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IDIS 619 Professor Tammy Madsen June 8, 2004 Eva Chan Alok Gupta Joachim Krueger Micki Mendez David Rowell Chris Wikoff
Santa Clara University
“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
TABLE OF CONTENTS
I. II. A. B. EXECUTIVE SUMMARY .................................................................................................... 6 EXTERNAL ANALYSIS.................................................................................................. 7 INDUSTRY DEFINITION ................................................................................................ 7 FIVE FORCES ANALYSIS ............................................................................................. 7 1. Level 3 Analysis ............................................................................................................... 7 C. MACRO ENVIRONMENTAL FORCES ANALYSIS .................................................................... 8 1. Global................................................................................................................................. 8 2. Social & Cultural Trends ................................................................................................. 8 3. Technological ................................................................................................................... 9 4. Governmental and Political .......................................................................................... 10 5. Ethical .............................................................................................................................. 11 6. Economic (Macroeconomic) Trends ........................................................................... 12 7. Demographic Trends..................................................................................................... 12 8. Summary ......................................................................................................................... 13 D. COMPETITOR ANALYSIS .................................................................................................... 14 1. Anheuser-Busch, Inc..................................................................................................... 14 a. Corporate Overview and Products.......................................................................... 14 b. Strategy & Positioning............................................................................................... 15 c. Resources ................................................................................................................... 15 d. Capabilities ................................................................................................................. 16 e. Value Drivers .............................................................................................................. 17 f. Cost Drivers ................................................................................................................. 18 g. Strengths ..................................................................................................................... 19 h. Challenges and Weaknesses .................................................................................. 19 2. SAB Miller plc ................................................................................................................. 20 a. Corporate Overview and Products.......................................................................... 20 b. Strategy & Positioning............................................................................................... 20 c. Resources ................................................................................................................... 21 d. Capabilities ................................................................................................................. 22 e. Value and Cost Drivers ............................................................................................. 22 f. Strengths and Weaknesses ...................................................................................... 23 3. COORS ........................................................................................................................... 23 a. Corporate Overview and Products.......................................................................... 23 b. Strategy & Positioning............................................................................................... 24 c. Resources ................................................................................................................... 24 d. Capabilities ................................................................................................................. 25 e. Value and Cost Drivers ............................................................................................. 26 f. Strengths and Weaknesses ...................................................................................... 26 4. Corona and Labatt – Import Competitors .................................................................. 26 a. Corporate Overview and Products.......................................................................... 26 b. Strategy & Positioning............................................................................................... 27 c. Resources ................................................................................................................... 28 d. Capabilities ................................................................................................................. 28 e. Value and Cost Drivers ............................................................................................. 29 3
f. Strengths and Weaknesses ...................................................................................... 29 5. Willingness to Pay Framework and Value chain analysis....................................... 29 6. Financial Positions of Competitors.............................................................................. 30 a. Financial Strength and Size: .................................................................................... 31 b. How do they perform relative to their industries? ................................................. 32 c. Summary & Implications ........................................................................................... 33 E. INTRA-INDUSTRY ANALYSIS .............................................................................................. 34 a. Strategic Groups in the Industry.............................................................................. 34 b. Mobility Barriers ......................................................................................................... 35 c. Trends in the beer industry - effect on strategic groups ...................................... 36 d. Position after the Strategic Move ............................................................................ 37 e. Role of Disruptive Technologies.............................................................................. 37 F. FAILURE ANALYSIS ............................................................................................................ 37 G. THREATS AND OPPORTUNITIES ANALYSIS ........................................................................ 38 H. SUMMARY OF EXTERNAL ANALYSIS .................................................................................. 39 III. A. B. C. INTERNAL ANALYSIS ................................................................................................. 40 BUSINESS DEFINITION / MISSION ..................................................................................... 40 MANAGEMENT STYLE ........................................................................................................ 41 ORGANIZATIONAL STRUCTURE, CONTROL, VALUES ....................................................... 42 1. Organizational Structure............................................................................................... 42 2. Controls used in monitoring employee behavior ...................................................... 42 3. Organization’s Values ................................................................................................... 43 D. STRATEGY/COMPETITIVE POSITION DEFINITION .............................................................. 43 1. Corporate Level.............................................................................................................. 43 a. Related diversification ............................................................................................... 44 b. Porter’s diversification tests ..................................................................................... 45 c. Broad And Focused differentiation.......................................................................... 46 d. Cost and Value drivers.............................................................................................. 47 e. Distribution of economic contribution...................................................................... 48 f. Barriers to Imitation .................................................................................................... 48 2. Functional Level ............................................................................................................. 49 a. Resources and Capabilities ..................................................................................... 49 b. Value chain ................................................................................................................. 51 c. VRIO Analysis............................................................................................................. 52 3. Financial Analysis .......................................................................................................... 53 a. Historical Performance and Key Ratios ................................................................. 53 b. Discounted Cash Flow Analysis .............................................................................. 56 4. Strengths and Weaknesses ......................................................................................... 57 5. Technology Strategy ..................................................................................................... 57 6. Strategic Move – Partnership with Grope SEB......................................................... 58 7. Effect of strategic move on Strategy........................................................................... 59 IV. A. B. C. ANALYSIS OF THE EFFECTIVENESS OF STRATEGY ....................................... 61 THE EFFECT OF THE STRATEGIC MOVE ON INDUSTRY CONDITIONS ............................... 61 SCENARIO ANALYSIS AND EFFECT ON VALUATION ........................................................... 63 OVERALL EFFECTIVENESS OF HEINEKEN’S STRATEGY ................................................... 66 4
RECOMMENDATIONS..................................................................................................... 67 3 SHORT TERM AND 3 LONG TERM RECOMMENDATIONS ............................................... 67 1. Short Term Recommendations.................................................................................... 67 2. Long Term Recommendations .................................................................................... 68 B. STRATEGY IMPLEMENTATION............................................................................................ 69 1. Implementation of one short term recommendation ................................................ 69 2. Implementation of one long term recommendation.................................................. 71 CONCLUSIONS ................................................................................................................ 72
VII. TABLES AND EXHIBITS ................................................................................................ 73 VIII. APPENDIX ......................................................................................................................... 98 ORIGINAL ARTICLE IN THE WALL STREET JOURNAL ........................................................ 98 ANALYSIS OF PORTER’S FIVE FORCES IN THE U.S. BEER MARKET................................ 99 1. Level 1 Analysis ............................................................................................................. 99 a. Rivalry.......................................................................................................................... 99 b. Threat of Entry / Barriers to Entry ......................................................................... 102 c. Threat of Suppliers / Power of Suppliers.............................................................. 104 d. Threat of Buyers / Buyer Power ............................................................................ 107 e. Threat of Substitutes ............................................................................................... 112 f. Role of Complements............................................................................................... 112 2. Level 2 Analysis ........................................................................................................... 113 a. Rivalry........................................................................................................................ 113 b. Threat of Entry / Barriers to Entry ......................................................................... 113 c. Threat of Suppliers / Power of Suppliers.............................................................. 114 d. Threat of Buyers / Buyer Power ............................................................................ 115 e. Threat of Substitutes ............................................................................................... 117 f. Role of Complements............................................................................................... 118 C. BEERTENDER SURVEY ................................................................................................... 119 A. B.
I. EXECUTIVE SUMMARY
Heineken NV, the world’s third largest brewer, has recently announced the introduction of a new product to the U.S. beer market dubbed the BeerTender. This new home appliance is designed to fit in the kitchen next to the espresso machine and to keep beer in a unique recyclable four-liter keg cold, fresh and ready for draught for up to three weeks. The unit was designed and crafted in conjunction with Krups, the well-known maker of upscale home appliances. The move is intended to capitalize on recent shifts in customer preference while benefiting Heineken’s portfolio mix at the same time. In the U.S.A., half of Heineken consumption is on-trade compared to competitor’s 25/75 on-trade to off-trade split. If successful, the move could increase both Heineken’s market share and profit margins as well as enlarge offtrade consumption, which is more profitable and less subject to decline than on-trade in times of economic downturn. Every strategic move is subject to external forces and internal capabilities. This paper identifies the following key success factors ultimately determining the outcome of Heineken’s initiative: External environment. The U.S. beer market is strongly consolidated and mature. Opportunities are mostly related to changes in demographics and customer preferences. Supply chain management in this heavily regulated environment is of paramount importance. Internal environment. Heineken’s unique approach to the market is manifest through a dominant vertical structure that utilizes a mixture of strong centralized policies and decentralized decision-making. While a strong base of resources and well-developed capabilities combine to give Heineken a competitive advantage, the company is challenged in responding to recent preference changes in the U.S. market. The U.S. operating company has concentrated its efforts in the Northeastern region with limited presence on the West coast. Heineken’s move is the correct response to the ongoing changes in the U.S. beer market. To be successful, Heineken should implement the following recommendations: • • • Roll out the BeerTender on a nation-wide basis. Introduce Amstel Light in BeerTender kegs. Specifically target the middle-aged population. 6
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
Beer manufacturer Beer manufacturer
• 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
1 st 1 nd 2 nd 2 rd 3 rd 3 th 4 th 4 th 5 th 5
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.
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.
Another direction of technological development addresses beer transportation and market intelligence. Some UK beer transporters began using RFIDs (Radio Frequency Identification) to track content information and capture consumer preference data. This technology may not be adopted in the US any time soon since consumer groups strongly oppose the disclosure of personal information. RFIDs have become subject to legislation20. Thus, US brewers currently only rely on supermarkets and other distribution channels for collection of customer preferences. 4. GOVERNMENTAL AND POLITICAL The beer industry is subject to extensive government regulations regarding distribution, labeling, advertising, credit, prices, container characteristics, alcoholic content, tax rates, and waste assessments. Legislations are introduced and enforced at the state level but are subject to federal regulations issued by the Bureau of Alcohol Tobacco and Firearms (ATF)21. The government imposes a disproportional tax rate on beer with the intention to reduce alcohol abuse. In 1991, the state excise tax doubled from $9 to $18 per barrel. Today, when summarized across production, distribution and retail, the tax represents 44% of the beer retail price22. Tax rates are determined at the state level and vary significantly from state to state23. Approximately, the government collects $3.4 billion at the federal level, $1.9 billion at the states level, and in addition $3.1 billion in sales taxes each year. In effect, the government makes seven times more profit from beer taxes than all domestic brewers combined24. State imposed pricing laws regulate the price allocation between brewers and wholesalers. In New York State, for instance, a brewer must not raise prices for 180 days after a price reduction. Also, if a price reduction is offered to one distributor, all other distributors in the state must receive the same benefit.25 The federal government also heavily regulates beer distribution. After prohibition ended in 1933, the 21st Amendment resulted in the introduction of the ‘three-tier’ distribution system. Beer is only allowed to be passed from producers through distributors to retail outlets26. This was done with the intention of reducing control of brewers over retailers and to ensure more effective tax collection. In addition, it is illegal to transport beer across state lines, which has led to a heavily fragmented distribution network currently consisting of more than 2,700 independent players27. The uniqueness of this system is also one of the primary reasons for the U.S. import beer market’s profitability, as it presents a major barrier to entry28. Recently,
however, there have been lobbying efforts by larger retail chains, such as Costco, to bypass these laws. These retailers seek to buy from producers directly, ‘warehouse beer at the state level’ and then distribute to their wholesale clubs29. Internet and mail order sales of beer are also restricted under the 21st Amendment including specific provisions that only allow licensed in-state retailers to distribute alcohol.30 Each state has different rules regarding marketing, importation and distribution of alcohol. Direct interstates sales are prohibited in a number of states (AL, AZ, AR, DE, KS, ME, MA, MI, MS, MT, NJ, NY, OH, OK, PA, SC, SD, TN, UT, VT, VA). In seven states (FL, GA, IN, KY, MD, NC, TX), it is a felony offense for retailers and non-basic permit holders to sell alcohol directly to consumers.31 The Supreme Court is currently reviewing the possible deregulation of interstate wine trade.32 The ruling will affect future Internet and mail order beer distribution. Beer companies are constantly battling for rights to advertise to specific demographic audiences and are at the same time being under pressure to observe regulations preventing underage drinking. The US law prohibits anyone below the age of 21 from alcohol consumption and brewers from advertising to such demographics. The Federal Trade Commission ruled that alcohol companies should not advertise to audiences comprised of more than 30 percent of minors.33 Though contesting the existence of any scientific evidence that would link advertising and underage drinking, beer companies have volunteered to curtail advertising to minors. Nevertheless, two class action lawsuits have recently been filed against alcohol companies, including Anheuser-Busch and SABMiller, for advertising FABs to demographic segments consisting of minors.34 5. ETHICAL Underage drinking is on the rise. A government-sponsored report estimated that the social cost of underage drinking is about $53 billion annually35 with traffic accidents and violent crimes as the leading cost. A Georgetown University study found that the average Internet traffic to beer company websites consists of up to 60 percent minors36. The current ethical debate is about whether brewing companies or parents are responsible for monitoring the web surfing patterns of minors and policing purchases of alcoholic beverages. The beer industry refers to numerous studies proving that parents have more influence over the youth's drinking behavior than advertising.
Consumer watchdogs, on the other hand, have accused brewers of making their company websites too minor-friendly.37 Specifically, they blame brewers for offering online content particularly appealing to minors, such as interactive games (e.g. alien shoot-outs and beer bottle tossing), custom music videos and interviews with pop stars. The debate regarding both issues is still ongoing. 6. ECONOMIC (MACROECONOMIC) TRENDS During the past three years the global economy has undergone one of its most severe recessions. Surprisingly, there is no evidence indicating that people would consume less beer during an economic downturn (though on-trade drinking declines in favor of off-trade). In fact, a regression analysis covering the past 20 years could not find any correlation between the GDP and the total domestic beer consumption38. Interestingly enough, the average annual beer price increase of 2 -3% during that time frame did not have any negative impact on the consumption either39. It has been established that the beer consumption only grows at half the growth rate of personal disposable income40. In contrast to the overall market, the import beer segment, owing to its much higher price point, tracks very closely the GDP and consumer expenditures.41 7. DEMOGRAPHIC TRENDS Demographics represent the strongest macro-economic force affecting beer sales. According to a recent study, approximately 40% of the U.S. population consumes beer on a regular basis and more than 30% of beer drinkers are frequent beer shoppers. Their demographic profile is strongly skewed toward young males (21-27 year-old) with low to moderate education and moderate household income.42 This core segment represents 27% of the overall beer sales and the highest per capita consumption with yearly intake of 66 gallons compared to the national average of 33 gallons43. The growth of this segment (CAGR of 1.4%) is generally considered to be the main driver for the US beer industry for the next decade, see Figures II.C.7.1 and II.C.7.2. However, the U.S. population is aging. More than 31% of U.S. citizens will reach their 50’s by 2005, compared to 26% in 1992. Consumers drink less beer as they age, 16 gallons per capita by the time they are 50 years old44, mostly due to health and wellness concerns. Based upon its current growth rate, the 50+ population will only make a moderate contribution to the beer consumption increase in the next decade.
8. SUMMARY Summarizing the past two sections, Porter’s five forces and the macroeconomic trends, the US beer market is moderately to strongly unfavorable to newcomers. The summary and ranking is shown graphically in Fig. II.C.8. The strong rivalry in conjunction with the unfavorable cultural and demographic trends makes the domestic beer market very unappealing. The following section, on the other hand, will show that the incumbent firms that have perfected their game can still prosper under these conditions.
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
Moderately Moderately favorable favorable
Moderately Moderately Unfavorable Unfavorable Unfavorable Unfavorable
Competitive General environment Competitive Environment General environment Environment
Figure II.C.8: Summary and ranking of the macroeconomic and Porter’s five forces acting on the US beer market.
D. COMPETITOR ANALYSIS Heineken has announced they are considering the rollout of the Beertender in the U.S. market. Anheuser-Busch, SAB Miller and Coors dominate this market and are therefore the focus of this analysis. Heineken is the second-ranked competitor in the import beer market segment, which is dominated by Corona, the flagship product of the Mexican Modelo group controlled by Anheuser-Busch. Labbatt, the Canadian-Belgian brewery, is number three. SABMiller and Coors have recently expanded into the beer import market. 1. ANHEUSER-BUSCH, INC. a. CORPORATE OVERVIEW AND PRODUCTS Anheuser-Busch, Inc., is 100 percent owned by the holding company Anheuser-Busch Companies, Inc. The company mostly focuses on domestic beer sales, 75% of its total revenue, 4% from international beer sales, 15% from packaging, and 6% from entertainment. predecessor, the Carondelet. George Schneider in Bavarian Brewery— St.Louis, Missouri in 1852 founded its After changing ownership
several times within just two years, it was acquired by Eberhard Anheuser in 1860. Later, he jointly managed the brewery with his son-in-law, Adolphus Busch, and renamed it into the Anheuser-Busch Brewing Association in 1879. Another landmark was reached in 1891, when the company acquired the rights to the Budweiser name, its all-time best-selling product. Having been a minor local player for most of its history, over the past 50 years Anheuser-Busch (A-B) developed into the world’s largest beer manufacturer. In the U.S., the company currently commands a market share of 49% and 12.1% worldwide.45 In 2003, the company sold beer in more than 80 countries46.
b. STRATEGY & POSITIONING Corporate level strategies. At the corporate level, Anheuser-Busch pursues the ‘dominant vertical business’ strategy47. All ratios (specialization, related and vertical) are well above 70%. The company focuses mainly, but not exclusively, on beer production and is heavily vertically integrated, which sets it apart from most of its main competitors. Business level strategies. Anheuser-Busch’s business strategy can be best described as a hybrid between cost leadership and broad differentiation, see Fig. II.D.1.b.1. Benefiting from its unmatched economy of scale, the company has the lowest cost structure in the industry. As the company owns almost half of the domestic beer market, it obviously appeals to the mass market. At the same time, A-B offers the most diversified product portfolio, ranging from the budget-priced (Busch family) to premium (Budweiser product line) and super-premium brands (Michelob family). The extensive product breadth spans from low-carb and regular to full and specialty beers. Refer to fig. II.D.1.b.2. Market share. As pointed out in the preceding section, the US beer market is heavily consolidated. Anheuser-Busch commands a domestic market share of 49% when Miller and Coors controls 19% and 11% respectively. This picture becomes even more dramatically in favor of Anheuser-Busch when the pool of domestic profits is analyzed. A-B earns 66% of the total available profits of the total U.S. market, whereas Miller only 15%, Coors 4%, and Heineken 5%48. c. RESOURCES Capital. Anheuser-Busch has substantial capital reserves and cash flow volume. In the year 2002, the company had a positive cash flow of close to $3B, of which $2B were spent on outstanding stock purchases. The company invested $834m on capital expenditures alone. The company plans to invest approximately $4.5 billion on technology improvements over the next five years. This is intended “to take advantage of growth and productivity improvement opportunities for its beer, packaging, and entertainment operations.”49 Diversification. Compared to its main competitors, A-B has a higher level of diversification, as it also engages in the entertainment industry and owns, or at least controls, major portions of the value chain, upstream as well as downstream.
d. CAPABILITIES Distribution, exclusive wholesales relationships. Supply chain management is one of the key success factors in the beer business. Its complexity has led to the development of the popular ‘beer game’50 that thousands of MBA students and executives have used for educational purposes. In real life, Anheuser-Busch has gained significant distribution power through This building exclusive wholesaler relationships. Sixty-seven percent of A-B’s domestic sales are distributed through wholesalers that exclusively carry Anheuser-Busch products51. and SABMiller, 2%!52). 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.53 It is further mandatory for distributors to maintain close communication ties with A-B. Consequently, 90% of A-B distributors believe that this brewer delivers best-in-class service. In comparison, only 43% of all distributors claim the same for SABMiller and 48% for Coors.54 In addition, A-B has taken advantage of the fact that the wholesale business is driven by consolidation, as wholesalers tend to bond with strong brewers that can guarantee them sufficient sales volume.55 Consequently, the average A-B wholesaler has an operating income five times higher than Miller or Coors distributors.56 At the retail level, A-B successfully follows a strategy that is entirely different from the rest of the industry. Convenience stores are known to offer the highest profit margins. A-B sells 33% of its production through this channel and commands a market share of 61%. Interestingly, A-B owns less than 50% of the overall market. Innovation. A-B has an impressive track record of introducing product innovations. Typically, the company focuses on product and brand developments that offer the highest profit margins. The latest example is the introduction of Michelob Ultra, a premium low-carbohydrate beer that took the market by storm. Within one year after its launch in late 2002, the new product achieved an impressive 1.6% market share - the most successful product introduction since Bud Light more than 20 years ago! Commitment of management. Anheuser-Busch is led by a strong management team. The executive staff has the highest retention rate in the beverage industry; on average its senior managers have held their positions for more than ten years. The company’s president, August A.
Busch III, representing the fourth generation of his family to lead the company, has been at the helm for 28 years.57 Advertising. Anheuser-Busch spends the most on advertising in the beer industry. In the year 2000, the company spent $400m on advertising58, more than its closest two competitors (Coors and SABMiller) combined. Having the 40th largest budget of all U.S. companies59, A-B’s advertising represents 40% of the beer industry’s overall spending of around $1 billion. A-B has six advertising agencies under contract and is best known for its Super Bowl ads. Its media campaigns reach the most universal demographics of all beer brewers and have the most impact.60 Interestingly, A-B’s large economy of scale advantage results in the industry’s lowest advertising spending per barrela, which is about 30% below industry average. In 2002, A-B spent $3.32 per barrel, Miller $6.03, Coors $9.51, and Guinness a startling $14.71. Heineken USA spends on average $14.44 per barrel, the second largest amount in the industry61. Pricing Power. Assuming that costs are constant, a company can in principle increase its profits by either increasing prices or sales volume. Over the past years, A-B has successfully implemented annual price increases of 3-4% that are higher than the industry average of 2-3%62. This is in line with a recent sensitivity analysis revealing that A-B gains twice as much profit from price than from volume increases63. At the same time the company sports operational profit margins of 23%, which is particularly high for a consumer goods company64. Both factors combined represent a major competitive advantage in a mature market! e. VALUE DRIVERS Quality of Product and Services. Of all 600 companies analyzed in the 2004 survey of the “America's Most Admired Companies” conducted by Fortune magazine, Anheuser-Busch ranked first in the category ‘quality of products and services’. The company also won the first rank in the overall category ‘Beverage Industry’. 65 Diversified Portfolio, Brand and Reputation. A-B offers an extensive product portfolio, Fig. II.D.1.b.2. The company has been successful in addressing the whole product spectrum ranging from high-priced super-premium beers, such as Michelob Ultra, to the low-priced brands, such as Busch and Natural Light. A-B produces five of the ten best-selling beer brands in the U.S.66 At the same time, A-B has developed superior skills in managing product life cycles.
