1 119.0% 32. Coors’ revenue ranks third.7% 4.7% 11.4 4.0 0.8 0.9 0.7% 4.9 83.9% 4.8 0.7 0.1% 11.7% 2.3% 11.3% 59.4 2.3 0.7 3.8 0.6 1.7 3.8% 45. A-B uses leverage rather than cash for acquisitions.3% 17.3 51.0 1.1 1.3 Operating Measures Operating Measures Avg Inventory Holding Period 31.7 52.0 0.1 41.1 5.2% 19.2% 8.7 2.0 106.8 81.1 0.8% 6.9% 51.1 3.8% 23. by far.9 -13.3% 8.9% 8.7 3. A-B is not the king of beers as both Grupo Modelo and Interbrew have much larger cash positions.0% 14.1 1.9 Avg Inventory Holding Period 31.the financial strength and effectiveness of Anheuser-Busch.5 1.3% 59.7% 4. Grupo Modelo.1% 58.0% 72.4% 7.9% -1.7% 11. FINANCIAL STRENGTH AND SIZE: If cash is king.7% 21. 31 .5% 0.5 1. and 1998-2003 A-B.9% 14.0 1.1 0. and Coors Annual Reports.1 29.9% 14.1% -0.5 2.1% 58.6.9 0. 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.9% 4.5 108.2 27.1% 11.7 0.7 2.9 0.D.8% 23.9 1.8% 60.6% -99.2% 13.1% 12.2% 16.9 1.7% 21.1% 114.

The sales growth rate leader over the last five years has been Interbrew due to its numerous acquisitions. no meaningful financial comparison can be determined. Return on Net Operating Assets. and Interbrew takes the lead. and Interbrew. Operating efficiency. Coors. vastly outperforming Interbrew and Grupo Modelo. while Grupo Modelo pays quickest of all. it is the industry laggard in all profitability measures. Corona is the leader in earnings growth. Even though the gross margins of A-B have improved. A-B. In addition. Historically. Interbrew has been growing by acquisitions. Interbrew’s poor performance is also due to different payment standards in Europe and its broad diversification worldwide. followed by Coors. PP&E turnover is lead by Grupo Modelo. both Coors and A-B have performed similarly in inventory holding period. and Coors. This is a key factor in their ability to outperform Coors and Interbrew.b. Return on Net Operating Assets. Interbrew. Net operating asset turnover reflects operational efficiencies. and Return on Equity. they remain nearly as low as Coors. A-B generates much higher ROE due mostly to its leverage. This is measured by the average days to pay payables. where Interbrew far outperforms the competitors by using its cash more effectively. 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. Grupo Modelo. Coors and A-B are again near equals. However. A-B leads all competitors in Net Profit Margin. A-B and Grupo Modelo both have strong wholesaler relationships that allow the companies to keep average receivables outstanding low. where suppliers require timely cash infusion. and A-B. Interbrew. HOW DO THEY PERFORM RELATIVE TO THEIR INDUSTRIES? Profitability. Grupo Modelo and Interbrew have the strongest gross margins. 32 . e SABMiller’s financial data is not included as the company changed ownership in 2002. A-B. and hence. and Coors. all brewers suffered a rapid sales and asset growth decrease in the more recent periods. However. followed by Grupo Modelo due to the popularity of Corona. which is to be expected given their focus on the premium beer market. followed in order by A-B. Growth rates. and Return on Equity. Grupo Modelo’s fast payment cycle is also likely due to regional standards. This is likely due to their relatively higher marketing expenses. The Asset growth order is Coors. their performance falls behind A-B in Net Profit Margin. followed by A-B. followed by Grupo Modelo.

large cash balance. competitor. However. it has little ability to enhance its leverage during the continuing consolidation phase in the beer industry. c. while enjoying strong gross margins due to the price of its beer. and EBIT interest coverage. Leverage. its current and quick ratios are much lower. SUMMARY & IMPLICATIONS Financially. though it may also be a takeover target given its large cash balance. Its strong profitability and consistent earnings improvements cover the current debt. profitability and very strong operating efficiency. because of its earning strength. Grupo Modelo’s strong cash position translates to its strong liquidity ratios and negative EBIT interest coverage. As mentioned before. Coors has the weakest gross margins though they have semi-strong operating measures. this period should pass quickly.Liquidity. While the acquisition has not put it in a financially risky position. Due to A-B’s leverage. A-B enjoys nearly 3.S. Interbrew is the next strongest competitor though its position is slipping as revenue growth is slowing and its cash management in inventory. as the recent financed acquisition of Carling Breweries has greatly reduced its ability to cover interest expense.132 A-B has the highest leverage ratio. The only downside is its high leverage. as its net interest expense is actually interest income. A-B had higher EBIT interest coverage than Coors in 2003. but it could improve operational performance. given its strong revenue and earnings. the change of focus 33 . but it is not likely to significantly increase the debt further. payment and collection needs improvements. quick. This analysis implies that while A-B is the strongest competitor. Coors is the weakest competitor although it enjoys greater revenues than Grupo Modelo. With the Carling purchase. and strong profitability. needs to work diligently on increasing revenue and improving operational efficiencies. A-B is the strongest positioned competitor. Grupo Modelo is the next due to its continual robust revenue growth. In comparison to its closest U. Interbrew. Grupo Modelo has no debt and is therefore not leveraged. Coors is the biggest gamble given its recent acquisition of Carling. earnings successes and large growth potential. Grupo Modelo is in the best position to fuel growth through acquisition. Coors has the next strongest liquidity ratios with the exception of EBIT interest coverage. However. with the highest revenue. Interbrew’s objective of returning to organic growth has slowly allowed it to reduce leverage. Interbrew also financed a large portion of its acquisitions and also has low current.5 times the revenue. Coors’ leverage increased noticeably.

000 barrels per year). II.c. National and import beer brewers. The competitive forces underlying the corresponding mobility barriers are product differentiation (taste. As consumers become more demanding and sophisticated.2% of the U. and contract brewing companies (businesses that market and sell beers that are produced by other contracted breweries). beer market and within the craft beer market its CR5 is 52. While being different from other beer groups. such as most companies analyzed in this paper. see Fig. marketing effectiveness and distribution power on the other. the craft beer industry has recently experienced an annual growth of 40%. II. In the case of the U. Regional brewers. these distinctions are scope in distribution versus price and product differentiation. E.a.7%136. compete on economies of scope and scale. Craft-Beer Industry. These companies also offer a strong local affiliation.000. etc. Craft beers differ from standard beers in flavor and brewing style134. beer industry. Brewers that employ high-volume processes and restrict product distribution to a limited number of states. Only the craft beer industry is discussed because it is the fastest growing. beer industry.1135. Craft beer producers tend to use higher quality ingredients resulting in more full-body products with a higher degree of flavor and freshness. INTRA-INDUSTRY ANALYSIS a. There are four strategic groups in the U. details are shown in Fig.E. The industry is using the same three-tier distribution system as the large national mass producers.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.000 barrels per year).E. Brewpubs: Restaurants and breweries that sell at least 50% of their production for onpremise consumption. II.2. This craft beer group owns 3.S.S.000 and 1. supported by the fact that they are often the only local brand. regional specialty breweries (15.1.E. Their strategies call for low cost 34 . This strategic group can be further differentiated into microbreweries (less than 15. Mass producers. as shown in Fig.) on one hand and economy of scale. STRATEGIC GROUPS IN THE INDUSTRY Strategic groups are characterized by having two or more competitive characteristics that uniquely differentiate them from each other133. Coors is a prime example for this group. local attributes.S. this group’s revenue is too small to have any significance at the national level.a.

D.ingredients and large volume manufacturing processes that limit full-flavor products.E. distributors are not interested in the volume craft brewers can guarantee. The value and cost drivers governing this group have been detailed in section II. Mass manufacturers focus on large-throughput processes that are incompatible with high product quality and distinct flavor. mass producers are able to reduce the amount of ad dollars spent per barrel sold.1: Characteristics of strategic groups in the U.S. a scale-economy. c) Distribution: Though they are offered higher profit margins. cannot compete on costs due to limited volume production. Economy of scope: a) Marketing and Advertising: Mass manufacturers gain substantial scope advantages by building and capitalizing on their national brand image. d) Advertising: Having access to national mass media. 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. b) Purchasing: Small batch sizes and high quality ingredient requirements reduce the bargaining power of craft brewers with suppliers. Mass manufacturers use high-volume guarantees to their advantage. Smaller brewers and craft brewers in particular. and 35 . Mass manufacturers US manuImporters facturers Portfolio width Brand Power Product Innovation Production Efficiency Purchasing Power Distribution power Advertising and Marketing Vertical integration Local affiliation Strategic Group High High Medium High High High High High Low Budweiser group Medium High Medium High High High High High Low Heineken group Regional breweries Medium High Medium Medium Medium Medium Medium Medium Medium Coors group Craft Beer Industry Low High High Low Low Medium Medium Low High Samuel Adams group Brewpubs Low Low Low Low Low None Low None High Gordon Biersch group Table II.

the company first set up its own ‘Specialty Brewing Group’. 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. these highly specialized in-house manufactured brands were at least benefiting from A-B’s scope economies.141 c. such as sales and marketing. TRENDS IN THE BEER INDUSTRY . f Including such obscure brands as the exclusively in Texas sold ‘Ziegenbock’ line (German word for male goat). Consequently. The company employed a combination of blocking. Lastly. II. This activity eventually led to an (unsuccessful) investigation by the U. For example.142 Though not intended to change its current product offerings. A-B tried to block access for craft beer competitors by offering large cash incentives to distributors to exclusively carry A-B products.c. 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. The verdict is still out on whether Anheuser-Busch will eventually succeed with this strategy. only very few craft beer breweries have succeeded in expanding their scope in distribution. is still out. AnheuserBusch 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. these companies lack the craftbrewed market image. which is important to a growing number of beer drinkers. Though the craft beer market is still relatively small.supporting a wide breadth of product lines137. It demonstrates how fiercely incumbents will react if newcomers try to change the rules of the game. As this value chain element is extremely viable to the beer industry. 36 . Another even better example of success is the Boston Beer Company that was founded in 1985 as a microbrewery.S.143 Though giving up on the economy of scale advantage. Justice Department in 2001. A-B then decided to shape the craft beer industry by acquiring microbreweries and then nationally expanding their operations through large cash infusions. shaping and absorption strategies to contain the evolution of craft brewers.E.S. its only purpose was to offer alternative craft brews to distributors. Since this strategy worked only temporarily.140 By 2000 it had grown into the sixth largest beer manufacturer in the U.EFFECT ON STRATEGIC GROUPS The major beer manufacturers have not been caught off-guard by the craft beer revolution.1. see Fig. On the other hand. Sierra Nevada Brewing Company started off as a microbrewery in 1979138 and became the ninth largest domestic brewery in just 20 years139.

It has been argued that the tremendous success of the craft beer industry has directly benefited the import beer market144. always were extensions of existing products lines and would therefore fall into the category of ‘sustaining product development’. d.The past twenty years have also seen some cross-elasticity between the mass and craft beer segments. These tactics backfired. beer market has been relatively stable with AnheuserBusch holding the leading spot. Drastic changes in the marketing mix therefore may result in rapid damage to the brand and the market position. FAILURE ANALYSIS Over the past twenty years the U.A. It simultaneously attempted to widen profit margins by increasing price (increase P). as it alerted consumers to the existence of full-flavor beer alternatives. Details are discussed in section IV. The Heineken BeerTender. may be a disruptive technology. Schlitz and Pabst were among the leading companies. Several strategic mistakes forced these two rivals to lose their market leadership and eventually their independence.S. This reflects both corporate conduct as well as consumer preferences. ROLE OF DISRUPTIVE TECHNOLOGIES The history of Beer brewing technology is thousands of years old. POSITION AFTER THE STRATEGIC MOVE While the proposed strategic move of Heineken will certainly not revolutionize the beer industry in the short-run.corn syrup (decrease C).A. it will introduce a new dimension to the performance matrix that current market players have not yet addressed. In the 50’s and 60’s of the past century. the company tried to reduce costs by substituting traditional hops with a less expensive ingredient . as the two following stories describe. as discussed in section IV. The same applies to the product developments that as revolutionary as consumers might have perceived them. The most damaging change occurred 37 . F. as part of a novel delivery and storage solution. e. causing the Schlitz market share to slip by over 7% in just two years.146 The beer industry overall is a very slowly moving business. Schlitz correctly identified operational and economic efficiency to be the keys to success. none of them would qualify as being disruptive within the framework first introduced by Clayton Christensen145. Instead of optimizing its operations. While production methods have certainly been perfected in recent history.

152 More lowcarb beers will enter the crowded market this year. Brewers can only improve profitability (V-C) by optimizing operational efficiencies (lower C). hence. Customers noticed the difference and started to abandon the brand. Heineken can potentially face market share erosion in the absence of new light product introductions.when Chill-garde was added to increase the product’s shelf life (decrease C).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 in both cases soon recognized the deteriorating quality (decreasing V) and eventually abandoned the respective brands. Schlitz overlooked the fact that Chill-garde reacts adversely with other brewing ingredients resulting in a milky appearance (decrease V). Such tactics can only work if the value perceived by consumers remains constant or increases. with less than 8% market share remaining. Light beer was the fad of the 90’s and Atkins inspired low carbohydrate diet ignited the latest low-carb beer trend. 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. continued to take a very conservative approach to its portfolio management. It is mandatory to preserve product quality catering to customer preferences (increase V). Anheuser-Busch introduced Michelob Ultra in 2002 and immediately captured 2. G. Customers revolted and the reputation of Schlitz was eventually fully destroyed by the mid-70’s. 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.6% of premium beer market share. on the other hand.151 Rolling Rock released Rock Green Light that sold one million cases in the first three months. 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. Anheuser-Busch. Unfortunately.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. Schlitz had to be sold to Stroh in 1982. which has been regarded as the main reason for the company’s prime market position during the past forty years. 38 . Finally. thus increasing overall V-C).

advertising. any strategic move will most likely have to capitalize on the two strongest macroeconomic forces. Market share positions are relatively stable and vigorously defended. Rather. the U. Supreme Court might potentially create the largest industry shakeup. 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. beer industry is strongly consolidated and mature. marketing. then brewers that have exclusive licenses with current distributors will have huge competitive advantage over brewers that have limited market access. the U.S. 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. In addition.S.154 Recently. the rules of the game are efficiencies in production. incumbents have substantial monetary and scale economy driven leverage to protect their turfs. SUMMARY OF EXTERNAL ANALYSIS Counting among the most profitable markets in the world. 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. H.155 Although the Supreme Court was asked to consider Internet and direct wine distribution. As economies of scale and scope are the main business drivers. Heineken can also introduce a low-carb beer in Europe where Michelob Ultra has not gained a foothold. If interstate beer shipments are allowed.Heineken currently focuses on three flagship products . market intelligence. beer delivery can also be affected. In any event. This analysis shows that any market share expansion must not be based upon the above value and cost drivers.153 Other than the competitive forces mentioned in the preceding sections. efficient distribution and cooperation of the very powerful supply chain parties will 39 . as they are already maxed out. transportation. Amstel and its light version Amstel Light. that dominant players are either not able or not willing to meet. and distribution. Large wholesalers would be expected to consolidate further under these conditions. demographics changes and emerging cultural trends. 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.

Netherlands.C. Heineken and Amstel sales are ranked number one and three in the European market. sales of Heineken were €9. Moretti and Tiger. Fulfill its corporate social responsibility with regard to policies on alcohol abuse. These relationships are diagramed in Fig. is that the customer perceived product quality has to remain untouched. light beers and alcohol-free beers worldwide and soft drinks in Europe. • • • Build a strong portfolio of beer brands with the Heineken brand as the leading international premium beer. Maintain strong local market positions.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.2. respectively. Heineken operates in over 170 countries and employs over 61.. the largest Asian brand. In 2003. however. It is one of the largest brewers in the world and with the widest global presence compared to all international counterparts. Fig. principles. INTERNAL ANALYSIS A. social and environmental issues. III. Heineken also produces specialty beers.1. BUSINESS DEFINITION / MISSION Heineken is a global beer producer headquartered in Amsterdam. The Heineken Group manufactured 154 brands of beer in 2003. III. a good sales mix and an efficient cost structure. Strategic goals and objectives of Heineken:158 Become one of the world largest and financially best-performing brewing company. The company’s long-term success is guided by its strategy and three core 40 . Other leading national brands include Cruzcampo.000 people.remain a key success factor determining the outcome of any strategic move. The most important factor. which in turn controls Heineken NV. Distribute Heineken with other local strong brands. with 105 million hectoliters of beer brewed in more than 65 countries. with Heineken and Amstel as the leading premium brands and Heineken holding premium positioning in every country in which it was marketed.V.255 billion.

The biggest acquisition was Austrian brewer BBAG. 159 The goal is to provide a framework in the pursuit of sustainable growth. Heineken announced the implementation of the “Take Heineken to the Next Level” project in 2002.Worldwide success driven by 3 corporate principles: • • • Product Quality Understanding the diversity of regional and national markets Relevant Communication (to local operating companies) In line with the corporate strategy and principles. establish good distribution networks and build strong brands in each country.162 41 . Heineken became the biggest brewer in seven Eastern Europe countries. 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. three generations of the Heineken family have been overseeing the company’s strategic focus. After the death of Alfred H.161 used tough tactics to shake up the long established play-it-safe culture and began to explore new market potential. and Anthony Ruys.160 Ruys immediately began to stir things up. Heineken focused much of its innovation on packaging in order to target previously untapped markets. B. Heineken takes advantage of its size and brand equity to “Heinekenize” the acquired companies. The project aims to improve operation excellence. Since then. which on average is 10 years younger than the board had been under Vuuresteen. MANAGEMENT STYLE Gerard Adriaan Heineken founded Heineken in 1864. Heineken in January of 2002. Competition in the beer industry continued to intensify and Heineken was too complacent in its historic path of slow and steady growth. Ruys spent over $3 billion to acquire over a dozen companies in 2002. a 57-year-old former Unilever executive was promoted to the chief executive position. Karel Vuursteen. As a result of this acquisition. This program is especially important in developing uniform professionalism throughout the regional operating companies that were added to Heineken by acquisition. a “Freddie” loyalist was unseated as the executive chairman after just five months. Ruys and his management team.

C.A. As shown in Fig. CONTROLS USED IN MONITORING EMPLOYEE BEHAVIOR Heineken NV develops standards for corporate brand expansion while each operating company specifies its local business objectives. Heineken Holding NV and its subsidiaries form the Heineken company. Facilities and Support Staff .1. VALUES 1.Heineken Technical Services oversee brewery construction.2 for a high level view of the Heineken structure and its resources and capabilities. solely owned by the Heineken family.. employee performance is monitored and measured with respect to the level of contribution to improvement of operational efficiencies and marketing. Developing and retaining talented management is a top priority in the “Take Heineken to the Next Level” initiative.corporate administrative functions that are shared across all operating companies. Policy and Control . Clusters . The management board of Heineken Holding NV is tasked with long-term continuity. CONTROL. independence and stability of Heineken NV. The “Heineken University” and e- 42 .2 L’Arche Holding S. The executive board of Heineken NV is responsible for developing Heineken’s strategy and policies. In order to align employee goals with the corporate strategy. sales and distribution objectives. Ownership Structure: Heineken NV. owns 50. III.C.1. ORGANIZATIONAL STRUCTURE. finance and leadership expertise.smaller operating companies that are grouped by region and report to the Amsterdam headquarters. ORGANIZATIONAL STRUCTURE The executive board of Heineken NV established a four-part framework to manage the decentralized company:163 1) 2) 3) 4) Operating companies .005% of Heineken Holding NV and Heineken Holding NV owns a 50. modernization and expansion.005% interest in Heineken NV164. Heineken NV and Heineken Holding NV are traded on the Euronext exchange in Amsterdam.major subsidiaries with an autonomous decisionmaking structure. 2. See Fig. III.C. Heineken provides managers with easily accessible learning platforms to enhance marketing.