1 Barrel represents 117.3 liters, 31 gallons, or 176 pints.
A review of the corresponding BCG matrix reveals that A-B has covered all three profitable sectors of the matrix. Fig. II.D.1.e.1. Delivery Due to its described distribution practices, A-B has a superior market presence at the wholesale, retail and on-premise consumption levels. The latter represents the largest retail channel with 25% of the overall market, in which A-B commands 40% market share. The very profitable convenience store channel with 23% of the market, of which A-B holds 61%, follows it.67 Technology During the past decade, A-B has heavily invested in its production facilities. All 12 breweries are now considered to be state-of-the-art which has significant impact on both the total output as well as the maintenance costs.68 The company also develops environmentally friendly technologies, such as the Bio-Energy Recovery System that utilizes otherwise lost methane originating from waste to heat boilers.69 Environmental and Community Policies A-B pursues a high-visibility environmentfriendly policy. In recognition of its long history of environmental stewardship, the company received the 18th Keep America Beautiful Vision for America award in 2003.70 The company has established an internal ‘Environmental Management System’ that establishes clear guidance on how environmental considerations are incorporated into business decisions. Through its subsidiary, the Busch Entertainment Companies, A-B maintains one of the world’s largest zoological collections in its 15 entertainment parks. Together with strong support of educational media programs, the company is perceived as environmental friendly. In addition, the company has spent $500m in the past 22 years on the education of the general public about alcohol abuseb71. f. COST DRIVERS Economy of Scale. The company’s sheer size plus the state-of the-art production facilities make it the most-efficient player in the US beer market. Consequently, A-B has the lowest cost for production72, transportation73, marketing74 and advertising75 per barrel. Strategic upstream supply chain management. Anheuser-Busch has a strong grip on its distribution system. The company gains significant strategic momentum from the upstream vertical integration and partnering with several upstream suppliers. A-B owns three malt plants,
Through support of the National Social Norms Resource Center, Anheuser-Busch claims to have reduced the alcohol abuse rate at the Santa Clara University by 20% in 2002.
three rice mills and two hops farms. The company possesses most of its manufacturing and packaging plants: eight can manufacturing plants, three can lid producers, one glass manufacturing plant, one crown and closure liner material plant, and one aluminum can recycling plant. Plant locations The 12 domestic A-B plants are strategically placed in 11 states covering most of the continental U.S. This has a significant impact on transportation costs. On average, A-B ships a barrel less than a quarter mile whereas Coors ships it three miles, a major contributor to the disparity in gross margins between the two competitors.c76 Market intelligence The beer industry’s efficiency benchmark inched up another notch when Anheuser-Busch in 2003 introduced the Internet-based resource BudNet. The intelligence software gathers customer buying trends, competitors’ position including discounts, placements and volume, and eventually determines the exact time, place and reasons that a customer purchases a specific bottle of beer.77 Information collected from BudNet helps Anheuser-Busch to develop marketing strategies that target specific race, gender, age groups and monitor rivals’ activities. It once again proves that brewers can no longer solely rely on improving their own operational efficiencies but rather need to streamline and manage their supply chain through optimization of partners’ interfaces, such as capturing market intelligence and installing information feedback mechanisms. A graphical summary of the interaction between A-B’s value and cost drivers is presented in Fig. II.D.1.f.1. g. STRENGTHS Anheuser-Busch derives most of its market strength from its overwhelming scale and scope economies. The ‘king of beers’ uniquely transforms this strength into several unrivaled competitive advantages, including cost efficiencies, exclusive relationships with many of its wholesalers, a dominant presence at the retail level, advertising efficiency and pricing power. h. CHALLENGES AND WEAKNESSES A recent survey among retailers and wholesalers indicated the following primary concerns78: a) Brand innovation. Distributors are concerned that A-B brands are beyond their expected lifecycle. Rapid shifts in demographics and taste preferences may catch the company
Miles-per-barrel have been calculated by dividing the total volume of sales per state by the distance to the nearest plant.
off-guard. The company should therefore invest more resources in developing its high-end position. b) A-B is growth limited because the company is operating above 95% production capacity, which already presents seasonal challenges. Further growth in output would require financing of an additional brewery, which the management reportedly is unwilling to support. c) The overwhelming success of the past decades could potentially lead to complacency among AB’s employees and distributors. The management has already started to address this challenge. 2. SAB MILLER PLC a. CORPORATE OVERVIEW AND PRODUCTS SABMiller has brewing operations in more than 40 countries spanning four continents. The company is the second largest brewer in the world by volume and one of the largest CocaCola bottlers and distributors of Coke’s carbonated soft drinks outside the U.S.79 The primary brands in the U.S. markets are Miller Genuine Draft, Miller Lite, Foster’s and Pilsner Urquell, and Henry Weinhard’s and Leinenkugel’s. Other U.S. brands include Icehouse, Old English 800, High Life, Milwaukee’s Best, Mickey’s Malt Liquor and a non-alcoholic beer called Sharp’s. In response to the low-carb diet frenzy in the U.S., the company teamed with Skyy Spirits to successfully introduce Skyy Blue, a citrus FAB. . The new product is billed as an ultra-premium malt beverage with a sophisticated image. A follow-on with an added touch of cranberry flavor has been introduced recently as Skyy Sport.80 b. STRATEGY & POSITIONING Corporate level strategies. The SABMiller corporate level strategy is a dominant linked corporations strategy. The stated corporate level strategy is to “optimize and expand its existing positions through acquisition” and to “seek value-adding opportunities to enhance its position as a global brewer”.
For example, SABMiller acquired Miller Brewing in 2002 as part of their
corporate level strategy to reduce risk through geographic and currency diversification.82 The geographic separation of SABMiller operating companies keeps sharing of market and value chain activities low. The specialization ratio is low when the geographic dispersion of the company’s separate businesses is taken into account. With this view, no single business has dominance. This is verified by observing that SABMiller’s largest turnover is generated in the North American market at US$ 3,473 million out of a total worldwide turnover of US$ 9,112 million or only 38% of total turnover. The next largest is the South African turnover which is 20
only 25% of total turnover. The interrelatedness ratio and vertical ratio are also low for the same reason of geographical separation, which inhibits value chain activity sharing and vertical integration of processing activities. Business level strategies. SABMiller business level strategy is to serve the mass markets for beer and soft drinks with broad differentiation as perceived by consumers. Most of the perceived differentiation is due to brand equity. Emphasis is placed on brand building through packaging and promotion to hold or gain market share. This perceived differentiation at the consumer level is observed in the current market as Miller Light has expanded share at the expense of Bud Light through nothing more than new packaging and brand promotion as both beers have remained unchanged83. The company’s stated business strategy is to drive volume, improve operational efficiency and grow its international premium beer brands, such as Pilsner Urquell, in the U.S. market. Market share. In 2000, Miller Brewing, then a subsidiary of Philip Morris84, held the second largest market share in the U.S. beer market at 20.6%. c. RESOURCES Capital. As of March 2003, SABMiller had fixed assets of US$ 11,060 million and current assets of US$ 1,819 million including US$ 559 million of cash in short term investments.85 These ample resources enable them to make acquisitions in line with their corporate level strategy and diversify currency and geographic risks. Technology. SABMiller brewing and bottling technology is world class. Their Trenton, N.J. facility is its largest brewing plant in the U.S. The plant has 1.4 million square feet of production space. It regularly produces up to 21 different brews per day on nine lines with capability to process 2,000 cans and 1,200 bottles per minute and 600 half-barrel kegs per hour. The facility brews nearly every brand in the portfolio and ships to more than 100 distributors in ten states. The facility is also a model of environmental excellence. Through aggressive recycling, the plant produces very little actual waste products.86 Infrastructure. The acquisition of Miller Brewing from Philip Morris put SAB plc on the map in North America with 9 breweries and the second largest total brewing capacity in the U.S. The company has brewing capacity of 195,000 (hls 000s) in 122 breweries worldwide.
Diversification. Diversification in SABMillers portfolio is low. Overall, the company primarily focuses on brewing and bottling of beer and soft drinks. The company owns hotel and gaming properties in South Africa that represent only 2.3% of total revenues. d. CAPABILITIES Understanding consumer needs. SABMiller has a global perspective of customer needs. Recent proof of their ability to understand customer needs is the climb in share of Miller Light over rival Bud Light. The company foresaw the combination of converging customer taste and the lowering of trade barriers could potentially accelerate the consolidation process of the beer market. SABMiller is globally positioned to take advantage of this consolidation through its global understanding of consumer needs.87 Innovation. SABMiller demonstrated its ability to innovate new products with the successful launch of Skyy Blue and Skyy Sport in conjunction with Skyy Spirits. Skyy Blue rapidly reached fourth88 in the FAB category, further exemplifying its ability to understand customer needs. Commitment of management. SABMiller management has demonstrated its continual commitment to innovation, understanding of customer needs and the creation of shareholder value. For instance, SABMiller successfully integrated the difficult acquisition of Miller Brewing. The corporate practice aims to make value-adding acquisitions and to develop strong brand equity89 while eliminating unprofitable volume90. Supply chain management. Management reduced sales and distribution costs by more than US$ 50 million by identifying synergies during the Miller Brewing acquisition.. The company is upgrading the performance management systems across the organization,91 and is leveraging its distribution platforms around the world to increase sales of its premium brands92. Integration skills. The successful acquisition of the second largest brewing company in North America is recent proof of SABMiller’s integration skills. With operations in 40 countries, most of which were integrated through acquisitions, the company has a long and successful history of integration capability. e. VALUE AND COST DRIVERS A primary value driver of SABMiller is its brand recognition. The Miller Genuine Draft and Miller Light brands, for example, have a long established brand equity that drives their
respective sales. The new brands such as Skyy Blue and Skyy Sport leverage some of their brand recognition from being part of the Miller family. Another value driver is the quality of the ingredients that produces favorable taste and characteristics of the beverages that customers desire. SABMiller is able to negotiate favorable distribution contracts with its wholesalers due to its economies of scale. This results in huge cost savings in production and distribution. f. STRENGTHS AND WEAKNESSES SABMiller has strong brand leadership and it continues to develop new brands through partnerships. The strategy of diversification across currencies and geography makes the company relatively immune to regional changes in beer consumption, tastes, growth trends, and currency fluctuations. Various weaknesses in some world markets as described above have caused some weakness for SABMiller in those geographies, which are too numerous to detail here. The reader is referred to SABMiller’s annual report for market-by-market analysis.93 The Miller Brewing acquisition required significant management attention and a large investment on the part of SABMiller that will continue to affect profitability over the next two to three years.94 3. COORS a. CORPORATE OVERVIEW AND PRODUCTS Aldoph Coors Company was founded in 1872. Coors was family owned until 1975 when the company first became public. The Coors family continues to be involved in the company with nine of its members working for the firm.95 All of Coors brewing and packing facilities are currently U.S. based, having divested a brewery in Zaragoza, Spain in 2000.96 Its largest facility, in Golden Colorado, has the ability to produce 20 million barrels of beer in a year and is considered the largest brewing facility in the world.97 Other facilities include a packaging plant in Virginia and another brewery in Tennessee. Coors focuses on the light beer market as the Coors light brand makes up 75% of its brand portfolio.98 Coors positions the following brands in the US market: Coors Light, Keystone Light, Original Coors, Killians and Zima.
b. STRATEGY & POSITIONING Market share. Coors currently commands 11% of the U.S. beer market share behind Miller Brewing and Anheuser-Busch. Mostly a regional player, Coors dominates smaller regions such as Hawaii and Idaho.99 In 2001 Coors purchased Carling Brewing Co. for $1.7 billion. Based in the UK, Carling provides Coors with 19% share of the UK market. Maintaining the number two position against Scottish and Newcastle in this market will become a larger focus for this company.100 Corporate level strategies. Coors’ current corporate strategies focus on improving operational efficiencies and expansion through acquisition. Coors seeks to grow its markets regionally. This is evident through its Carling acquisition and its current regional appeal in the U.S. All of Coors’ revenues come from the sale and distribution of beer and malt beverages. Following a dominant vertical structure, Coors has been following a more focused operations strategy by divesting key businesses, such as ACX technologies- its packaging wing - to benefit from market efficiencies.101 Business level strategies. As a focused differentiator, Coors concentrates on developing and marketing its premium brands. These brands make up more than 85% percent of its product portfolio.102 Coors marketing mix consists of mostly light beer positioned at the 21-35 year old male demographic and its promotion is based on the “good times, party” lifestyle. In 2002 Coors became an official sponsor of the NFL and aggressively promoted its sponsorship. Advertising consumes significant amount of resources for Coors. Marketing spending in 2000 was 23% of revenue compared to 11% for both A-B and Miller. Its spending was poised to grow 3% annually.103 On premise sales are an important part of the marketing mix, and Coors targets wholesalers through close ties to top regional buyers. 104 While price is a concern for the younger age group, Coors Original and Coors Light are considered premium beers, which garner a 30% price premium in the market.105 c. RESOURCES Capital. Coors has only $19.5 million in cash and short-term investments, which is significantly lower than other competitors. Coors has been spending substantially more in the areas of marketing, production and distribution. On a smaller scale, Coors must produce and sell enough premium beer to compete with the two largest brewers in the U.S., A-B and Miller. Their concentration of brewing and packaging resources in fewer locations puts them at a disadvantage
with regard to transportation costs. As well, costly packing options, such as glass, have a greater appeal to their target market in the premium beer segment.106 Technology. Coors was the first beverage manufacturer to introduce aluminum cans in 1959.
In line with this technology, Coors initiated the first recycling programs by offering a
penny return on every can. Today, Coors strives to improve its recycling of packaging products through its new bottling and packaging designs.108 As well, Coors’ efforts to reduce the weight of glass bottles provides transport savings and seventy-two million pounds of glass a year.109 Distribution. Coors has limited scale of distribution. It shares about 30% of its sales volume with Miller through the channel. Coors benefits from the larger scale of Millers’ distribution network that allows Coors greater access to under-developed regional markets.110 In 2001,, Coors struck a deal with Molson to market and distribute its brands in the U.S. This joint venture allows Coors to expand its distribution capacity by 700 thousand barrels a year.111 Taking advantage of other partnerships, Coors recently outsourced the keg management of its UK brewing business to TrenStar Inc.; a move that aims to relieve Coors UK of its keg and cask inventories, provide better retail services to its on-trade customers and increase container utilization. 112 d. CAPABILITIES Marketing. In 2003, Coors invested in new database tools to assist their marketing groups in channel marketing and campaign management.113 Coors’ ability to manage and leverage such a tool speaks to its capabilities in targeting the right market at the right time. Innovation. Coors’ latest introduction is a low-carbohydrate beer branded, Aspen Light, which is an imitator in the market space for “low-carb” alternative foods. Aspen Light is part of the sustaining technologies for Coors. Leading the way for “malternatives”, Coors introduced Zima in the early 1990’s. Coors UK in the past year was responsible for two new innovations in serving beer. The “Ice Box” is a packaging technology that allows customers to turn their beer box into a waterproof ice bucket for ease of portability. A waterproof coating to prevents leakage.114 Coors also rolled out an on-trade invention called “BARMAIDS”,a “special pipe system” that can serve a pint of beer in just less than five seconds.115 Human Resources. Coors has a legacy of socially conservative leadership andhas recently made great strides in affirmative action and competitive compensation policies. Honors for Coors were recently given by Hispanic Magazine as one of the top US companies supporting 25
local Hispanic communities through recruitment policies and business contracts.116 The company was ranked in the UK as one of the top one hundred companies to work for. Better than average compensation and perks such as discounts on groceries and childcare were cited.117 e. VALUE AND COST DRIVERS Coors is improving its brewing operations by investing in supply chain management systems, joint ventures with packaging companies and plant upgrades. These investments allowed Coors to improve its manufacturing costs by two dollars a barrel from 2002 to 2003. Coors plans to continue this trend through the next four to five years to reduce costs per barrel by four to five dollars.118 Higher value for Coors brands is driven by distribution and advertising. Internet based systems, order management systems and database systems for targeted marketing aim to improve channel distribution.119 (See Fig. II.D.3.e.1 ) f. STRENGTHS AND WEAKNESSES Coors has never wavered in its dedication to maintain their access-based position in the market. Its success has been attributed to latching onto a market trend toward health conscious consumers and developing and executing a focused strategy. The company’s weakness is in establishing the correct cost basis for their strategy. Coors has the highest COGS per barrel compared to its peers. This is mostly driven by the high transportation costs resulting from the central location of Coors’ production plants.120 It remains to be seen if Coors can execute in its two main regional markets, the U.S. and the UK. Further growth may be limited unless the company seeks global expansion. As of today, Coors is not participating in the fastest growing global geography, China. 4. CORONA AND LABATT – IMPORT COMPETITORS a. CORPORATE OVERVIEW AND PRODUCTS Corona beer, a brand of Grupo Modelo de Mexico, and Labatt, a brand of Labatt USA, are the major import competitors to Heineken. In addition to the individual brands of Corona, Grupo Modelo also owns Pacifico and Modelo Especial. Labatt USA has strong brands with additional products such as Rolling Rock, and is the distributor of Tecate and Dos Equis. Both companies participated in the beer industry consolidation. Anheuser Busch has increased ownership of Grupo Modelo to 51% after an initial investment of 13% in 1993.121 While A-B has
controlling ownership, Grupo Modelo controls distribution of its beer within the U.S.122 In 1995, Interbrew, the Belgium based international beer giant, purchased Labatt Canada and formed a joint venture with FEMSA Cervesa to produce Labatt USA. Corona reached a major milestone in 1997 when it surpassed Heineken to become the #1 import beer in America.123 Labatt is a distant third in the U.S. import beer market. While Corona remains firmly entrenched in the single product business structure, Labatt USA has entered into the Ice Brewed™ beer and malternative markets. By carefully measuring its product mix, Labatt USA is able to cover the gamut of consumer beer tastes, with a much larger stable of differentiated beer labels. Corona focuses on its core Mexican brands and enjoys strong sales growth in each brand. Because both companies are foreign owned, it is difficult to break out the operating profit by brand within the U.S. market. This is especially true in the case of Labatt USA, as they are a joint venture of Labatt Canada and FEMSA, and Labatt Canada is a wholly owned subsidiary of Interbrew. b. STRATEGY & POSITIONING Corporate level strategies. The corporate level strategy of Labatt USA is dominant linked, serving various niche markets throughout the country. Labatt’s large portfolio of specialty beers serves different niche markets with widely divergent geographic strengths.124 Grupo Modelo pursues a dominant linked strategy, however its limited brands serve only smaller niche group. Both companies focus on the specialty beer market by controlling manufacturing and distribution channels through vertical integration. Business level strategies. Labatt USA’s and Grupo Modelo’s business strategies are product differentiation. Both companies emphasize the quality of their products and their abilities to satisfy customers. Market share. In the overall U.S. market, Grupo Modelo controls 28% of the import beer market with the vast majority of these sales coming from its Corona Brand.125 Labatt USA has a 14.2% market share with the majority of its sales coming from Beck’s, Labatt, Bass, and Rolling Rock.126
c. RESOURCES Capital. Both Labatt USA and Grupo Modelo have access to large amounts of capital. Interbrew currently has €550 million in cash and cash equivalents and Grupo Modelo has approximately $1.05 billion in cash and cash equivalents. Technology. Both companies invest heavily in state-of-the-art manufacturing facilities and research and development. Infrastructure. In 1999, Labatt USA restructured to form four regional divisions that each assume profit and loss responsibilities.127 Grupo Modelo has only recently expanded its manufacturing facilities in the United States. International sales and marketing divisions are responsible for brand and product development. Diversification. Labatt USA is diversified within beer categories and within customer and geographic segments. The Rolling Rock brand is centered toward the more blue-collar working class on the East Coast, while its Bass and Lowenbrau brands target the same segments as Corona. Most of Labatt USA’s growth can be attributed to past acquisitions. In the future, Interbrew will introduce other successful imports through its sales and distribution channel. Grupo Modelo sells only five brands of beer in the U.S., and it has grown organically without acquisition. d. CAPABILITIES Grupo Modelo. Building brand and managing the wholesaler relationship are Grupo Modelo’s greatest capabilities. After winning the right to use the Corona brand in key South West states such as California and Arizona in 1957, Grupo Modelo has done an excellent job of associating Corona with Mexican resorts and tropical locations. Managing the relationship also allowed Grupo Modelo to prosper in the US. There have been instances when entire ciies ran ran out of Corona even after prices were doubled. Labatt USA. The strength of Labatt USA lies in its capabilities in innovating and managing the supply and distribution channels. Labatt USA is able to meet different regional demands than Corona because it has access to brands from its European owner, Interbrew, and its Mexican owner, FEMSA.
e. VALUE AND COST DRIVERS The primary value driver for Grupo Modelo and Labatt USA is their individual brand equity. Corona has been a staple in Mexico since the early 1900s. Many of the brands in Labatt USA’s stable, such as Bass and Lowenbrau have been around for centuries. Since Grupo Modelo focuses on only 5 brands with huge production volume, it is able to exploit manufacturing and production scale and scope economies as cost drivers. Labatt USA relies more on its regional brand strengths to take advantage of distribution efficiencies. f. STRENGTHS AND WEAKNESSES Labatt USA and Grupo Modelo enjoy strong brand leadership, while Labatt has additional advantages due to its relationship with Interbrew and FEMSA that allows brand expansion. 5. WILLINGNESS TO PAY FRAMEWORK AND VALUE CHAIN ANALYSIS This framework analyzes the share of the economic contribution between buyers and producers and the underlying cost and value drivers determining this distribution. In the case of the beer industry, this analysis is complicated by the fact that the three-tier system demands at least three different entities to participate in the value chain. Historically, beer manufacturers have been very restrictive in releasing any details about profit margins and cost structures of individual product lines. Unfortunately, this applies to Heineken in particular. The disclosure of such data would compromise the brewers’ competitive positions. Three distinct segments of the U.S. beer market concentrating on the super-premium, premium and popular beer segment that represent 13%, 55% and 23% of the overall market respectively, were analyzed. As an example, three Anheuser-Busch brands are presented for which conclusive data on the cost and profit distribution across the value chain are available128 This is shown in Fig. II.D.5.1. The consumer prices listed in this figure represent the average price per case (24 cans of 12 oz.) across the U.S. The relative price differences were confirmed by our own proprietary local research129. It is apparent that consumer prices may vary by as much as 50% across product lines, whereas the COGS per case is around $4 for all brands. COGS is constant because the beer cost for all three products is only about $0.54 and product independent cost items such as packaging and direct labor, $1.87 and $0.54 respectively, contribute more than 50% to COGS.
A number of strategic implications can be derived from the distribution of incomes. Resulting from the mandatory autonomy of the players in the value chain, brewers proportionally share operational income gained from high-priced products with the distribution networks. As a result, distributors’ and retailers’ income per product line may vary by as much as 500%, depending on the product line. In addition, management of the product portfolio mix is critical at every level of the supply chain based upon volume and profit margins. It presents a major incentive to the wholesale and retail channel to promote the most profitable brands. Over the past ten years, distributors’ profits have been increasing 50% faster than those of the brewers130. This is another indication of the power these value chain participants have. Therefore, distribution access and control are key success factors in the U.S. beer market. It is extremely difficult to quantify the buyer’s surplus. It is determined by productspecific factors, such as buyer’s preference, brand recognition, and circumstantial factors, such as place of consumption, packaging and delivery, seasonal and climatic conditions, etc. It is apparent that buyers’ surplus must be considerably higher than the purchasing price as the result of the product’s proven price inelasticity and independence of price-related macro-economic forces as described in section II.C. In addition, surveys found that beer has the best price/value ratio of all alcoholic drinks.131
A-B A-B 191,100 191,100 14,146,700 14,146,700 2,075,900 2,075,900 1,296,809 1,296,809 Coors Coors 19,440 19,440 4,017,913 4,017,913 174,657 174,657 389,296 389,296 Grupo Grupo Modelo Interbrew Modelo Interbrew 902,238 542,022 902,238 542,022 2,839,288 8,579,781 2,839,288 8,579,781 319,782 615,104 319,782 615,104 -150,518 114,774 -150,518 114,774
Cash & s/t in (US$) 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.D.5.1: Competitor’s Cash, Sales, Earnings, and FCF
6. FINANCIAL POSITIONS OF COMPETITORS Financial analysis of Heineken’s major competitors set the industry benchmarks that are later used to analyze Heineken’s operational performance as well as industry profitability and shareholder return. In addition, economies of scale and scope can be measured by analyzing profit margins. Through the analysis of the following five areas, conclusions are made regarding
the financial strength and effectiveness of Anheuser-Busch, Coors, Grupo Modelo, and Interbrew. d
a. FINANCIAL STRENGTH AND SIZE: If cash is king, A-B is not the king of beers as both Grupo Modelo and Interbrew have much larger cash positions. As discussed in a later section, A-B uses leverage rather than cash for acquisitions. A-B does have, by far, the largest revenue, net income and free cash flow. Grupo Modelo and Interbrew are the next closest in total revenue but have lower free cash flow because of very large capital expenditures in attempts to improve operational efficiencies. Coors’ revenue ranks third, but FCF to investors was actually larger than Net Income due to increased debt issuance. (See Table II.D.6.a.1.)
Profitability Measures 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 45.4% 45.9% 46.5% 42.9% 41.8% 41.4% 57.1% 58.9% 58.8% 60.3% 59.8% 60.8% 45.4% 45.9% 46.5% 42.9% 41.8% 41.4% 57.1% 58.9% 58.8% 60.3% 59.8% 60.8% 13.4% 14.0% 14.7% 4.5% 4.6% 4.3% 11.9% 12.1% 11.7% 2.9% 7.8% 7.2% 13.4% 14.0% 14.7% 4.5% 4.6% 4.3% 11.9% 12.1% 11.7% 2.9% 7.8% 7.2% 19.7% 21.8% 23.6% 10.4% 10.2% 8.4% 10.7% 11.8% 11.5% 4.3% 8.4% 7.6% 19.7% 21.8% 23.6% 10.4% 10.2% 8.4% 10.7% 11.8% 11.5% 4.3% 8.4% 7.6% 45.9% 56.0% 72.0% 13.3% 14.2% 14.4% 12.9% 13.4% 12.7% 4.1% 12.2% 10.7% 45.9% 56.0% 72.0% 13.3% 14.2% 14.4% 12.9% 13.4% 12.7% 4.1% 12.2% 10.7% 4.7% 4.9% 4.3% 17.6% 20.8% 6.4% 18.7% 13.9% 12.7% 23.9% 8.5% 0.7% 4.7% 4.9% 4.3% 17.6% 20.8% 6.4% 18.7% 13.9% 12.7% 23.9% 8.5% 0.7% 3.3% 3.9% 4.0% 32.9% 51.1% -0.4% 17.9% 14.0% 12.3% 23.1% -0.9% -1.2% 3.3% 3.9% 4.0% 32.9% 51.1% -0.4% 17.9% 14.0% 12.3% 23.1% -0.9% -1.2% 11.0% 10.2% 7.3% 21.3% 17.2% 8.0% 21.5% 15.2% 16.6% -99.8% -8.3% 8.1% 11.0% 10.2% 7.3% 21.3% 17.2% 8.0% 21.5% 15.2% 16.6% -99.8% -8.3% 8.1% 114.6 60.1 61.9 114.6 60.1 61.9 10.8 81.9 83.9 10.8 81.9 83.9 22.0 106.5 108.9 22.0 106.5 108.9 1.1 0.9 0.9 1.1 0.9 0.9 1.1 1.9 2.0 1.1 1.9 2.0 0.9 0.9 0.7 0.7 3.8 3.8 0.9 0.9 0.3 0.3 0.7 0.7 0.6 0.6 5.1 5.1 0.7 0.7 0.3 0.3 59.7 59.7 83.3 83.3 105.3 105.3 0.9 0.9 2.1 2.1 0.9 0.9 0.7 0.7 6.4 6.4 0.7 0.7 0.3 0.3
Operating Measures Operating Measures Avg Inventory Holding Period 31.1 29.2 27.7 29.6 28.2 30.6 117.1 119.9 Avg Inventory Holding Period 31.1 29.2 27.7 29.6 28.2 30.6 117.1 119.9 Avg Days to Collect Receivables 17.7 17.0 16.8 34.1 41.1 66.2 14.2 11.9 Avg Days to Collect Receivables 17.7 17.0 16.8 34.1 41.1 66.2 14.2 11.9 Avg Days to Pay Payables 49.8 48.9 50.3 51.1 50.7 52.1 21.7 22.0 Avg Days to Pay Payables 49.8 48.9 50.3 51.1 50.7 52.1 21.7 22.0 Net Operating Asset Turnover 1.3 1.4 1.4 2.1 2.0 1.5 1.1 1.1 Net Operating Asset Turnover 1.3 1.4 1.4 2.1 2.0 1.5 1.1 1.1 PP&E Turnover 1.6 1.6 1.7 3.1 3.1 2.8 1.1 1.1 PP&E Turnover 1.6 1.6 1.7 3.1 3.1 2.8 1.1 1.1 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 0.9 0.4 0.4 8.2 8.2 1.8 1.8 0.5 0.5 0.9 0.9 0.5 0.5 8.4 8.4 2.1 2.1 0.5 0.5 0.9 0.9 0.5 0.5 8.5 8.5 2.7 2.7 0.4 0.4 1.2 1.0 1.2 1.0 0.8 0.7 0.8 0.7 31.6 32.8 31.6 32.8 0.5 0.5 1.8 1.8 0.8 0.8 1.5 1.5 1.0 1.0 0.7 0.7 5.1 5.1 1.0 1.0 0.4 0.4
4.8 4.6 4.5 4.8 4.6 4.5 2.7 2.7 2.8 2.7 2.7 2.8 -8.5 -10.9 -13.8 -8.5 -10.9 -13.8 0.0 0.0 n/a n/a 0.0 0.0 n/a n/a 0.0 0.0 n/a n/a
Table II.D.6.a.1: Financial ratios for Heineken’s main competitors in the U.S. beer market. e
The source of raw financial data is the Thompson Online and Thompson Research database accessed online at the SCU Orradre Library, and 1998-2003 A-B, Grupo Modelo, Interbrew, and Coors Annual Reports.
b. HOW DO THEY PERFORM RELATIVE TO THEIR INDUSTRIES? Profitability. Grupo Modelo and Interbrew have the strongest gross margins, which is to be expected given their focus on the premium beer market. However, their performance falls behind A-B in Net Profit Margin, Return on Net Operating Assets, and Return on Equity. This is likely due to their relatively higher marketing expenses. In addition, Interbrew has been growing by acquisitions. The lower ROE and ROA could likely be attributable to lower earnings due to additional expense in developing the brands acquired in the late 1990’s. Although Coors maintains relative financial stability, it is the industry laggard in all profitability measures. A-B leads all competitors in Net Profit Margin, Return on Net Operating Assets, and Return on Equity. Even though the gross margins of A-B have improved, they remain nearly as low as Coors. A-B generates much higher ROE due mostly to its leverage. Growth rates. The sales growth rate leader over the last five years has been Interbrew due to its numerous acquisitions, followed by Grupo Modelo due to the popularity of Corona, Coors, followed by A-B. The Asset growth order is Coors, Interbrew, Grupo Modelo, and A-B. However, all brewers suffered a rapid sales and asset growth decrease in the more recent periods. Corona is the leader in earnings growth, followed by Coors, A-B, and Interbrew. Operating efficiency. Historically, both Coors and A-B have performed similarly in inventory holding period, vastly outperforming Interbrew and Grupo Modelo. A-B and Grupo Modelo both have strong wholesaler relationships that allow the companies to keep average receivables outstanding low. This is a key factor in their ability to outperform Coors and Interbrew. Interbrew’s poor performance is also due to different payment standards in Europe and its broad diversification worldwide. This is measured by the average days to pay payables, where Interbrew far outperforms the competitors by using its cash more effectively. Coors and A-B are again near equals, while Grupo Modelo pays quickest of all. Grupo Modelo’s fast payment cycle is also likely due to regional standards, where suppliers require timely cash infusion. Net operating asset turnover reflects operational efficiencies, and Interbrew takes the lead, followed by Grupo Modelo, A-B, and Coors. PP&E turnover is lead by Grupo Modelo, followed in order by A-B, Interbrew, and Coors.
SABMiller’s financial data is not included as the company changed ownership in 2002, and hence, no meaningful financial comparison can be determined.
Liquidity. As mentioned before, Grupo Modelo’s strong cash position translates to its strong liquidity ratios and negative EBIT interest coverage, as its net interest expense is actually interest income. Coors has the next strongest liquidity ratios with the exception of EBIT interest coverage, as the recent financed acquisition of Carling Breweries has greatly reduced its ability to cover interest expense. Due to A-B’s leverage, its current and quick ratios are much lower. However, because of its earning strength, A-B had higher EBIT interest coverage than Coors in 2003. Interbrew also financed a large portion of its acquisitions and also has low current, quick, and EBIT interest coverage. Leverage. Grupo Modelo has no debt and is therefore not leveraged. With the Carling purchase, Coors’ leverage increased noticeably. Interbrew’s objective of returning to organic growth has slowly allowed it to reduce leverage.132 A-B has the highest leverage ratio. Its strong profitability and consistent earnings improvements cover the current debt, but it is not likely to significantly increase the debt further. c. SUMMARY & IMPLICATIONS Financially, A-B is the strongest positioned competitor, with the highest revenue, profitability and very strong operating efficiency. The only downside is its high leverage. Interbrew is the next strongest competitor though its position is slipping as revenue growth is slowing and its cash management in inventory, payment and collection needs improvements. Grupo Modelo is the next due to its continual robust revenue growth, large cash balance, and strong profitability, but it could improve operational performance. Coors is the weakest competitor although it enjoys greater revenues than Grupo Modelo. Coors has the weakest gross margins though they have semi-strong operating measures. In comparison to its closest U.S. competitor, A-B enjoys nearly 3.5 times the revenue. This analysis implies that while A-B is the strongest competitor, it has little ability to enhance its leverage during the continuing consolidation phase in the beer industry. However, given its strong revenue and earnings, this period should pass quickly. Interbrew, while enjoying strong gross margins due to the price of its beer, needs to work diligently on increasing revenue and improving operational efficiencies. Grupo Modelo is in the best position to fuel growth through acquisition, though it may also be a takeover target given its large cash balance, earnings successes and large growth potential. Coors is the biggest gamble given its recent acquisition of Carling. While the acquisition has not put it in a financially risky position, the change of focus 33
from running a domestically oriented company to that of an international company could impede its ability to improve operational efficiencies that are needed to improve profitability. E. INTRA-INDUSTRY ANALYSIS a. STRATEGIC GROUPS IN THE INDUSTRY Strategic groups are characterized by having two or more competitive characteristics that uniquely differentiate them from each other133. In the case of the U.S. beer industry, these distinctions are scope in distribution versus price and product differentiation. The competitive forces underlying the corresponding mobility barriers are product differentiation (taste, local attributes, etc.) on one hand and economy of scale, marketing effectiveness and distribution power on the other. There are four strategic groups in the U.S. beer industry, as shown in Fig. II.E.a.1. Only the craft beer industry is discussed because it is the fastest growing. Craft-Beer Industry. Craft beers differ from standard beers in flavor and brewing style134. Craft beer producers tend to use higher quality ingredients resulting in more full-body products with a higher degree of flavor and freshness. These companies also offer a strong local affiliation, supported by the fact that they are often the only local brand. As consumers become more demanding and sophisticated, the craft beer industry has recently experienced an annual growth of 40%, see Fig. II.E.c.1135. The industry is using the same three-tier distribution system as the large national mass producers. This strategic group can be further differentiated into microbreweries (less than 15,000 barrels per year), regional specialty breweries (15,000 and 1,000,000 barrels per year), and contract brewing companies (businesses that market and sell beers that are produced by other contracted breweries). This craft beer group owns 3.2% of the U.S. beer market and within the craft beer market its CR5 is 52.7%136, details are shown in Fig. II.E.a.2. Brewpubs: Restaurants and breweries that sell at least 50% of their production for onpremise consumption. While being different from other beer groups, this group’s revenue is too small to have any significance at the national level. Regional brewers. Brewers that employ high-volume processes and restrict product distribution to a limited number of states. Coors is a prime example for this group. National and import beer brewers. Mass producers, such as most companies analyzed in this paper, compete on economies of scope and scale. Their strategies call for low cost
ingredients and large volume manufacturing processes that limit full-flavor products. The value and cost drivers governing this group have been detailed in section II.D.
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.E.1: Characteristics of strategic groups in the U.S. brewing industry b. MOBILITY BARRIERS The following cost and value drivers characterize the four groups and effectively prevent players from switching or expanding into other groups: Economy of scale: a) Production. Mass manufacturers focus on large-throughput processes that are incompatible with high product quality and distinct flavor. Smaller brewers and craft brewers in particular, cannot compete on costs due to limited volume production. b) Purchasing: Small batch sizes and high quality ingredient requirements reduce the bargaining power of craft brewers with suppliers. c) Distribution: Though they are offered higher profit margins, distributors are not interested in the volume craft brewers can guarantee. Mass manufacturers use high-volume guarantees to their advantage. d) Advertising: Having access to national mass media, mass producers are able to reduce the amount of ad dollars spent per barrel sold, a scale-economy. Economy of scope: a) Marketing and Advertising: Mass manufacturers gain substantial scope advantages by building and capitalizing on their national brand image, and 35
supporting a wide breadth of product lines137. On the other hand, these companies lack the craftbrewed market image, which is important to a growing number of beer drinkers. Incumbents in the mass-manufacturing segment will use any combination of these drivers to erect mobility barriers with the intent to restrict other competitors from entering their territory. Consequently, only very few craft beer breweries have succeeded in expanding their scope in distribution. For example, Sierra Nevada Brewing Company started off as a microbrewery in 1979138 and became the ninth largest domestic brewery in just 20 years139. Another even better example of success is the Boston Beer Company that was founded in 1985 as a microbrewery.140 By 2000 it had grown into the sixth largest beer manufacturer in the U.S.141 c. TRENDS IN THE BEER INDUSTRY - EFFECT ON STRATEGIC GROUPS The major beer manufacturers have not been caught off-guard by the craft beer revolution, see Fig. II.E.c.1. Though the craft beer market is still relatively small, 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. The company employed a combination of blocking, shaping and absorption strategies to contain the evolution of craft brewers.142 Though not intended to change its current product offerings, the company first set up its own ‘Specialty Brewing Group’; its only purpose was to offer alternative craft brews to distributors. As this value chain element is extremely viable to the beer industry, A-B tried to block access for craft beer competitors by offering large cash incentives to distributors to exclusively carry A-B products. This activity eventually led to an (unsuccessful) investigation by the U.S. Justice Department in 2001. Since this strategy worked only temporarily, A-B then decided to shape the craft beer industry by acquiring microbreweries and then nationally expanding their operations through large cash infusions. Lastly, A-B started to absorb the craft beer movement by flooding the market with a flurry of new A-B craft beer brandsf with the goal to capture 50% of the market segment.143 Though giving up on the economy of scale advantage, these highly specialized in-house manufactured brands were at least benefiting from A-B’s scope economies, such as sales and marketing. The verdict is still out on whether Anheuser-Busch will eventually succeed with this strategy, is still out. It demonstrates how fiercely incumbents will react if newcomers try to change the rules of the game.
Including such obscure brands as the exclusively in Texas sold ‘Ziegenbock’ line (German word for male goat).
The past twenty years have also seen some cross-elasticity between the mass and craft beer segments. It has been argued that the tremendous success of the craft beer industry has directly benefited the import beer market144, as it alerted consumers to the existence of full-flavor beer alternatives. d. POSITION AFTER THE STRATEGIC MOVE While the proposed strategic move of Heineken will certainly not revolutionize the beer industry in the short-run, it will introduce a new dimension to the performance matrix that current market players have not yet addressed. Details are discussed in section IV.A. e. ROLE OF DISRUPTIVE TECHNOLOGIES The history of Beer brewing technology is thousands of years old. While production methods have certainly been perfected in recent history, none of them would qualify as being disruptive within the framework first introduced by Clayton Christensen145. The same applies to the product developments that as revolutionary as consumers might have perceived them, always were extensions of existing products lines and would therefore fall into the category of ‘sustaining product development’. The Heineken BeerTender, as part of a novel delivery and storage solution, may be a disruptive technology, as discussed in section IV.A. F. FAILURE ANALYSIS Over the past twenty years the U.S. beer market has been relatively stable with AnheuserBusch holding the leading spot. In the 50’s and 60’s of the past century, Schlitz and Pabst were among the leading companies. Several strategic mistakes forced these two rivals to lose their market leadership and eventually their independence.146 The beer industry overall is a very slowly moving business. This reflects both corporate conduct as well as consumer preferences. Drastic changes in the marketing mix therefore may result in rapid damage to the brand and the market position, as the two following stories describe. Schlitz correctly identified operational and economic efficiency to be the keys to success. Instead of optimizing its operations, the company tried to reduce costs by substituting traditional hops with a less expensive ingredient - corn syrup (decrease C). It simultaneously attempted to widen profit margins by increasing price (increase P). These tactics backfired, causing the Schlitz market share to slip by over 7% in just two years. The most damaging change occurred
when Chill-garde was added to increase the product’s shelf life (decrease C). Schlitz overlooked the fact that Chill-garde reacts adversely with other brewing ingredients resulting in a milky appearance (decrease V). Customers revolted and the reputation of Schlitz was eventually fully destroyed by the mid-70’s. Finally, Schlitz had to be sold to Stroh in 1982, with less than 8% market share remaining.147 148 Pabst shared a similar fate when the company also changed the ingredients for their product lines in order to reduce production costs. Customers noticed the difference and started to abandon the brand. Pabst was eventually bought by the Mill Valley based S&P holding company in 1985149 and is now again the nation’s fourth largest beer brewer. Anheuser-Busch, on the other hand, continued to take a very conservative approach to its portfolio management, which has been regarded as the main reason for the company’s prime market position during the past forty years.150 The lesson learned in this regard is that Schlitz and Pabst tried to boost profit by cutting corners in order to become cost leaders (decreasing V, thus increasing overall V-C). Such tactics can only work if the value perceived by consumers remains constant or increases. Unfortunately, customers in both cases soon recognized the deteriorating quality (decreasing V) and eventually abandoned the respective brands. The success of Anheuser-Busch (maintain V) and the failure of Schlitz and Pabst prove one more time that beer-drinkers are more taste than price sensitive. Brewers can only improve profitability (V-C) by optimizing operational efficiencies (lower C). It is mandatory to preserve product quality catering to customer preferences (increase V).
G. THREATS AND OPPORTUNITIES ANALYSIS The landscape of the beer industry has changed in the past decade as the US consumers have adopted several diet trends. Light beer was the fad of the 90’s and Atkins inspired low carbohydrate diet ignited the latest low-carb beer trend. Anheuser-Busch introduced Michelob Ultra in 2002 and immediately captured 2.6% of premium beer market share.151 Rolling Rock released Rock Green Light that sold one million cases in the first three months.152 More lowcarb beers will enter the crowded market this year; hence, Heineken can potentially face market share erosion in the absence of new light product introductions.
Heineken currently focuses on three flagship products - Heineken, Amstel and its light version Amstel Light. Heineken can potentially leverage its brand and launch an ultra low-carb version of Amstel or a different brand altogether to take advantage of this diet craze. Heineken can also introduce a low-carb beer in Europe where Michelob Ultra has not gained a foothold.153 Other than the competitive forces mentioned in the preceding sections, the U.S. Supreme Court might potentially create the largest industry shakeup. There is a complex set of regulations that govern alcohol sales. It is currently illegal to ship alcohol across state lines and brewers cannot sell alcohol directly to consumers in most states.154 Recently, Michigan and 36 other states requested the Supreme Court to reaffirm the state rights to regulate alcohol sales and resolve conflicts among federal courts involving the interpretation of the 21st Amendment as some circuit courts upheld restrictions on direct alcohol shipments while some courts did not.155 Although the Supreme Court was asked to consider Internet and direct wine distribution, beer delivery can also be affected. If interstate beer shipments are allowed, then brewers that have exclusive licenses with current distributors will have huge competitive advantage over brewers that have limited market access. Large wholesalers would be expected to consolidate further under these conditions. H. SUMMARY OF EXTERNAL ANALYSIS Counting among the most profitable markets in the world, the U.S. beer industry is strongly consolidated and mature. Market share positions are relatively stable and vigorously defended. As economies of scale and scope are the main business drivers, the rules of the game are efficiencies in production, marketing, market intelligence, advertising, transportation, and distribution. This analysis shows that any market share expansion must not be based upon the above value and cost drivers, as they are already maxed out. In addition, incumbents have substantial monetary and scale economy driven leverage to protect their turfs. Rather, any strategic move will most likely have to capitalize on the two strongest macroeconomic forces, demographics changes and emerging cultural trends, that dominant players are either not able or not willing to meet. The craft beer revolution provides evidence that such a move can indeed be very successful but will most likely result in retaliation by the incumbents if perceived as a threat. In any event, efficient distribution and cooperation of the very powerful supply chain parties will
remain a key success factor determining the outcome of any strategic move. The most important factor, however, is that the customer perceived product quality has to remain untouched.
III. INTERNAL ANALYSIS
A. BUSINESS DEFINITION / MISSION Heineken is a global beer producer headquartered in Amsterdam, Netherlands. It is one of the largest brewers in the world and with the widest global presence compared to all international counterparts. Heineken operates in over 170 countries and employs over 61,000 people. In 2003, sales of Heineken were €9.255 billion, with 105 million hectoliters of beer brewed in more than 65 countries. The Heineken Group manufactured 154 brands of beer in 2003, with Heineken and Amstel as the leading premium brands and Heineken holding premium positioning in every country in which it was marketed. Heineken and Amstel sales are ranked number one and three in the European market, respectively. Other leading national brands include Cruzcampo, Moretti and Tiger, the largest Asian brand. Heineken also produces specialty beers, light beers and alcohol-free beers worldwide and soft drinks in Europe.156 157 Heineken strives to achieve global market penetration and preserve its independence through a three tier administrative structure that allows the Heineken family to control Heineken Holding N.V., which in turn controls Heineken NV. These relationships are diagramed in Fig. Fig. III.C.1.2. principles. Strategic goals and objectives of Heineken:158 Become one of the world largest and financially best-performing brewing company. • • • Build a strong portfolio of beer brands with the Heineken brand as the leading international premium beer. Maintain strong local market positions, a good sales mix and an efficient cost structure. Distribute Heineken with other local strong brands. Fulfill its corporate social responsibility with regard to policies on alcohol abuse, social and environmental issues. The company’s long-term success is guided by its strategy and three core
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, Heineken announced the implementation of the “Take Heineken to the Next Level” project in 2002.
The goal is to
provide a framework in the pursuit of sustainable growth. The project aims to improve operation excellence, establish good distribution networks and build strong brands in each country. This program is especially important in developing uniform professionalism throughout the regional operating companies that were added to Heineken by acquisition. Heineken takes advantage of its size and brand equity to “Heinekenize” the acquired companies. B. MANAGEMENT STYLE Gerard Adriaan Heineken founded Heineken in 1864. Since then, three generations of the Heineken family have been overseeing the company’s strategic focus. After the death of Alfred H. Heineken in January of 2002, Karel Vuursteen, a “Freddie” loyalist was unseated as the executive chairman after just five months, and Anthony Ruys, a 57-year-old former Unilever executive was promoted to the chief executive position.160 Ruys immediately began to stir things up. Competition in the beer industry continued to intensify and Heineken was too complacent in its historic path of slow and steady growth. Ruys and his management team, which on average is 10 years younger than the board had been under Vuuresteen,161 used tough tactics to shake up the long established play-it-safe culture and began to explore new market potential. Ruys initiated the “Take Heineken to the Next Level” project and shifted Heineken’s focus toward the 21-27 year-old demographic and new customers through deployment of new marketing tactics. Heineken focused much of its innovation on packaging in order to target previously untapped markets. Ruys spent over $3 billion to acquire over a dozen companies in 2002. The biggest acquisition was Austrian brewer BBAG. As a result of this acquisition, Heineken became the biggest brewer in seven Eastern Europe countries.162
C. ORGANIZATIONAL STRUCTURE, CONTROL, VALUES 1. ORGANIZATIONAL STRUCTURE The executive board of Heineken NV established a four-part framework to manage the decentralized company:163 1) 2) 3) 4) Operating companies - major subsidiaries with an autonomous decisionmaking structure. Clusters - smaller operating companies that are grouped by region and report to the Amsterdam headquarters. Policy and Control - corporate administrative functions that are shared across all operating companies. Facilities and Support Staff - Heineken Technical Services oversee brewery construction, modernization and expansion.