1. All operating companies are required to develop and maintain these programs in their regional territories. Passion for Quality: Heineken utilizes rigorous processes to ensure the best beer quality. Business Principles: Heineken embraces and supports 15 global social accountability programs. The company also implements environmental protection programs to address water consumption. Heineken has been enjoying EPS growth of 15% (CAGR). sports.165 166 3. STRATEGY/COMPETITIVE POSITION DEFINITION 1. D. music and other commercial events to enhance social enjoyment. An estimated distribution of earnings across the geographies Heineken is serving is presented in Fig.2. that 7% of the earnings growth was organic and 8% was from acquisitions. Enjoyment: Heineken sponsors arts. The company follows an uncompromising brewing practice using their age-old brewing recipe. employee representation. To reinforce and expand its position in profitable markets. society and the environment. child labor.167 Respect: Heineken respects individuals. III. management and waste issues. sexual harassment and non-discrimination. It has been estimated.D. The company follows local regulations and advocates responsible alcohol consumption. and retains employees through continuous development. adopts social responsibilities such as avoiding advertisements to minors.168 In fact.Learning system promotes the development of management capabilities through the sharing of best practices and proprietary knowledge. ORGANIZATION’S VALUES Heineken embraces three core values and executes a set of strict business principles. CORPORATE LEVEL Since 1992. including anti-corruption. It is the company’s declared corporate strategic goal to pursue the following key elements:170 • • To improve margins by increasing the proportion of premium and specialty brands in the mix. 43 . Heineken is regarded as one of the most aggressive global corporate acquirers and has established core capabilities for identifying appropriate take-over candidates169.

France.2: Heineken’s organizational structure a. the ratio of relatedness 44 . in that market. Depending on the circumstances of the respective geography.S. Heineken will either take the dominant position with a market share goal of greater than35% in a high-volume market such as Poland. Netherlands • Heineken. III. or the leader in the premium segment.Greece • Heineken Espana • Heineken Espana • Export • Export • Heineken USA • Heineken USA • Zywiec SA. Poland • Zywiec SA. France • Heineken Italia • Heineken Italia • • Vrumona. 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.171 Executive Executive Board Board Policy & Control Policy & Control • Marketing • Marketing • Production • Production • Finance • Finance • • Human Resources Human Resources • IT systems • IT systems • Communication • Communication • Legal • Legal Facilities & Support Facilities & Support • Technical Services • Technical Services • Security • Security • Company Secretary • Company Secretary • • Personal Draft System Personal Draft System Operating Companies Operating Companies • Heineken. The remaining business lines are in wine. or build a leadership position in a high-value low-volume market segment such as the import premium beer segment in the U.1.1. Holland • Athenlan Brewery. The company is strongly vertically integrated upstream.D. a key success factor of the corporate strategy.Greece • Athenlan Brewery. Whenever allowed by local laws. and Italy. spirits and soft drinks. To further improve cost structures.172 Heineken can be best described as a dominant vertical corporation. seventy-nine percent of Heineken’s business is based on beer production.D. RELATED DIVERSIFICATION Based upon the classification first introduced by Richard Rumelt. France • Sogebra. As shown in Fig. Netherlands • Sogebra.a.• • To build up new positions in attractive growth markets with the aim of being market leader.1. Holland Vrumona. Poland Clusters Clusters • Latin America • Latin America • Caribbean / • Caribbean / Central America Central America • • Africa / Middle East Africa / Middle East • Asia Pacific • Asia Pacific • Other Europe • Other Europe Figure III.

Heineken screens the target for compatibility and potential synergies with its current operations. b. production. Heineken historically has been very restrictive in disclosing detailed financial breakdowns. the generated cash is used to continue to develop the Heineken brand.” c) two players have at least 66% of the market. even if the asset is profitable.1.is relatively high. PORTER’S DIVERSIFICATION TESTS Heineken has made an impressive number of international acquisitions over the last ten years. and management assets. b) “the end game is close. This practice can be seen as a textbook example of Porter’s diversification tests175.D. III. such as IT. These recent acquisitions. it follows a well–proven pattern of business practices that are sketched out in the preceding figure. First. which is exemplary of Porter’s fourth diversification test . It then replaces some of the local management with seasoned Heineken managers.a. Heineken believes it can best enter a new geography when a) there are “attractive” beer markets. using its existing volumes and distribution. When Heineken enters a new country. The increasing profit is reinvested in further building of local brands. marketing and finance as summarized in Fig. Based upon the company’s century-old experience with efficient high-volume beer brewing.b. the company makes a series of targeted acquisitions aimed at building a critical mass of brands. which are listed in Fig. III. When a local brand has achieved a dominant market position. To qualify as an acquisition target. The various operating companies and clusters strongly rely on shared corporate resources. For example.D.1. when analyzing a possible acquisition. fit seamlessly into Heineken’s longstanding M&A tradition that extends from the 1930s.Pursuing diversification opportunities that allow shared activities.176 It is difficult to apply Porter’s better-off test and the industry attractiveness test. distribution. If a newly acquired asset doesn’t match this corporate diversification strategy. and d) there is very strong volume growth174. a local or regional operator needs to have the potential to serve as a platform for developing Heineken’s own premium brands. Heineken will sell or close it and take the restructuring charge. This 45 .2. the new leadership reduces costs through building scale economies.

1) broad differentiation through multiple strong local brands to open distribution channels. It can be concluded. The regional operations utilize a focused differentiation strategy closely tied to the strong Heineken brand equity. that most acquired companies have been successfully integrated since the Heineken’s overall ROA has remained consistently at about 20%. 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. The remaining 69.178 At the corporate level.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. The Heineken brand made up 20. III. BROAD AND FOCUSED DIFFERENTIATION Developing the business strategy is the responsibility of local operating company management. This corporate level influence over the operating companies has created similarity in systems and processes between the localized companies177. 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. c. and 2) focused differentiation of the Heineken and Amstel brands to drive sales growth.6% of 2003 sales were divided among the company’s 152 other regional brands. The Amstel brand comprised 10.1% of 2003 sales with Amstel production in 20 countries.3% of 2003 sales and was produced in 29 countries.1. Local management is expected to implement business objectives within the boundaries established by the Executive Board. More focus is put on differentiation of the Heineken brand than on any other. more than any other of the company’s brands. This is shown in the generic business level framework of Fig.makes it very hard to judge specific recent mergers. however.c.2. Heineken views itself as a single-product company since 90% of corporate turnover is from the sale of beer179. during the past five years.182 46 . Exchange of best-practice marketing and other strategic expertise is disseminated through Heineken University.D. two strategies are employed.

D. the company develops and supports global benchmarking programs 47 .c. Heineken’s most effective cost driver is economies of scope. Operating in hundreds of countries.2. 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. Heineken has gained a strong market position in a greater number of geographies than any other brewer.1: Business Level Strategy d. COST AND VALUE DRIVERS Cost drivers. the Euro has seen a record exchange rate with respect to the dollar. In addition. 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. In the past year. a recent major reorganization in its Dutch brewing facilities has further reduced production costs. packaging and promotional style.183 Already benefiting from large-scale economies. the company enjoys economies of scope in the centralized development and maintenance of its guidelines for branding. Similarly. Heineken’s cost reductions in its major export operations have allowed the company to recoup some of the exchange value loss.Figure III. 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.

advertising. The company continues to keep the learning costs high for competitors through its institution of the “Taking Heineken to the Next Level” project.2% of net sales on AMP in 2003185 compared to 13. sales and distribution.188 f. Heineken impedes competitor imitation by utilizing learning economies. 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.d.. created to bring greater professionalism throughout the ranks. and communication (or AMP. e.for optimizing marketing.S. The company also utilizes property rights protection such as patents for its unique packaging innovations. marketing and promotion).6% of turnover in 2003187.S. In the U. 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. sharing. In countries outside the U. which are all implemented at the local level by regional operations.2%. packaging. marketing. III.5% in 2000186. 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. Heineken has three main value drivers. A summary of Heineken’s cost and value drivers can be found in Fig. DISTRIBUTION OF ECONOMIC CONTRIBUTION Heineken spent 12. which establish causal ambiguity and social complexity.D. 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 Heineken brand offerings are all premium priced and these AMP drivers are used to sustain this premium value image.. All other operation costs were 74. This gave Heineken another year of double digit operating profit of 13. 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.2.1 Value drivers. beer drinking is associated more with quantity than quality.189 The company instituted the Heineken University five years back to “promote the development. dissemination and use of 48 .

193 New marketing approaches are continually explored in order to drive a valuable perception of the brand. Heineken NV is the third largest brewer in the world and has over 110 breweries on four continents. a. 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. The company recognizes that management of the brand and the corporate reputation is of the highest importance.190 E-learning is held on a regular basis to supplement the immediate dissemination of corporate expertise. causal ambiguity is very high. Heineken and its suppliers have filed patents to protect their investments by slowing down or preventing competitor imitation. A successful promotion of the brand was achieved in 2002 with a new stylish aluminum bottle developed for exclusive clubs and venues194. 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. Heineken creates and maintains corporate level guidelines for brand style. and brand development. at events and other on-premise venues. With respect to the new BeerTender innovation and its other innovations. It is the Heineken brand and reputation that customers value as it emotes the proper level of trust and cachet when served among friends.195 Its brand portfolio is extensive and brand recognition is strong. 49 .strategic expertise that can be applied in practice immediately”.191 For all of these reasons. 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. 2. The company has established an operating structure that supports capability-building activities and gives the company a strong competitive advantage.192 Heineken increases customer retention through its reputation and brand value. brand value. RESOURCES AND CAPABILITIES Resources.

Before the arrangement with Satellite Logistics was established.196 A reorganization of the sales team in the U. Heineken USA established a relationship with Satellite Logistics to improve the management of kegs in the channel for draft beer. Heineken is able to leverage key contractual outsourcing arrangements to reduce costs and provide value added services through their distribution network. Heineken USA uses a unique demand planning and system called HOPS (Heineken Operations Planning System).S. Heineken’s operating structure allows it to leverage expertise in R&D.200 Along with providing efficient channels in each market.S.201 Capabilities. 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. purchasing.198 In North America alone Heineken has over 450 distributors.. marketing. HOPS went through a major upgrade in 1999 when Logility Inc. human resources and finance over all operating 50 . Heineken’s worldwide distribution channels are one of Heineken’s most valuable resources.S. Heineken reduced its costs of cooperage management by outsourcing this activity and improved its service levels to distributors. last year repositioned Heineken to take advantage of its strong presence in the “off-trade” (same as off-premise) sector. Heineken has increased marketing and sales resources within the U. production. 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.particularly in those regions. With greater focus on the convenience store segment. Integrating this valuable resource in Europe has helped Heineken to achieve “comprehensive coverage” across the continent. such as the U. Combining Heineken’s process and Logility’s software. in order to grow its presence outside the Northeastern region where 40% of its sales volume is concentrated. Heineken was able to reduce errors in distributor forecasting by 15% and cut lead times by 50%.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 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. In 2002.199 In order to better utilize its distribution network. where their Heineken and Amstel import products are their main offerings. supplied Heineken with “packaged applications” to make HOPS Internet based.

distribution agreements and acquisitions. In larger regional markets. sponsorships and promotions.207 As mentioned previously Heineken has utilized its technical expertise to develop new strains of barley and hops. Heineken refers to these systems as a “virtual corporate office. As new companies come under the policies and procedures of Heineken’s core functions. In each region. customer and institutional (consortium and university) collaboration as well as in house R&D staff. VALUE CHAIN Heineken is organized strategically to optimize its activities. Heineken’s technology strategy encompasses supplier.companies that map to its global footprint. Each regional company utilizes this decentralized decision making to develop targeted advertising. such as the U. Since 1995.206 b.. In the past year it transitioned these functions to the corporate intranet. one of their largest acquisitions. to implement new quality systems and to invent new product and packaging technologies. Heineken strives for a profitable mix of its local brands and its international brands. this decentralized authority extends to exporting and distribution functions. The company has been active in research and development throughout the value chain.203 A testament of Heineken’s skill will be the successful integration of Austria’s BBAG.204 Heineken bridges its operations through its branding strategy. In order to ensure future success. the synergies of each acquisition are realized.”202 Heineken’s ability to utilize these systems effectively is evident in the success of its acquisition strategy.S. Each activity Heineken engages in helps support their capabilities. Heineken has a unique method for codifying and sharing expertise in these functional areas.205 This applies mostly to European operations where the company inherited brands through brewing. Branding is a core capability for Heineken. The department was staffed with knowledgeable individuals from operating companies and other corporate functional departments. Heineken currently has one of the most advanced inspection systems to detect broken glass or 51 . Its information systems play a pivotal role in corporate communications. Heineken’s resources within each regional operating company play the biggest role in making decisions about the marketing mix. all of Heineken’s acquisitions have returned their cost of capital. Heineken recently established a separate mergers and acquisitions department. 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.

While Heineken’s resources are abundant.210 Along with partnering activities and brand expansion.2.1. eventually increase market share and benefit from the “consolidation of operations between the two” companies. Globally. the activity of garnering “brand equity” is important to Heineken.D. and hopes to provide its trademark “premium” beer as a complement to Guangdong’s Kingway “popular” brand. c. This leadership position supports the partnerships Heineken will establish to continue its global expansion. Inquires. capabilities and activities gives the company a sustained competitive advantage in the global beer industry. VRIO ANALYSIS The summation of Heineken’s resources. partnering. III. such as consumer surveys are used to monitor preferences in the market. Of particular importance are the company’s capabilities in branding. Heineken has been seeking to “keep its brand relevant” for this generation. can help to expand its customer base. The company realizes that following trends in the market. such as demographics and tastes.213 For a more detailed description of Heineken’s value chain. see Fig.S.other “foreign particles” in already filled bottles. Heineken rolled out its “Beacon” program in 2002. All of these capabilities provide barriers to 52 .212 This program is particularly relevant in the U.209 Guangdong Brewery hopes to leverage this partnership to extend its distribution channels throughout China.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. Heineken Asia Pacific Brewers. Currently the company imports its Heineken brand to China through its operating company. it is the unique way Heineken utilizes these resources that allow it to maintain high performance levels. which seeks to “tap into the younger consumer”. will take a 21% stake in Guangdong Brewery Holdings and will start to produce its first “China-made brew” by the end of 2004. As president of Heineken USA.b. 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. market where the majority of beer is consumed by the 21-30 year-old demographic. innovation and information systems. Heineken’s Chinese operating company.211 Market research over the past three years has pushed Heineken in a new direction regarding its target markets. The beginning of this year marked the start of a very important partnership within the China region.

3. a comprehensive analysis of Heineken’s historical financial and operational performance using trends in the company’s financial statements. 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.s III.3. • SGA Expense: Increased yearly as a percentage of revenue between 1998 and 2003 from 29.3.1 and III.D. FINANCIAL ANALYSIS In order to understand the financial health of Heineken.7% due to increases in management expenses and advertising costs above revenue gains. 53 . III.D.g a.a.D. This is due largely to the increased revenues and decreased COGS as a percentage of sales. the Common Size Income Statement and the Year-over-Year Growth of Income Statement Items.1%.0%). HISTORICAL PERFORMANCE AND KEY RATIOS Income Statement. A graphic presentation of the VRIO is shown in Fig.a. and 1998-2003 Heineken Annual Reports.c.2.1 which shows the Restated Income Statement.2. 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.0% to 48.c. First. g The source of raw financial data is the Thompson Online and Thompson Research database accessed online at the SCU Orradre Library.2. As a percentage of sales (net profit margin). two analyses were performed. • COGS: Declined as a percentage of sales between 1999 and 2003 from 51. III. • Sales: From 1999 to 2003 sales increased by an average of 11. • Net Income: Increased in absolute value between 1998 and 1999 by €282M (10. The following analysis refers to Fig.2% (CAGR of 10. net income has increased by an average of 8. The overall decrease in COGS as a percentage of revenue is due to investments in manufacturing equipment and economies of scale. and the trend graphs shown in Fig.9% CAGR). key ratios and stock performance from 1999 to 2003 were examined.2.imitation as previously discussed.1% to 32. with a low of 46.7% in 2002.D.9%. Second.

Given the increase in revenue. ending down at 7. • Cash Flow from Operations: Increasing steadily during a five year period.D. this is expected. III.650M in 1999 to €3. when there was a large increase in taxes payable due to a change in accounting policy. While sales have increased steadily.3 and Fig. the Statement of Cash Flows.853M in 2003 due to goodwill associated with the BBAG acquisition.7% in 2003. III.3.a. • Inventories: Increasing in absolute value.D. slightly trending upward as a percentage of total assets. 54 . III.5.7% and as a percentage of total assets. especially in Nigeria and Vietnam.3. Common Size Balance Sheet and Year-to-Year Growth of Balance Sheet Items. • Property.D. Given the increase in other asset items due to the firm’s profitability. Shareholders’ Equity. Retained Earnings: Increasing in absolute value since 1999 but with some variation. • • Accounts Payable: Increasing in absolute value. The most substantial increase was in the current period as Heineken partially financed its $2B acquisition of BBAG.Balance Sheet.167M in 2002.a. The following discussion refers to Fig.D. Heineken has also been steadily investing in its manufacturing plants.4. • Cash Flow from Investments: Cash flow used by investing activities peaked at €2. III.3.D. • • Total Shareholders’ Equity: Increasing from €2.3.3. Earnings per Share Growth: Generally increasing but at a decreasing rate from 1999 to 2003. but decreasing in 2003. with the exception of 2000. • Net Receivables: Increased steadily in absolute value but have trended slightly up and ended down to 12. III. net PP&E has decreased nearly 5%.3.a. and the trend graphs shown in Fig. Statement of Cash Flows. Heineken has steadily learned to manage its inventory balances. Long-Term Debt: Increasing steadily in absolute value and as a percentage of total assets during the five-year period.a. Plant & Equipment: Nearly doubling since 1998 in absolute value.4 as well. which shows the Restated Balance Sheet. See Fig. with trend slightly upwards as percentage of total assets. Heineken has done a good job of managing its receivables.a. The following discussion refers to Fig.