See Fig. III.C.1.2 for a high level view of the Heineken structure and its resources and capabilities. Ownership Structure: Heineken NV, Heineken Holding NV and its subsidiaries form the Heineken company. As shown in Fig. III.C.1.2 L’Arche Holding S.A., solely owned by the Heineken family, owns 50.005% of Heineken Holding NV and Heineken Holding NV owns a 50.005% interest in Heineken NV164. Heineken NV and Heineken Holding NV are traded on the Euronext exchange in Amsterdam. The executive board of Heineken NV is responsible for developing Heineken’s strategy and policies. The management board of Heineken Holding NV is tasked with long-term continuity, independence and stability of Heineken NV. 2. CONTROLS USED IN MONITORING EMPLOYEE BEHAVIOR Heineken NV develops standards for corporate brand expansion while each operating company specifies its local business objectives. In order to align employee goals with the corporate strategy, employee performance is monitored and measured with respect to the level of contribution to improvement of operational efficiencies and marketing, sales and distribution objectives. Developing and retaining talented management is a top priority in the “Take Heineken to the Next Level” initiative. Heineken provides managers with easily accessible learning platforms to enhance marketing, finance and leadership expertise. The “Heineken University” and e-
Learning system promotes the development of management capabilities through the sharing of best practices and proprietary knowledge.165 166 3. ORGANIZATION’S VALUES Heineken embraces three core values and executes a set of strict business principles.167 Respect: Heineken respects individuals, society and the environment. The company follows local regulations and advocates responsible alcohol consumption. The company also implements environmental protection programs to address water consumption, management and waste issues. Enjoyment: Heineken sponsors arts, sports, music and other commercial events to enhance social enjoyment. Passion for Quality: Heineken utilizes rigorous processes to ensure the best beer quality. The company follows an uncompromising brewing practice using their age-old brewing recipe, adopts social responsibilities such as avoiding advertisements to minors, and retains employees through continuous development. Business Principles: Heineken embraces and supports 15 global social accountability programs, including anti-corruption, child labor, employee representation, sexual harassment and non-discrimination. All operating companies are required to develop and maintain these programs in their regional territories. D. STRATEGY/COMPETITIVE POSITION DEFINITION 1. CORPORATE LEVEL Since 1992, Heineken has been enjoying EPS growth of 15% (CAGR). It has been estimated, that 7% of the earnings growth was organic and 8% was from acquisitions.168 In fact, Heineken is regarded as one of the most aggressive global corporate acquirers and has established core capabilities for identifying appropriate take-over candidates169. An estimated distribution of earnings across the geographies Heineken is serving is presented in Fig. III.D.1.2. It is the company’s declared corporate strategic goal to pursue the following key elements:170 • • To improve margins by increasing the proportion of premium and specialty brands in the mix. To reinforce and expand its position in profitable markets.
To build up new positions in attractive growth markets with the aim of being market leader, or the leader in the premium segment, in that market. To further improve cost structures.
Depending on the circumstances of the respective geography, Heineken will either take the dominant position with a market share goal of greater than35% in a high-volume market such as Poland, France, and Italy, or build a leadership position in a high-value low-volume market segment such as the import premium beer segment in the U.S.171
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, Netherlands • Heineken, Netherlands • Sogebra, France • Sogebra, France • Heineken Italia • Heineken Italia • • Vrumona, Holland Vrumona, Holland • Athenlan Brewery,Greece • Athenlan Brewery,Greece • Heineken Espana • Heineken Espana • Export • Export • Heineken USA • Heineken USA • Zywiec SA, Poland • Zywiec SA, Poland
• 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.D.1.a.2: Heineken’s organizational structure
a. RELATED DIVERSIFICATION Based upon the classification first introduced by Richard Rumelt,172 Heineken can be best described as a dominant vertical corporation. As shown in Fig. III.D.1.1, seventy-nine percent of Heineken’s business is based on beer production. The remaining business lines are in wine, spirits and soft drinks. The company is strongly vertically integrated upstream, a key success factor of the corporate strategy. Whenever allowed by local laws, Heineken seeks forward integration through the acquisition of local distributors with the intention to expand its geographic reach173. Since all business lines are in the beverage industry, the ratio of relatedness
is relatively high.
The various operating companies and clusters strongly rely on shared
corporate resources, such as IT, marketing and finance as summarized in Fig. III.D.1.a.2. b. PORTER’S DIVERSIFICATION TESTS Heineken has made an impressive number of international acquisitions over the last ten years. These recent acquisitions, which are listed in Fig. III.D.b.1, fit seamlessly into Heineken’s longstanding M&A tradition that extends from the 1930s. Heineken believes it can best enter a new geography when a) there are “attractive” beer markets, b) “the end game is close,” c) two players have at least 66% of the market; and d) there is very strong volume growth174. When Heineken enters a new country, it follows a well–proven pattern of business practices that are sketched out in the preceding figure. First, the company makes a series of targeted acquisitions aimed at building a critical mass of brands, production, distribution, and management assets. It then replaces some of the local management with seasoned Heineken managers. Based upon the company’s century-old experience with efficient high-volume beer brewing, the new leadership reduces costs through building scale economies. The increasing profit is reinvested in further building of local brands. When a local brand has achieved a dominant market position, the generated cash is used to continue to develop the Heineken brand. This practice can be seen as a textbook example of Porter’s diversification tests175. For example, when analyzing a possible acquisition, Heineken screens the target for compatibility and potential synergies with its current operations, which is exemplary of Porter’s fourth diversification test - Pursuing diversification opportunities that allow shared activities. To qualify as an acquisition target, a local or regional operator needs to have the potential to serve as a platform for developing Heineken’s own premium brands, using its existing volumes and distribution. If a newly acquired asset doesn’t match this corporate diversification strategy, Heineken will sell or close it and take the restructuring charge, even if the asset is profitable.176 It is difficult to apply Porter’s better-off test and the industry attractiveness test. Heineken historically has been very restrictive in disclosing detailed financial breakdowns. This 45
makes it very hard to judge specific recent mergers. It can be concluded, however, that most acquired companies have been successfully integrated since the Heineken’s overall ROA has remained consistently at about 20%, during the past five years. c. BROAD AND FOCUSED DIFFERENTIATION Developing the business strategy is the responsibility of local operating company management. Local management is expected to implement business objectives within the boundaries established by the Executive Board. This corporate level influence over the operating companies has created similarity in systems and processes between the localized companies177. Exchange of best-practice marketing and other strategic expertise is disseminated through Heineken University.178 At the corporate level, Heineken views itself as a single-product company since 90% of corporate turnover is from the sale of beer179. The Heineken brand made up 20.3% of 2003 sales and was produced in 29 countries, more than any other of the company’s brands. The Amstel brand comprised 10.1% of 2003 sales with Amstel production in 20 countries. The remaining 69.6% of 2003 sales were divided among the company’s 152 other regional brands. Most of the remaining brands are brewed in only one of the 170 countries in which Heineken operates and were added to the company’s portfolio through acquisition. At the business level of the regional operating companies, two strategies are employed; 1) broad differentiation through multiple strong local brands to open distribution channels, and 2) focused differentiation of the Heineken and Amstel brands to drive sales growth. This is shown in the generic business level framework of Fig. III.D.2.c.1. More focus is put on differentiation of the Heineken brand than on any other. The regional operations utilize a focused differentiation strategy closely tied to the strong Heineken brand equity, which is recognized as the main growth driver.180 This dual strategy deployment at the business level serves the corporate policy of balancing growth through acquisition with organic growth.181 It is also inline with the corporate goal of maintaining profitable and strong local market positions through strong local brands with Heineken at the helm as the leading premium beer.182
Figure III.D.2.c.1: Business Level Strategy
d. COST AND VALUE DRIVERS Cost drivers. Heineken’s most effective cost driver is economies of scope. Operating in hundreds of countries, Heineken has gained a strong market position in a greater number of geographies than any other brewer. This large presence has driven Heineken to greater economies of scale through consolidation of its regional brewing resources into larger and more efficient brewing facilities as well as through greater efficiencies in its marketing and communications. A key example of this interplay of scope and scale is that most of the company’s beer for export is brewed in the Netherlands.183 Already benefiting from large-scale economies, a recent major reorganization in its Dutch brewing facilities has further reduced production costs. In the past year, the Euro has seen a record exchange rate with respect to the dollar. Heineken’s cost reductions in its major export operations have allowed the company to recoup some of the exchange value loss. The company also is able to leverage its scope by sharing lessons learned in improvement of production costs and value drivers across regional operating companies through the Heineken University and e-learning programs. In addition, the company enjoys economies of scope in the centralized development and maintenance of its guidelines for branding, packaging and promotional style. Similarly, the company develops and supports global benchmarking programs
for optimizing marketing, sales and distribution, which are all implemented at the local level by regional operations. A summary of Heineken’s cost and value drivers can be found in Fig. III.D.2.d.1 Value drivers. Heineken has three main value drivers, packaging, marketing, and communication (or AMP, advertising, marketing and promotion). In countries outside the U.S., beer drinking is associated more with quantity than quality. AMP drivers are used to persuade beer drinkers to trade up from the lower-cost brands to premium Heineken and Amstel brands for image and lifestyle reasons184. In the U.S., the Heineken brand offerings are all premium priced and these AMP drivers are used to sustain this premium value image. e. DISTRIBUTION OF ECONOMIC CONTRIBUTION Heineken spent 12.2% of net sales on AMP in 2003185 compared to 13.5% in 2000186. All other operation costs were 74.6% of turnover in 2003187. This gave Heineken another year of double digit operating profit of 13.2%. Spending on AMP is closely monitored by some analysts in the recognition that consumers need to be given a reason to either trade up or continue to pay premium prices for a product that otherwise can be indistinguishable from competitors.188 f. BARRIERS TO IMITATION Heineken takes advantage of resources and capabilities to help distinguish its brands and expand its competitive industry position by preventing imitation and increasing customer retention. Heineken impedes competitor imitation by utilizing learning economies, which establish causal ambiguity and social complexity. The company also utilizes property rights protection such as patents for its unique packaging innovations. Heineken’s long history of achieving and maintaining premium positioning worldwide has endowed the company with many valuable lessons that can not be easily imitated. The company continues to keep the learning costs high for competitors through its institution of the “Taking Heineken to the Next Level” project, created to bring greater professionalism throughout the ranks. The project enables the company to more accurately assess and compare their performance metrics and “exchange best practice marketing techniques” among operating groups in order to learn about and share the most effective working methods.189 The company instituted the Heineken University five years back to “promote the development, sharing, dissemination and use of
strategic expertise that can be applied in practice immediately”.190 E-learning is held on a regular basis to supplement the immediate dissemination of corporate expertise. The many years of learning have evolved the company into a highly efficient organization that continues to put emphasis on continually educating itself for future growth and strength. Heineken further stretches its learning cost advantage through R&D efforts over the entire supply chain from new and improved strains of barley and hops to new product and packaging developments.191 For all of these reasons, causal ambiguity is very high. With respect to the new BeerTender innovation and its other innovations, Heineken and its suppliers have filed patents to protect their investments by slowing down or preventing competitor imitation.192 Heineken increases customer retention through its reputation and brand value. The company recognizes that management of the brand and the corporate reputation is of the highest importance. It is the Heineken brand and reputation that customers value as it emotes the proper level of trust and cachet when served among friends, at events and other on-premise venues. Heineken creates and maintains corporate level guidelines for brand style, brand value, and brand development.193 New marketing approaches are continually explored in order to drive a valuable perception of the brand. A successful promotion of the brand was achieved in 2002 with a new stylish aluminum bottle developed for exclusive clubs and venues194. 2. FUNCTIONAL LEVEL Heineken’s resources and capabilities combine to support the firm’s business level strategy as both a broad differentiator in its regional markets and a focused differentiator in its import and premium markets. The company has established an operating structure that supports capability-building activities and gives the company a strong competitive advantage. a. RESOURCES AND CAPABILITIES Resources. Heineken NV is the third largest brewer in the world and has over 110 breweries on four continents.195 Its brand portfolio is extensive and brand recognition is strong,
particularly in those regions, such as the U.S., where their Heineken and Amstel import products are their main offerings. Heineken has increased marketing and sales resources within the U.S. in order to grow its presence outside the Northeastern region where 40% of its sales volume is concentrated.196 A reorganization of the sales team in the U.S. last year repositioned Heineken to take advantage of its strong presence in the “off-trade” (same as off-premise) sector. With greater focus on the convenience store segment, Heineken was able to leverage several new packaging introductions such as the new “keg can” that replaces the familiar beer can cylinder with a keg shaped version.197 Heineken’s centralized research and development resources provide innovation sharing across operating companies and are a cornerstone of the company’s technology strategy. Heineken’s Technical Services group is the core support for all of Heineken’s brewing operations and this group supports the company with development of new packaging innovations and partnerships. Heineken’s worldwide distribution channels are one of Heineken’s most valuable resources. Integrating this valuable resource in Europe has helped Heineken to achieve “comprehensive coverage” across the continent.198 In North America alone Heineken has over 450 distributors.199 In order to better utilize its distribution network, Heineken USA uses a unique demand planning and system called HOPS (Heineken Operations Planning System). HOPS went through a major upgrade in 1999 when Logility Inc. supplied Heineken with “packaged applications” to make HOPS Internet based. Combining Heineken’s process and Logility’s software, Heineken was able to reduce errors in distributor forecasting by 15% and cut lead times by 50%.200 Along with providing efficient channels in each market, Heineken is able to leverage key contractual outsourcing arrangements to reduce costs and provide value added services through their distribution network. In 2002, Heineken USA established a relationship with Satellite Logistics to improve the management of kegs in the channel for draft beer. Heineken reduced its costs of cooperage management by outsourcing this activity and improved its service levels to distributors. Before the arrangement with Satellite Logistics was established, Heineken distributors had been consistently disappointed by the heavy costs of storing empty Heineken kegs until they could be exported in “full lots” back to the Netherlands for refilling.201 Capabilities. Heineken’s operating structure allows it to leverage expertise in R&D, marketing, purchasing, production, human resources and finance over all operating
companies that map to its global footprint. Heineken has a unique method for codifying and sharing expertise in these functional areas. Its information systems play a pivotal role in corporate communications. In the past year it transitioned these functions to the corporate intranet. Heineken refers to these systems as a “virtual corporate office.”202 Heineken’s ability to utilize these systems effectively is evident in the success of its acquisition strategy. As new companies come under the policies and procedures of Heineken’s core functions, the synergies of each acquisition are realized. Since 1995, all of Heineken’s acquisitions have returned their cost of capital.203 A testament of Heineken’s skill will be the successful integration of Austria’s BBAG, one of their largest acquisitions. In order to ensure future success, Heineken recently established a separate mergers and acquisitions department. The department was staffed with knowledgeable individuals from operating companies and other corporate functional departments.204 Heineken bridges its operations through its branding strategy. Branding is a core capability for Heineken. In each region, Heineken strives for a profitable mix of its local brands and its international brands.205 This applies mostly to European operations where the company inherited brands through brewing, distribution agreements and acquisitions. Heineken’s resources within each regional operating company play the biggest role in making decisions about the marketing mix. Each regional company utilizes this decentralized decision making to develop targeted advertising, sponsorships and promotions. In larger regional markets, such as the U.S., this decentralized authority extends to exporting and distribution functions.206 b. VALUE CHAIN Heineken is organized strategically to optimize its activities. Centralized functional areas bring together the expertise needed to run a business efficiently while a decentralized marketing mix allows for the proper execution of Heineken’s business plans. Each activity Heineken engages in helps support their capabilities. Heineken’s technology strategy encompasses supplier, customer and institutional (consortium and university) collaboration as well as in house R&D staff. The company has been active in research and development throughout the value chain.207 As mentioned previously Heineken has utilized its technical expertise to develop new strains of barley and hops, to implement new quality systems and to invent new product and packaging technologies. Heineken currently has one of the most advanced inspection systems to detect broken glass or 51
other “foreign particles” in already filled bottles.208 Heineken Technical Services contracted with Insight Systems in 2002 to develop this inspection technology The company’s technology activities have established Heineken as a world leader in brewing operations. This leadership position supports the partnerships Heineken will establish to continue its global expansion. The beginning of this year marked the start of a very important partnership within the China region. Heineken’s Chinese operating company, Heineken Asia Pacific Brewers, will take a 21% stake in Guangdong Brewery Holdings and will start to produce its first “China-made brew” by the end of 2004. Currently the company imports its Heineken brand to China through its operating company, and hopes to provide its trademark “premium” beer as a complement to Guangdong’s Kingway “popular” brand.209 Guangdong Brewery hopes to leverage this partnership to extend its distribution channels throughout China, eventually increase market share and benefit from the “consolidation of operations between the two” companies.210 Along with partnering activities and brand expansion, the activity of garnering “brand equity” is important to Heineken. The company realizes that following trends in the market, such as demographics and tastes, can help to expand its customer base. Inquires, such as consumer surveys are used to monitor preferences in the market.211 Market research over the past three years has pushed Heineken in a new direction regarding its target markets. Globally, Heineken rolled out its “Beacon” program in 2002, which seeks to “tap into the younger consumer”.212 This program is particularly relevant in the U.S. market where the majority of beer is consumed by the 21-30 year-old demographic. Heineken has been seeking to “keep its brand relevant” for this generation. As president of Heineken USA, Frans van der Minne is able to pull from a pool of marketing tools available to him from Heineken’s centralized marketing resources such as “Thirst” or create his own locally targeted sponsorships such as Latin-American concerts.213 For a more detailed description of Heineken’s value chain, see Fig. III.D.2.b.1. c. VRIO ANALYSIS The summation of Heineken’s resources, capabilities and activities gives the company a sustained competitive advantage in the global beer industry. While Heineken’s resources are abundant, it is the unique way Heineken utilizes these resources that allow it to maintain high performance levels. Of particular importance are the company’s capabilities in branding, partnering, innovation and information systems. All of these capabilities provide barriers to 52
imitation as previously discussed. A graphic presentation of the VRIO is shown in Fig.s III.D.2.c.1 and III.D.2.c.2.
3. FINANCIAL ANALYSIS In order to understand the financial health of Heineken, two analyses were performed. First, a comprehensive analysis of Heineken’s historical financial and operational performance using trends in the company’s financial statements, key ratios and stock performance from 1999 to 2003 were examined. Second, a company valuation was calculated using the discounted cash flow method and a share value sensitivity analysis was performed to measure changes in cost of capital and growth rates.g a. HISTORICAL PERFORMANCE AND KEY RATIOS Income Statement. The following analysis refers to Fig. III.D.3.a.1 which shows the Restated Income Statement, the Common Size Income Statement and the Year-over-Year Growth of Income Statement Items, and the trend graphs shown in Fig. III.D.3.a.2. • Sales: From 1999 to 2003 sales increased by an average of 11.2% (CAGR of 10.0%). Heineken’s increasing revenue is due to the increasing market share of import beer as a percentage of total beer consumption and the company’s increased international scope. • COGS: Declined as a percentage of sales between 1999 and 2003 from 51.0% to 48.1%, with a low of 46.7% in 2002. The overall decrease in COGS as a percentage of revenue is due to investments in manufacturing equipment and economies of scale. • SGA Expense: Increased yearly as a percentage of revenue between 1998 and 2003 from 29.1% to 32.7% due to increases in management expenses and advertising costs above revenue gains. • Net Income: Increased in absolute value between 1998 and 1999 by €282M (10.9% CAGR). As a percentage of sales (net profit margin), net income has increased by an average of 8.9%. This is due largely to the increased revenues and decreased COGS as a percentage of sales.
The source of raw financial data is the Thompson Online and Thompson Research database accessed online at the SCU Orradre Library, and 1998-2003 Heineken Annual Reports.
Balance Sheet. The following discussion refers to Fig. III.D.3.a.3, which shows the Restated Balance Sheet, Common Size Balance Sheet and Year-to-Year Growth of Balance Sheet Items, and the trend graphs shown in Fig. III.D.3.a.4 as well. • Net Receivables: Increased steadily in absolute value but have trended slightly up and ended down to 12.7% and as a percentage of total assets. Given the increase in revenue, Heineken has done a good job of managing its receivables. • Inventories: Increasing in absolute value, with trend slightly upwards as percentage of total assets, ending down at 7.7% in 2003. While sales have increased steadily, Heineken has steadily learned to manage its inventory balances. • Property, Plant & Equipment: Nearly doubling since 1998 in absolute value, net PP&E has decreased nearly 5%. Given the increase in other asset items due to the firm’s profitability, this is expected. • • Accounts Payable: Increasing in absolute value, slightly trending upward as a percentage of total assets, but decreasing in 2003. Long-Term Debt: Increasing steadily in absolute value and as a percentage of total assets during the five-year period. The most substantial increase was in the current period as Heineken partially financed its $2B acquisition of BBAG. Shareholders’ Equity. See Fig. III.D.3.a.3 and Fig. III.D.3.a.4. • • Total Shareholders’ Equity: Increasing from €2,650M in 1999 to €3,167M in 2002. Retained Earnings: Increasing in absolute value since 1999 but with some variation.
Earnings per Share Growth: Generally increasing but at a decreasing rate from 1999 to 2003. Statement of Cash Flows. The following discussion refers to Fig. III.D.3.a.5, the Statement of Cash Flows. • Cash Flow from Operations: Increasing steadily during a five year period, with the exception of 2000, when there was a large increase in taxes payable due to a change in accounting policy. • Cash Flow from Investments: Cash flow used by investing activities peaked at €2,853M in 2003 due to goodwill associated with the BBAG acquisition. Heineken has also been steadily investing in its manufacturing plants, especially in Nigeria and Vietnam. 54
Cash Flow from Financing: From 1999-2002 cash flow from financing activities remained relatively stable as debt and dividends remained relatively stable. In 2003, the BBAG acquisition was financed partially by an increase in debt, increasing cash from financing. Performance of Business Segments. As almost all Heineken’s revenue is from beer,
segmentation analysis is only performed by geographical elements. Performance of different geographies: Geographical and tabular financials are shown in Exhibit III.D.3.a.6. Heineken’s Volume, Revenues, and Operating Profit are heavily concentrated in Western Europe. While Europe consumes 49% of the Heineken’s volume, this represents 63% of the revenues, but only 48% of the Operating Profit. The Americas, however, consume only 12% of the volume, but provide 14% of the Revenues, and 29% of the Operating Profit. Central and Eastern Europe consume 19% of the volume, providing 11% of the revenue, but only yielding 7% of the operating profit. Africa yields much more even volume, revenue and profit, with 12%, 8%, and 12% respectively. Asia-Pacific is the smallest market with only 8% of the volume, 4% of the revenues, and 4% of the operating profit. This analysis shows that Heineken’s heart is tied to Europe, but the Americas provide significant operating profit. Key ratios. Fig. III.D.3.a.7 illustrates the key ratios for the period 1999 to 2003. • Profitability: Net profit margin has remained steadfast during the five-year period at approximately 9%, though slipping to 8.6% in 2003. Return on equity has also remained relatively strong at approximately 20%, although down to 16.5% in 2003. Return on net operating assets has improved in the last 3 years to 8.4% over the five-year average of 4.3% though slipping in 2003 to 7.6%. • Liquidity: The current ratio has been held steady during the period at 1.2. The quick ratio improved slightly in 2003, rising to 1.0. EBIT interest coverage lowered to 6.8 from an average of 8.6 following the purchase of BBAG. Overall, Heineken has improved their liquidity slightly, but has also reduced their ability to pay interest to some extent.
Leverage: The debt/equity and Cash Flow from Operations to total debt ratios have deteriorated between 1999 and 2003. Heineken has increased their leverage to the industry average, though it is still leveraged less than A-B. They have chosen debt and cash to finance acquisitions and operational improvements rather than issuing additional shares.
Operating Efficiency: Compared to industry averages and competitors, Heineken scores well in all operating efficiency measures, with the exception of Inventory Holding Period. Stock performance. Heineken’s stock price has declined from €24.81/share to
€23.68/share in the past five years. This decline is mostly due to the overall stock market decline beginning in 2000. Adjusted to Heineken’s stock price and not including fluctuations in currency, the chart in Fig. III.D.3.a.8 illustrates that while Heineken has outperformed the Amsterdam stock index, they have underperformed in comparison to A-B and only slightly in comparison to Coors. Conclusion – historical financials and ratios. Analysis of Heineken’s historical financial data and key ratios shows that the company has performed soundly. The company has steadily increased revenues and earnings, more efficiently increased leverage and sound operating measures, though weakness in the overall stock market has not recognized this progress. b. DISCOUNTED CASH FLOW ANALYSIS A discounted cash flow analysis was performed to determine Heineken’s intrinsic stock value to determine a fair valuation without outside influences. The calculations are shown in Exhibit III.D.3.a.9. and details of the analysis are discussed in the following paragraphs. WACC Calculation. WACC is calculated by weighting equity costs using the Capital Asset Pricing Model and the effective interest rate for Heineken, which results in a rate of 5.55%. Valuation of Heineken. Firm valuation is estimated using the discounted cash flow method based on financial projections for the next 5 years (2004-2008). By categorizing the income statement into the major components, Revenue, COGs, SG&A expense, and Depreciation and Amortization and “Other” expenses, historical rates were used to determine future values for each component, resulting in Net Income. growth rate and the WACC estimate. 56 The terminal valuation was calculated by estimating Heineken’s future performance given the beer industry’s average
Heineken’s intrinsic share value is therefore €24.57 per share. Given that the current share price is €29.25 (AMS 5/31/2004)214, it is concluded that Heineken is currently slightly overvalued by the market. Value per share sensitivity analysis. Sensitivity analysis by varying growth rate (g) between 4% and 6% and the WACC between 4% and 7% shows that because the current WACC and growth rate are very close, the calculated value per share ranges dramatically. This is a weakness of the model. 4. STRENGTHS AND WEAKNESSES Strengths: In summary, Heineken has strengths in branding, product and packaging innovation, educating employees, sharing expertise throughout the company and distribution. Weaknesses: Heineken’s business strategy may prevent it from following key trends in certain markets. In the U.S., Heineken is not strongly positioned in the “low-carb” market and is not seeking “malternative” partnerships or proprietary product lines. This points to limitations in the company’s strategy and its commitment to follow the established strategy rather than cater to fads that could improve short-term profits. The company’s import position creates risk since import beers are highly sensitive to economic conditions.215 Heineken lacks channel strength and equal presence in all regions of the U.S. For instance, Heineken is strongly positioned in the North East U.S. region that is already dominated by import beers that have a penetration of 15-20%.216 In other regions where imports have more growth potential from smaller share levels, Heineken has a weaker presence. Higher logistics costs inherent in the import position, such as the maintenance of higher inventories and higher transportation costs are another source of competitive weakness for the import segment of the company’s portfolio. 5. TECHNOLOGY STRATEGY Heineken’s technology strategy described in the previous sections is relevant to its corporate and business level strategies. Heineken’s move into marketing and distributing the BeerTender appliance can be seen as a diversification move in an industry where a dominant vertical structure is prominent and effective. Heineken’s policies regarding a centralized R&D structure complement its dual business strategies by allowing each regional operating company the ability to leverage each others 57
knowledge about packaging and brewing technologies. This regional knowledge is funneled through the corporate resources in order to build value for the consumer and to provide cost benefits to all brewing facilities. Implementing sufficient quality control is of particular relevance when Heineken seeks new brewing partnerships. This activity recently prompted Heineken to invest over five million dollars in Lion Nathon’s brewing facilities in Australia where operations did not initially meet Heineken’s standards.217 6. STRATEGIC MOVE – PARTNERSHIP WITH GROPE SEB The BeerTender is a good example of Heineken’s technology strategy at work. The partnership between France’s Groupe SEB and Heineken in co-developing this technology is a testament to Heineken’s ability to collaborate with other large international companies. By effectively utilizing Heineken’s central R&D resources, operating companies can utilize the BeerTender innovation to drive value in their local markets. This activity both complements and is consistent with the firm’s differentiation strategy. Background. Groupe SEB is a world leader in small domestic appliances.218 With its presence in almost as many countries (120) as Heineken, Group SEB employs fifteen thousand people worldwide and carries a broad portfolio of branded products.219 In 2002 Groupe SEB purchased the failing operations of competitor, Moulinex. In the deal, Moulinex sold off its food preparation and brunch line businesses, which included four of Moulinex’s 26 subsidiaries.220 The four operations sold to SEB were Krups GmbH, Moulinex Espana, Vistar SA and Krups North America. With this purchase, Groupe SEB’s market share increased to 15% of the global market in small appliance sales.221 SEB Strategy. Groupe SEB’s strategic objectives focus on becoming “the world reference in small domestic equipment.” Consistent with Heineken’s view on technological superiority providing greater value, Groupe SEB focuses on providing value through innovation at the optimal “price-performance ratio”.222 The company is dedicated to building competencies in product development. In order to execute on this objective, Groupe SEB co-developed software in 2002 to implement a “product features” modeling tool. This system helps Groupe SEB determine which product features are most relevant for customers and, in turn, are worth more in the market.223 As of last year, Groupe SEB employed 400 people and spent 1.8% of revenues on R&D.224 Innovation metrics are important to the firm. Management measures the
“rate of new products” and “patent performance.” Each year the firm files about 50 to 70 patents.225 The company’s supporting activities include customer support, coordinating productive and flexible manufacturing and maintaining a broad portfolio of products. Support services offered by SEB include call centers, Internet sites, a “Customer Welcome Centre” in France, and exhibition centers in Brazil.226 In order to improve the quality of customer support, the company upgraded its call center software last year. New CRM software will allow better processing and control of calls.227 SEB’s supply chain processes have been enhanced with “order-driven production.” This change was implemented to get away from sales driven forecasts and improve supply targets.228 Improving efficiencies in production is of particular benefit to SEB given that it produces 80% of all of the products it sells.229 These products include cookware, food and beverage preparation appliances, linen care products, personal care devices, and floor care products. Groupe SEB strives to offer a complete choice of small appliances in “every market segment and all potential consumer targets.”230 Strategic Sourcing Framework: Both Groupe SEB and Heineken have core capabilities in R&D. Heineken’s motivations for partnering with Groupe SEB to develop the BeerTender were probably driven from its lack of technological expertise in small appliances. Heineken has no resources to produce such appliances even if they could invent such a device. The fact that Heineken, in developing this beer-dispensing product, would have to source it from an appliance manufacturer, gives relevance to the strategic sourcing framework.231 As suggested, it was Heineken’s lack of capabilities that outweighed its need to control development and manufacturing. Supply is a major strategic issue for Heineken given the innovative nature of the product. The unknown elements of demand increase the risks of supply and gives Heineken motivation to devise well thought out penetration plans for the product. While not impossible, it is highly improbable that Heineken will ever expand its capabilities to include BeerTender production. 7. EFFECT OF STRATEGIC MOVE ON STRATEGY The BeerTender innovation complements the focused differentiation of the business level strategy on the Heineken brand. It is expected to increase net sales margins in the take-home segment232. Consumers are willing to pay the same or more per unit volume for the freshness of
draught beer and the cachet of the pouring ritual. The BeerTender’s four-liter keg is recyclable and the direct packaging cost is less than bottles or cans. This innovation will foster Heineken brand recognition and loyalty, and improve off-trade consumption, which is especially important to brewers during economic downturns when on-trade consumption declines. The BeerTender introduction brings new challenges at the business level in terms of distribution logistics, marketing, and communication. The largest challenge is getting the consumer mated up with a BeerTender and the new four-liter kegs since one component of the dispensing system does not make sense without the availability of the other. As the BeerTender is targeted to grow the take-home market and the consumption of Heineken by the maturing demographic, new emphasis on these market segments will be required. The local operations in each country in which the BeerTender is introduced will need to develop efficient avenues for communicating the value of the innovation and how the consumer should make arrangements for acquisition of the appliance and the new keg refills. Heineken has not announced any provisions for the distribution of Heineken’s local and regional brands in the unique four-liter kegs. This means that the introduction of the BeerTender will not complement the broad differentiator strategy at the business level. The importance of consumer demand for choice at the wholesale level233 and the current high demand for premium light beers in the U.S. market234 is well understood in the industry. This may be cause for Heineken to consider the release of the new kegs in its more popular local and regional brands and at least Amstel Light in the U.S. in the new kegs.
IV. ANALYSIS OF THE EFFECTIVENESS OF STRATEGY
A. THE EFFECT OF THE STRATEGIC MOVE ON INDUSTRY
The overwhelming success of the craft beer revolution (see section II.E.) and external analysis show that a product featuring a new competitive dimension can succeed in market expansion in the mature and highly competitive beer market. U.S. beer consumers have become increasingly demanding in their beer drinking experience during the past ten years. The dimensions of taste, freshness, and venue of consumption, occasion, and sophistication take on new competitive significance moving forward in the drive to capture and hold market shares. With its new overall delivery, storage, and enjoyment enhancing characteristics, the BeerTender addresses this paradigm shift by serving the demographic that appreciates import beer. Compared to other beer segments and the population in general, these beer drinkers tend to have higher education levels and higher incomes as shown in Fig. IV.A.1. The BeerTender presents a disruptive process, rather than a technology, that goes beyond the appliance itself. It possesses of number of attributes that are not currently offered by other beer market players: • • • • Ability to drink fresh draught beer at home. Demographic research235 shows that this attribute is one of the key value drivers for beer consumption. Novel packaging solution. This feature is becoming more important in the perception of the quality of the beer.236 New storage solution. Beer bottles will no longer take up space in the kitchen fridge, as the beer is now stored in a stand-alone appliance. Reduction of waste. The environmentally friendly population will appreciate that beer no longer comes in disposable containers but in returnable and reusable kegs. This novel beer enjoyment process satisfies the three criteria set forth by Clayton Christensen237 for disruptive technology as shown in Fig. IV.A.2 :
um On-premise cons
f re N sh ov ne el ss ty/ /s sty op li hi ng st / ica tio n
Te nd er
Figure IV.A.2: Schematics of the disruptive potential of the BeerTender technology, based upon customer perceived value drivers. Better performance in some respect: Only advanced thermo-electric technology
development can produce relatively inexpensive countertop home appliances, such as the BeerTender. Current refrigeration technologies are larger, heavier, noisier, and produce external heat.238 Only the BeerTender offers the solution. Although this device has additional attributes such as, style and novelty, only a small group will be interested in buying the BeerTender in the beginning. Based on survey results, between 1% and 9% of the combined super premium, microbrewery, and import beer market will purchase this appliance. Worse performance in most other respects: The majority of beer drinkers may find the BeerTender initially very limiting: limited brand choices, lack of on-premise atmosphere, and under developed keg delivery and return systems. Pace of innovation is higher than for sustaining technology developments: Given the maturity of the current normal beer drinking experience, it is highly likely that the evolution of the BeerTender technology will outpace current cooling and storage solutions. Budweiser has already developed a new canning process that preserves draught freshness.239 Guinness released a new bottle featuring a “Rocket Widget” to form the beer head.240 The superior technology of the BeerTender will undoubtedly encourage competitors to further develop imitating or
substitute solutions for improving freshness and experience and for avoiding Heineken and Groupe SEB patents on BeerTender technology. B. SCENARIO ANALYSIS AND EFFECT ON VALUATION The previous financial valuation does not take into account the rollout of the BeerTender. The calculations used to validate any potential increase in market value from the BeerTender include an estimate of the market size, market penetration by segment, savings from bottling costs, and estimates of the wholesale price for new sales. Detailed calculations of the following Scenario Analysis are provided in Fig. III.D.3.a.10 and BeerTender Survey results in the appendix furnish supporting material. In order to calculate the potential market size, a multiplier must be established between the BeerTender Survey results and the real market. The survey shows that most respondents have an affinity for import and premium beer. Multiplying the total U.S. beer volume by the fraction of the market imports and premium beers represent (11.4% and 7.6% respectively), an estimate of beer volume market is calculated to be 535.37 million cases.241 The BeerTender survey provides (see section VIII.C) an initial demand forecast by segment. This demand is then used to calculate the initial penetration. For the following years a constant growth of 4% is assumed, which is used to compute Heineken’s valuation under three different scenarios. The results of the survey separated the BeerTender market into four segments. Each was labeled by their intrinsic habits; Heineken Insiders, Heineken Majority, Novelty Seekers, and Home Bodies. Heineken Insiders drink only Heineken at home, and therefore it is estimated that the product of their demand and market size will result in cannibalized Heineken sales from bottles and cans to BeerTender kegs. For all brands, except for Heineken, 25% is consumed on-trade and 75% off-trade. The Heineken split is 50/50242. Assuming the same on-/off-trade split, the Heineken Majority consumes 50% of their beer at home. Therefore, the BeerTender will cannibalize 50% of the off-trade can and bottle consumption. Novelty seekers will convert to Heineken for the novelty of the BeerTender. It is assumed that they will drink approximately 75% at home243, assuming the non-Heineken on-/off-trade split of 25/75. Home Bodies, like the Novelty Seekers, represent converts, the difference being they consume all their beer at home.
Novelty Seekers and Hoem Bodies represent incremental market share growth in Heineken’s favor. The wholesale price of beer in the U.S. market was calculated using margins for each player in the distribution chain, which were determined through primary research.244 The BeerTender kegs provide beer to the consumer without some of the costs of bottling and canning. The costs involved in bottling and canning include, sterilization, filling, labeling, and packaging. Cost savings were estimated by using the bottling cost of $1.87 per case for A-B (discussed in the willingness to pay section of the external analysis) and multiplying by 20%, assuming sterilization and refilling costs are only 20% of the normal bottling process. In addition to cost savings in cannibalized consumption, Heineken will benefit from a lower cost of goods on incremental revenue. III.D.3.a.10. Having gathered the market size, potential demand by segment, estimated cost savings, wholesale prices, and margins, an estimate of the BeerTender’s financial impact can be calculated. For each segment, the demand is multiplied by the market size and by the appropriate percentage of cannibalization or conversion to determine the total amount of cases that each segment will consume through the BeerTender. While the unit volume associated with the BeerTender is not represented in cases, it is convenient to do this analysis in terms of case volume; this concession has no effect on the final result, as it is only a unit measure with a constant conversion. For the cannibalized case sales, the savings are computed as the product of savings per case multiplied by total cases. The savings translate to a direct pre-tax net income increase. For converted sales, revenue is calculated as the product of the wholesale price multiplied by total cases, multiplied by the BeerTender keg margin. The result is a pre-tax increase in net income to Heineken using the assumption that marketing expenses are a relatively consistent expense. In order to calculate the effect on Heineken’s market value, these numbers are added to the original DCF valuation with additional assumptions. Assuming a 2004 Christmas rollout of the BeerTender, it was estimated that increased spending during this time period would allow Heineken to realize 25% of annual sales potential during this season. Scenario 1 – Latent Demand. In the base scenario, the results of the BeerTender Survey’s “latent demand” were used as the demand in the market place. Using the scenario A margin analysis showing the calculations is provided in Fig.
analysis model shown in Scenario 1 of Exhibit III.D.3.a.9 and I Exhibit III.D.3.a.10., the calculations determine that €3.04 million in savings will be achieved and €1.46 million in profits will be earned from new sales. Using the DCF analysis, the net effect is an increase in stock price of around 0.5%. Scenario 2 – Achieve Promotional Goals. The second scenario assumes that Heineken uses its marketing and communications strength to create awareness of the BeerTender’s novelty and style by one standard deviation; a measure that is consistent with the marketing assumptions in the survey analysis. The scenario model results indicate that cost savings will yield €9.14 million and €13.45 million in profits from new sales. This yields an increase of 3.2% in share price as shown in Scenario 2 of Fig. III.D.3.a.9 and I Fig. III.D.3.a.10. Scenario 3 – Choice and Increased Beer Price. The most optimistic scenario assumes that Heineken introduces the “Around the World in 80 days” promotion as outlined in the recommendations. This promotion brings choice to the consumers, and the company increases the price 15% per keg, which yields approximately 8% more per case wholesale. Based upon the survey results, cost savings will be €17.5 million and net income from new revenues to €48.6 million. This generates an increase in share price of 7.8% as shown in Fig. III.D.3.a.9 and Fig. III.D.3.a.10 in for Scenario 3. Conclusion – Valuation. Table IV.B below summarizes the variation in value per share calculated for the different scenarios evaluated. The results of the various scenario analyses are positive for the implementation of the BeerTender, indicating that Heineken should introduce the BeerTender, increase market awareness, introduce choice and charge more 15% more per volume at retail for the BeerTender keg in order to maximize shareholder value.
Table IV.B: Summary of Valuation Scenarios
Results Base Case - (w/o Beer Tender) Scenario 1 - (Beer Tender & Latent Demand) Scenario 2 - (w/Beer Tender & Hit Promotional Goals) Scenario 3 - (w/Beer Tender & Choices & Price ↑) €/Share € 24.57 € 24.70 € 25.35 € 26.49 % Change 0.5% 3.2% 7.8%
C. OVERALL EFFECTIVENESS OF HEINEKEN’S STRATEGY Sales of BeerTender in the U.S. complements Heineken’s focused differentiation strategy by offering a unique beer drinking experience. Heineken USA will offer its premium brand, Heineken, in the new four-liter keg to enhance brand image. Heineken’s presence in the U.S. market is improved by positioning the BeerTender toward the older demographics and the offpremise seegment. Older beer drinkers with more easily disposable income can more easily afford the BeerTender. These drinkers (35-49 years old) are estimated to comprise 35% of the beer drinking population by 2005. While the beer consumption growth in this age group is not as high as the 21 to 27 year old group, it will remain the largest consumption group over the next five years.245 While its import positioning allows the company to earn higher than average profits, it also exposes the company to greater risk during periods of economic downturn. This strategic weakness is highlighted by the fact that Heineken’s split of on-premise sales to off-premise sales is 50-50. Generally, the on-premise is the most sensitive sector that is most heavily influenced by the economy, and the off-premise sector garners higher profits for the brewer. Most U.S. brewers maintain a 25 to 75 split between their on-premise and off-premise sales respectively to maintain a healthy channel mix.246 The introduction of BeerTender will attract off-premise customers to enjoy Heineken, thus improving profits and sheltering the company from negative macroeconomic factors.
A. 3 SHORT TERM AND 3 LONG TERM RECOMMENDATIONS 1. SHORT TERM RECOMMENDATIONS The preceding analyses lead to the following short-term (one year) recommendations: 1) Nationwide U.S. Rollout of BeerTender. As the introduction of the BeerTender is in-line with the strategic goals of Heineken, the first recommendation is that the company should launch its introduction in the U.S. at the nationwide level. There are three primary reasons for recommending a nationwide rollout versus a regional rollout. First, a nationwide rollout gives a first mover advantage immediately by erecting a formidable barrier to entry for competitor’s imitations and substitutes. Most consumers who are charmed by the benefits of the BeerTender are not likely to make a similar near-term purchase. Second, the resources Heineken and Groupe SEB need for a nationwide rollout are almost already in place. Heineken is responsible for the production and distribution of the BeerTender kegs.247 Therefore, the company need only reserve shelf space for the new kegs at each of its ten regional warehouses where they can remain empty until demanded at the retail level. A rollout nationwide will actually serve to simplify the logistics of supplying those consumers that purchase the BeerTender in one location and then move to another. The required number of kegs can be filled by the requesting retailer’s Heineken wholesaler and from there delivered to the consumer through the retail outlet to meet spot demand. Heineken has existing marketing and promotional resources at the national level. As previously indicated, the BeerTender is intended to target the upscale and affluent consumers who tend to be older than the 21-27 year old population that Heineken is currently addressing. In order to position the BeerTender, Heineken must create focused advertising and promotional collateral with this demographic difference in mind. Groupe SEB is responsible for the production, marketing and future development of the BeerTender appliances. The BeerTender will carry the Krups brand. The Krups distribution network in the U.S is already established to serve the more mature and upscale consumer. Krups 67
is very selective in choosing distribution outlets as it only considers high-end stores such as Macy’s, Amazon, Bed Bath and Beyond, SmartMall and Cooking.com.248 Third, it is easily understood that all beer wholesalers and mass market retailers are volume driven. A nationwide rollout will attract the attention and support of both the alcoholic beverage channel and the national appliance retailers that carry Krups brand appliances. 2) Introduce Amstel Light in BeerTender kegs. Americans are increasingly health conscious and are susceptible to following health fads capriciously. The current American health craze is centered on low carbohydrate diets. As previously discussed in the external analysis, these diets are driving demand for more light beers. Making Amstel Light available in BeerTender kegs will cater to the light beer consumers and potentially increase demand for the BeerTender and other Heineken brands. 3) Introduce Tapvat in the U.S. Market. The Tapvat is a disposable five-liter keg with a built in tap for off-premise consumption. The BeerTender survey shows that the $300 price tag of the BeerTender is a deterrent to much of the market that would otherwise enjoy fresh cold draught beer at home (see section VIII.C.). The Tapvat does not have the same cachet or refrigeration features of the BeerTender. Its lower price makes it a good introduction for the cost conscious consumer to the benefits of draught at home. As the drinking habits of these consumers are established around Heineken and their financial means grow, it follows that they will eventually desire to trade up to the BeerTender appliance. 2. LONG TERM RECOMMENDATIONS The preceding analyses lead to the following long-term (greater than one year) recommendations: 1) Introduce an Around the World in 80 Days Promotion. This promotion concept is called the “World Passport of Draught Beers”. This is a mail-order program that gives the consumer the opportunity to sample a four-liter selection of beer from a different country and region every 16 days. The consumer completes one world tour every 80 days. Each tour begins in Holland with a four-liter keg of Heineken to keep the Heineken brand at the forefront of the promotion. The world traveler then receives a different beer from a different region and country every 16 days so that the world tour is completed with Heineken and four other Heineken company brands from around the globe in 80 days. Figure V.A.1.2.1 shows four possible world
tours. With so many countries and brands to choose from, 23 complete tours can be completed without repeating a single brand. 2) Implement market precision forecasting system While Anheuser-Busch gathers customer information with BudNet, Heineken should build a similar data mining system to forecast customer demand and streamline its supply chain. The “HeinekenNet” should link with the HOPS system to deliver the kegs, cans and bottles to wholesalers worldwide. The software should also have intelligent capabilities that can predict seasonal demand and automatically send Heineken shipments to wholesalers ahead of the demand. In addition, HeinekenNet should monitor regional preferences and offer targeted promotions. For example, music fans can be rewarded by free music downloads; or a surfer who lives in Miami Beach can receive a free beach chair when six BeerTender kegs are purchased. 3) Build the next generation of BeerTender Early adaptors and enthusiasts might prefer to have individualized BeerTenders to set themselves apart once the traditional BeerTender becomes widely adopted. It is proposed that Heineken builds new differentiating models of the appliance to reinvigorate the demand. Two examples are 1) a new DuoTender that can hold two kegs of beer, Heineken and Amstel. Consumers will enjoy the experience of operating a mini-pub in their own homes. 2) The traditional BeerTender can be given a makeover, with different color schemes. B. STRATEGY IMPLEMENTATION 1. IMPLEMENTATION OF ONE SHORT TERM RECOMMENDATION In the short term, Heineken needs to ensure the full adoption nationwide of the BeerTender through the implementation of the following steps: Distribution. Prior to introducing the American public to the BeerTender, Heineken needs to prepare the distribution channel for the rollout. The Heineken warehouse distribution system needs to be set up to handle the kegs and their return for refilling. A sufficient number of kegs needs to be put in the Heineken distribution warehouses to meet initial demand. This lesson was learned during the first month of rollout in Holland where the demand exceeded the supply to such an extent that Heineken had to suspend all promotion in order to lessen the demand.249 The preparation of the warehouses needs to be synchronized with the filling of the Krups supply 69
channel with BeerTenders. It is important that the initial momentum of the rollout is sustained through a sufficient availability of BeerTenders. Timing. The best timing for the rollout of the BeerTender is the Christmas selling season. This incorporates the all-important Thanksgiving holiday. If these plans are not already in place for December 2004, plans for the rollout prior to the beginning of summer in 2005 should be initiated immediately. Advertising. Since novelty and styling are the key value drivers for the BeerTender, communication of these features should be emphasized. The advertising should leverage the existing product placement of Heineken’s current advertisements and demonstrate the novelty of fresh cold draught at home and the unique and elegant styling of the BeerTender. One proposal for the effective leveraging is the placement of a colorful brochure in the packaging of Heineken 12 and 24 packs. The brochure should direct the consumer to retailers that carry the Krups branded products. The costs of advertising should be shared between Krups and Heineken since both companies benefit from the commercial success of the BeerTender. New advertising placements should be made in media that target the middle-aged demographic. The message needs to emphasize the novelty, styling and convenience of the BeerTender appliance and sophisticated enjoyment of fresh cold draught at home. Control. The rollout performance of the BeerTender and kegs needs to be closely monitored through the distribution network. If volumes are below expectations than price promotions such as rebates on the BeerTender should be offered. The price elasticity was found through the analysis of the BeerTender survey to be between two and six. This means that price promotions will increase revenue, volume and awareness simultaneously. Promotion can be decreased if demand outstrips supply as it did in the Netherlands. R&D efforts to target on-the-go segment. The younger demographic, aged 21 to 27 generally likes to bring beer to house parties or tail-gate parties, or camping trips. Heineken could capture the interest of this segment, even at the high price point, with a portable version of the BeerTender. Research and development efforts to ruggedize the BeerTender, much like the Jeep portable boom box, should be initiated, the source of power being the automotive cigarette lighter. This will continue to keep momentum of the rollout going and grow demand through the product life cycle.