8 from an average of 8. but provide 14% of the Revenues. Return on equity has also remained relatively strong at approximately 20%.6 following the purchase of BBAG. however. Fig.D. Heineken has improved their liquidity slightly. the BBAG acquisition was financed partially by an increase in debt. Performance of different geographies: Geographical and tabular financials are shown in Exhibit III.3. increasing cash from financing. but has also reduced their ability to pay interest to some extent. Central and Eastern Europe consume 19% of the volume. 55 . III. As almost all Heineken’s revenue is from beer. and 29% of the Operating Profit. The quick ratio improved slightly in 2003. and 4% of the operating profit. Africa yields much more even volume. In 2003. Key ratios.6%. but only 48% of the Operating Profit.3. Performance of Business Segments.a. revenue and profit.5% in 2003. Heineken’s Volume.3% though slipping in 2003 to 7.6% in 2003. and Operating Profit are heavily concentrated in Western Europe. although down to 16. Return on net operating assets has improved in the last 3 years to 8. • Profitability: Net profit margin has remained steadfast during the five-year period at approximately 9%. Asia-Pacific is the smallest market with only 8% of the volume.7 illustrates the key ratios for the period 1999 to 2003. consume only 12% of the volume. rising to 1. and 12% respectively. with 12%.6. but only yielding 7% of the operating profit. though slipping to 8. but the Americas provide significant operating profit. While Europe consumes 49% of the Heineken’s volume.2. this represents 63% of the revenues.4% over the five-year average of 4. 8%. segmentation analysis is only performed by geographical elements. EBIT interest coverage lowered to 6. 4% of the revenues.0.D.a. providing 11% of the revenue.• Cash Flow from Financing: From 1999-2002 cash flow from financing activities remained relatively stable as debt and dividends remained relatively stable. Revenues. Overall. This analysis shows that Heineken’s heart is tied to Europe. The Americas. • Liquidity: The current ratio has been held steady during the period at 1.

Stock performance. growth rate and the WACC estimate. b. Heineken’s stock price has declined from €24. COGs. The calculations are shown in Exhibit III. with the exception of Inventory Holding Period.55%. III.9. WACC Calculation.• Leverage: The debt/equity and Cash Flow from Operations to total debt ratios have deteriorated between 1999 and 2003. Revenue. and Depreciation and Amortization and “Other” expenses. Firm valuation is estimated using the discounted cash flow method based on financial projections for the next 5 years (2004-2008).3. This decline is mostly due to the overall stock market decline beginning in 2000. Heineken has increased their leverage to the industry average. more efficiently increased leverage and sound operating measures. resulting in Net Income.a. Heineken scores well in all operating efficiency measures. though weakness in the overall stock market has not recognized this progress. Conclusion – historical financials and ratios. WACC is calculated by weighting equity costs using the Capital Asset Pricing Model and the effective interest rate for Heineken.a. and details of the analysis are discussed in the following paragraphs. Adjusted to Heineken’s stock price and not including fluctuations in currency.D. 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. Valuation of Heineken. The company has steadily increased revenues and earnings.D. the chart in Fig. historical rates were used to determine future values for each component.68/share in the past five years. By categorizing the income statement into the major components. they have underperformed in comparison to A-B and only slightly in comparison to Coors. SG&A expense. Analysis of Heineken’s historical financial data and key ratios shows that the company has performed soundly.3.81/share to €23. • Operating Efficiency: Compared to industry averages and competitors. which results in a rate of 5.8 illustrates that while Heineken has outperformed the Amsterdam stock index. 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. 56 The terminal valuation was calculated by estimating Heineken’s future performance given the beer industry’s average .

5. Value per share sensitivity analysis.57 per share. Heineken is not strongly positioned in the “low-carb” market and is not seeking “malternative” partnerships or proprietary product lines. product and packaging innovation. educating employees. Heineken is strongly positioned in the North East U.S. the calculated value per share ranges dramatically. sharing expertise throughout the company and distribution. Heineken has a weaker presence. In the U. Heineken has strengths in branding.. 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 57 . Given that the current share price is €29. The company’s import position creates risk since import beers are highly sensitive to economic conditions. TECHNOLOGY STRATEGY Heineken’s technology strategy described in the previous sections is relevant to its corporate and business level strategies. Higher logistics costs inherent in the import position.S.Heineken’s intrinsic share value is therefore €24.216 In other regions where imports have more growth potential from smaller share levels. region that is already dominated by import beers that have a penetration of 15-20%. 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. 4. For instance. 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. Weaknesses: Heineken’s business strategy may prevent it from following key trends in certain markets. This is a weakness of the model. STRENGTHS AND WEAKNESSES Strengths: In summary. 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.S.25 (AMS 5/31/2004)214.215 Heineken lacks channel strength and equal presence in all regions of the U. it is concluded that Heineken is currently slightly overvalued by the market. 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.

223 As of last year. 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. 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.219 In 2002 Groupe SEB purchased the failing operations of competitor. By effectively utilizing Heineken’s central R&D resources.221 SEB Strategy. STRATEGIC MOVE – PARTNERSHIP WITH GROPE SEB The BeerTender is a good example of Heineken’s technology strategy at work.224 Innovation metrics are important to the firm. are worth more in the market. which included four of Moulinex’s 26 subsidiaries. Groupe SEB is a world leader in small domestic appliances. Groupe SEB co-developed software in 2002 to implement a “product features” modeling tool. Background.8% of revenues on R&D.220 The four operations sold to SEB were Krups GmbH. 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. In the deal.222 The company is dedicated to building competencies in product development. Group SEB employs fifteen thousand people worldwide and carries a broad portfolio of branded products. Moulinex. In order to execute on this objective. 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.217 6. Groupe SEB focuses on providing value through innovation at the optimal “price-performance ratio”. in turn. With this purchase. Groupe SEB employed 400 people and spent 1. Groupe SEB’s market share increased to 15% of the global market in small appliance sales. Moulinex sold off its food preparation and brunch line businesses. This system helps Groupe SEB determine which product features are most relevant for customers and. Management measures the 58 . Vistar SA and Krups North America. This activity both complements and is consistent with the firm’s differentiation strategy. Moulinex Espana. Implementing sufficient quality control is of particular relevance when Heineken seeks new brewing partnerships.knowledge about packaging and brewing technologies.218 With its presence in almost as many countries (120) as Heineken. operating companies can utilize the BeerTender innovation to drive value in their local markets.

EFFECT OF STRATEGIC MOVE ON STRATEGY The BeerTender innovation complements the focused differentiation of the business level strategy on the Heineken brand. The unknown elements of demand increase the risks of supply and gives Heineken motivation to devise well thought out penetration plans for the product. Groupe SEB strives to offer a complete choice of small appliances in “every market segment and all potential consumer targets. a “Customer Welcome Centre” in France.” This change was implemented to get away from sales driven forecasts and improve supply targets.”230 Strategic Sourcing Framework: Both Groupe SEB and Heineken have core capabilities in R&D. personal care devices.231 As suggested. would have to source it from an appliance manufacturer. gives relevance to the strategic sourcing framework. linen care products.“rate of new products” and “patent performance. and exhibition centers in Brazil.225 The company’s supporting activities include customer support. Consumers are willing to pay the same or more per unit volume for the freshness of 59 . the company upgraded its call center software last year.227 SEB’s supply chain processes have been enhanced with “order-driven production. The fact that Heineken.229 These products include cookware. While not impossible. Internet sites. and floor care products. food and beverage preparation appliances. it was Heineken’s lack of capabilities that outweighed its need to control development and manufacturing.226 In order to improve the quality of customer support.228 Improving efficiencies in production is of particular benefit to SEB given that it produces 80% of all of the products it sells. It is expected to increase net sales margins in the take-home segment232.” Each year the firm files about 50 to 70 patents. 7. Supply is a major strategic issue for Heineken given the innovative nature of the product. it is highly improbable that Heineken will ever expand its capabilities to include BeerTender production. New CRM software will allow better processing and control of calls. in developing this beer-dispensing product. Heineken has no resources to produce such appliances even if they could invent such a device. Heineken’s motivations for partnering with Groupe SEB to develop the BeerTender were probably driven from its lack of technological expertise in small appliances. coordinating productive and flexible manufacturing and maintaining a broad portfolio of products. Support services offered by SEB include call centers.

market234 is well understood in the industry.S. 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. new emphasis on these market segments will be required.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. 60 . This innovation will foster Heineken brand recognition and loyalty. 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. and communication. in the new kegs. The importance of consumer demand for choice at the wholesale level233 and the current high demand for premium light beers in the U. 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. marketing. and improve off-trade consumption.S. This means that the introduction of the BeerTender will not complement the broad differentiator strategy at the business level. Heineken has not announced any provisions for the distribution of Heineken’s local and regional brands in the unique four-liter kegs. As the BeerTender is targeted to grow the take-home market and the consumption of Heineken by the maturing demographic. 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.

This feature is becoming more important in the perception of the quality of the beer. IV. It possesses of number of attributes that are not currently offered by other beer market players: • • • • Ability to drink fresh draught beer at home.2 : 61 . rather than a technology.1. that goes beyond the appliance itself.A. This novel beer enjoyment process satisfies the three criteria set forth by Clayton Christensen237 for disruptive technology as shown in Fig. freshness. The dimensions of taste.A.) 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. as the beer is now stored in a stand-alone appliance.IV. IV.236 New storage solution. Beer bottles will no longer take up space in the kitchen fridge. and sophistication take on new competitive significance moving forward in the drive to capture and hold market shares. The BeerTender presents a disruptive process. storage. and enjoyment enhancing characteristics. Demographic research235 shows that this attribute is one of the key value drivers for beer consumption. the BeerTender addresses this paradigm shift by serving the demographic that appreciates import beer.S. beer consumers have become increasingly demanding in their beer drinking experience during the past ten years. U. Reduction of waste. Novel packaging solution. occasion. THE EFFECT OF THE STRATEGIC MOVE ON INDUSTRY CONDITIONS The overwhelming success of the craft beer revolution (see section II. The environmentally friendly population will appreciate that beer no longer comes in disposable containers but in returnable and reusable kegs. these beer drinkers tend to have higher education levels and higher incomes as shown in Fig.E. With its new overall delivery. ANALYSIS OF THE EFFECTIVENESS OF STRATEGY A. and venue of consumption. Compared to other beer segments and the population in general.

238 Only the BeerTender offers the solution.A. and under developed keg delivery and return systems.239 Guinness released a new bottle featuring a “Rocket Widget” to form the beer head. Although this device has additional attributes such as. such as the BeerTender. it is highly likely that the evolution of the BeerTender technology will outpace current cooling and storage solutions. lack of on-premise atmosphere. heavier. Pace of innovation is higher than for sustaining technology developments: Given the maturity of the current normal beer drinking experience. Based on survey results. Better performance in some respect: Only advanced thermo-electric technology development can produce relatively inexpensive countertop home appliances. Worse performance in most other respects: The majority of beer drinkers may find the BeerTender initially very limiting: limited brand choices. Current refrigeration technologies are larger. style and novelty. between 1% and 9% of the combined super premium. microbrewery.240 The superior technology of the BeerTender will undoubtedly encourage competitors to further develop imitating or 62 . only a small group will be interested in buying the BeerTender in the beginning.2: Schematics of the disruptive potential of the BeerTender technology.satisfaction um On-premise cons ption f re N sh ov ne el ss ty/ /s sty op li hi ng st / ica tio n e/freshness Atmosphere/choic Consumption at home Convenience/ch oice/portability Be er Te nd er time Figure IV. based upon customer perceived value drivers. and produce external heat. and import beer market will purchase this appliance. noisier. Budweiser has already developed a new canning process that preserves draught freshness.

D. and Home Bodies. a multiplier must be established between the BeerTender Survey results and the real market. represent converts. Novelty seekers will convert to Heineken for the novelty of the BeerTender. Novelty Seekers. 63 . The calculations used to validate any potential increase in market value from the BeerTender include an estimate of the market size. Home Bodies. Each was labeled by their intrinsic habits. This demand is then used to calculate the initial penetration.C) an initial demand forecast by segment. 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. like the Novelty Seekers. Heineken Insiders. 25% is consumed on-trade and 75% off-trade. Therefore. the Heineken Majority consumes 50% of their beer at home. and estimates of the wholesale price for new sales. Heineken Insiders drink only Heineken at home. savings from bottling costs. SCENARIO ANALYSIS AND EFFECT ON VALUATION The previous financial valuation does not take into account the rollout of the BeerTender.4% and 7. B. assuming the non-Heineken on-/off-trade split of 25/75. In order to calculate the potential market size.6% respectively). The Heineken split is 50/50242. the difference being they consume all their beer at home. For the following years a constant growth of 4% is assumed.S.241 The BeerTender survey provides (see section VIII. which is used to compute Heineken’s valuation under three different scenarios. The results of the survey separated the BeerTender market into four segments. except for Heineken.a.3. The survey shows that most respondents have an affinity for import and premium beer. beer volume by the fraction of the market imports and premium beers represent (11. Heineken Majority.37 million cases. market penetration by segment. Multiplying the total U. an estimate of beer volume market is calculated to be 535.substitute solutions for improving freshness and experience and for avoiding Heineken and Groupe SEB patents on BeerTender technology. Detailed calculations of the following Scenario Analysis are provided in Fig.10 and BeerTender Survey results in the appendix furnish supporting material. III. Assuming the same on-/off-trade split. For all brands. the BeerTender will cannibalize 50% of the off-trade can and bottle consumption. It is assumed that they will drink approximately 75% at home243.

In the base scenario.244 The BeerTender kegs provide beer to the consumer without some of the costs of bottling and canning. The result is a pre-tax increase in net income to Heineken using the assumption that marketing expenses are a relatively consistent expense. wholesale prices. Heineken will benefit from a lower cost of goods on incremental revenue. estimated cost savings. multiplied by the BeerTender keg margin. as it is only a unit measure with a constant conversion.3. Assuming a 2004 Christmas rollout of the BeerTender. The wholesale price of beer in the U.10. assuming sterilization and refilling costs are only 20% of the normal bottling process. While the unit volume associated with the BeerTender is not represented in cases.87 per case for A-B (discussed in the willingness to pay section of the external analysis) and multiplying by 20%. For the cannibalized case sales. Cost savings were estimated by using the bottling cost of $1.D. For each segment. and packaging.a. revenue is calculated as the product of the wholesale price multiplied by total cases. 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. an estimate of the BeerTender’s financial impact can be calculated. Having gathered the market size. labeling. and margins. it was estimated that increased spending during this time period would allow Heineken to realize 25% of annual sales potential during this season. the savings are computed as the product of savings per case multiplied by total cases. In addition to cost savings in cannibalized consumption. Using the scenario A margin analysis showing the calculations is provided in Fig. filling. these numbers are added to the original DCF valuation with additional assumptions.Novelty Seekers and Hoem Bodies represent incremental market share growth in Heineken’s favor. III. this concession has no effect on the final result. sterilization. the results of the BeerTender Survey’s “latent demand” were used as the demand in the market place. Scenario 1 – Latent Demand. In order to calculate the effect on Heineken’s market value. The costs involved in bottling and canning include.S. 64 . it is convenient to do this analysis in terms of case volume. For converted sales. The savings translate to a direct pre-tax net income increase. which were determined through primary research. market was calculated using margins for each player in the distribution chain. potential demand by segment.

49 % Change 0.46 million in profits will be earned from new sales. Based upon the survey results.(w/Beer Tender & Choices & Price ↑) €/Share € 24. which yields approximately 8% more per case wholesale.9 and Fig.9 and I Fig. III.10.D. indicating that Heineken should introduce the BeerTender.10 in for Scenario 3.70 € 25.14 million and €13. Using the DCF analysis. the net effect is an increase in stock price of around 0. increase market awareness. Scenario 3 – Choice and Increased Beer Price.2% in share price as shown in Scenario 2 of Fig.a.2% 7. This yields an increase of 3.D.a.a.5%. Table IV.04 million in savings will be achieved and €1.a. III. III. cost savings will be €17.B: Summary of Valuation Scenarios Results Base Case . and the company increases the price 15% per keg.3..B below summarizes the variation in value per share calculated for the different scenarios evaluated.D.8% 65 . introduce choice and charge more 15% more per volume at retail for the BeerTender keg in order to maximize shareholder value.D. III.D.45 million in profits from new sales.10.3. The scenario model results indicate that cost savings will yield €9.a.3. The most optimistic scenario assumes that Heineken introduces the “Around the World in 80 days” promotion as outlined in the recommendations.analysis model shown in Scenario 1 of Exhibit III.5% 3.(w/Beer Tender & Hit Promotional Goals) Scenario 3 .35 € 26. Conclusion – Valuation. the calculations determine that €3.3.57 € 24.3. a measure that is consistent with the marketing assumptions in the survey analysis. This promotion brings choice to the consumers.5 million and net income from new revenues to €48. Table IV.3.8% as shown in Fig.(w/o Beer Tender) Scenario 1 . Scenario 2 – Achieve Promotional Goals.6 million. The results of the various scenario analyses are positive for the implementation of the BeerTender.a. This generates an increase in share price of 7.(Beer Tender & Latent Demand) Scenario 2 .D. 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.9 and I Exhibit III.

and the off-premise sector garners higher profits for the brewer. thus improving profits and sheltering the company from negative macroeconomic factors.246 The introduction of BeerTender will attract off-premise customers to enjoy Heineken.C. in the new four-liter keg to enhance brand image. it also exposes the company to greater risk during periods of economic downturn. 66 . Heineken. Heineken’s presence in the U. Older beer drinkers with more easily disposable income can more easily afford the BeerTender. the on-premise is the most sensitive sector that is most heavily influenced by the economy. These drinkers (35-49 years old) are estimated to comprise 35% of the beer drinking population by 2005.S.245 While its import positioning allows the company to earn higher than average profits. Heineken USA will offer its premium brand. it will remain the largest consumption group over the next five years. OVERALL EFFECTIVENESS OF HEINEKEN’S STRATEGY Sales of BeerTender in the U. market is improved by positioning the BeerTender toward the older demographics and the offpremise seegment. Generally. complements Heineken’s focused differentiation strategy by offering a unique beer drinking experience. This strategic weakness is highlighted by the fact that Heineken’s split of on-premise sales to off-premise sales is 50-50. While the beer consumption growth in this age group is not as high as the 21 to 27 year old group.S. Most U. brewers maintain a 25 to 75 split between their on-premise and off-premise sales respectively to maintain a healthy channel mix.S.

3 SHORT TERM AND 3 LONG TERM RECOMMENDATIONS 1. marketing and future development of the BeerTender appliances. There are three primary reasons for recommending a nationwide rollout versus a regional rollout.V. As the introduction of the BeerTender is in-line with the strategic goals of Heineken. the resources Heineken and Groupe SEB need for a nationwide rollout are almost already in place. 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. As previously indicated.247 Therefore. Krups 67 . SHORT TERM RECOMMENDATIONS The preceding analyses lead to the following short-term (one year) recommendations: 1) Nationwide U. In order to position the BeerTender. 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.S is already established to serve the more mature and upscale consumer. Heineken is responsible for the production and distribution of the BeerTender kegs. Groupe SEB is responsible for the production. RECOMMENDATIONS A. the first recommendation is that the company should launch its introduction in the U. 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. Heineken has existing marketing and promotional resources at the national level. Second. The BeerTender will carry the Krups brand. 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.S. Heineken must create focused advertising and promotional collateral with this demographic difference in mind. First. Rollout of BeerTender. 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 Krups distribution network in the U.S. at the nationwide level.