2. IMPLEMENTATION OF ONE LONG TERM RECOMMENDATION Introduce an Around the World in 80 Days Promotion. Up to this point in time, Heineken has made no indication that other brands are slotted for introduction in the unique fourliter BeerTender keg. This, of course, makes sense in that the business level strategy is to continue the focused differentiation of the growth driving Heineken brand in order to gain more of the off-trade sales, which are more insulated from economic downturns and provide higher margins than the on-trade. The survey results point clearly to beer selection as a key value driver of the BeerTender. In the short run before competitors are able to overcome the isolating factors set up by Heineken and finally imitate the BeerTender concept, this strategy may work by making inroads into the homes of Heineken brand loyalist. In the long run, competitors will find ways to imitate the BeerTender function, creating competitive choice for consumers that will challenge Heinekens lead. For competitors, choice is more of a problem. Heineken has a portfolio of 154 brands, including Heineken and Amstel, produced in all corners of the world. Only a small number of these are imported into the U.S. It is recommended that Heineken seize this first mover opportunity to capture more off-trade share by promoting a selection of its more popular brands through the BeerTender. It would seem that even a fraction of 154 brands is more than enough to capture the interests of the most avid beer enthusiast who enjoys the pouring ritual cachet and freshness of draught beer at home. With a large enough selection from its portfolio of beers, Heineken probably can capture most if not all of the beer consumption of the BeerTender owners. The traveler is issued a “Heineken World Passport” at the beginning of his or her world tour. The passport contains a number of world tours that can be completed in succession. The world traveler receives a colorful sticker depicting the logo of each new country brand as it is received. The passport stamp is placed into the traveler’s world beer passport to show the status of each tour and to provide the owner of the passport with a visual record for admiring and sharing with other enthusiasts. The promotion can be augmented with prizes by awarding points for each completion of a world tour. These points can be submitted for a small prize at the completion of each tour or accumulated for larger and larger prizes depending on the number of points accumulated.
BeerTender kegs can be shipped through an agreement with BevMo (Beverages and More) which has "brick and mortar" stores in all 50 states. Per government regulations, this presence allows BevMo to ship alcoholic beverages within each state from local stores and warehouses. BevMo is already a Heineken retailer and its position as a specialty liquor store is consistent with respondent’s preferences for purchasing the BeerTender. Per the BeerTender survey 80% of survey participants wanted to purchase this appliance and the kegs from a specialty store such as BevMo.
From innovations in hops and barley to operational management and efficient production, brand development, marketing and promotion, aluminum bottles and keg cans and cold fresh draught at home with the BeerTender, Heineken is truly a global beer industry leader and a strong innovator at all levels of the value chain. The BeerTender provides the company with a new tool to foster the premium image of the Heineken brand and to grow its off-trade share. Heineken’s BeerTender gives beer drinking new cachet and fresh draught taste with a ritual like experience that is fun and enjoyable at home. This new concept in packaging may be the answer to how Heineken can penetrate the aging boomer demographic and even reverse the beer industries loss to wine and spirits substitutes. The company can expect to increase its share of the off-trade and improve its free cash flow for up to a 7.8% increase in share price only one year after introduction in the U.S. market. It appears competitors will be caught totally off guard without any foreseeable or equal response for some time to come. Heineken needs to take full advantage of its first mover advantage to firmly establish its leadership position in the draught at home market that it will soon introduce to the U.S. and other parts of the world to every Heineken beer drinker’s delight.
VII. 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
Good to drink with meals
Good to drink at a party
Figure II.C.2.1: Category image among alcohol drinkers who have consumed alcohol in the past seven days.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.C.7.1: Share of beer consumption across age groups in the U.S. beer market.251
Percentage of beer drinkers in age group
For older people
20% 15% 10% 5% 0% -5% -10% -15%
1996 2001 2006 2011
5 year growth rate [%]
Figure II.C.7.2: Growth rate of the US age groups. Given numbers reflect the growth rate over 5 years, not the CAGR.252
Anheuser-Busch Anheuser-Busch Heineken, Heineken, N.V. N.V.
SAB Miller SAB Miller
Heineken Heineken U.S.A. U.S.A.
Adolph Adolph Coors Co. Coors Co. Labbatt Labbatt USA USA Grupo Grupo Modelo Modelo Low Cost uniqueness perceived by customer Niche markets
Figure II.D.1.b.1: Comparison of the business level strategies employed by the beer manufacturers analyzed in this study.
50 and above
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.D.1.b.2: Anheuser-Busch’s portfolio in 2002.
Portfolio share Growth rate Profit margins
Figure II.D.1.e.1: Anheuser-Busch’s product portfolio presented in the BCG matrix. Note, given shares present the percentage within the Anheuser-Busch portfolio, not the total market share. Anheuser-Busch owns approximately 50% of the total US Beer market. 253
ch us B gh Li t6 % ch us B 7%
36% +9% $1.66
32% -3% $1.66
high market share
ud B Li t gh % 36
6.0% +100% $ 2.05
8% +1.5% $?
6% +2.0% $0.66
7% -3% $0.66
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
• 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, high operational efficiency • Development of new brands (Michelob Ultra and World Select) • Dev. of super-premium low carbonhydrate beer • Busch Agricultural Resources, Inc., (BARI) researches and develops brewing ingredients
• Impact selling: Continuous education of sales force and distributors (considered to be best-of-class) • BudNet: IT-based market intelligence system
• 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)
• 12 production facilities covering continental US. • 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
• 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.
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. • Budweiser ad campaign well known. • 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
Figure II.D.1.f.1: A selection of value and cost drivers contributing to Anheuser-Busch’s value chain.
Financial and Org. 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. 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
Legend: -- Value Drivers
•Close partnerships with suppliers – Ball Corp 50/50 venture to secure supply of cans – Graphic Packaging supplies most paperboard products, was once a fully-owned subsidiary •Utilizes e-procurement initiatives for indirect suppliers – “ERIC”
• Packaging technologies contributed by Owens Brockway • Secures contracts for vital inputs to its brewing operations – ex: barley
• 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
• 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, product news, “close-tomarket” promotion •TIPS training for customers – how to become responsible servers •Database systems for targeting and positioning
-- Cost Drivers
Figure II.D.3.e.1: A selection of value and cost drivers contributing to Adolph Coors’ value chain.
V-P: Buyers’ surplus
Retail price (excl. sales tax)
• High quality ingredients • Full body flavor • Brand image • Low-carb (light version)
• Freshness • ‘Male image’ • Brand image
P-C: Firms’ surplus
Wholesale $1.71 $0.98 $0.75 $2.05 $1.66
• ‘Hey, it is beer!’
$0.23 $0.41 $0.65 $2.10 $0.56 $0.42 $0.28 $0.56 $0.54 $1.43 $0.53
$2.10 $0.95 $0.67 $0.39 $0.87 $0.54 $1.43 $1.23
$2.10 $0.83 $0.59 $0.35 $0.77 $0.54 $1.43 $1.23
SG&A Pre-sell Warehousing Delivery State tax & freight Excise tax
COGS $4.17 $4.17 $3.97
Figure II.D.5.1: Value chain and willingness to pay analysis for three different Anheuser-Busch product lines. All numerical data are taken from reference254 and are averaged across the US market. These products represent three different market segments and are intended to show the profit distribution across the value chain
Price, product differentiation Customer sophistication
Guiness Heineken Corona Labatt
Anheuser Busch Miller
Figure II.E.a.1: Strategic groups in the US beer industry: Brewpubs, Craft Brewers, Regional Brewers, and Mass Manufacturers (from left to right). Size of circles does not scale with revenue.
Others 36.2% Boston Beer Co. 24.9%
Redhock Ale Brewery F.X.Matt 4.4% Brewing C. 4.7%
New Belgium Brewing 5.0%
Sierra Nevada Brewing C. Jacob 11.1% Spoetzl Brewing Co. 5.0% Leinenkugel Brewing Co. 6.7%
Figure II.E.a.2: Market share of the leading microbrewers in the US craft beer industry255
(000's of 2.25 Gallon Cases)
Figure II.E.c.1: Annual production of craft beer industry. Visible is the strong ramp during the early- and mid-nineties plus the leveling-off beginning in 1998. As discussed in the text, counter actions taken by the mass beer manufacturers have contributed to the slowdown in the pas six years. For discussion, see text.
Top 20 States for Imported Beer
Top 20 Metropolitan Areas for Imported Beer
(000's of 2.25 Gallon Cases)
(000's of 2.25 Gallon Cases)
14,000 12,000 10,000 8,000 6,000 4,000 2,000 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
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
$75,000 & over $60,000 $74,999 $50,000 $59,999 $40,000 $49,999 $30,000 $39,999 $20,000 $29,999 Under $20,000
ngele s, C A New York , NY Chic ago, Phila IL delph ia, P Bosto A n are a, M Nass A au-S uffolk , NY Phoe nix, A Z Las V egas , NV Wa s hingto n, DC Oran ge C ouny , CA Detro it, MI San Dieg o, CA Rive rside , CA Hous ton, T X Oakla nd, C A Tam pa, F L Dalla s, TX Atlan ta, G San A Fran cisco , CA Miam i, FL
Regular beer Non-Alcoholic beer Micro/Specialty Beer Imported beer Population
Attended Graduate School
Graduated High School
Attended High School
Figure IV.A.1: Selected geographical and demographical data of the US import beer market. Underlying data have been taken from reference256 80
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, build good distribution and strong brand
Information Flow to Heineken NV
Policy and Control: Marketing, Production, Finance, HR,IT,Legal R&DPackaging, IT, Distribution,etc.
Facilities and Support Staff: Technical Services, Security, Administrators Heineken University E-Learning
Local Management makes local decisions, under corporate guidelines
Figure III.C.1.1: Summary of Heineken structure and its resources and capabilities
L’Arche Holding S.A.
Heineken Holding NV
Figure III.C.1.2: Ownership Structure of Heineken
Wine and spirits 7% Soft drinks 11%
Figure III.D.1.a.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.1.1: Heineken’s profit broken down by geographies
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
under 50% 50.00% 50.00% 6.00%
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
Figure III.D.b.1: Heineken’s M&A history from 1927 to 2004 83
Costly to imitate ?
Exploited by organization ?
Yes/ No ?
Yes/ No ?
Yes/ No ?
Yes/ No ?
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.
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.
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.
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
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.
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.
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, most of Heineken's growth comes from international operations.
Sustained competitive Advantage
Heineken fully exploits this strategy.
Brand Recognition & Capabiltities
Sustained competitive advantage
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.
Systems at other companies may be comprable in functionality, but the value is in the processes supported by the systems.
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.
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.
Yes/ No ?
Yes/ No ?
Yes/ No ?
Yes/ No ?
Economic Performanc e
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
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.
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?
Costly to imitate ?
Heineken has been exploiting this practice for many decades.
Sustained competitive advantage.
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.
Though Heineken was the first US beer manufacturer in 1995 to utilize this new technology, competitors meanwhile have installed their own technology.
Other competitors have already implemented their own IT systems.
Heineken USA fully relies on this tool.
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.
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.
Heineken fully utilizes its brewing resoures
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.
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.
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.
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
• Local management under corporate guidelinesbranding, distribution, production efficiencies – • M&A division created in 2002 • Close partnerships with importers in US market ownership of Star Brand Imports -> – • Centralized support departments Finance, Human Resources, R&D, Production, Marketing • Access to 4B euros in financing •HR programs– Heineken University •Emphasis on“young minds given the appointment of Ruys, CEO ” •Heineken Partner Network network of expatriate partners around the world – – •Heineken CSR programs Corp. 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, Tapvat, Aluminum bottles – •Close relationships with supply partners Rexam bottle manufacturing divestment, continued sole source •Central/Joint purchasing to leverage buying power –
•Purchasing power– largest brewer in Europe and world s 3rd largest ’ •HOPS system– demand planning in the US
• Programs span the supply chain •Has close ties to research institutes and universities •Heineken Technical Services
• 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
• Network of 450 distributors in the US •Penetration of the channel – 77% (v A-B at 80%) •Out-of-house resource for cooperage– Kegspediter
• Brand portfolio mix – optimized for profitability •Programs to increase brand equity–Beacon, “Thirst”, Music downloads •13% of sales spent on advertising in the US market •Increased sales force in the US– expanding market presence
Figure III.D.2.b.1: A selection of value and cost drivers contributing to Heineken’ value chain. 86
Restated Income Statement (000)
Revenue Cost of Goods Sold Gross Profit SG&A Expense EBITDA Deprec./Amort EBIT Interest Expense Non-Oper Income EBT Income Taxes Min Int in Earnings Other Income (Loss) NI before Ext. Items Ext. Items & Disc. Ops. NI avail to common 1999 6,164,400 (3,141,200) 3,023,200 (1,796,200) 1,227,000 (355,200) 871,800 (80,100) 17,500 809,200 (264,800) (28,000) 0 516,400 0 516,400 2000 7,014,000 (3,395,000) 3,619,000 (2,230,000) 1,389,000 (414,000) 975,000 (109,000) 48,000 914,000 (277,000) (16,000) 0 621,000 0 621,000 2001 7,937,000 (3,775,000) 4,162,000 (2,561,000) 1,601,000 (454,000) 1,147,000 (118,000) 70,000 1,099,000 (327,000) (57,000) 0 715,000 52,000 767,000 2002 2003 9,011,000 9,255,000 (4,196,000) (4,453,506) 4,815,000 4,801,494 (3,047,000) (3,026,494) 1,768,000 1,775,000 (486,000) 1,282,000 (146,000) 85,000 1,221,000 (364,000) (62,000) 0 795,000 0 795,000 (553,000) 1,222,000 (180,000) 141,000 1,183,000 (319,000) (66,000) 0 798,000 0 798,000
Common Size Income Statement (% of Sales)
1999 2000 2001 2002 2003 100.0% 100.0% 100.0% 100.0% 100.0% 51.0% 48.4% 47.6% 46.6% 48.1% 49.0% 51.6% 52.4% 53.4% 51.9% 29.1% 19.9% 5.8% 14.1% 1.3% 0.3% 13.1% 4.3% 0.5% 0.0% 8.4% 0.0% 8.4% 31.8% 19.8% 5.9% 13.9% 1.6% 0.7% 13.0% 3.9% 0.2% 0.0% 8.9% 0.0% 8.9% 32.3% 20.2% 5.7% 14.5% 1.5% 0.9% 13.8% 4.1% 0.7% 0.0% 9.0% 0.7% 9.7% 33.8% 19.6% 5.4% 14.2% 1.6% 0.9% 13.6% 4.0% 0.7% 0.0% 8.8% 0.0% 8.8% 32.7% 19.2% 6.0% 13.2% 1.9% 1.5% 12.8% 3.4% 0.7% 0.0% 8.6% 0.0% 8.6%
Income Statement Analysis (CY over PY % Change)
1999 13.0% 10.5% 15.9% 13.9% 18.9% 4.5% 26.0% 2000 13.8% 8.1% 19.7% 24.2% 13.2% 16.6% 11.8% 2001 13.2% 11.2% 15.0% 14.8% 15.3% 9.7% 17.6% 2002 13.5% 11.2% 15.7% 19.0% 10.4% 7.0% 11.8% 23.7% 21.4% 11.1% 11.3% 8.8% n/a 11.2% 2003 2.7% 6.1% -0.3% -0.7% 0.4% 13.8% -4.7% 23.3% 65.9% -3.1% -12.4% 6.5% n/a 0.4% n/a 0.4%
50.5% 36.1% 8.3% -67.0% 174.3% 45.8% 17.0% 13.0% 20.2% 12.7% 4.6% 18.1% 132.9% -42.9% 256.3% n/a n/a n/a 16.1% 20.3% 15.1% n/a 16.1% n/a 20.3%
n/a -100.0% 23.5% 3.7%
Exhibit III.D.3.a.1: Restated 5-Year Income Statement for Years Ended July 31
10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0
Income Statement Items (€ 000) Revenue COGS SG&A Net Income
30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Revenue COGS SG&A Net Income 1999
Income Statement Items (% Growth Year Over Year)
-5.0% 2000 2001 2002 2003
Income Statement Items as % of Revenue
30.0% COGS SG&A Other Exp NI
Exhibit III.D.3.a.2: Income Statement Trend Graphs
0.0% 1999 2000 2001 2002 2003
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 1,207 824 1,175 778 1,416 791 900 1,042 1,110 1,379 490 550 692 765 834 112 124 150 160 0 2,600 7,316 4,321 2,995 233 189 6,017 457 323 87 993 1,860 449 475 248 336 3,368 31 712 1,907 2,650 6,017 2,398 8,052 4,776 3,276 336 279 6,289 529 232 78 1,053 1,892 901 664 124 312 3,893 0 711 1,685 2,396 6,289 3,059 9,017 5,403 3,614 348 196 7,217 620 329 107 1,179 2,235 781 668 381 394 4,459 0 784 1,974 2,758 7,217 2,813 9,897 5,803 4,094 423 451 7,781 629 778 105 1,137 2,649 1,215 600 393 381 5,238 0 784 1,759 2,543 7,781 3,629 10,980 5,985 4,995 1,122 1,151 10,897 745 853 16 1,296 2,910 2,721 982 732 385 7,730 0 784 2,383 3,167 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 20.1% 13.1% 16.3% 10.0% 13.0% 13.1% 14.3% 14.4% 14.3% 12.7% 8.1% 8.7% 9.6% 9.8% 7.7% 1.9% 2.0% 2.1% 2.1% 0.0% 43.2% 121.6% 71.8% 49.8% 3.9% 3.1% 100.0% 7.6% 5.4% 1.4% 16.5% 30.9% 7.5% 7.9% 4.1% 5.6% 56.0% 0.5% 11.8% 31.7% 44.0% 100.0% 38.1% 128.0% 75.9% 52.1% 5.3% 4.4% 100.0% 8.4% 3.7% 1.2% 16.7% 30.1% 14.3% 10.6% 2.0% 5.0% 61.9% 0.0% 11.3% 26.8% 38.1% 100.0% 42.4% 124.9% 74.9% 50.1% 4.8% 2.7% 100.0% 8.6% 4.6% 1.5% 16.3% 31.0% 10.8% 9.3% 5.3% 5.5% 61.8% 0.0% 10.9% 27.4% 38.2% 100.0% 36.2% 127.2% 74.6% 52.6% 5.4% 5.8% 100.0% 8.1% 10.0% 1.3% 14.6% 34.0% 15.6% 7.7% 5.1% 4.9% 67.3% 0.0% 10.1% 22.6% 32.7% 100.0% 33.3% 100.8% 54.9% 45.8% 10.3% 10.6% 100.0% 6.8% 7.8% 0.1% 11.9% 26.7% 25.0% 9.0% 6.7% 3.5% 70.9% 0.0% 7.2% 21.9% 29.1% 100.0%
Balance Sheet Analysis (CY over PY % Change)
12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 27.4% -31.8% 42.6% -33.8% 82.0% 14.4% 13.8% 15.8% 6.5% 24.2% 8.5% 12.2% 25.8% 10.5% 9.0% 33.3% 11.2% 21.0% 6.7% -100.0% 19.5% 12.9% 12.6% 13.3% -0.3% -26.3% 13.4% 11.1% 49.9% 48.6% 28.1% 27.4% -6.6% 3.3% -3.1% 6.9% 14.9% -16.8% 0.0% 20.1% 11.8% 13.4% -7.8% 10.1% 10.5% 9.4% 44.4% 47.6% 4.5% 15.7% -28.1% -10.1% 6.1% 1.7% 100.8% 39.7% -50.0% -7.2% 20.8% -100.0% -0.1% -11.6% -13.0% 4.5% 27.6% 12.0% 13.1% 10.3% 3.6% -29.7% 14.8% 17.2% 41.8% 37.2% 12.0% 18.1% -13.3% 0.6% 207.3% 26.3% 8.2% n/a 10.3% 17.2% 24.6% 14.8% -8.0% 9.8% 7.4% 13.3% 21.6% 130.1% 7.8% 1.5% 136.5% -1.9% -3.6% 18.5% 55.6% -10.2% 3.1% -3.3% 18.8% n/a 0.0% -10.9% -6.5% 7.8% 29.0% 10.9% 3.1% 22.0% 165.2% 155.2% 40.0% 18.4% 9.6% -84.8% 14.0% 9.9% 124.0% 63.7% 86.3% 1.0% 44.4% n/a 0.0% 35.5% 32.8% 40.0%
Exhibit III.D.3.a.3: Restated Balance Sheet as of 12/31
6,000 5,000 4,000
Balance Sheet Trends €M
Net Receivables Inventories Net PP&E Accounts Payable Long Term Debt
3,000 2,500 2,000 €M 1,500 1,000 500 0
Common Stock/Ord Cap Retained Earnings
Equity Items Trend
3,000 2,000 1,000 0
50% 40% 30% 20% 10% 0% -10% -20% 1999
Balance Sheet Trends
Year over Year % Increase/Decrease
Total Current Assets Total Assets Tot Cur Liabilities Total Liabilities
Exhibit III.D.3.a.4: Trends in Heineken’s Balance Sheet.
Year over Year % Increase/Decrease
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. 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. 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 12/31/99 516,400 355,200 22,004 14,823 (14,295) 0 894,132 (99,427) (38,348) (27,879) 45,767 68,038 178,255 1,020,538 12/31/00 621,000 414,000 17,300 147,100 (155,200) 0 1,044,200 (109,000) (59,800) (12,500) 71,700 (289,200) 340,500 985,900 12/31/01 767,000 454,000 44,000 42,000 257,000 0 1,564,000 (142,000) (142,000) (26,000) 91,000 0 155,000 1,500,000 12/31/02 795,000 486,000 25,000 (106,000) 12,000 0 1,212,000 (68,000) (73,000) (10,000) 9,000 0 (44,000) 1,026,000 12/31/03 798,000 553,000 4,000 382,000 339,000 0 2,076,000 (269,000) (69,000) 160,000 116,000 0 70,000 2,084,000
(707,803) 68,176 0 (639,627)
(694,600) (193,300) 0 (887,900)
(792,000) 84,000 (13,000) (721,000)
(966,000) (304,000) (26,000) (1,296,000)
(1,454,000) (287,000) (1,112,000) (2,853,000)
75,398 0 0 614,100 9 (810,973) (121,466) 259,445 947,955 1,207,400
361,900 0 0 (842,800) (500) (1,456,900) (481,400) (383,400) 1,207,400 824,000
(23,000) 0 0 (478,000) 73,000 (1,127,500) (428,000) 351,000 824,000 1,175,000
883,000 0 0 (1,010,000) 0 (1,010,000) (127,000) (397,000) 1,175,000 778,000
1,581,000 0 0 (174,000) 0 (174,000) 1,407,000 638,000 778,000 1,416,000
Exhibit III.D.3.a.5: Statement of Cash Flows (given in 1000 €)
Asia Africa Americas Cent/East Eur W. Eur Total 2002 7,240 9,559 7,587 14,188 46,275 84,848 2003 7,715 11,671 11,484 18,906 49,191 98,968
W. Eur 50%
2003 Beer Volume
Cent/East Europe 19%
Asia Africa Americas Cent/East Eur W. Eur Total 2002 450 753 1,251 826 5,731 9,011 2003 410 769 1,317 1,005 5,755 9,255
W. Eur 62%
Cent/East Europe 11%
Asia Africa Americas Cent/East Eur W. Eur Total 2002 47 188 416 78 553 1,282 2003 48 149 358 83 584 1,222
W. Eur 48%
2003 Operating Profit
Cent/East Europe 7%
Exhibit III.D.3.a.6: Statement of Cash Flows (given in 1000 €)
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 0.5 2.1 0.5 2.7 0.4 0.5 1.8 0.9 0.4 8.2 0.9 0.5 8.4 0.9 0.5 8.5 1.2 0.8 31.6 31.1 17.7 49.8 1.3 1.6 29.2 17.0 48.9 1.4 1.6 27.7 16.8 50.3 1.4 1.7 29.6 34.1 51.1 2.1 3.1 4.7% 3.3% 4.9% 3.9% 4.3% 4.0% 7.3% 5 Yr 3 Yr 2003 5 Yr 4.5%
Coors 3 Yr 4.6% 2003 4.3% 8.4%
Grupo Modelo 5 Yr 3 Yr 2003 5 Yr 60.3% 2.9% 4.3% 4.1%
Interbrew 3 Yr 7.8% 8.4% 2003 7.2% 7.6% 5 Yr 8.9% 4.3%
Heineken 3 Yr 9.0% 8.4% 2003 8.6% 7.6%
Ind Avg 2003 51.7% 9.0% 5.4% 17.2%
45.4% 45.9% 46.5% 42.9% 41.8% 41.4% 57.1% 58.9% 58.8% 13.4% 14.0% 14.7% 11.9% 12.1% 11.7% 10.7% 11.8% 11.5% 19.7% 21.8% 23.6% 10.4% 10.2%
59.8% 60.8% 51.7% 52.6% 51.9%
45.9% 56.0% 72.0% 13.3% 14.2% 14.4% 12.9% 13.4% 12.7%
12.2% 10.7% 19.8% 20.3% 16.5%
17.6% 20.8% 32.9% 51.1% 21.3% 17.2%
6.4% -0.4% 8.0%
18.7% 13.9% 12.7% 17.9% 14.0% 12.3% 21.5% 15.2% 16.6%
23.9% 23.1% -99.8%
8.5% -0.9% -8.3%
0.7% -1.2% 8.1%
10.7% 15.8% 3.4%
16.1% 20.9% 40.0%
28.2 41.1 50.7 2.0 3.1
30.6 66.2 52.1 1.5 2.8
117.1 14.2 21.7 1.1 1.1
119.9 11.9 22.0 1.1 1.1
114.6 10.8 22.0 1.1 1.1
60.1 81.9 106.5 0.9 1.9
61.9 83.9 108.9 0.9 2.0
59.7 83.3 105.3 0.9 2.1
59.9 45.0 55.1 2.0 2.2
63.0 45.8 56.7 2.0 2.2
65.5 49.1 57.2 1.6 2.0
43.5 53.7 57.2 0.6 2.0
1.0 0.7 32.8
1.0 0.7 5.1
4.8 2.7 -8.5
4.6 2.7 -10.9
4.5 2.8 -13.8
0.9 0.7 3.8
0.7 0.6 5.1
0.9 0.7 6.4
1.3 0.9 9.0
1.2 0.9 8.4
1.2 1.0 6.8
1.7 0.6 4.3
Exhibit III.D.a.7: Heineken Financial Ratio Comparison
€/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
Exhibit III.D.3.a.8: Heineken’s stock price performance in the past five years
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 @ 29.5% Effective Tax Rate Term Amount g = 5.00% How Determined Estimate of large established firm Provided by Factiva from 2003 data (06/02/04) 10 Yr Treasury Bill Yield from www.finance.yahoo.com (06/04/04) Calculated S&P 500 Return from 12/31/02 - Present Weight Equity Debt Total Debt & Equity
B = 0.15
rf = 4.75% rm = 11.6%
2003 7.50% 5.29%
2003 3,167 2,721 5,888
Weight 53.8% 46.2%
Market Risk Premium CAPM = k Effective Interest (Avg Cost of Debt) WACC (Using Weights)
WACC 6.85% 5.78% 5.29% 5.55%
Weight 54% 46%
WACC @ 4% WACC @ 6% WACC @ 7%
growth = 4% growth = 4.5% growth = 6%
€ 13.64 -€ 25.29 -€ 5.82
€ 5.12 € 9.48 n/a
€ 4.00 € 6.01 € 14.02
Proforma DCF Scenario Valuation Analysis
Prior Periods Base Case (w/o Beer Tender) (M €) Revenue (5% Growth) COGS (51.9% GM) SG&A Expense (33% of Rev) Depreciation & Amortization (6% of Rev) Other (5% of Rev) NI available to Common Shareholders 2002 9,011.0 (4,196.0) (3,047.0) (486.0) (487.0) 795.0 2003 9,255.0 (4,453.5) (3,026.5) (553.0) (424.0) 798.0 NPV €/Shares 2004 9,717.8 (4,664.5) (3,206.9) (583.1) (485.9) 777.4 € 96,296 € 24.57 2005 10,203.6 (4,897.7) (3,367.2) (612.2) (510.2) 816.3 Projected 2006 10,713.8 (5,142.6) (3,535.6) (642.8) (535.7) 857.1 2007 11,249.5 (5,399.8) (3,712.3) (675.0) (562.5) 900.0 2008 11,812.0 (5,669.8) (3,898.0) (708.7) (590.6) 945.0 Terminal Value
# Shrs 391,980,000 Scenario 1 - 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 2003 798.0 2004 777.42 0.37 0.76 778.5 € 96,809 € 24.70 2005 816.29 1.46 3.04 820.8
Projected 2006 857.11 1.52 3.16 861.8 2007 899.96 1.58 3.29 904.8 2008 944.96 1.64 3.42 950.0 Terminal Value 181,020
# Shrs 391,980,000 Scenario 2 - 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 795.0 2003 798.0 2004 778.55 3.36 2.29 784 € 99,386 € 25.35 Projected 2004 777.42 12.15 4.38 794 € 103,836 € 26.49 €/Share € 24.57 € 24.70 € 25.35 € 26.49 2005 816.29 48.60 17.51 882 2005 820.79 13.45 9.14 843
Projected 2006 861.79 13.98 9.51 885 2007 904.83 14.54 9.89 929 2008 950.02 15.13 10.28 975 Terminal Value 185,861
# Shrs 391,980,000 Scenario 3 - 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 795.0 2003 798.0
2006 857.11 50.54 18.21 926
2007 899.96 52.56 18.93 971
2008 944.96 54.67 19.69 1,019 Terminal Value 194,223
# Shrs 391,980,000 Results
798 NPV €/Shares
% Change 0.5% 3.2% 7.8%
Base Case - (w/o Beer Tender) Scenario 1 - (Beer Tender & Latent Demand) Scenario 2 - (w/Beer Tender & Hit Promotional Goals) Scenario 3 - (w/Beer Tender & Choices & Price ↑)
Exhibit III.D.3.a.9: Heineken Valuation Analysis
Beer Tender Scenario Analysis
Estimate of the Beer Tender Market Size Total Beer Market = 2,824,710,000 Cases/Year Import Market 11.4% 321,000,000 Super Prem/Micro Beer 7.6% 214,370,000 Estimated Cases in Market = 535,370,000 Estimate of Cost Savings/Case Current $1.87 $0.00 $1.87 $1.50 Proposed $0.00 $0.37 $0.37 Wholesale $/Case Retail Price Markup Whlsle Price Initial Price $32.00 66% $ 10.80 Scen#3 Increased Price $34.50 66% $11.64 $/Case Estimate of Selling Price to Wholesaler Distribution Level COGS Margin REV Mfg $ 7.88 27% $ 10.80 $ 10.80 25% $ 14.40 Wholesaler Store $ 14.40 25% $ 19.20 Taxes $ 19.20 40% $ 32.00
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
$10.80 $7.88 $2.92 27.0%
$10.80 $6.39 $4.41 40.9%
Lower mfg costs due to reduced bottling costs, 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 0.61% 100% 0 3,265,757 0.19% 50% 0 508,602 0.06% 75% 240,917 0 0.07% 100% 374,759 0 Total Cases 615,676 3,774,359 Cost Savings/Case x $1.50 $10.80 Total Cost Savings = $5,646,440 $6,649,295 € 4,605,579 40.9% Euro conversion @ €1.226/US$ = $2,716,360 After Tax @ 34% (€) = € 3,039,682 € 2,215,628 € 1,462,315 Assuming Achieve Promotional Goals % Cannibalized Cases % Will Buy Heineken Cannibalized from New Heineken Beer Tenders Drinkers Sales Cans to BT 1.85% 100% 0 9,904,345 0.54% 50% 1,445,499 0 0.41% 75% 1,646,263 0 0.75% 100% 4,015,275 0 11,349,844 Total Cases 5,661,538 Cost Savings/Case x $1.50 $10.80 Total Cost Savings = $16,979,367 $61,144,608 Euro conversion @ €1.226/US$ = € 13,849,402 40.9% After Tax @ 34% (€) = € 9,140,605 $24,978,705 € 20,374,147 € 13,446,937 ` Beer Tender w/Choices and Price Increase % Cannibalized Cases % Will Buy Heineken Cannibalized from New Heineken Drinkers Sales Beer Tenders Cans to BT 3.49% 100% 0 18,684,413 1.14% 50% 0 3,051,609 1.38% 75% 5,541,080 0 2.51% 100% 13,437,787 0 Total Cases 18,978,867 21,736,022 Cost Savings/Case x $11.64 $1.50 Total Cost Savings = $32,517,089 $220,985,177 € 26,522,911 Euro conversion @ €1.226/US$ = 40.9% After Tax @ 34% (€) = € 17,505,121 $90,276,537 € 73,635,022 € 48,599,115
Selling Price = Total Revenue x Profit Margin = Net Profit Increase (new Sales) = Euro conversion @ €1.226/US$ = After Tax @ 34% (€)
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 @ €1.226/US$ = After Tax @ 34% (€)
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 @ €1.226/US$ = After Tax @ 34% (€)
Exhibit III.D.3.a.10: BeerTender Scenario Analysis 96
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.A.1.2.1: Example of Four World Tours
A. ORIGINAL ARTICLE IN THE WALL STREET JOURNAL
Heineken Promotes Draft Beer at Home
By Dan Bilefsky 392 words 13 February 2004 The Wall Street Journal B2 English (Copyright (c) 2004, Dow Jones & Company, Inc.) Heineken NV, the brewer that boasts it introduced Europe's first bottled and canned beer, is launching a home appliance that it hopes will do for beer what the coffee machine did for coffee. Heineken said it teamed up with Groupe SEB SA, the French maker of the Krups coffee machine, to design the device -- dubbed the BeerTender -- that looks like an espresso maker and comes with a fourliter replaceable keg. The device serves draft beer and keeps it chilled for as long as five weeks. The Dutch brewer plans to launch the machine in the Netherlands in March and then will likely introduce it across Europe and the U.S. The BeerTender will retail for 249 euros ($319) -- roughly the same price as an upmarket home espresso maker. However, the likelihood of beer-guzzling couch potatoes giving up their beer cans in favor of a would-be espresso machine for beer was greeted with skepticism by beer analysts. They said the launch of the machine underlined the desperation of global brewers to sell more beer at a time when beer consumption is falling on both sides of the Atlantic. "It's hard to believe people would want to drink beer out of a machine that looks like an espresso maker and is too expensive, but I can see it becoming hip among the beer-obsessed," said Nicole van Putten, beer analyst at Fortis Bank in Amsterdam. She said that in the U.S. the machine would have trouble unseating the ubiquitous keg, which has become a feature at American house parties and barbecues and comes in increasingly compact sizes. Manel Vrijenhoek, a Heineken spokeswoman, said the BeerTender was meant to be a more-sophisticated alternative to the keg, which tends to be associated with American-style fraternity parties. She said inhouse studies have shown that more than 70% of consumers want to drink draft beer at home. Heineken wants to tap into the growing trend of beer drinkers eschewing the bar in favor of downing a glass of beer in their living rooms. Heineken, which was the first foreign brewer to export beer to the U.S. after the end of Prohibition, said it was too early to tell how much the machine would contribute to sales. Document J000000020040213e02d00011
B. ANALYSIS OF PORTER’S FIVE FORCES IN THE U.S. BEER MARKET 1. LEVEL 1 ANALYSIS This section presents a Level 1 analysis of the U.S. beer industry analyzing the strength and degree of threat of each factor underlying each of Porter’s five forces. a. RIVALRY Number of competitors, their size and power. Though there are countless players in the U.S. beer market ranging from multi-billion global corporations over regional manufacturers down to local brewpubs, their size and power is very unevenly distributed. In fact, the U.S. beer market is one the most highly concentrated in the world. It is dominated by the Anheuser-Busch Companies that command a market share of 49%, followed by SAB Miller (21%) and Coors (11%). The CR4, commonly used to measure the concentration of an industry, is well above 80%257. The Herfindahl index, a more accurate measure, has been continuously growing over
0.34 0.32 0.30 Herfindahl index 0.28 0.26 0.24 0.22 0.20 0.18 0.16 0.14 1990
the past more than ten years, Fig.
VIII.B.1.a.1258. Its current value of 0.293%2 indicates a strict oligopoly. Markets with an index above 0.18 to 0.20 are generally considered to be oligopolistic. Another indication of the fierceness of the competition is that
1994 1996 Year 1998 2000 2002
four of the top ten players in 1980 have meanwhile been bought over by their competitors. It is therefore not with any surprise that on a
Figure VIII.B.1.a.1: Herfindahl index for the US Beer industry. Calculations are based on data are taken from reference given in the text.
global scale market concentrations have generally been found to directly relate to profits per unit earned in the respective geography, fig. VIII.B.1.a..2. The U.S. beer market counts among the most profitable global entities, which together with its dominant size makes its incumbents the most powerful global players. Unfavorable (5).
Industry total years.
South Africa Mexico France Canada
Profit per barrel [US$]
stagnating over the past twenty While it has been expanding till the 80’s with an average growth rate of 4%, changes in the demography and reductions in the individual consumption have since then led to an average overall growth rate of below 1%, Fig. VIII.B.1.a.3. 259 Certain markets segments, such
UK Netherlands Belgium
Italy Brazil Spain Argentina
Market concentration CR3
Figure VIII.B.1.a.2: Profit per barrel vs. market concentration for the world’s 15 most profitable beer markets.
as the import beer market that Heineken is playing in, still grow at an annual rate of 8%260, see figure VIII.B.1.a.4. The overall import beer market share of around 10%, however, is too small to make a significant impact on the total market. Moderately favorable (2). Fixed
250,000 US consumption [mill. of barrels] 100 90 80 70 gallons / adult 60 50
variable costs. From an operational point of view, beer brewing is a relatively simple business that has a disproportional high amount of fixed costs and is consequently mostly driven by economy of scale. As most major players are competing on costs with transportation being a major factor, they aim to
1970 1980 Year
Figure VIII.B.1.a.3: US domestic beer total and average individual consumption over the past 50 years. Calculations are based upon data provided in [Conway 2001].
build large brewing capacities in strategically chosen locations. If a new entrant to the market were to play at the national level, he would be facing substantial capital equipment investments by the order of $100M per location (only considering brewery plants and equipment). Further,
100% 98% 96% 94% 92% 90% 88% 86% 84% 82% 80% 1975
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. companies tremendous financial Therefore,
Market share (domestic beer) [%]
marketing, brand building, advertising and promotion to build critical momentum, which needs to be considered fixed costs as
Figure VIII.B.1.a.4: Domestic and import beer market share over the past 25 years
well. Favorable (1). Beer differentiation and switching costs. Beer types can be differentiated into many different categories and nuances, among others taste, degree of bitterness, alcohol percentage, calorie content, etc. In addition, some beer drinkers prefer locally brewed over nationwide distributed brands. While the product is apparently vastly differentiated, the associated quantifiable switching costs from the consumer perspective are negligible. Moderately unfavorable (4). Capacity is normally augmented in large increments. In principle, beer can be produced, packaged and shipped in any chosen quantity. Unfavorable (5). Competitor diversity. The three biggest domestic players, Anheuser-Busch, SAB Miller, and Coors, publicly state and pursue very similar strategies261 summarized by: • • • Grow volume and profitability. Enhance market position by targeted acquisitions. Expand into international geographies (specifically China).
These can be best
Moderately favorable (2). High strategic stakes. The beer market is of major strategic importance to the biggest players. While Anheuser-Busch also relies on revenue derived from packing and entertainment parks operations (combined 20% of the total revenue), beer production is still the company’s main focus. Coors and SAB Miller solely produce beer. For this reason, every strategic move in
the market place will be closely monitored and its impact on the companies’ strategies will be evaluated in great detail. Favorable (1). Exit barriers. Specialized assets and fixed costs of exit represent the largest exit barriers. Brewery equipment is highly specialized and cannot be converted to be used for any other production purpose. If a large-scale producer were to exit the market place, he would therefore only be able to obsolete his production equipment. Moderately unfavorable (4). b. THREAT OF ENTRY / BARRIERS TO ENTRY Economies of scale. Anyone can enter the beer brewing and canning business with a rather insignificant investment and even gain a local following of devoted consumers. For instance, canning equipment capable of 25 cases per hour with two operators can be leased for as little as $250 per month264. Economies of scale in the three areas of production, advertising and distribution are the most significant factors for successful competition at the national level. Of these three, the most significant scale factor is realized in advertising since larger producers spread this spending over a larger market share and product portfolio than smaller brewers265. Advertising per volume unit can vary by a factor of ten.266 The threat of entry due to the relatively high cost of promoting the brand through advertising per hectoliter for a new entrant is therefore low. Favorable (1). Product differentiation. Product differentiation in the brewing industry is accomplished in four ways; (1) taste, (2) price, (3) reputation or brand building, (4) packaging. Of these, taste, price and brand are the most important. The consumer, of course, determines taste. All other factors being equal, the consumer will choose the brand that has the most satisfying taste. Packaging is sometime used to promote the brand, especially in the case of the super premium category. For example, Heineken introduced a “keg” can, which is a keg shaped can that distinctly differentiates its appearance among all of the other brands on the shelf. As mentioned in the previous sections, advertising and promotion are very expensive but they are the primary ways of developing brand image and reputation. These expenses cut heavily into the delivered product cost and subtract from the profit margin. Therefore, product differentiation presents the same barrier to new entry and it ranks low. Favorable (1). Capital requirements. As mentioned earlier, very little initial capital is required to become a beer producer. In order to make significant inroads in the beer business, however, very large amounts of sustained capital are required, especially in marketing and advertising costs. 102
For example, Heineken spent $100M on its media advertising and sponsorships in 1999267. The threat of entry due to the difficulty of new entrants accessing raising the capital necessary to promote their brand image is therefore low. Favorable (1). Access to distribution channels. Access to distribution channels can be a excessive barrier in this industry, as it is heavily regulated by the government (see section II.C.4). Since wholesalers can choose to not carry products that produce insufficient revenues, some have made exclusive agreements with large incumbents. The larger brewers, on the other hand, can exercise substantial influence over wholesalers by offering them increased profit margins to exclusively distribute their brands. As covered in section II.D.1, Anheuser-Busch has almost perfected this practice.268 Only the top two or three brands within a category as determined by retailer demand draw the attention of the best wholesalers. This makes the second best wholesalers in each state even more important for the other players. Fledgling brands can ‘buy” the attention of wholesalers in order to improve their presence. This practice makes it more difficult for the smaller brewers to produce profits.269 As the U.S. wholesalers have been steadily consolidating, the third and fourth largest wholesalers still allow the smaller share brands to penetrate the market. For brands that cannot attract the attention of even these wholesalers, the threat of marginalization is high. The threat of entry due to the difficulty of new entrants accessing the distribution channels is therefore low or favorable (1). Cost disadvantages independent of scale. Wholesalers are most interested in distributing brands that are in high demand at the retail level.270 Just like their preference for Coke Classic, people have acquired a taste for specific brands of beer. This preference in significant numbers of people can only be developed over a long period of presence in the marketplace, which can only be replaced at huge advertising and promotion expense. Empirical evidence for this is that Heineken is the largest selling premium brand in the U.S. market. Heineken was the first nonAmerican beer brewer to reenter the U.S. market after Prohibition, unloading its first shipment in port Hoboken only three days after it ended. It continued to develop its brand name recognition by opening The Heineken Pavilion at the 1939 World Exhibition in New York City.271 The threat of entry due to the cost of brand image development required to equal or surpass competitors that have had a long history with beer drinkers is low. Favorable (1).
Government policy. The brewing industry is subject to extensive and comprehensive federal, state, and local government regulations, see II.C.4. This makes it difficult and costly to pursue growth throughout the entire domestic market. Favorable (1). Expected retaliation. Since there is generally little diversification in the brewing industry, it remains a high stakes game. Incumbents will vigorously protect their brand image, reputation and market shares against new entrants. With the slowdown of the domestic beer consumption, the threat of retaliation to a new entrant is increasing. This could take the form of increased advertising and promotion or price reductions by brands that are feeling threatened by the new entrant. Favorable (1). c. THREAT OF SUPPLIERS / POWER OF SUPPLIERS The four principle supplier categories in the beer industry are raw materials, brewing equipment providers, packaging materials, and labor. Fig. VIII.B.1.c.1 below provides a synopsis of supplier factors and figure VIII.B.1.c.2 graphically shows the supplier interaction process.