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. Americans are increasingly health conscious and are susceptible to following health fads capriciously. 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. 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.C. SmartMall and Cooking. The consumer completes one world tour every 80 days. 2) Introduce Amstel Light in BeerTender kegs.). these diets are driving demand for more light beers. The Tapvat does not have the same cachet or refrigeration features of the BeerTender. The current American health craze is centered on low carbohydrate diets. Its lower price makes it a good introduction for the cost conscious consumer to the benefits of draught at home.2.1 shows four possible world 68 . This promotion concept is called the “World Passport of Draught Beers”. it is easily understood that all beer wholesalers and mass market retailers are volume driven.com. 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.A. Amazon. 3) Introduce Tapvat in the U. 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. it follows that they will eventually desire to trade up to the BeerTender appliance. Bed Bath and Beyond. Market. 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. 2.248 Third.S.1. As previously discussed in the external analysis.is very selective in choosing distribution outlets as it only considers high-end stores such as Macy’s. Figure V. The Tapvat is a disposable five-liter keg with a built in tap for off-premise consumption. As the drinking habits of these consumers are established around Heineken and their financial means grow.

The software should also have intelligent capabilities that can predict seasonal demand and automatically send Heineken shipments to wholesalers ahead of the demand. For example. HeinekenNet should monitor regional preferences and offer targeted promotions. Heineken and Amstel. A sufficient number of kegs needs to be put in the Heineken distribution warehouses to meet initial demand. IMPLEMENTATION OF ONE SHORT TERM RECOMMENDATION In the short term. 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. Two examples are 1) a new DuoTender that can hold two kegs of beer. 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. It is proposed that Heineken builds new differentiating models of the appliance to reinvigorate the demand. The Heineken warehouse distribution system needs to be set up to handle the kegs and their return for refilling. Heineken should build a similar data mining system to forecast customer demand and streamline its supply chain. 2) Implement market precision forecasting system While Anheuser-Busch gathers customer information with BudNet. cans and bottles to wholesalers worldwide. In addition. With so many countries and brands to choose from. or a surfer who lives in Miami Beach can receive a free beach chair when six BeerTender kegs are purchased. 23 complete tours can be completed without repeating a single brand. Consumers will enjoy the experience of operating a mini-pub in their own homes. STRATEGY IMPLEMENTATION 1. 2) The traditional BeerTender can be given a makeover. Heineken needs to ensure the full adoption nationwide of the BeerTender through the implementation of the following steps: Distribution. B. Prior to introducing the American public to the BeerTender.tours.249 The preparation of the warehouses needs to be synchronized with the filling of the Krups supply 69 . Heineken needs to prepare the distribution channel for the rollout. The “HeinekenNet” should link with the HOPS system to deliver the kegs. music fans can be rewarded by free music downloads. with different color schemes.

channel with BeerTenders. This will continue to keep momentum of the rollout going and grow demand through the product life cycle. with a portable version of the BeerTender. New advertising placements should be made in media that target the middle-aged demographic. Heineken could capture the interest of this segment. volume and awareness simultaneously. 70 . Since novelty and styling are the key value drivers for the BeerTender. communication of these features should be emphasized. If volumes are below expectations than price promotions such as rebates on the BeerTender should be offered. Timing. The best timing for the rollout of the BeerTender is the Christmas selling season. The younger demographic. R&D efforts to target on-the-go segment. One proposal for the effective leveraging is the placement of a colorful brochure in the packaging of Heineken 12 and 24 packs. Advertising. 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. This incorporates the all-important Thanksgiving holiday. aged 21 to 27 generally likes to bring beer to house parties or tail-gate parties. Research and development efforts to ruggedize the BeerTender. or camping trips. should be initiated. If these plans are not already in place for December 2004. It is important that the initial momentum of the rollout is sustained through a sufficient availability of BeerTenders. even at the high price point. The message needs to emphasize the novelty. The brochure should direct the consumer to retailers that carry the Krups branded products. styling and convenience of the BeerTender appliance and sophisticated enjoyment of fresh cold draught at home. the source of power being the automotive cigarette lighter. plans for the rollout prior to the beginning of summer in 2005 should be initiated immediately. The rollout performance of the BeerTender and kegs needs to be closely monitored through the distribution network. Control. The costs of advertising should be shared between Krups and Heineken since both companies benefit from the commercial success of the BeerTender. This means that price promotions will increase revenue. much like the Jeep portable boom box. Promotion can be decreased if demand outstrips supply as it did in the Netherlands. The price elasticity was found through the analysis of the BeerTender survey to be between two and six.

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. Up to this point in time. Only a small number of these are imported into the U. produced in all corners of the world. of course.2. In the long run. 71 . creating competitive choice for consumers that will challenge Heinekens lead.S. IMPLEMENTATION OF ONE LONG TERM RECOMMENDATION Introduce an Around the World in 80 Days Promotion. This. 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. competitors will find ways to imitate the BeerTender function. For competitors. Heineken probably can capture most if not all of the beer consumption of the BeerTender owners. which are more insulated from economic downturns and provide higher margins than the on-trade. The promotion can be augmented with prizes by awarding points for each completion of a world tour. The passport contains a number of world tours that can be completed in succession. 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. 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. The survey results point clearly to beer selection as a key value driver of the BeerTender. this strategy may work by making inroads into the homes of Heineken brand loyalist. Heineken has a portfolio of 154 brands. 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. With a large enough selection from its portfolio of beers. In the short run before competitors are able to overcome the isolating factors set up by Heineken and finally imitate the BeerTender concept. The traveler is issued a “Heineken World Passport” at the beginning of his or her world tour. Heineken has made no indication that other brands are slotted for introduction in the unique fourliter BeerTender keg. choice is more of a problem. The world traveler receives a colorful sticker depicting the logo of each new country brand as it is received. including Heineken and Amstel.

BevMo is already a Heineken retailer and its position as a specialty liquor store is consistent with respondent’s preferences for purchasing the BeerTender.8% increase in share price only one year after introduction in the U. marketing and promotion.BeerTender kegs can be shipped through an agreement with BevMo (Beverages and More) which has "brick and mortar" stores in all 50 states. 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. The company can expect to increase its share of the off-trade and improve its free cash flow for up to a 7. 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. aluminum bottles and keg cans and cold fresh draught at home with the BeerTender. CONCLUSIONS From innovations in hops and barley to operational management and efficient production. 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. Heineken is truly a global beer industry leader and a strong innovator at all levels of the value chain. brand development.S. It appears competitors will be caught totally off guard without any foreseeable or equal response for some time to come. this presence allows BevMo to ship alcoholic beverages within each state from local stores and warehouses. Heineken’s BeerTender gives beer drinking new cachet and fresh draught taste with a ritual like experience that is fun and enjoyable at home. Per government regulations. and other parts of the world to every Heineken beer drinker’s delight. VI. 72 . market.S. Per the BeerTender survey 80% of survey participants wanted to purchase this appliance and the kegs from a specialty store such as BevMo.

S.VII.250 40% 35% 30% 25% 20% 15% 10% 5% 0% 21-27 28-34 Age groups 35-49 50+ 1997 1998 1999 2000 2005E 2010E Figure II. beer market.7.251 Percentage of beer drinkers in age group For older people Tastes great 73 .C.C.1: Share of beer consumption across age groups in the U. TABLES AND EXHIBITS 90% 80% Response of Regular Alcohol Drinkers 70% 60% 50% 40% 30% 20% 10% 0% Fun to drink Good to drink at home Good to drink at a bar Beer Wine Malternatives For younger people Healthy to drink occasionally High quality Good value Good to drink with meals Good to drink at a party Too expensive Sophisticated Figure II.1: Category image among alcohol drinkers who have consumed alcohol in the past seven days.2.

C.V.b. SAB Miller SAB Miller Heineken Heineken U.A. N.A. Labbatt Labbatt USA USA Grupo Grupo Modelo Modelo Low Cost uniqueness perceived by customer Niche markets Figure II. N. not the CAGR. U.S. Adolph Adolph Coors Co.252 Mass market Anheuser-Busch Anheuser-Busch Heineken.1.20% 15% 10% 5% 0% -5% -10% -15% Total 1996 2001 2006 2011 5 year growth rate [%] Figure II.D.V.7.S. Heineken. Given numbers reflect the growth rate over 5 years.1: Comparison of the business level strategies employed by the beer manufacturers analyzed in this study.2: Growth rate of the US age groups. Coors Co. 0-20 Yrs. 30-39 Yrs 40-49 Yrs 74 . 50 and above 20-29 Yrs.

1: Anheuser-Busch’s product portfolio presented in the BCG matrix. Legend: Portfolio share Growth rate Profit margins high market growth low Figure II.Anheuser-Busch Portfolio 2002 ) % (6 er th O 1% er ) lv % Si (0 ) di tra % ar l U t (3 ac b ) B elo igh % L h (1 b ic b M elo lo h he ic M ic M L al ur at N ht ig 8% ud B r3 se ei w 2% Figure II.2: Anheuser-Busch’s portfolio in 2002.66 low 75 .b. given shares present the percentage within the Anheuser-Busch portfolio.D. 253 ch us B gh Li t6 % ch us B 7% 36% +9% $1.1.0% +100% $ 2.66 7% -3% $0.66 32% -3% $1.e. Note.0% $0. Anheuser-Busch owns approximately 50% of the total US Beer market.66 high market share ud B Li t gh % 36 6.1.5% $? 6% +2.05 8% +1.D. not the total market share.

was once a fully-owned subsidiary •Utilizes e-procurement initiatives for indirect suppliers – “ERIC” Inbound logistics • Packaging technologies contributed by Owens Brockway • Secures contracts for vital inputs to its brewing operations – ex: barley Operations • Asset Care – forecasted maintenance program for brewing facilities •Preventative maintenance programs – outsourced •Completed two year project on plant upgrade with Ball Corporation •Created virtual laboratories to increase productivity and improve quality control Outbound logistics • New system allow for distributors to gain control of their orders to improve tracking and delivery •Shared distribution system with Miller •Partnership with Molsen for distribution of its beer in the US •Outsourcing of keg ownership/management – partnership with TrenStar Inc •ISO tank containers used for international transport – equipped with refrigeration units Marketing & Sales • Introduction of Aspen Edge – low carbohydrate beer offering •Repositioning of Zima in the “malternative” product segment •Strong light beer brand – Coors Light •Investment in three types of advertising media – traditional advertising.f. Marketing & Sales • Largest ad and promotion budget of all beer producers ($650 million) • Lowest advertising/barrel costs of all beer companies • Ad campaigns have highest impact on target group.1: A selection of value and cost drivers contributing to Adolph Coors’ value chain. • All plants are state-of-theart • Minimal freight costs • Operating at 96% capacity • Economy of scale (A-B is the most cost-effective player) • Higher leverage in the distribution channel Outbound logistics • 67% of production is sold through exclusive wholesalers (increasing!) • 80% of wholesalers exclusively sell A-B • A-B owns 13 wholesalers • Highly efficient interaction with downstream supply chain • Ability to instantaneously react to changes in consumer patterns. parties • Improved dispense technology – pint can be served at two degree’s above freezing • Updated supply chain management systems • Ciber system for best practices in governance to meet requirements of Sarbanes-Oxley Act • Ice bucket box transforms into cooler for outdoor events/parties Human Resources Technology Development Legend: -.Cost Drivers Figure II.e..1: A selection of value and cost drivers contributing to Anheuser-Busch’s value chain. Financial and Org. • Budweiser ad campaign well known.1. structure • Good cash flow with improving cost structure • Aggressive debt reduction – reduced by 1/3 in just two years • Higher than average advertising expenditures • Reorganization of US sales and marketing groups • Strong culture where employees are recognized for every achievement of the organization • People at the core of their strategic plan – good benefits! • Diversity programs for hiring and maintaining minority workers • Promote social responsibility in employee practices – hired taxis for everyone at Co.3. Inc. of super-premium low carbonhydrate beer • Busch Agricultural Resources. high operational efficiency • Development of new brands (Michelob Ultra and World Select) • Dev.D. (BARI) researches and develops brewing ingredients Value Technology Development Procurement • Impact selling: Continuous education of sales force and distributors (considered to be best-of-class) • BudNet: IT-based market intelligence system Inbound logistics • 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 • 12 production facilities covering continental US. “close-tomarket” promotion •TIPS training for customers – how to become responsible servers •Database systems for targeting and positioning -. • Leading market share position in all retail channels (prime player in convenience stores that earn the highest margins) • Strong reputation among wholesalers • Broadest portfolio of all US beer manufacturers Cost Figure II. 76 .Financial and org. structure • Highest net profit margins in the industry • Lowest average days to collect receivables • Strong cash flow with lowest cost structure in the industry Human Resources • Strong management team with years of specific industry experience (Busch family: 1 1/2 centuries!) • Very disciplined portfolio management • Clear vision and execution of international expansion strategy • Strong emphasis on execution.Value Drivers Procurement •Close partnerships with suppliers – Ball Corp 50/50 venture to secure supply of cans – Graphic Packaging supplies most paperboard products.D. product news.

59 $0.1: Value chain and willingness to pay analysis for three different Anheuser-Busch product lines.53 SG&A $2.28 $0.83 $0.67 $0. sales tax) • High quality ingredients • Full body flavor • Brand image • Low-carb (light version) • Freshness • ‘Male image’ • Brand image $17.42 $0.54 $1.56 $0.35 $0.40 Wholesale $1.65 $2.95 $0.98 $0. it is beer!’ Anheuser-Busch Wholesale Retail $11.23 SG&A Pre-sell Warehousing Delivery State tax & freight Excise tax Costs Anheuser-Busch SG&A COGS $4.39 $0.54 $1.23 $0. These products represent three different market segments and are intended to show the profit distribution across the value chain 77 .54 $1.97 Figure II.43 $0. All numerical data are taken from reference254 and are averaged across the US market.17 $3.71 $0.10 $0.51 $1.10 $0.77 $0.43 $1.56 $0.17 $4.40 Operating Income P-C: Firms’ surplus Retail $15.66 • ‘Hey.5.23 $2.10 $0.87 $0.41 $0.43 $1.Ultra-Premium (Michelob) Premium (Budweiser) Popular (Busch) V-P: Buyers’ surplus Retail price (excl.75 $2.68 $0.05 $1.D.

9% Redhock Ale Brewery F. 5.7% Figure II.7% New Belgium Brewing 5.E. Size of circles does not scale with revenue.2: Market share of the leading microbrewers in the US craft beer industry255 78 .1: Strategic groups in the US beer industry: Brewpubs. 24.E. 6.1% Spoetzl Brewing Co. product differentiation Customer sophistication Brew pubs Craft brewers High Guiness Heineken Corona Labatt Medium Coors Anheuser Busch Miller Stroh’s Pabst Low Local Regional National Global Distribution Figure II.a. and Mass Manufacturers (from left to right).0% Sierra Nevada Brewing C.Matt 4.0% Leinenkugel Brewing Co.Price. Regional Brewers. Others 36. 4. Craft Brewers. Jacob 11.2% Boston Beer Co.X.a.4% Brewing C.

As discussed in the text.000 (000's of 2.000 10. Visible is the strong ramp during the early.E.c. see text. For discussion.25 Gallon Cases) 15.1: Annual production of craft beer industry. 1989 1992 1993 1991 1994 1997 1998 1996 1999 2002 2001 79 .000 5.000 20.and mid-nineties plus the leveling-off beginning in 1998.000 0 2000 1995 1990 Figure II.25. counter actions taken by the mass beer manufacturers have contributed to the slowdown in the pas six years.

FL Regular beer Non-Alcoholic beer Micro/Specialty Beer Imported beer Population Los A Graduate Degree Attended Graduate School Graduated College Attended College Graduated High School Attended High School Figure IV. A Z Las V egas .000 $39. F L Dalla s.000 0% ngele s.000 16. DC Oran ge C ouny . T X Oakla nd.25 Gallon Cases) 14.1: Selected geographical and demographical data of the US import beer market. G San A Fran cisco .000 Top 20 States for Imported Beer 18.000 4. NV Wa s hingto n. C A Tam pa. TX Atlan ta. MI San Dieg o.60.000 6.999 Under $20.000 8. NY Chic ago.999 $50.000 2. NY Phoe nix.A.000 Top 20 Metropolitan Areas for Imported Beer (000's of 2.000 10.999 $20.000 $49. Underlying data have been taken from reference256 80 .000 & over $60.25 Gallon Cases) 50. Phila IL delph ia.000 0 Califo rnia New York Florid a Illino is Penn sylva nia Texa s New Jerse y Mass achu setts Mich igan Virgin ia Ohio Arizo na Geor gia North Caro lina Colo rado Neva da Mary land Was hingto n Conn ectic ut Wisc onsin 60% 40% Regular beer Non-Alcoholic beer Micro/Specialty Beer Imported beer Population 35% 30% by Beer Category 25% 20% 15% 10% 50% Income Distribution of Consumers by Beer Category 40% 30% 20% 10% 5% 0% $75. P Bosto A n are a.000 12.000 $74. M Nass A au-S uffolk .999 $30. CA Detro it.999 $40.000 0 40. CA Hous ton. C A New York . CA Miam i.000 10.000 $29.000 $59.000 30. CA Rive rside .000 20.000 (000's of 2.

1. Administrators Heineken University E-Learning Operating Companies Operating Companies Operating Companies Operating Companies Operating Companies ClusterSmall OCs Local Management makes local decisions.A. Heineken Holding NV Heineken NV Figure III. under corporate guidelines Figure III.C. IT.Legal R&DPackaging.005% L’Arche Holding S.005% 50.2: Ownership Structure of Heineken 81 .1. build good distribution and strong brand Information Flow to Heineken NV Policy and Control: Marketing.1: Summary of Heineken structure and its resources and capabilities 50.C.IT. Facilities and Support Staff: Technical Services. HR.L’Arche Holding SA Heineken Holding NV Ensure Heineken NV’s Steady growth and long term continuity Heineken NV-Manage Operation and Develop Strategies 3-tier Admin Structure Supervisory Board of Heineken NV supervises the Executive Board “Take Heineken to the Next Level” –Improve operation efficiency. Production. Security.etc. Finance. Distribution.

1: Relative contributions of Heineken’s businesses to the company’s overall revenue Africa 4% Asia 5% Italy 4% Other 7% USA 26% Netherlands 10% Greece 9% Spain 6% France 16% Poland 13% Figure III.D.Wine and spirits 7% Soft drinks 11% Others 3% Beer 79% Figure III.1.1.a.1: Heineken’s profit broken down by geographies 82 .D.