Supplier Power Factors Supplier Power Factors Brewing
Packaging Packaging Materials Labor Forces Materials Labor Forces 3, neutral 5, unfavorable Supplier industry structure 3, neutral 5, unfavorable Supplier industry structure Substitutes for suppliers’ 2, moderately Substitutes for suppliers’ 5, unfavorable 5, unfavorable 2, moderately 5, unfavorable product 5, unfavorable 5, unfavorable 5, unfavorable favorable product favorable Brewing industry’s 4, moderately 2, moderately 4, moderately Brewing industry’s 4, moderately 2, moderately 4, moderately 1, favorable importance to suppliers favorable unfavorable 1, favorable unfavorable importance to suppliers unfavorable favorable unfavorable Level of differentiation of 2, moderately 4, moderately Level of differentiation of 2, moderately 3, neutral 4, moderately 3, neutral suppliers’ product favorable unfavorable 3, neutral 3, neutral suppliers’ product favorable unfavorable Suppliers’ threat of forward Suppliers’ threat of forward 1, favorable 1, favorable 1, favorable 1, favorable integration 1, favorable 1, favorable 1, favorable 1, favorable integration
Fig. VIII.B.1.c.1: Summary of supplier power factors
The first area of analysis is the raw materials suppliers. The five ingredients required to make beer are grain (usually barley), water, hops, and yeast.272 Supplier industry structure. Nearly all of the raw materials essential for beer manufacturing are commodity items sold by a multitude of different producers, with the exception of yeast, which is cultured individually at each company from strains as old as the brewer’s existence. Supplier power is therefore low and favorable to the beer industry (1).
Categories of Categories of analysis analysis
Brewing Equipment Equipment Raw Materials Providers Raw Materials Providers 1, favorable 3, neutral 1, favorable 3, neutral
Substitutes for suppliers’ product. Because beer manufacturers strive for consistent taste, there are no real substitutes for the principle ingredients. This results in a high supplier power rating, which is unfavorable to the beer industry (5). Brewing industry’s importance to suppliers. Of the three supplied raw materials, hops is the only material that is chiefly grown for beer production, and it is one of the most important as it used to balance the natural sweetness with an herbal aroma and bitterness.273 as cattle feed.274 As a result, supplier power is favorable to the beer industry (2). Level of differentiation of suppliers’ product. Since hops provide aroma, this ingredient has the most potential supplier product
Beer Making Process and Supplier Integration
Water Barley Hops Yeast
especially malted barley, is also mainly grown for beer production, though it has secondary uses
important As a
distinctions can be made by freshness and taste with respect to barley as well. result, supplier Suppliers’ material suppliers power threat will is of enter moderately forward the beer
Malting Brewing Process
unfavorable to the beer industry (4). integration. There is little threat that raw
manufacturing industry and consequently supplier power is weak (1). The second major suppliers to the beer
Figure VIII.B.1.c.2: Beer supplier interaction process.
industry are the brewing capital equipment manufacturers. These manufacturers provide filtration equipment to cleanse incoming
water, mills for processing the grain, large mash tuns and brew kettles to produce the beer, filtration equipment to remove final impurities before bottling, and process control hard and software. Supplier industry structure. Some equipment is highly specialized and only a few suppliers exist, while other production equipment is supplied by multiple manufacturers or can be designed and built by plant engineers. Given this disparity, supplier power is rated as neutral to the beer industry (3).
Substitutes for suppliers’ product. Industrial equipment is essential in the mass production environment of a major brewery, and only some items can be built in house with economic feasibility. Therefore, supplier power is rated high and is unfavorable to the beer industry (5). Brewing industry’s importance to suppliers. While not exact matches, most equipment used in the brewing industry is similar to equipment used in other food processing industries though there are specific niche providers. As a result, this mix is generally weighted unfavorable to the beer industry (4). Level of differentiation of suppliers’ product. There is a greater level of differentiation among more specialized equipment manufacturers, but in general differentiation is found in service and support activities. Therefore, supplier power is rated neutral (3). Suppliers’ threat of forward integration. There is little possibility that the suppliers will expand into beer production, and as a result forward integration is rated low (1). The third area of supplier analysis is packaging materials, which include glass bottles, aluminum cans, in which beer is packaged for sale, and pallets, boxes, and labels. Supplier industry structure. Ball Corporation, Crown Cork and Seal, Metal Container Corporation and Rexam Beverage Cans America are among the many companies that supply aluminum cans, glass bottles (Owens-Brockway Glass Container Corp, Anchor Glass Container Corp., Ball-Foster Glass Container Corp.), and other packaging materials to the beer industry275
. The larger companies are suppliers throughout the food industry, while the smaller suppliers Substitutes for suppliers’ product. The only viable substitute for the glass and bottle
tend to focus on the beer industry. Neutral (3). industry is the developing market for plastic bottles. This potentially represents a formidable threat. Moderately favorable (2). Brewing industry’s importance to suppliers. The brewing industry represented approximately 34% of the aluminum can market from 1995-1999 and approximately 44% of the glass container market. As a result of the brewing industry’s dominance in the market, supplier power related to this issue is rated low, or favorable to the brewing industry (1).277 Level of differentiation of suppliers’ product. As packaging materials are commodity products, there is little opportunity for product differentiation outside of proximity to brewing
facilities due to the switching costs of additional freight. Therefore, supplier power related to differentiation is rated moderately low (2). Suppliers’ threat of forward integration. There is little possibility that packaging suppliers will expand into beer production, and as a result forward integration is rated low (1). The fourth and final grouping of suppliers is labor power. Of the top 3 beer manufacturers, only Coors is not fully unionized, although the company does have some subsidiaries and even plants within the U.S. that do have union representation. Supplier industry structure. The predominant union in the U.S. domestic market278 is the Teamsters Union. In Europe, unions are typically organized within country boundaries, though this may change as the European Union strategy grows. Because of the dominance of these two labor unions, supplier power due to industry structure is rated high (5). Substitutes for suppliers’ product. While non-union labor exists, it would be a formidable challenge to overcome the entrenched labor unions. Even Coors eventually allowed the Teamsters access to their plants to end a boycott. Due to the lack of substitutes, supplier power due to lack of substitutes is rated high (5). Industry’s importance to suppliers. The Teamsters Union represents 1.4 million employees and is the most diverse union in the U.S. and represents many different trade groups, which also generally true of labor unions in Europe279. Although the beer industry represents an important segment for the Teamsters, their diversification allows for substantial power, and therefore supplier strength is rated moderately unfavorable to the beer industry (4). Level of differentiation of suppliers’ product. There is little differentiation in the quality of employee’s among various unions, though trade unions typically represent trades with specialized skills and work experience. Therefore, this issue is rated moderate (3). Suppliers’ threat of forward integration. There is little possibility that the labor forces will develop their own beer producing firms, and as a result forward integration is rated low (1). d. THREAT OF BUYERS / BUYER POWER The beer market in the United States, as with other alcoholic beverage industries such as wine and spirits, is heavily regulated. As described in section II.C.4, distribution is regulated by the three-tier system.280 There are three types of buyers in the beer industry; licensed wholesalers, retailers and the consumer.
Wholesalers, while faced with industry consolidation, still remain powerful buyers due to the regulatory environment of the US alcoholic beverage market, see section on macroeconomic forces. Buyer industry structure. The number of beer wholesalers has been decreasing over the past thirty years. Today there are still over 2500 regional beer distributorships down from over 5000 thirty years ago. In the midst of this consolidation two distinct groups of beer wholesalers has emerged; the independent multi-brand distributor and the exclusive partner. Brewers such as A-B have found exclusive deals to their benefit and larger suppliers such as A-B have been purchasing stakes in larger regional US distributors.281 These factors make the structure of the industry moderately favorable (2) Products represent significant portion of buyer’s costs. Given the trend for more exclusive distribution, more and more wholesalers are looking to make beer a sole source of income. As a result, buyer power is strengthened by this fact alone and is unfavorable to the beer industry (5). Products are standard or undifferentiated. Differentiation for wholesalers is marked by the profit potential of branded beers. Imports and premium beers have commanded significant profits for wholesalers, earning 50% more per case than domestic beers in 2003.282 Given only two categories of profit potential, domestic/non-premium and import/premium beers, the market does not seem to be differentiated from a profit perspective. The result is moderately unfavorable (3) for the industry. Few switching costs. Exclusive wholesalers face higher switching costs than independent multi-brand distributors. Contracts with brewer bind the ability of the wholesalers to expand their portfolios through exclusivity and “share the selves” clauses. While it would be costly for wholesalers to switch to other brewer’s brands it is equally hard for brewers to cut ties with a particular distributor. “Franchise termination laws” in the U.S. protects wholesalers from the whims of brewers and gives wholesalers grants to specific regional territories.283 The trade-off of switching costs for both brewer and wholesaler signifies a moderately favorable situation in terms of buyer power (2). Buyers earn low profits. Insulated from threat of termination, wholesalers typically mark up beer 18% to 20%284. The advent of exclusivity and brewers purchasing stakes in their US distributor counters the effect on mark-ups by lowering the number of negotiation points for
wholesalers. However, this trend would have little effect on the majority of regional players licensed to sell exclusively in particular regions. As a result, buyer power is relatively low on this point exclusively and moderately favorable for the industry (3). Buyers pose credible threat of backward integration. Backward integration is not a threat in this industry as a whole. Wholesalers, if at all, are threatened by forward integration by brewers. Wholesalers do not have the technological competencies for brewing beer and it is unlikely that they would buy them. As a determinate of buyer power this factor is favorable for the beer industry (1). Industry’s product unimportant to the “quality” of the buyer’s products or services. The quality of beer is an important factor in the resale channel. Without a quality product, wholesalers would find it hard to market and sell their services no matter the mark-up. This fact, points to a favorable effect for the beer industry in minimizing the power of the buyer (1). Retailers, as a group, are much more diverse than their channel counterparts, the wholesalers. There are seven major groups of beer retailers: on-premise restaurants and bars, convenience stores, supermarkets, liquor stores, drug stores, large concessions and wholesale clubs. Buyer industry structure. The number of on-premise establishments was about 300,000 nationwide in 2002. This buyer segment has consistently made up 25% of the volume of beer sales over the past five years. In addition, this segment made up approximately 48% of dollar beer sales. Convenience stores and supermarkets run a close second and third in terms of volume sales at 23% and 20% respectively (2003).285 While the retail segment is diverse the profit potential is not; on-premise resellers accounted for about 80% of the profits in the segment last year. Although the on-premise segment is large and dominates profits, there is a benefit to the beer industry in the diversity of on premise retailers. The structure points a moderately favorable effect on retailer power (2). Products represent significant portion of buyer’s costs. Analyzing different retailers, some have more potential to be sensitive to prices given their cost structure. For example, beer dominates on premise sales making up 52% of all alcoholic beverage sales in 2002.286 Products are standard or undifferentiated. Retailers are concerned with both profit potential and consumer preferences. In the consumer market there are many beer choices, but
distinct profit opportunities between brands is not apparent. Retailers seek to make their beer buying choices based on their market’s preferences and are more influenced by the differentiators that brewers create in the market. Diversity in the beer market and customer’s preferences makes retailers less price sensitive and therefore differentiation becomes a moderately favorable for the beer industry in terms of buying power (2). Few switching costs. Retailers, given their inability to gain direct access to brewers as a point of distribution, are at a disadvantage when trying to switch between beer wholesalers. In most states, wholesalers are given exclusive rights to a region and choice is limited for the retailer.287 If retailers are bound by customer preference and preference is extremely diverse, choosing not to engage with a particular beer wholesaler in the area would be costly. This factor weakens buyer power and is favorable for the industry (1). Buyers earn low profits. The largest retail sector, on-premise, generally makes about 80% gross margins on beer sales. The largest growth retailers, wholesale clubs, such as Costco, earn about 10% gross margins on beer. In 2003, wholesale clubs beer sales grew by 16%. While on-premise beer profits dominate the market, profits will continue to be an unimportant factor in retail price sensitivity and therefore a moderately favorable factor for the beer industry (2). Buyers pose credible threat of backward integration. One current trend in on-premise beer retailing is the brew pub. Brewers, such as Gordon Biersch, fall into this category and are a specific example of backward integration in the market. Considering the cost for brew pubs to market and sell their products off-premise is quite large ($300 revenue/per keg for sales on premise versus $80 revenue/per keg for sales off premise)288 the threat of large scale backward integration is small. This fact has a favorable effect on buyer power on the beer industry (2). Industry’s product unimportant to the “quality” of the buyer’s products or services. The quality of the beer is determined by brewers and is perceived by the customer in the same way. Restaurants have the potential for bad customer perception if beer is served poorly. As well supermarkets run the risk of poor customer perception if they sell very old inventories of beer. While both retailers want to sell quality beer – beer does not have a great impact of the quality of their service. This factor is moderately unfavorable because it increases retailer price sensitivity (4). The third groups of buyers are consumers. Consumers purchase beer for personal consumption from beer retailers.
Buyer industry structure. Consumers are very diverse in the beer preferences. This fragmented market is favorable to the beer industry as many different types of beer buyers dilute the concentration of power (1). Products represent significant portion of buyer’s costs. Beer does consume a greater portion of a consumer’s beverage costs given the heavy taxation. Forty-four percent of the cost of a bottle of beer is attributed to taxes on alcoholic beverages289. Consumers with larger disposable incomes are less price-sensitive in their beer choices, while those with little disposable income are more price-sensitive. Since half of all beer is consumed by the 21-34 year old demographic segment290 and income potential during this period of life is limited, beer costs do become a factor in consumer price sensitivity. The impact is moderately unfavorable for the industry (3). Products are standard or undifferentiated. Differentiation in the consumer market is marked by taste and preference. There were over 3,000 different brands distributed in the US in 2002.291 These brands fall into larger categories of premium light, premium regular, imports, craft and budget. Beer is extremely differentiated in the U.S. market and this fact is favorable for the industry (1). Few switching costs. Switching cost for consumers can be analyzed from a differentiation and cost perspective. While the actual monetary cost to switch brands is practically zero, differentiators may cause preference and increase “mental” switching costs. Overall switching costs are moderately favorable for the industry as differentiation plays a big role in consumer preferences (2). Buyers earn low profits. This idea of profits is not applicable to this group of buyers. Buyers pose credible threat of backward integration. While consumers can brew beer in their own homes, they can not make a profitable enough to compete on a national level. This factor is insignificant and favorable for the industry (1). Industry’s product unimportant to the “quality” of the buyer’s products or services. Although consumers do not produce their own products, they are still interested in beer quality. The beer industry mirrored this concern with some brewers instituting “freshness dating” on all bottles and cans in the late 90’s. This fact is generally favorable for the industry in terms of buyer power (1).
e. THREAT OF SUBSTITUTES Number of substitutes. Threat of substitutes (4) In addition to over a hundred different beer labels to choose from, consumers can also purchase wine, malt-flavored alcoholic drinks (sometimes also called flavored alcoholic beverages, FABs), distilled spirits and also non-alcoholic drinks. The beer industry is facing a fierce competition from the wine and other malt-flavored alcoholic drinks in particular, as they target the same demographic group. Wine drinking has become part of the American culture. The coming of age of the baby boomer generation fueled the growth of the wine industry. More importantly, the “millennial generation" with members of the leading edge in their early 20s, has even a bigger appetite for wine than previous generations.292 In fact, the year 2003 has seen a 32% gain in core wine consumer population. Consequently, the wine consumption hit a new all-time high of 2.68 gallons per capita.293 Of particular relevance to Heineken is that the import beer sector has been found to be much more affected by this trend than the domestic one.294 FABs were first introduced to the U.S. market in 2001 and became an instant hit. Smirnoff Ice, the dominant supplier of FABs, grew from zero to over 25 million cases and sales approached two percent of the beer industry in its first full year of distribution.295 In 2003, for the first time in 30 years, the volume of spirits was larger than that of beer and wine. than beer offers has led to the evolution of FABs.297
success is the direct result of the change in consumer taste preference. Demand for sweeter taste The leading brands in this category are Smirnoff Ice, SKYY Blue, Bacardi Silver, Stolichnaya Citrona and Mike's hard lemonade. FABs appeal to consumers who occasionally drink beer, but also consume mixed drinks and are looking for something new. In fact, half of the new FAB consumers have switched from beer. Price performance of substitutes. Compared to all mentioned substitutes, beer has the best price/value ratio. A recent survey among 1300 participants indicated that 73% agreed with this statement. 51% thought the same of wine, but only 29% of FABs and 25% of spirits298. f. ROLE OF COMPLEMENTS According to Gordon Walker299 complementary products are characterized by systematically positively correlated demand and creation of a reciprocal expansion of demand. While there are a number of products and services that either promote the consumption of beer
(sports games, concerts, etc.) or are a required part of the overall experience (bottles, cans, kegs, etc.), none of these fulfills both of Walker’s criteria. There no complements for beer. Neutral (3). 2. LEVEL 2 ANALYSIS a. RIVALRY The structure of the U.S. beer market is very much in favor of its incumbents. Its oligopolistic concentration together with the fierce competition effectively blocks any potential newcomer from entering at the national scale. Every challenger would face serious hurdles in establishing an effective marketing and distribution infrastructure. In addition, the economy of scale together with the market’s huge profitability provides the dominant players with sufficient financial leverage to immediately retaliate against any perceived threat. This unfriendly scenario and the slow overall growth rate make the U.S. beer market extremely unattractive to potential entrants.
Factors affecting rivalry Factors affecting rivalry
Number of competitors, their Number of competitors, 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
1 2 3 1 2 3
2 1 4
2 1 4
5 4 7
5 4 7
b. THREAT OF ENTRY / BARRIERS TO ENTRY There are perhaps few technologies better understood than brewing beer and anyone can start the process in their own home. Common logic would tell us that it would be easy for new entrants if they only have a delectable formula. Even great recipes are not the key to entry. Beers
are differentiated by brand and image development that takes years to achieve for which no substitute is available. New entrants have little relative volume and little relative clout with the government mandated and regulated distribution system. With little diversification among incumbents, it is a high stakes game that incumbents will vigorously protect.
Barriers to Entry 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 1 1
2 3 4
2 3 4
c. THREAT OF SUPPLIERS / POWER OF SUPPLIERS Because of the predominance of unionized labor, Labor Forces represent the most significant threat of supplier power. Raw material and packaging providers also represent significant threats of supplier power, but because of the large number of providers, their significance is not as great as that of labor. Brewing equipment providers are positioned as the least likely threat of supplier power, mostly by virtue of the current overcapacity in the industry and declining growth rate in beer consumption. Brewers are less inclined to need additional equipment and once installed, as the machinery has a long life span. Based on our analysis of the industry, our conclusion is that “supplier power” represents a moderately unfavorable competitive force to the beer industry. Moderately unfavorable (4).
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
Brewing Brewing Equipment Equipment Providers Providers 4th 4th Score Rank
3 5 4 3 1
5 4 3 1
3rd 3rd 1st 1st 2nd 2nd 4th 4th 5th 5th
Packaging Packaging Materials Materials 3rd 3rd Score Rank
3 2 1 2 1
2 1 2 1
1st 1st 4th 4th 3rd 3rd 2nd 2nd 5th 5th
Labor Forces Labor Forces 1st 1st Score Rank
5 5 4 3 1
5 4 3 1
1st 1st 2nd 2nd 3rd 3rd 4th 4th 5th 5th
d. THREAT OF BUYERS / BUYER POWER While differentiation (favorable) becomes a more prominent factor in buyer power the farther down the chain of distribution, quality, strategic importance and the structure of the channel as a whole has a strong affect on the industry. Important factors for buyer power in the wholesaler sector and retail sector differ from the consumer sector in terms of those items that represent efficient movement of beer inventories through the channel. Competition in the channel is inhibited by exclusive wholesaling agreements and wholesalers' regional licenses. It is extremely difficult for brewers to gain access to these channels in the U.S. The threat of channel buyers is strong, while branding in the consumer market helps to decrease the overall threat of the group as a whole. The effects of the aforementioned factors are moderately unfavorable. (4)
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 2 5
2 2 5
3 5 2
3 5 2
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?
1 1 5
1 1 5
4 5 6
4 5 6
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 2 1
1 2 1
5 2 6
5 2 6
e. THREAT OF SUBSTITUTES Level 2: The threat of substitutes is moderately high. There are numerous alcoholic beverage substitutes available with minimal switching costs. Emerging demographics prefer wine and FABs over beer. Consequently, the beer industry has started to lose market share to these beverages. Moderately Unfavorable (4).
Moderately Unfavorable Moderately Unfavorable (4) (4) Strength Strength
4 3 4 3
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
1 2 1 2
f. 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
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.
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
be explained by the fact that import beer drinkers have higher disposable incomes302. Second, choice of beer is an important value driver. The survey population is not as sure about novelty and style as value drivers, as the standard deviation of choice of beers is less than half of the total sample value whereas the standard deviation and mean are about equal for style and novelty. In other words, this survey population prefers beer choice over style and novelty. Heineken has distinctive capabilities in marketing and communications. During the rollout of the BeerTender, Heineken should promote style and novelty in order to achieve the same of awareness as choice. Table VIII.C.3 and Table VIII.C.4 summarize the results from this simulation. Table VIII.C.3 Demand for a $300 BeerTender-like (choices included) Appliance after successful Promotion Program % of 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 8.37% 41.70% 3.49% 3.77% 30.35% 1.14% 6.28% 22.00% 1.38% 7.95% 31.51% 2.51% 8.52% Total
Heineken Insiders Heineken Majority Novelty Seekers Home Bodies
Table VIII.C.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 8.37% 22.13% 1.85% Heineken Insiders Heineken Majority Novelty Seekers Home Bodies 3.77% 6.28% 7.95% 14.41% 6.50% 9.45% Total 0.54% 0.41% 0.75% 3.55%
The same model can simulate the demand function at several price points so that the price elasticity can be computed. The model yields a price elasticity between 2 and 6 depending on the effectiveness of marketing. If marketing is ineffective, the elasticity is closer to 6 and price promotions will be required to inflate demand.
Percentage of responses
10% 20% 30% 40% 50% 60% 70% 0%
Percentage of responses 80%
social activity (picnic, party, friends place, etc.) home
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.)
Figure VIII.C.1.a: Responses to selected questions of the BeerTender survey.
Q7: Where do you most like to drink beer? (Check all that apply.)
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
Q12: Imported brands of beer that you buy (Check all that apply.)
50% Percentage of responses
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.) 30% Percentage of responses 25% 20% 15% 10% 5% 0% freshness price convenience sophistication packaging
Figure VIII.C.1.b: Responses to selected questions of the BeerTender survey.
Q16: Importance of attributes of a countertop draught beer appliance (Check all that apply.)
Percentage of responses
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.)
department liquor store store
Figure VIII.C.1.c: Responses to selected questions of the BeerTender survey.
Figure VIII.C.2. Regression Model The model explains the willingness to pay for a BeerTender-like appliance and captures 40% of the variance.
•Pay $57.18 for initial interest
•STD of $41.58 •P value of 2.9%
•Pay $89.02 if respondent
does not go to night clubs (Q7)
•STD of $39.65 •P value of 2.9%
•Pay $4.04 for every point
respondent values styling (Q16) •STD of $1.81 •P value of 3.4%
This value drive is applicable for Heineken drinkers only (Q12).
•Pay $2.66 for every point
respondent values novelty (Q16) •STD of $1.18 •P value of 2.8%
•Pay $0.042 for every point squared
respondent values choice (Q16) •STD of $0.01 •P value of 0.006%
Fig. VIII.C.3: Summary of Monte Carlo Simulation The length of each row of arrows represents the willingness to pay of a synthetic customer as computed by the model. The statistics are performed on these synthetic customers to compute demand. This distribution is assumed to be normal. Won’t buy Will buy
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