Date 1927 1931 1933 1935 1935 1935 1935 1935 1935 1935 1941 1946 1951 1955 1960 1962 1967 1968

Name Brasserie Leopold Malayan Breweries (now APB) First exports to USA

ABC Brewery Nigerian Breweries Vrumona soft drinks South Pacific Brewery Mouterij Albert Cisalpina Brasseries Lorraine Multi Bintang Amstel

1971 1972 1974 1974 1980 1982 1982 1983 1983 1984 1984 1984 1984 1984 1984 1984 1984 1985 1985 1988 1989 1991 1991 1991 1994

Interbra Alsacienne de Brasserie Grande Brasserie National Brewing Company Mouterij Ruisbroek Bralima Brewery De Ridder Murphy's Kaiser UDB and Pelforth El Aguila Quilmes Commonwealth Breweries Cerveceria Bohemia Brasserie Nationale d'Haiti Internationale Brasserie Brasseries et Limonaderies Breweries of Greece Brasseries de Bourbon Shanghai Mila Royal Brand VMCo Import Company Dominion Breweries Komaromi Sorgyar Withdrawal from Dutch spirits

Country Belgium Singapore USA Angola Egypt Morocco Dutch East Indies French Indochina Belgian Congo Palestine Singapore Nigeria Netherlands Papua New Guinea Belgium Italy Martinique Indonesia Netherlands Surinam Curacao Jordan Lebanon Greece Madagascar Central Africa France New Caledonia Trinidad Belgium Central Africa Netherlands Ireland Brazil France Spain Argentina Bahamas Dominican Republic Haiti Cameroon Burundi Greece Reunion China Netherlands USA New Zealand Hungary Netherlands

Stake 50.00%

under 50% 50.00% 50.00% 6.00%

over 50%

over 50% over 50% 14.20% 51.00% 36.70% 15.00% 48.00% 8.50% 10.50% 34.00% over 50% 51.00%

Date Mar-94 Mar-94 Apr-94 Aug-94 Sep-94 Oct-94 Oct-94 Feb-95 Mar-95 Aug-95 Oct-95 Dec-95 Feb-96 Feb-96 Feb-96 Jun-96 Jul-96 Jul-96 Oct-96 Oct-96 Jun-97 Nov-97 Jan-98 Mar-98 May-98 Jun-98 Oct-98 May-99 Sep-99 Dec-99 Jan-00 Jan-00 Dec-00 Feb-01 Feb-02

Company Zywiec Breweries Komaromi Sorgyar Calanda Haldengut El Aguila Hainan Brewery Cambodia Brewery Zagorka Brewery Interbrew Italia Myanmar Brewery Multi Bintang Zlaty Bazant Zywiec Breweries Fischer Group Groupe Saint-Arnould Birra Moretti Hatay Brewery Withdrawal Burma Moerdijk Nigerian Breweries Kumasi Breweries ABC Brewery El Aguila Karsay Nitra Zywiec Breweries Zywiec Breweries Merger Zywiec & BrewPole Pivara Skopje Calanda-Haldengut Tempo Martiner and Gemer Cruzcampo DB Nigerian Breweries BrauHolding Int. Bravo Int.

Country Poland Hungary Switzerland Spain China Cambodia Bulgaria Italy Myanmar Indonesia Slovakia Poland France France Italy Vietnam Myanmar Netherlands Nigeria Ghana Ghana Spain Czech Poland Poland Poland Macedonia Switzerland Israel Slovakia Spain NZ Nigeria Germany Russia

% Stake 24.9% 100.0% 93.0% 64.3% 80.0% 80.0% 80.0% 100.0% 60.0% 75.9% 66.0% 31.8% 54.4% 66.0% 100.0% 55.0% 60.0% 33.5% 15.0% 25.0% 90.0% increase to 71.33% 49.0% 50.0% 75.0% 50.0% 25.0% extra 15% 17.8% 51.0% 98.7% 41.6% now 54.2% 49.9% 100.0%

Price of stake [Mio NLG] 35 34 57 64 54 20 17 34 39 57 N/A N/A N/A N/A N/A 190 NLG 87m 59 N/A N/A N/A N/A 50 70 45 N/A 13

60

445

50.30%

Figure III.D.b.1: Heineken’s M&A history from 1927 to 2004 83

Costly to imitate ?

Exploited by organization ?

Yes/ No ?

Explanation

Yes/ No ?

Explanation

Yes/ No ?

Explanation

Yes/ No ?

Explanation

Economic Performance
Reference
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. Above normal Gibbs, Mike, Nigel Parson, and James Wheatcroft, Heineken, Initiation of coverage, WestLB Panmure, 8 February 2000, p.14. Above normal Gibbs, Mike, Nigel Parson, and James Wheatcroft, Heineken,Initiation of coverage, WestLB Panmure, 8 February 2000, p.32. Above normal Gibbs, Mike, Nigel Parson, and James Wheatcroft, Heineken,Initiation of coverage, WestLB Panmure, 8 February 2000, p.47.

Yes

Distribution depots serving wholesalers

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

Yes
In 1999, Heineken started to fully exploit this strategy. In response to a AnheuserBusch marketing campaign stressing the freshness of their products.

Can be copied by any importer at any time without any further restrictions

Parity.

Yes

International orientation

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. 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

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. 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

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. 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

Yes, most of Heineken's growth comes from international operations.

Sustained competitive Advantage

Yes

Yes

Yes

Yes
Heineken fully exploits this strategy.

Brand Recognition & Capabiltities

Sustained competitive advantage

Yes

Heineken's "Virtual Corporat Office"

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

Figure III.D.2.c.1: VRIO analysis for Heineken, part I. When possible, Heineken USA specific drivers are listed.

Competitive Implication

Feature

Valuable ?

Rare ?

84

Competitive Implication

Yes/ No ?

Explanation

Yes/ No ?

Explanation

Yes/ No ?

Explanation

Yes/ No ?

Explanation

Economic Performanc e
Reference
Above normal Gibbs, Mike, Nigel Parson, and James Wheatcroft, Heineken,Initiation of coverage, WestLB Panmure, 8 February 2000, p.27. Normal http://www.businessweek.com/ads ections/chain/2.1/logility.html 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] <http://stlouis.bizjournals.com/stlo uis/stories/2004/03/01/daily42.htm l> Above normal

Yes

'Heinekenization'

Heineken has a longstanding track record of successfully acquiring capitalweak domestic companies. The company will then impose its management and Yes 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

Yes

Our research indicated that Heineken has perfected this business procedure through decades of learning and practice.

The high learning costs involved in these processes will effectively slow down competitors attempting to copy this strategy.

Exploited by organizatio n?

Valuable ?

Feature

Costly to imitate ?

Rare ?

Heineken has been exploiting this practice for many decades.

Sustained competitive advantage.

Yes

HOPS (Heineken Operational Planning System)

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% 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
Though Heineken was the first US beer manufacturer in 1995 to utilize this new technology, competitors meanwhile have installed their own technology.

No

Yes

Other competitors have already implemented their own IT systems.

Heineken USA fully relies on this tool.

Parity.

Yes

No

Brewing Operations

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.

Yes

Strategic Partnerships

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.

Figure III.D.2.c.2: VRIO analysis for Heineken, part II. When possible, Heineken USA specific drivers are listed. 85

production efficiencies – • M&A division created in 2002 • Close partnerships with importers in US market ownership of Star Brand Imports -> – • Centralized support departments Finance.Infrastructur • Local management under corporate guidelinesbranding. Social Responsibility •Improved Hops & Barley •Insight filled bottle inspection systemsdetection technology for glass/foreign particles in bottles •Corporate communications systems online resources from Tridion/Blast Radius – •BeerTender. distribution.1: A selection of value and cost drivers contributing to Heineken’ value chain. CEO ” •Heineken Partner Network network of expatriate partners around the world – – •Heineken CSR programs Corp.b. R&D.D.2. Tapvat. Production. Human Resources. Music downloads •13% of sales spent on advertising in the US market •Increased sales force in the US– expanding market presence --Cost Drivers Figure III. 86 . continued sole source •Central/Joint purchasing to leverage buying power – Human Technology --Value Drivers Procuremen Supply •Purchasing power– largest brewer in Europe and world s 3rd largest ’ •HOPS system– demand planning in the US R&D • Programs span the supply chain •Has close ties to research institutes and universities •Heineken Technical Services Brewing & • 110 breweries around the world •New production facilities in China in 2004 to service the world largest beer market •Quality systems for glass packagingBiotrace contamination testing Distributio • Network of 450 distributors in the US •Penetration of the channel – 77% (v A-B at 80%) •Out-of-house resource for cooperage– Kegspediter Marketing/Brand • Brand portfolio mix – optimized for profitability •Programs to increase brand equity–Beacon. Marketing • Access to 4B euros in financing •HR programs– Heineken University •Emphasis on“young minds given the appointment of Ruys. Aluminum bottles – •Close relationships with supply partners Rexam bottle manufacturing divestment. “Thirst”.

7% 14.000) (4.014.000 1.9% 13.2% 15.9% 13.000 0 621.0% 0.000 (4.5% 36.815.0% 9.7% 23.4% 50.1% 8.000 (327.0% 51.000 (486.0% 8.0% 51.000 (553.9% 5.4% 6.1% 11.1% 0.7% 13.000 (3.9% -3.494 (3.000 1.3% 20.2% 1.395. Ops.6% 0.0% 8.000 2001 7.3% 15.8% 2001 13.000) 1.000) 48.183.7% 0.4% 7.000) (66.227.8% 8.1: Restated 5-Year Income Statement for Years Ended July 31 87 .3% 8.2% 13.1% 19.6% 0.9% -42.0% 8.000) 1. Items Ext.000 52.7% 9.0% 11.222.200 (264.0% 8.7% Exhibit III.6% 0.7% 4.1% n/a 20.000 (414.6% 11. Items & Disc.8% -4.000 1.000) 141.000) 1.3% -67.099.000 0 795.230.000) 975.000 (146.000 (355.2% 0.3% -0.000 (277.3% 9.0% 23.400 2000 7.3% 0.6% 52.8% 0.6% 5.200) 3.196.5% 0.9% 18.3.2% 16.4% 14.0% 8.506) 4.6% 46.0% 100.0% 8.D.0% 48.200) 1.0% 100.0% 20.601.4% 47.8% 3.1% 132.000 (2.000 (109.9% 256.0% 100.7% 19.3% n/a -100.221.000 2002 2003 9.0% 2000 13.000 9.801.0% 13.1% 4.000 0 798.1% -12.6% 48.7% 33.4% 0.8% 32.7% 24.3% 45.000 (2.4% n/a 0.164.5% 0.7% 0.800) (28.Restated Income Statement (000) Revenue Cost of Goods Sold Gross Profit SG&A Expense EBITDA Deprec.9% 32.8% 5.000 1.000) 3.0% 8.0% 3.000) 0 795.8% 15.000) 70.9% 0.000) (3.000) (57.7% 6.4% 13.000 (118.1% 19.0% 13.561.0% 174.9% 1.3% 65.000 Common Size Income Statement (% of Sales) 1999 2000 2001 2002 2003 100.400 (3.8% 23.000) (16.023.0% 10.8% n/a 11.9% 13.a.7% 21.8% 19.026.0% 10.000) 1.200 (1.7% 17.8% 4.000) 0 621.8% 17.0% 8.5% 26.2% 11.1% 49.7% 19. NI avail to common 1999 6.5% n/a 0.7% 0.5% 11.100) 17.6% 2002 13.8% 19.2% 12.4% 51.768.000) 0 798.141.6% Income Statement Analysis (CY over PY % Change) 1999 13.500 809.5% 1.4% 11.000) 1.000 914.000) (62.000 4.1% 20.9% 1.000) 0 715.400 0 516.9% 0.000 767.8% 14.162.2% 6.3% 0.9% 29.0% 100.9% 13.775.6% 4.2% 15.1% -0.000 (319.200) 871.147.000 (454.000 (364.3% n/a n/a n/a 16.1% n/a 16.6% 18.0% 14.9% 4.619.4% 53.775.4% 0.000) 4.282.2% 1.7% 0.5% 3.796.000 (3.800 (80.011.2% 2003 2.4% 31.000) 0 516.5% 15./Amort EBIT Interest Expense Non-Oper Income EBT Income Taxes Min Int in Earnings Other Income (Loss) NI before Ext.255.453.3% 13.937.1% 1.389.047.000) 85.494) 1.000 (180.5% 12.0% 0.2% 5.

000 0 Income Statement Items (€ 000) Revenue COGS SG&A Net Income 30.0% 40.000 5.000.000 9.000.10.0% Exhibit III.2: Income Statement Trend Graphs 0.3.000.0% 15.000 4.0% 1999 2000 2001 2002 2003 88 .0% 10.0% 25.a.0% 0.000.000 1.0% 10.000.0% Income Statement Items as % of Revenue 50.D.0% 30.000 3.000.000 2.000.0% 2000 2001 2002 2003 60.0% 5.0% Revenue COGS SG&A Net Income 1999 Income Statement Items (% Growth Year Over Year) 1999 2000 2001 2002 2003 -5.000 6.000 8.000.000.000 7.0% COGS SG&A Other Exp NI 20.0% 20.000.

059 9.0% 165.6% 32.0% 8.0% 9.4% 1.4% 14.0% 13.6% 5.3% 100.8% 38.0% -7.8% 10.8% 82.813 9.1% 11.1% 13.1% -11.8% 3.0% 2.6% 34.5% 9.9% 2.4% 13.985 4.3% 14.8% 0.017 457 323 87 993 1.3% 17.8% 10.2% 40.6% 18.0% 8.6% 4.5% 32.459 0 784 1.0% Balance Sheet Analysis (CY over PY % Change) 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 27.2% 12.0% 0.321 2.017 5.1% 11.543 7.897 745 853 16 1.4% 38.042 1.8% 15.6% 56.D.980 5.6% 3.0% 19.1% 5.5% 11.4% 9.8% 1.3% -0.776 3.9% 0.3% 8.9% 50.0% 8.0% 10.7% -50.7% 25.6% 207.0% 6.8% 29.3% 3.7% 100.8% 7.8% 0.1% 0.4% 47.5% 7.629 10.0% 35.0% 43.9% 45.7% 8.0% 4.9% 3.3.3% -3.6% -10.416 791 900 1.7% 9.8% 13.893 0 711 1.685 2.8% -100.9% 14.8% 100.215 600 393 381 5.3% 26.5% 7.2% 8.7% 1.1% -13.3% 14.781 3.6% 14.0% 100.758 7.0% 18.1% 22.1% 100.7% 86.9% 3.9% 12.0% 18.4% 124.6% 13.1% 27.289 3.9% 0.368 31 712 1.9% 67.0% 36.9% 124.5% 27.8% 0.8% 39.9% 48.6% 7.379 490 550 692 765 834 112 124 150 160 0 2.730 0 784 2.4% -7.4% 3.3% 1.6% 4.8% 49.3% 11.017 2.1% 100.5% 15.5% 24.3: Restated Balance Sheet as of 12/31 89 .8% 9.2% n/a 10.9% 74.296 2.7% -28.1% 49.0% 63.0% -10.6% 100.1% 2.3% 5.6% -84.9% -6.8% 37.0% 7.995 1.0% 15.398 8.8% n/a 0.383 3.1% 7.5% -1.179 2.2% 21.316 4.6% 1.0% 75.1% 16.3% 0.6% 5.9% -16.2% 74.3% 10.600 7.0% 7.5% 30.3% 31.6% 52.4% 44.6% -33.289 529 232 78 1.1% 1.6% 28.2% 41.7% -100.0% 14.9% 27.8% 6.9% -3.4% 5.4% 13.235 781 668 381 394 4.8% 7.3% 4.0% -0.217 620 329 107 1.6% 130.396 6.5% 12.6% -29.5% 136.8% 2.3% 13.1% 10.1% 8.6% 2.151 10.650 6.910 2.3% 5.1% 14.2% 16.995 233 189 6.0% 9.2% 127.2% 25.6% 71.8% 7.207 824 1.8% 40.1% 6.3% 26.4% n/a 0.1% 100.1% 4.7% 3.175 778 1.3% 10.094 423 451 7.0% 11.4% 11.3% 12.8% 42.2% 121.0% 9.0% Exhibit III.a.0% 33.110 1.4% 100.0% 10.8% -8.1% 128.614 348 196 7.0% 5.2% 24.167 10.1% 22.8% 10.9% 4.0% 6.0% 10.0% 10.897 Common Size Balance Sheet as a % of Total Assets 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 20.974 2.052 4.721 982 732 385 7.7% 14.6% 9.7% 1.2% 155.7% 44.860 449 475 248 336 3.0% 61.0% 33.4% -31.2% 3.6% -13.Restated Balance Sheet as of 12/31 (€ M) Assets (MS) Cash & Equivalents Net Receivables Inventories Other Current Assets Total Current Assets Prop Plant Eq-Gross Accum Depreciation Net PP&E Other Investments Other Non-Current Assets Total Assets Liabilities (000'S) Accounts Payable S/T Debt & Curr L/T Debt Dividends Payable Other Current Liab Tot Cur Liabilities Long Term Debt Prov Risks/Charges Minority Interest Def Tax & Other Liab Total Liabilities Equity (000'S) Equity Reserves Common Stock/Ord Cap Retained Earnings Common Shldrs Equity Total Liabilities & Equity 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 1.217 2.3% 21.1% -10.053 1.238 0 784 1.1% 6.7% 5.5% 16.403 3.5% 61.9% 29.8% 54.3% 18.1% 4.649 1.3% 0.9% 26.1% 14.803 4.0% 38.6% 12.5% 70.781 629 778 105 1.5% 12.759 2.892 901 664 124 312 3.5% 55.1% 10.1% -3.0% 20.3% 10.8% 14.9% 52.8% 17.3% -26.0% 1.1% 5.0% 44.9% 7.4% 16.2% 21.8% 31.0% 13.0% 13.2% 100.276 336 279 6.122 1.4% -6.0% 42.7% 30.7% 100.907 2.7% 100.0% 6.1% 10.137 2.2% 20.5% 9.897 5.

000 2.500 1.000 5. Year over Year % Increase/Decrease 2000 2001 2002 2003 90 .000 1.000 0 1999 50% 40% 30% 20% 10% 0% -10% -20% 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Balance Sheet Trends Year over Year % Increase/Decrease Total Current Assets Total Assets Tot Cur Liabilities Total Liabilities Exhibit III.000 2.000 Balance Sheet Trends €M Net Receivables Inventories Net PP&E Accounts Payable Long Term Debt 3.4: Trends in Heineken’s Balance Sheet.000 €M 1.a.6.500 2.000 4.D.000 500 0 Common Stock/Ord Cap Retained Earnings Equity Items Trend €M 3.3.

800) (500) (1.000 553.076.800) (12.400 355.955 1.454. Stock -Dividends Paid on Common +/-Net Issuance of Common Stock +/-Clean Surplus Plug (Ignore) =Cash From Financing Net Change in Cash + Beginning Cash Balance = Ending Cash Balance 12/31/99 516.000 (23.084.000 454.132 (99.300 147.427) (38.000) (287.5: Statement of Cash Flows (given in 1000 €) 91 .000 0 0 (174.973) (121.000) (69.000 486.Cash Flow Analysis Fiscal Year Operating: Net Income +Depreciation & Amortization +Increase in Deferred Taxes +Increase in Other Liabilities +Increase in Minority Interest +Preferred Dividends =Funds From Operations -Increase in Receivables -Increase in Inventory -Increase in Other Current Assets +Increase in Accounts Payable +Increase in Taxes Payable +Increase in Other Curr.627) (694.900 12/31/01 767.000 414.000) (73.803) 68.000) 1.000) (2.000 (269.445 947.400 824.000) 0 (1.a.000 0 2.500.000 116.100 (155.000) (397.207.000 778.000) (26.000 12/31/03 798.000 2.295) 0 894.296.000) (304.000) 75.348) (27.564.176 0 (639.400) 1.000 339.175.000 0 70.416.000 0 1.700 (289.010.000 382.010.207.500) 71.000 (1.175.000) 160.500 985.000 883.000) (1.000 1.200 22.456.000) (721.038 178.000 4.000 824. Liabilities =Cash From Operations Investing: -Capital Expenditures -Increase in Investments -Purchases of Intangibles =Cash From Investing Financing: +Increase in Debt -Dividends Paid on Preferred +Increase in Pref.300) 0 (887.000) 73.000 0 (44.000 0 155.879) 45.000) 91.000 (13.200 (109.000) 351.044.3.000 1.000 257.000) 1.212.020.000) (59.000) 84.000 42.400) (383.000) 0 0 (478.000) (142.000 1.000 (142.000 12/31/02 795.000) (966.823 (14.112.000) 9.853.400 361.026.000) (10.000 778.398 0 0 614.000 (68.000 0 0 (1.000 17.000 (106.004 14.000) (1.767 68.581.000 638.200) 0 1.200) 340.000) (127.255 1.407.500) (428.900 0 0 (842.466) 259.127.000) 1.000) 0 (174.000) 12.900) (792.000 1.000 (707.D.900) (481.000 0 1.600) (193.000) (26.100 9 (810.538 12/31/00 621.000) (1.000 25.000 Exhibit III.000 44.

282 2003 48 149 358 83 584 1. Eur 62% Africa 8% Cent/East Europe 11% Americas 14% Operating Profit Asia Africa Americas Cent/East Eur W.6: Statement of Cash Flows (given in 1000 €) 92 .011 2003 410 769 1.317 1.3.Beer Volumes Asia Africa Americas Cent/East Eur W.848 2003 7.222 W. Eur 50% 2003 Beer Volume Asia 8% Africa 12% Cent/East Europe 19% Americas 12% Revenues Asia Africa Americas Cent/East Eur W.240 9.191 98.275 84.968 W. Eur Total 2002 47 188 416 78 553 1.005 5.251 826 5. Eur 48% 2003 Operating Profit Asia 4% Africa 12% Cent/East Europe 7% Americas 29% Exhibit III. Eur Total 2002 450 753 1.559 7.484 18.587 14.715 11.255 2003 Revenues Asia 4% W.671 11.755 9.D.188 46.906 49.a.731 9. Eur Total 2002 7.

7% 10.8% 20.5% -0.1 2.7% 13.4% 17.6 2.8 1.0% 12.9% 4.5% 19.6 4.9 1.9 0.8 1.6% 2003 4.0 3.1 4.1 57.1% 11.3% 21.1 114.1 1.7: Heineken Financial Ratio Comparison 93 .2 1.a.7% 11.1 30.2 0.7% 17.7 0.7 2.2% 28.0 55.8% 51.0 43.8 31.8 117.3 0.1 60.7 49.2 0.8 0.1 4.9% 56.1 0.2 17.6 29.8% 11.Anheuser Busch Profitability Measures Gross Margin Net Profit Margin Return on Net Operating Assets Return on Equity Growth Rates Sales Assets Earnings Operating Measures Avg Inventory Holding Period Avg Days to Collect Receivables Avg Days to Pay Payables Net Operating Asset Turnover PP&E Turnover Liquidity Measures Current Ratio Quick Ratio EBIT Interest Coverage Leverage Debt to Equity Ratio CFO to Total Debt 1.8% 60.2 52.6% 7.7 2.1 17.4 1.8% 3.0 45.6% 20.7 0.5 1.9% 45.6 2.4% 14.8 2.7% 52.7% -1.1% 20.8 0.1% 11.4% 10.8% 23.8 0.7 0.2% 12.8 22.0% 7.9% 46.0% 13.3% 17.4 1.8% 8.2 41.6% 10.9 4.9 0.7 0.3% 16.2 21.9 0.3 0.2% 7.9 1.8% 8.9 0.5% 15.7 6.0% 18.9 22.3 1.1 51.8 50.0% 8.8 0.3% 14.0 n/a 0.1% 21.0 1.7% 9.9 2.1% Interbrew 3 Yr 7.5 2.1 1.0 0.1 14.9% 3.1 1.0 6.3% Heineken 3 Yr 9.5 0.6% Ind Avg 2003 51.6% 5 Yr 8.7 3.4% 45.9 106.5 2.0 0.9% 4.8 1.3% 5 Yr 3 Yr 2003 5 Yr 4.6 10.7 32.9% 4.9% 41.8% 13.9% 58.9% 14.5 2.8 1.5 1.0 1.9 0.0 1.7% 0.5 8.3% 2.1 59.8 -13.0 n/a 0.4% 57.0% 10.0 0.4 0.3 0.1 81.1 3.6% 23.0% 5.5 4.5% 42.7% 11.9 8.0% 11.2 63.2 65.8 0.0 2.2% 6.7 0.0 n/a 0.1 50.9% 51.9% 23.2% 45.7 16.2 0.9 61.7 29.8 56.5 53.4% 2003 7.5 8.9 45.9 2.5 1.9 0.2 0.4 8.9 83.3% 4.7 -8.2% 10.4% 2003 8.4 0.1% -99.8% 8.1 119.9% 40.6% 51.7 Exhibit III.9% 12.4% Grupo Modelo 5 Yr 3 Yr 2003 5 Yr 60.2 1.5 49.4% 8.9 0.5% Coors 3 Yr 4.6 31.2% 59.9% -8.1 2.4% 12.6 66.3 0.1 0.4 0.1 1.4% 12.3% 8.0% 14.0 2.5 2.7% 15.3% 0.2% 14.D.7% 19.8% 32.7 0.9 9.6 2.4 1.2% 8.3 105.7% 21.1 0.7 1.6 1.3 1.2% 16.1% 58.7 5.9 0.9% 12.9 108.4% 10.9% 13.5% 17.3% 4.6 27.6 34.7 -10.6% 9.0 1.3 0.8% 41.7 57.7 83.7% 12.9 1.0 48.0% 72.4% 16.3% 4.6 5.3 0.9 11.9% 2.0 0.4% -0.4 1.7% 3.0 59.

D.3.€/Share € 10 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 € 15 Heineken Coors BUD S&P500 Netherland Mkt € 20 € 25 € 30 € 35 € 40 € 45 Market Performance Exhibit III.a.8: Heineken’s stock price performance in the past five years 94 .

0) (708.45 9.5% growth = 6% € 13.79 13.Present Weight Equity Debt Total Debt & Equity Sensitivity Analysis B = 0.2% WACC Calculation Market Risk Premium CAPM = k Effective Interest (Avg Cost of Debt) WACC (Using Weights) WACC 6.51 882 2005 820.5% Effective Tax Rate Term Amount g = 5.0) (424.9) 777.0) (487.1 2007 11.5 € 96.3) (675.51 885 2007 904.15 4.29% 5.898.96 52.5 (5.8 (5.980.82 € 5.29 48.453.9) (583.0 Terminal Value 181.55% Weight 54% 46% WACC @ 4% WACC @ 6% WACC @ 7% growth = 4% growth = 4.28 975 Terminal Value 185.7) 857.60 17.01 € 14.836 € 26.49 2005 816.809 € 24.89 929 2008 950.w/Beer Tender (w/Choices and Price ↑) (M €) Base NI Available to Shareholders New Revenues from Beer Tender Reduced COGs NI available to Common Shareholders 798 NPV €/Shares Prior Periods 2002 795.142.255.(w/o Beer Tender) Scenario 1 .21 926 2007 899.49 €/Share € 24.98 9.96 1.29 784 € 99.0 2006 857.76 778.2) 816.57 € 24.0 2003 798.00% How Determined Estimate of large established firm Provided by Factiva from 2003 data (06/02/04) 10 Yr Treasury Bill Yield from www.(w/Beer Tender & Choices & Price ↑) Exhibit III.386 € 25.38 794 € 103.29 -€ 5.96 54.6) (3.047.020 795 # Shrs 391.46 3.712.54 9.7) (3.2) (612.57 2005 10.11 50.664.713.0 Terminal Value 180.000 Scenario 1 .1) (485.7) (590.37 0.000 Scenario 2 .011.0) (562.11 1.69 1.000 Scenario 3 .296 € 24.50% 5.D.980.0) (486.3.980.29 1.000 Results 798 NPV €/Shares % Change 0.16 861.2% 7.56 18.196.02 Proforma DCF Scenario Valuation Analysis Prior Periods Base Case (w/o Beer Tender) (M €) Revenue (5% Growth) COGS (51.2) (510.9% GM) SG&A Expense (33% of Rev) Depreciation & Amortization (6% of Rev) Other (5% of Rev) NI available to Common Shareholders 2002 9.026.15 rf = 4.980.w/Beer Tender (Latent Demand Only) (M €) Base NI Available to Shareholders New Revenues from Beer Tender Reduced COGs NI available to Common Shareholders Prior Periods 2002 795.0 (5.5) (3.w/Beer Tender (Hit Promotional Goals) (M €) Base NI Available to Shareholders New Revenues from Beer Tender Reduced COGs NI available to Common Shareholders 798 NPV €/Shares Prior Periods 2002 795.93 971 2008 944.535.055 # Shrs 391.0) 798.CAPM Calculation k = E(r D )=rf + (B x [E(rm)-rf]) = rf + (B x [Mkt Risk Premium]) Assumptions Perpetual Growth Rate Beta Risk Free Rate Expected Market Return (High) Cost of Debt Effective Interest Rate Discounted Cost @ 29.0) 795.0 2008 11.96 1.5) 900.29 904.a.8 Projected 2006 857.249.04 820.48 n/a € 4.9: Heineken Valuation Analysis 95 .00 € 6.019 Terminal Value 194.58 3.0) (3.67 19.42 0.55 3.(Beer Tender & Latent Demand) Scenario 2 .8 2008 944.83 14.85% 5.8 2007 899.399.812.721 5.888 Weight 53.0 (4.42 12.0 NPV €/Shares 2004 9.70 € 25.8) (3.8) (535.12 € 9.36 2.6 (4.13 10.64 3.78% 5.35 € 26.6) 945.70 2005 816.167 2.0 2003 798.02 15.367.223 795 # Shrs 391.4 € 96.5) (553.5) (3.52 3.0 2003 9.com (06/04/04) Calculated S&P 500 Return from 12/31/02 .0 (4.8% 46.0 2004 778.finance.8% Base Case .79 13.29% 2003 3.3 Projected 2006 10.yahoo.717.42 950.5% 3.8) (3.75% rm = 11.64 -€ 25.6% 2003 7.54 18.669.897.6) (642.203.14 843 Projected 2006 861.206.35 Projected 2004 777.0 2003 798.8 (4.861 795 # Shrs 391.(w/Beer Tender & Hit Promotional Goals) Scenario 3 .0 2004 777.

022 Cost Savings/Case x $11.904.226/US$ = After Tax @ 34% (€) Scenario#2 Heinken Insiders (100% Home Drinkers) Heinken Majority (50% Home Drinkers) Novelty Seekers (75% Home Drinkers) Home Bodies (100% Home Drinkers) Selling Price = Total Revenue x Profit Margin = Net Profit Increase (new Sales) = Euro conversion @ €1.121 $90.07% 100% 374.38% 75% 5.517.413 1.80 $7.226/US$ = € 13.538 Cost Savings/Case x $1.39 $4.359 Cost Savings/Case x $1.051.75% 100% 4.522.80 Total Cost Savings = $5. offset partially by refill handling New Rev = New incremental revenue from Beer Tender usage Savings = Heinken Insiders (100% Home Drinkers) Heinken Majority (50% Home Drinkers) Novelty Seekers (75% Home Drinkers) Home Bodies (100% Home Drinkers) Latent Demand Only (No Marketing) % Cannibalized Cases % Will Buy Heineken Cannibalized from New Heineken Beer Tenders Drinkers Sales Cans to BT 0.0% $10.06% 75% 240.37 Wholesale $/Case Retail Price Markup Whlsle Price Initial Price $32.147 € 13.844 Total Cases 5.360 After Tax @ 34% (€) = € 3.985.646.440 $6.917 0 0.437.4% 321.676 3.978.628 € 1.000 Estimated Cases in Market = 535.979.089 $220.00 66% $ 10.275 0 11.49% 100% 0 18.87 $1.602 0.64 $1.D.00 $1.50 Proposed $0.759 0 Total Cases 615.684.716.000.039.000 Estimate of Cost Savings/Case Current $1.50 $10.85% 100% 0 9.579 40.80 Total Cost Savings = $16.40 25% $ 19.499 0 0.608 Euro conversion @ €1.787 0 Total Cases 18.937 ` Beer Tender w/Choices and Price Increase % Cannibalized Cases % Will Buy Heineken Cannibalized from New Heineken Drinkers Sales Beer Tenders Cans to BT 3.115 Selling Price = Total Revenue x Profit Margin = Net Profit Increase (new Sales) = Euro conversion @ €1.00 Packaging Costs Refill Handling Chgs Total Savings/Case = Net Savings with Beer Tender = Margin Analysis Selling Wholesale Price $US/Case Old Cost @ 27% Margin New Profit/Case Operating Margin Scenario#1 $10.50 Total Cost Savings = $32.00 $0.9% Euro conversion @ €1.226/US$ = After Tax @ 34% (€) Scenario#3 Heinken Insiders (100% Home Drinkers) Heinken Majority (50% Home Drinkers) Novelty Seekers (75% Home Drinkers) Home Bodies (100% Home Drinkers) Selling Price = Total Revenue x Profit Margin = Net Profit Increase (new Sales) = Euro conversion @ €1.88 27% $ 10.849.a.349.315 Assuming Achieve Promotional Goals % Cannibalized Cases % Will Buy Heineken Cannibalized from New Heineken Beer Tenders Drinkers Sales Cans to BT 1.40 Wholesaler Store $ 14.64 $/Case Estimate of Selling Price to Wholesaler Distribution Level COGS Margin REV Mfg $ 7.445.370.177 € 26.757 0.609 1.682 € 2.226/US$ = 40.87 $0.50 $10.9% Lower mfg costs due to reduced bottling costs.541.978.215.41% 75% 1.295 € 4.015.92 27.599.367 $61.374.000 Super Prem/Micro Beer 7.370.19% 50% 0 508.462.80 Scen#3 Increased Price $34.20 Taxes $ 19.705 € 20.140.649.80 $ 10.226/US$ = $2.3.710.61% 100% 0 3.505.080 0 2.867 21.226/US$ = After Tax @ 34% (€) Exhibit III.Beer Tender Scenario Analysis Estimate of the Beer Tender Market Size Total Beer Market = 2.144.276.774.605 $24.51% 100% 13.9% After Tax @ 34% (€) = € 17.022 € 48.54% 50% 1.635.20 40% $ 32.80 $6.263 0 0.9% After Tax @ 34% (€) = € 9.000 Cases/Year Import Market 11.605.736.80 25% $ 14.661.265.10: BeerTender Scenario Analysis 96 .88 $2.41 40.911 Euro conversion @ €1.50 66% $11.824.6% 214.402 40.446.646.345 0.14% 50% 0 3.37 $0.537 € 73.

Tour 1 2 3 4 Example of Four World Tours Brand Country Heineken Holland "33" Export France 974 Reunion ABC Stout Cambodia Amstel Bright Netherlands Antilles Heineken Holland Affigem Belgium Almaza Lebanon Anchor Draft Vietnam Bavaria Brazil Heineken Holland Aszok Hungary Amstel Malta Nigeria Aoke China Coral Netherlands Antilles Heineken Holland Cruzcampo Spain Maccabee Egypt Export Gold New Zealand Panama Panama Region Europe Europe Africa Asia/Pacific Americas Europe Europe Africa Asia/Pacific Americas Europe Europe Africa Asia/Pacific Americas Europe Europe Africa Asia/Pacific Americas Figure V.2.A.1.1: Example of Four World Tours 97 .

said it was too early to tell how much the machine would contribute to sales. She said that in the U.roughly the same price as an upmarket home espresso maker. after the end of Prohibition. 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. The Dutch brewer plans to launch the machine in the Netherlands in March and then will likely introduce it across Europe and the U.) Heineken NV.S. 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. a Heineken spokeswoman. said the BeerTender was meant to be a more-sophisticated alternative to the keg." said Nicole van Putten.S. She said inhouse studies have shown that more than 70% of consumers want to drink draft beer at home. the machine would have trouble unseating the ubiquitous keg. the brewer that boasts it introduced Europe's first bottled and canned beer. but I can see it becoming hip among the beer-obsessed. which was the first foreign brewer to export beer to the U. Manel Vrijenhoek.VIII. However. to design the device -. The device serves draft beer and keeps it chilled for as long as five weeks. The BeerTender will retail for 249 euros ($319) -.that looks like an espresso maker and comes with a fourliter replaceable keg. APPENDIX A. Dow Jones & Company. beer analyst at Fortis Bank in Amsterdam. is launching a home appliance that it hopes will do for beer what the coffee machine did for coffee.dubbed the BeerTender -. 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. Document J000000020040213e02d00011 98 . which tends to be associated with American-style fraternity parties. the French maker of the Krups coffee machine. Inc. "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. Heineken said it teamed up with Groupe SEB SA.S. 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. Heineken. which has become a feature at American house parties and barbecues and comes in increasingly compact sizes.

is well above 80%257. Fig. In fact.2.20 are generally considered to be oligopolistic.26 0. Oligopoly VIII. a more accurate measure. Unfavorable (5).B. 99 .1: Herfindahl index for the US Beer industry. fig. Its current value of 0. a.18 0.a.B.S.1258. their size and power is very unevenly distributed.S. global scale market concentrations have generally been found to directly relate to profits per unit earned in the respective geography. beer industry analyzing the strength and degree of threat of each factor underlying each of Porter’s five forces. their size and power. which together with its dominant size makes its incumbents the most powerful global players. 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%. Another indication of the fierceness of the competition is that 1994 1996 Year 1998 2000 2002 1992 four of the top ten players in 1980 have meanwhile been bought over by their competitors.1.1.30 Herfindahl index 0.1. ANALYSIS OF PORTER’S FIVE FORCES IN THE U.. RIVALRY Number of competitors. the U. Though there are countless players in the U.28 0. Markets with an index above 0. BEER MARKET 1.20 0.293%2 indicates a strict oligopoly.18 to 0. has been continuously growing over 0.34 0. beer market ranging from multi-billion global corporations over regional manufacturers down to local brewpubs.S.B.a.24 0. Calculations are based on data are taken from reference given in the text.S. The CR4.32 0. commonly used to measure the concentration of an industry.16 0. followed by SAB Miller (21%) and Coors (11%).a. LEVEL 1 ANALYSIS This section presents a Level 1 analysis of the U. The Herfindahl index. VIII.22 0.B.S.14 1990 perfect competition the past more than ten years. beer market counts among the most profitable global entities. The U. It is therefore not with any surprise that on a Figure VIII.

a. Fig.1. Moderately favorable (2). South Africa Mexico France Canada growth.B. The overall import beer market share of around 10%. is too small to make a significant impact on the total market.3.B.4. of barrels] 100 90 80 70 gallons / adult 60 50 Total consumption versus variable costs. changes in the demography and reductions in the individual consumption have since then led to an average overall growth rate of below 1%. Calculations are based upon data provided in [Conway 2001]. market concentration for the world’s 15 most profitable beer markets.1.a. From an operational point of view.3: US domestic beer total and average individual consumption over the past 50 years. 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. however. 100 . Fixed 250. build large brewing capacities in strategically chosen locations. If a new entrant to the market were to play at the national level.000 100. such Greece 15 UK Netherlands Belgium Unites States 10 Italy Brazil Spain Argentina 5 0 65% 70% 75% 80% 85% 90% 95% 100% 105% Market concentration CR3 Figure VIII.2: Profit per barrel vs. 259 Certain markets segments. Further. they aim to 200. As most major players are competing on costs with transportation being a major factor. VIII.B. as the import beer market that Heineken is playing in.000 40 30 Individual consumption 50.1.a.B.a.25 Australia Industry total years. has The been beer market 20 Profit per barrel [US$] Ireland stagnating over the past twenty While it has been expanding till the 80’s with an average growth rate of 4%.000 20 10 0 1940 1950 1960 1970 1980 Year 1990 2000 0 2010 Figure VIII. he would be facing substantial capital equipment investments by the order of $100M per location (only considering brewery plants and equipment). still grow at an annual rate of 8%260.1. see figure VIII.000 US consumption [mill.000 150.

which needs to be considered fixed costs as 1980 1985 1990 1995 Year 2000 2005 2010 Figure VIII. High strategic stakes. the associated quantifiable switching costs from the consumer perspective are negligible. SAB Miller. Enhance market position by targeted acquisitions. Coors and SAB Miller solely produce beer. Market share (domestic beer) [%] marketing. companies tremendous financial Therefore. alcohol percentage. etc. While the product is apparently vastly differentiated. The three biggest domestic players. beer can be produced. Unfavorable (5). beer production is still the company’s main focus. The beer market is of major strategic importance to the biggest players. In principle. and Coors. For this reason. among others taste. Competitor diversity. some beer drinkers prefer locally brewed over nationwide distributed brands. every strategic move in 101 . In addition. Capacity is normally augmented in large increments. advertising and promotion to build critical momentum. calorie content. 262 263 . degree of bitterness. These can be best Moderately favorable (2).B.1.4: Domestic and import beer market share over the past 25 years well. brand building. Favorable (1). publicly state and pursue very similar strategies261 summarized by: • • • Grow volume and profitability. Moderately unfavorable (4).a. Expand into international geographies (specifically China). packaged and shipped in any chosen quantity. Anheuser-Busch.100% 98% 96% 94% 92% 90% 88% 86% 84% 82% 80% 1975 20% domestic Imports 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2015 Market share (imported beer) [%] beer sales are largely driven by brand image spend amount resources and a of on advertising. Beer differentiation and switching costs. Beer types can be differentiated into many different categories and nuances. While Anheuser-Busch also relies on revenue derived from packing and entertainment parks operations (combined 20% of the total revenue).

As mentioned in the previous sections. advertising and promotion are very expensive but they are the primary ways of developing brand image and reputation. The consumer. Brewery equipment is highly specialized and cannot be converted to be used for any other production purpose. (2) price. determines taste. Favorable (1). Favorable (1). advertising and distribution are the most significant factors for successful competition at the national level. product differentiation presents the same barrier to new entry and it ranks low. very little initial capital is required to become a beer producer. taste. If a large-scale producer were to exit the market place. which is a keg shaped can that distinctly differentiates its appearance among all of the other brands on the shelf. Anyone can enter the beer brewing and canning business with a rather insignificant investment and even gain a local following of devoted consumers.the market place will be closely monitored and its impact on the companies’ strategies will be evaluated in great detail. very large amounts of sustained capital are required. the consumer will choose the brand that has the most satisfying taste. For instance. of course. b. These expenses cut heavily into the delivered product cost and subtract from the profit margin. In order to make significant inroads in the beer business. (3) reputation or brand building. he would therefore only be able to obsolete his production equipment. Moderately unfavorable (4). (1) taste. canning equipment capable of 25 cases per hour with two operators can be leased for as little as $250 per month264. Product differentiation in the brewing industry is accomplished in four ways. THREAT OF ENTRY / BARRIERS TO ENTRY Economies of scale. Heineken introduced a “keg” can. Exit barriers.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. Of these three. All other factors being equal. Favorable (1). (4) packaging. Advertising per volume unit can vary by a factor of ten. For example. Product differentiation. Of these. Packaging is sometime used to promote the brand. Therefore. Economies of scale in the three areas of production. Specialized assets and fixed costs of exit represent the largest exit barriers. especially in the case of the super premium category. As mentioned earlier. price and brand are the most important. Capital requirements. however. 102 . 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. especially in marketing and advertising costs.

Access to distribution channels can be a excessive barrier in this industry. as it is heavily regulated by the government (see section II. can exercise substantial influence over wholesalers by offering them increased profit margins to exclusively distribute their brands. wholesalers have been steadily consolidating. Empirical evidence for this is that Heineken is the largest selling premium brand in the U. 103 .S. The threat of entry due to the difficulty of new entrants accessing the distribution channels is therefore low or favorable (1).1.271 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. Since wholesalers can choose to not carry products that produce insufficient revenues. This makes the second best wholesalers in each state even more important for the other players. For brands that cannot attract the attention of even these wholesalers. It continued to develop its brand name recognition by opening The Heineken Pavilion at the 1939 World Exhibition in New York City.C.D. market after Prohibition. As covered in section II. Favorable (1). This preference in significant numbers of people can only be developed over a long period of presence in the marketplace. people have acquired a taste for specific brands of beer. some have made exclusive agreements with large incumbents. Fledgling brands can ‘buy” the attention of wholesalers in order to improve their presence.4). Heineken spent $100M on its media advertising and sponsorships in 1999267.For example.S. on the other hand. Access to distribution channels. 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).S.268 Only the top two or three brands within a category as determined by retailer demand draw the attention of the best wholesalers. The larger brewers.270 Just like their preference for Coke Classic. unloading its first shipment in port Hoboken only three days after it ended. Heineken was the first nonAmerican beer brewer to reenter the U. the threat of marginalization is high. Anheuser-Busch has almost perfected this practice. market.269 As the U. Cost disadvantages independent of scale. the third and fourth largest wholesalers still allow the smaller share brands to penetrate the market. Wholesalers are most interested in distributing brands that are in high demand at the retail level. which can only be replaced at huge advertising and promotion expense. This practice makes it more difficult for the smaller brewers to produce profits.

Government policy. unfavorable 5.2 graphically shows the supplier interaction process. favorable 1. neutral 1.c.B. unfavorable product 5. moderately 1. Expected retaliation. unfavorable 2. and local government regulations.1. brewing equipment providers. moderately 4. Nearly all of the raw materials essential for beer manufacturing are commodity items sold by a multitude of different producers. moderately Brewing industry’s 4. favorable 1. unfavorable Supplier industry structure 3. favorable integration 1. Since there is generally little diversification in the brewing industry. moderately 2. favorable 3. neutral 3. favorable unfavorable importance to suppliers unfavorable favorable unfavorable Level of differentiation of 2. reputation and market shares against new entrants. The five ingredients required to make beer are grain (usually barley). unfavorable favorable product favorable Brewing industry’s 4. Favorable (1). moderately 5.1. Incumbents will vigorously protect their brand image. it remains a high stakes game. moderately 2.c. favorable 1. c.C. neutral 5. neutral 104 . packaging materials. favorable 1. This makes it difficult and costly to pursue growth throughout the entire domestic market. moderately 4. the threat of retaliation to a new entrant is increasing. water.1: Summary of supplier power factors The first area of analysis is the raw materials suppliers. and labor. neutral suppliers’ product favorable unfavorable 3. neutral 4. hops. moderately 4. neutral 5.1 below provides a synopsis of supplier factors and figure VIII. favorable 1. favorable importance to suppliers favorable unfavorable 1. favorable integration Fig. unfavorable 5. THREAT OF SUPPLIERS / POWER OF SUPPLIERS The four principle supplier categories in the beer industry are raw materials.c. see II.B.272 Supplier industry structure. Supplier Power Factors Supplier Power Factors Brewing Packaging Packaging Materials Labor Forces Materials Labor Forces 3. favorable 1.1. VIII. with the exception of yeast. The brewing industry is subject to extensive and comprehensive federal. state.4. neutral suppliers’ product favorable unfavorable Suppliers’ threat of forward Suppliers’ threat of forward 1. unfavorable 5. unfavorable Supplier industry structure Substitutes for suppliers’ 2. This could take the form of increased advertising and promotion or price reductions by brands that are feeling threatened by the new entrant. Categories of Categories of analysis analysis Brewing Equipment Equipment Raw Materials Providers Raw Materials Providers 1. moderately Substitutes for suppliers’ 5. Favorable (1). Supplier power is therefore low and favorable to the beer industry (1). which is cultured individually at each company from strains as old as the brewer’s existence. VIII. favorable 3. Fig.B. With the slowdown of the domestic beer consumption. moderately 3. moderately 3. moderately Level of differentiation of 2. and yeast.

273 as cattle feed. which is unfavorable to the beer industry (5). Of the three supplied raw materials. result. 105 . These manufacturers provide filtration equipment to cleanse incoming water. Level of differentiation of suppliers’ product.274 As a result. Since hops provide aroma. hops is the only material that is chiefly grown for beer production. There is little threat that raw “Wort” 1st Fermentation manufacturing industry and consequently supplier power is weak (1). Because beer manufacturers strive for consistent taste. Given this disparity. industry are the brewing capital equipment manufacturers. supplier Suppliers’ material suppliers power threat will is of enter moderately forward the beer Malting Brewing Process unfavorable to the beer industry (4). is also mainly grown for beer production. mills for processing the grain. This results in a high supplier power rating. integration. and process control hard and software. Brewing industry’s importance to suppliers. Some equipment is highly specialized and only a few suppliers exist. Supplier industry structure. large mash tuns and brew kettles to produce the beer.1. though it has secondary uses differentiation.B. supplier power is favorable to the beer industry (2). there are no real substitutes for the principle ingredients. this ingredient has the most potential supplier product Beer Making Process and Supplier Integration Water Barley Hops Yeast Barley.c. especially malted barley. while other production equipment is supplied by multiple manufacturers or can be designed and built by plant engineers. The second major suppliers to the beer 2nd Fermentation Figure VIII.2: Beer supplier interaction process. and it is one of the most important as it used to balance the natural sweetness with an herbal aroma and bitterness. supplier power is rated as neutral to the beer industry (3). filtration equipment to remove final impurities before bottling.Substitutes for suppliers’ product. but other important As a distinctions can be made by freshness and taste with respect to barley as well.

Level of differentiation of suppliers’ product. supplier power related to this issue is rated low. While not exact matches. Metal Container Corporation and Rexam Beverage Cans America are among the many companies that supply aluminum cans. As packaging materials are commodity products. Ball Corporation. As a result.. supplier power is rated neutral (3). Brewing industry’s importance to suppliers. Industrial equipment is essential in the mass production environment of a major brewery. Moderately favorable (2). As a result of the brewing industry’s dominance in the market. supplier power is rated high and is unfavorable to the beer industry (5). this mix is generally weighted unfavorable to the beer industry (4). There is a greater level of differentiation among more specialized equipment manufacturers. The brewing industry represented approximately 34% of the aluminum can market from 1995-1999 and approximately 44% of the glass container market. The third area of supplier analysis is packaging materials. industry is the developing market for plastic bottles. Ball-Foster Glass Container Corp. Crown Cork and Seal.Substitutes for suppliers’ product. while the smaller suppliers Substitutes for suppliers’ product. Supplier industry structure. This potentially represents a formidable threat. and only some items can be built in house with economic feasibility. Brewing industry’s importance to suppliers. Therefore. in which beer is packaged for sale. Anchor Glass Container Corp. There is little possibility that the suppliers will expand into beer production. Neutral (3). there is little opportunity for product differentiation outside of proximity to brewing 106 . Suppliers’ threat of forward integration. glass bottles (Owens-Brockway Glass Container Corp. but in general differentiation is found in service and support activities. and as a result forward integration is rated low (1). boxes. or favorable to the brewing industry (1). The larger companies are suppliers throughout the food industry.). and pallets. and labels. aluminum cans. and other packaging materials to the beer industry275 276 .277 Level of differentiation of suppliers’ product. Therefore. most equipment used in the brewing industry is similar to equipment used in other food processing industries though there are specific niche providers. which include glass bottles. The only viable substitute for the glass and bottle tend to focus on the beer industry.

As described in section II. There is little differentiation in the quality of employee’s among various unions. is heavily regulated. licensed wholesalers. Therefore. supplier power due to lack of substitutes is rated high (5). There is little possibility that packaging suppliers will expand into beer production. and therefore supplier strength is rated moderately unfavorable to the beer industry (4). THREAT OF BUYERS / BUYER POWER The beer market in the United States. their diversification allows for substantial power. The Teamsters Union represents 1. There is little possibility that the labor forces will develop their own beer producing firms. Suppliers’ threat of forward integration. retailers and the consumer. which also generally true of labor unions in Europe279. Although the beer industry represents an important segment for the Teamsters. Because of the dominance of these two labor unions. domestic market278 is the Teamsters Union. The fourth and final grouping of suppliers is labor power. Substitutes for suppliers’ product.S. supplier power related to differentiation is rated moderately low (2). Therefore. though trade unions typically represent trades with specialized skills and work experience.4 million employees and is the most diverse union in the U. Even Coors eventually allowed the Teamsters access to their plants to end a boycott. While non-union labor exists. Supplier industry structure. Industry’s importance to suppliers.S. and as a result forward integration is rated low (1). as with other alcoholic beverage industries such as wine and spirits. Suppliers’ threat of forward integration. and represents many different trade groups. The predominant union in the U. distribution is regulated by the three-tier system.S.4. Of the top 3 beer manufacturers. unions are typically organized within country boundaries.C.facilities due to the switching costs of additional freight. Level of differentiation of suppliers’ product. though this may change as the European Union strategy grows. it would be a formidable challenge to overcome the entrenched labor unions. and as a result forward integration is rated low (1).280 There are three types of buyers in the beer industry. only Coors is not fully unionized. 107 . Due to the lack of substitutes. that do have union representation. this issue is rated moderate (3). d. In Europe. supplier power due to industry structure is rated high (5). although the company does have some subsidiaries and even plants within the U.

The number of beer wholesalers has been decreasing over the past thirty years.281 These factors make the structure of the industry moderately favorable (2) Products represent significant portion of buyer’s costs.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. Contracts with brewer bind the ability of the wholesalers to expand their portfolios through exclusivity and “share the selves” clauses. domestic/non-premium and import/premium beers. In the midst of this consolidation two distinct groups of beer wholesalers has emerged. As a result. Buyer industry structure. “Franchise termination laws” in the U. while faced with industry consolidation. the independent multi-brand distributor and the exclusive partner.282 Given only two categories of profit potential. Products are standard or undifferentiated. Today there are still over 2500 regional beer distributorships down from over 5000 thirty years ago. Few switching costs. still remain powerful buyers due to the regulatory environment of the US alcoholic beverage market. Imports and premium beers have commanded significant profits for wholesalers. The result is moderately unfavorable (3) for the industry. Exclusive wholesalers face higher switching costs than independent multi-brand distributors.S. earning 50% more per case than domestic beers in 2003. Insulated from threat of termination. 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. protects wholesalers from the whims of brewers and gives wholesalers grants to specific regional territories. Given the trend for more exclusive distribution. 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 108 . Differentiation for wholesalers is marked by the profit potential of branded beers. more and more wholesalers are looking to make beer a sole source of income. buyer power is strengthened by this fact alone and is unfavorable to the beer industry (5).Wholesalers. wholesalers typically mark up beer 18% to 20%284. the market does not seem to be differentiated from a profit perspective. see section on macroeconomic forces. 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.

this segment made up approximately 48% of dollar beer sales. wholesalers would find it hard to market and sell their services no matter the mark-up. In addition. Wholesalers do not have the technological competencies for brewing beer and it is unlikely that they would buy them. The structure points a moderately favorable effect on retailer power (2). Backward integration is not a threat in this industry as a whole. However. Analyzing different retailers. Retailers. Buyer industry structure. As a determinate of buyer power this factor is favorable for the beer industry (1). This fact. For example. large concessions and wholesale clubs. this trend would have little effect on the majority of regional players licensed to sell exclusively in particular regions. convenience stores. liquor stores. on-premise resellers accounted for about 80% of the profits in the segment last year.286 Products are standard or undifferentiated. there is a benefit to the beer industry in the diversity of on premise retailers. Retailers are concerned with both profit potential and consumer preferences. points to a favorable effect for the beer industry in minimizing the power of the buyer (1).000 nationwide in 2002. buyer power is relatively low on this point exclusively and moderately favorable for the industry (3). Without a quality product. some have more potential to be sensitive to prices given their cost structure. There are seven major groups of beer retailers: on-premise restaurants and bars. the wholesalers. Products represent significant portion of buyer’s costs. are threatened by forward integration by brewers. are much more diverse than their channel counterparts.wholesalers. drug stores. but 109 . Convenience stores and supermarkets run a close second and third in terms of volume sales at 23% and 20% respectively (2003). as a group. In the consumer market there are many beer choices. if at all. As a result. beer dominates on premise sales making up 52% of all alcoholic beverage sales in 2002. Industry’s product unimportant to the “quality” of the buyer’s products or services. This buyer segment has consistently made up 25% of the volume of beer sales over the past five years. Although the on-premise segment is large and dominates profits. Wholesalers. The number of on-premise establishments was about 300. Buyers pose credible threat of backward integration.285 While the retail segment is diverse the profit potential is not. supermarkets. The quality of beer is an important factor in the resale channel.

Brewers. 110 . on-premise. wholesale clubs beer sales grew by 16%. Industry’s product unimportant to the “quality” of the buyer’s products or services. fall into this category and are a specific example of backward integration in the market. such as Costco. such as Gordon Biersch. The largest growth retailers. Retailers. wholesalers are given exclusive rights to a region and choice is limited for the retailer. 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). profits will continue to be an unimportant factor in retail price sensitivity and therefore a moderately favorable factor for the beer industry (2). wholesale clubs. Restaurants have the potential for bad customer perception if beer is served poorly. While on-premise beer profits dominate the market. choosing not to engage with a particular beer wholesaler in the area would be costly.287 If retailers are bound by customer preference and preference is extremely diverse. This factor is moderately unfavorable because it increases retailer price sensitivity (4). As well supermarkets run the risk of poor customer perception if they sell very old inventories of beer. In 2003. earn about 10% gross margins on beer. Buyers pose credible threat of backward integration. While both retailers want to sell quality beer – beer does not have a great impact of the quality of their service. The quality of the beer is determined by brewers and is perceived by the customer in the same way. In most states. 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. One current trend in on-premise beer retailing is the brew pub. The third groups of buyers are consumers. are at a disadvantage when trying to switch between beer wholesalers. The largest retail sector. Buyers earn low profits. given their inability to gain direct access to brewers as a point of distribution. Consumers purchase beer for personal consumption from beer retailers. generally makes about 80% gross margins on beer sales. 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. This factor weakens buyer power and is favorable for the industry (1). This fact has a favorable effect on buyer power on the beer industry (2). Few switching costs.distinct profit opportunities between brands is not apparent.

Differentiation in the consumer market is marked by taste and preference. The beer industry mirrored this concern with some brewers instituting “freshness dating” on all bottles and cans in the late 90’s. Industry’s product unimportant to the “quality” of the buyer’s products or services. This factor is insignificant and favorable for the industry (1). market and this fact is favorable for the industry (1). premium regular.Buyer industry structure. they can not make a profitable enough to compete on a national level. while those with little disposable income are more price-sensitive. Buyers earn low profits. Beer does consume a greater portion of a consumer’s beverage costs given the heavy taxation. they are still interested in beer quality. differentiators may cause preference and increase “mental” switching costs. There were over 3. The impact is moderately unfavorable for the industry (3). Forty-four percent of the cost of a bottle of beer is attributed to taxes on alcoholic beverages289. Although consumers do not produce their own products. This fragmented market is favorable to the beer industry as many different types of beer buyers dilute the concentration of power (1). 111 . imports. While consumers can brew beer in their own homes. This idea of profits is not applicable to this group of buyers.291 These brands fall into larger categories of premium light. craft and budget. Products represent significant portion of buyer’s costs. Beer is extremely differentiated in the U. This fact is generally favorable for the industry in terms of buyer power (1). While the actual monetary cost to switch brands is practically zero. Overall switching costs are moderately favorable for the industry as differentiation plays a big role in consumer preferences (2). Consumers with larger disposable incomes are less price-sensitive in their beer choices. Consumers are very diverse in the beer preferences.000 different brands distributed in the US in 2002. 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. Products are standard or undifferentiated. Switching cost for consumers can be analyzed from a differentiation and cost perspective. Few switching costs.S. beer costs do become a factor in consumer price sensitivity. Buyers pose credible threat of backward integration.

The coming of age of the baby boomer generation fueled the growth of the wine industry. More importantly. beer has the best price/value ratio. the “millennial generation" with members of the leading edge in their early 20s.e. Threat of substitutes (4) In addition to over a hundred different beer labels to choose from. the wine consumption hit a new all-time high of 2. A recent survey among 1300 participants indicated that 73% agreed with this statement. the volume of spirits was larger than that of beer and wine. Stolichnaya Citrona and Mike's hard lemonade.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. the year 2003 has seen a 32% gain in core wine consumer population.S. Demand for sweeter taste The leading brands in this category are Smirnoff Ice. Bacardi Silver. consumers can also purchase wine. 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. 51% thought the same of wine. malt-flavored alcoholic drinks (sometimes also called flavored alcoholic beverages.294 FABs were first introduced to the U. In fact. Wine drinking has become part of the American culture. as they target the same demographic group. f.68 gallons per capita. Smirnoff Ice. While there are a number of products and services that either promote the consumption of beer 112 . FABs). Consequently.292 In fact. Price performance of substitutes. the dominant supplier of FABs.295 In 2003. market in 2001 and became an instant hit. ROLE OF COMPLEMENTS According to Gordon Walker299 complementary products are characterized by systematically positively correlated demand and creation of a reciprocal expansion of demand. grew from zero to over 25 million cases and sales approached two percent of the beer industry in its first full year of distribution. has even a bigger appetite for wine than previous generations. than beer offers has led to the evolution of FABs. THREAT OF SUBSTITUTES Number of substitutes. but also consume mixed drinks and are looking for something new. SKYY Blue. for the first time in 30 years. half of the new FAB consumers have switched from beer. Compared to all mentioned substitutes. but only 29% of FABs and 25% of spirits298. FABs appeal to consumers who occasionally drink beer.297 296 This success is the direct result of the change in consumer taste preference.

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. etc.(sports games.S. Neutral (3). Its oligopolistic concentration together with the fierce competition effectively blocks any potential newcomer from entering at the national scale.) or are a required part of the overall experience (bottles. This unfriendly scenario and the slow overall growth rate make the U. etc. 2. Even great recipes are not the key to entry. 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. There no complements for beer.). concerts. their size and power size and power Industry growth rate Industry growth rate Fixed versus variable costs Fixed versus variable costs Product lacks differentiation or Product lacks differentiation or switching costs switching costs Capacity is augmented in large Capacity is augmented in large increments increments Competitors are diverse in Competitors are diverse in strategy strategy High strategic stakes High strategic stakes Exit barriers are high Exit barriers are high Overall Rating: Overall Rating: Effects on Industry Effects on Industry Favorable Favorable Moderately favorable Moderately favorable Favorable Favorable Moderately unfavorable Moderately unfavorable Unfavorable Unfavorable Moderately favorable Moderately favorable Favorable Favorable Moderately unfavorable Moderately unfavorable Favorable (1) Favorable (1) Strength Strength 1 2 1 1 2 1 Rank Rank 1 2 3 1 2 3 4 4 6 6 5 5 8 8 2 1 4 2 1 4 5 4 7 5 4 7 b. LEVEL 2 ANALYSIS a. Common logic would tell us that it would be easy for new entrants if they only have a delectable formula. In addition. cans. kegs. Every challenger would face serious hurdles in establishing an effective marketing and distribution infrastructure. their Number of competitors. RIVALRY The structure of the U. Beers 113 .S. beer market extremely unattractive to potential entrants. beer market is very much in favor of its incumbents. Rivalry Rivalry Factors affecting rivalry Factors affecting rivalry Number of competitors. none of these fulfills both of Walker’s criteria.

Raw material and packaging providers also represent significant threats of supplier power. it is a high stakes game that incumbents will vigorously protect. With little diversification among incumbents. Brewers are less inclined to need additional equipment and once installed. mostly by virtue of the current overcapacity in the industry and declining growth rate in beer consumption. their significance is not as great as that of labor. New entrants have little relative volume and little relative clout with the government mandated and regulated distribution system. Based on our analysis of the industry. but because of the large number of providers. 114 . as the machinery has a long life span. our conclusion is that “supplier power” represents a moderately unfavorable competitive force to the beer industry. THREAT OF SUPPLIERS / POWER OF SUPPLIERS Because of the predominance of unionized labor. Brewing equipment providers are positioned as the least likely threat of supplier power. Barriers to Entry Barriers to Entry Barriers to Entry Factors Barriers to Entry Factors Economies of scale Economies of scale Product differentiation Product differentiation Cost disadvantages Cost disadvantages independent of scale independent of scale Capital requirements Capital requirements Access to distribution channels Access to distribution channels Expected retaliation Expected retaliation Governmental barriers Governmental barriers Overall Rating: Overall Rating: Effects on Industry Effects on Industry Favorable Favorable Favorable Favorable Unfavorable Unfavorable Favorable Favorable Favorable Favorable Favorable Favorable Favorable Favorable Favorable (1) Favorable (1) Strength Rank Strength Rank 1 1 1 1 6 1 6 1 1 1 1 1 7 5 7 5 1 1 1 1 1 1 2 3 4 2 3 4 c. Labor Forces represent the most significant threat of supplier power. Moderately unfavorable (4).are differentiated by brand and image development that takes years to achieve for which no substitute is available.

quality. while branding in the consumer market helps to decrease the overall threat of the group as a whole. THREAT OF BUYERS / BUYER POWER While differentiation (favorable) becomes a more prominent factor in buyer power the farther down the chain of distribution.S. 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. (4) 115 . The threat of channel buyers is strong. strategic importance and the structure of the channel as a whole has a strong affect on the industry.Overall Rating: moderately unfavorable (4) Overall Rating: moderately unfavorable (4) Supplier Power Factors Supplier Power Factors Raw Materials Raw Materials 2nd Supplier Rank: Supplier Rank: Score 2nd Rank Supplier industry structure Supplier industry structure Substitutes for suppliers’ Substitutes for suppliers’ product product Brewing industry’s Brewing industry’s importance to suppliers importance to suppliers Level of differentiation of Level of product suppliers’ differentiation of suppliers’ product Suppliers’ threat of forward Suppliers’ integration threat of forward integration Score 1 5 2 4 1 Categories of Categories of analysis analysis 1 5 2 4 1 4th 4th 1st 1st 3rd 3rd 2nd 2nd 5th 5th Rank Brewing Brewing Equipment Equipment Providers Providers 4th 4th Score Rank Score 3 3 5 4 3 1 5 4 3 1 3rd 3rd 1st 1st 2nd 2nd 4th 4th 5th 5th Rank Packaging Packaging Materials Materials 3rd 3rd Score Rank Score 3 3 2 1 2 1 2 1 2 1 1st 1st 4th 4th 3rd 3rd 2nd 2nd 5th 5th Rank Labor Forces Labor Forces 1st 1st Score Rank Score 5 5 5 4 3 1 5 4 3 1 1st 1st 2nd 2nd 3rd 3rd 4th 4th 5th 5th Rank d. The effects of the aforementioned factors are moderately unfavorable. 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.

Buyer Power Buyer Power Buyer's Factors Buyer's Factors Wholesalers Wholesalers Is the product differentiated? Is the product differentiated? Does the buyer earn low Does the buyer earn low profits? profits? Is the product important to the Is the product important to the buyers' product quality? buyers' product quality? Is the product a significant Is the product a significant portion of buyer's costs? portion of buyer's costs? Size and concentration of buyer Size and concentration of buyer groups groups Are there switching costs? Are there switching costs? % volume sold to the buyer % volume sold to the buyer Is the buyer strategically Is the buyer strategically important to the firm? important to the firm? Does a threat of backward Does a threat of backward vertical integration exist? vertical integration exist? Overall Rating Overall Rating Effects on Industry Effects on Industry Moderately Favorable Moderately Favorable Moderately Favorable Moderately Favorable Favorable Favorable Unfavorable Unfavorable Moderately Favorable Moderately Favorable Moderately Favorable Moderately Favorable Unfavorable Unfavorable Unfavorable Unfavorable Favorable Favorable Moderately Favorable Moderately Favorable Moderately Favorable Moderately Favorable Moderately Unfavorable Moderately Unfavorable Moderately Favorable Moderately Favorable Favorable Favorable Favorable Favorable Unfavorable Unfavorable Unfavorable Unfavorable Moderately Favorable Moderately Favorable Moderately Unfavorable (4) Moderately Unfavorable (4) Strength Strength 2 Rank Rank 8 2 8 3 3 6 6 1 1 7 7 5 5 4 4 2 2 5 2 2 5 3 5 2 3 5 2 5 1 5 1 1 9 1 9 Retailer Retailer Is the product differentiated? Is the product differentiated? Does the buyer earn low Does the buyer earn low profits? profits? Is the product important to the Is the product important to the buyers' product quality? buyers' product quality? Is the product a significant Is the product a significant portion of buyer's costs? portion of buyer's costs? Size and concentration of buyer Size and concentration of buyer groups groups Are there switching costs? Are there switching costs? % volume sold to the buyer % volume sold to the buyer Is the buyer strategically Is the buyer strategically important to the firm? important to the firm? Does a threat of backward Does a threat of backward vertical integration exist? vertical integration exist? 2 2 1 1 2 2 8 8 4 4 9 9 3 3 7 7 1 1 5 1 1 5 4 5 6 4 5 6 5 2 5 2 3 2 3 2 116 .

Emerging demographics prefer wine and FABs over beer.Buyer Power Buyer Power Buyer's Factors Buyer's Factors Consumers Consumers Is the product differentiated? Is the product differentiated? Does the buyer earn low Does the buyer earn low profits? profits? Is the product important to the Is the product important to the buyers' product quality? buyers' product quality? Is the product a significant Is the product a significant portion of buyer's costs? portion of buyer's costs? Size and concentration of buyer Size and concentration of buyer groups groups Are there switching costs? Are there switching costs? % volume sold to the buyer % volume sold to the buyer Is the buyer strategically Is the buyer strategically important to the firm? important to the firm? Does a threat of backward Does a threat of backward vertical integration exist? vertical integration exist? Overall Rating Overall Rating Effects on Industry Effects on Industry Moderately Unfavorable (4) Moderately Unfavorable (4) Strength Strength Rank Rank Favorable Favorable N/A N/A N/A N/A Moderately Unfavorable Moderately Unfavorable Favorable Favorable Moderately Favorable Moderately Favorable Favorable Favorable Unfavorable Unfavorable Favorable Favorable 1 1 1 1 4 4 3 3 1 2 1 1 2 1 5 2 6 5 2 6 5 1 5 1 4 7 4 7 e. There are numerous alcoholic beverage substitutes available with minimal switching costs. Moderately Unfavorable (4). THREAT OF SUBSTITUTES Level 2: The threat of substitutes is moderately high. Consequently. Moderately Unfavorable Moderately Unfavorable (4) (4) Strength Strength 4 3 4 3 Substitutes Substitutes Factors increasing the Factors increasing the effects of substitutes effects of substitutes Do buyers have high Do buyers have high propensity to substitute? propensity to substitute? Is the price performance of Is the price performance of substitutes high? substitutes high? Overall Ranking Overall Ranking Effects on Industry Effects on Industry Moderately Unfavorable Moderately Unfavorable Neutral Neutral Rank Rank 1 2 1 2 117 . the beer industry has started to lose market share to these beverages.

f. 118 . ROLE OF COMPLEMENTS There are no products or services that qualify as complements for beer.

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 Gordon Biersch, Anchor Steam*, Coors*, Miller* * 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. Imported Sierra Nevada, Samuel Adams, Budweiser, Heineken, Guinness, Corona

119

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: • 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. • It is assumed the synthetic data is normally distributed and the mean and standard deviation match the survey data. • It is assumed the synthetic coefficients (Fig. VIII.C.2) are normally distributed and the mean and standard deviation match the regression model.

120

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.

• •

N = 200 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 segment that is % of survey % of survey willing to buy the population that wants population willing to appliance at $300 as to buy appliance by buy appliance by projected by segment segment simulation 8.37% 29.04% 2.43% 3.77% 6.28% 7.95% 19.94% 11.95% 18.26% Total Table VIII.C.2 Latent demand for a $300 BeerTender Appliance % of segment that is % of survey % of survey willing to buy the population that wants population willing to appliance at $300 as to buy appliance by buy appliance by projected by segment segment simulation Heineken Insiders Heineken Majority Novelty Seekers Home Bodies 8.37% 3.77% 6.28% 7.95% 7.30% 5.00% 0.96% 0.88% Total 0.61% 0.19% 0.06% 0.07% 0.93% 0.75% 0.75% 1.45% 5.38%

Heineken Insiders Heineken Majority Novelty Seekers Home Bodies

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 121

Table VIII.C.3 Demand for a $300 BeerTender-like (choices included) Appliance after successful Promotion Program % of segment that is % of survey % of survey willing to buy the population that population willing to appliance at $300 as wants to buy buy appliance by projected by appliance by segment segment simulation 8.70% 3.51% 8.28% 7. Table VIII.38% 7.77% 30.95% 31.be explained by the fact that import beer drinkers have higher disposable incomes302.13% 1. 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.77% 6.75% 3.95% 14. Heineken should promote style and novelty in order to achieve the same of awareness as choice.41% 0.28% 22.55% 122 .52% Total Heineken Insiders Heineken Majority Novelty Seekers Home Bodies Table VIII.C.51% 2.C. choice of beer is an important value driver.41% 6. The survey population is not as sure about novelty and style as value drivers.00% 1. Heineken has distinctive capabilities in marketing and communications.14% 6.45% Total 0.49% 3.37% 41. this survey population prefers beer choice over style and novelty.C.85% Heineken Insiders Heineken Majority Novelty Seekers Home Bodies 3.3 and Table VIII.54% 0.37% 22.4 Demand for a $300 BeerTender Appliance After Successful Promotion Program % of segment that is % of survey % of survey willing to buy the population that wants population willing to appliance at $300 as to buy appliance by buy appliance by projected by segment segment simulation 8.35% 1. During the rollout of the BeerTender. In other words.50% 9. Second.4 summarize the results from this simulation.

The same model can simulate the demand function at several price points so that the price elasticity can be computed. If marketing is ineffective. 123 . the elasticity is closer to 6 and price promotions will be required to inflate demand. The model yields a price elasticity between 2 and 6 depending on the effectiveness of marketing.

) Mil ler Ro llin gR ock Mic Mic hel key ob 's B ig M ou th Kin gC ob ra Na tur al L i gh Old t En glis h8 00 Me iste rB rau 124 . friends place.Percentage of responses 10% 20% 30% 40% 50% 60% 70% 0% Percentage of responses 80% 10% social activity (picnic. etc. Q7: Where do you most like to drink beer? (Check all that apply.C. party.) home 20% 30% 40% 50% 60% 70% 0% tavern/bar/pub restaurant sporting event Sie rra Ne vad Sa a mu el A dam s Py ram id Bu dw eis er Co ors Q11: Domestic brands of beer that you buy (Check all that apply.a: Responses to selected questions of the BeerTender survey.1.) night club Figure VIII.

125 .) 30% Percentage of responses 25% 20% 15% 10% 5% 0% freshness price convenience sophistication packaging Figure VIII.) 50% Percentage of responses 40% 30% 20% 10% 0% Gu inn ess Co ron a Ba ss He ine ken Sa pp oro Do sE qu is Am ste l Sp at e n Fo ste r's Pil As sne ahi rU rqu elle Be ck' s Kir an Tsi ng Tao Tec ate Lo we nb r au L ab bat 's Mo lso n 35% Q14: Importance of various beer attributes (Check all that apply.C.1.60% Q12: Imported brands of beer that you buy (Check all that apply.b: Responses to selected questions of the BeerTender survey.

35% Q16: Importance of attributes of a countertop draught beer appliance (Check all that apply. 126 .c: Responses to selected questions of the BeerTender survey.C.) department liquor store store grocery store hardware store Figure VIII.) 30% Percentage of responses 25% 20% 15% 10% 5% 0% choice of beer size/capacity price styling novelty/ coolness 90% 80% 70% Percentage of responses 60% 50% 40% 30% 20% 10% 0% specialty store (like Beverages and More) wholesale warehouse (like Costco) novelty store (like Sharper Image) Q18: Where would like to buy this countertop draught beer appliance? (Check all that apply.1.

18 for initial interest (Q15) •STD of $41.04 for every point respondent values styling (Q16) •STD of $1.58 •P value of 2.9% •Pay $89.Figure VIII.18 •P value of 2.9% •Pay $4.66 for every point respondent values novelty (Q16) •STD of $1.01 •P value of 0.81 •P value of 3.8% •Pay $0. Regression Model The model explains the willingness to pay for a BeerTender-like appliance and captures 40% of the variance.02 if respondent does not go to night clubs (Q7) •STD of $39.65 •P value of 2.2.C.042 for every point squared respondent values choice (Q16) •STD of $0.4% This value drive is applicable for Heineken drinkers only (Q12). •Pay $2.006% 127 . •Pay $57.

VIII. This distribution is assumed to be normal. Won’t buy Will buy . N=200 . . The statistics are performed on these synthetic customers to compute demand. .C. $300 128 .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.Fig.

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