Monday, April 18, 2005

What’s brewing at Heineken?

Following three years of underperformance, Heineken NV announced that current CEO, Anthony Ruys, will step down in October. Jean François van Boxmeer, a Belgian executive board member has been named as the new CEO to the group.

The new CEO has the difficult task of dealing with several years of under-performance. The slide of the dollar , the switch in US consumer preferences away from beer to spirits, the slump in consumer confidence in the core western Europe market all have hit Heineken results. In February Heineken had reported a drop in 2004 net profits by 33% and warned that 2005 profits would be even lower.
Van Boxmeer has unveiled plans to radically shake up and restructure the company’s struggling operations. Amongst the measure announced by van Boxmeer is a streamlining of top management layer from 36 executives to 13 and a re-focus of operations from 6 to 5 geographic areas, each with a president who will report directly to Chief Operating Officer Marc Bolland.
The changes came as a result of concerns by supervisory board members and senior executives over the company’s ability to deal swiftly with moves by the competition, particular in light of several key mergers by rival brewers. For instance, InBev, one of Heineken’s major competitors was created in August from the $11.4 billion merger of Interbrew of Belgium and AmBev of Brazil. The company is now planning to launch its Brazilian beer Brahma in more than 15 countries, in the hope that a light-flavored South American brew will help boost global sales.
Analysts have welcomed the restructuring program that Van Boxmeer has highlighted as they hope that it will provide the company wit flexibility to respond to the competition and make strategic alliance. However, according to Van Lanschot analyst Paul Hofman, the restructuring “does not mean that the company is suddenly out of the woods. It's got weak geographic operational positioning and a troublesome ownership structure.”
The departure of Anthony Ruys has certainly left many questions regarding the strategy of the firm. What should the company focus on?
With a declining core market, stiff competition form other brewers and lack of exposure to emerging markets Heineken certainly needs to re-consider it strategy and geographical exposure.
Europe still accounts for 53% of Heineken sales. Competitors such as Inbev and SABMiller have already taken steps to reduce their exposure to the mature European market by expanding their operations in Russia and China through takeover deals. As such, the most pressing matter is Grupo Empresarial Bavaria, South America’s second biggest beer producer. Bavaria is considered as one of the last jewels of the fast growing South American beer market with leading position in Columbia, Ecuador, Peru and Panama.

Heineken is one of the contenders for the Columbian brewer amongst other global brewers. However, this could be further complicated by the control of the Heineken family over the company. The former is weary of emerging markets and wants to retain its control and the company independence. The new CEO has acknowledged this, has alluded to the fact that Heineken would be not change its structure and at the same time reiterating that Heineken needed to “play a leading role in the beer industry”.

The Heineken family currently controls 50.0005% of the group. This is also further complicated by the fact that according to an interview in weekly magazine Semana, Alejandro Santo Domingo, the son of billionaire Julio Mario Santo Domingo who owns 70% of Bavaria declared that his family would only consider a merger for a stock swap transaction. He was quoted saying “the family is not interested in getting millions of dollars in a banking account”. The company is valued at $9 billion dollars and Heineken does not have enough cash to fund such a big acquisition.

What should the company do? Convincing the Heineken family that owns 50.005% of the share may prove difficult due to their risk aversion to emerging market and the potential dilution of ownership. However, in light of strengthening competition and declining core market, turning towards emerging market may be the only way to keep Heineken in a strong position. As of
2004, the new Americas region accounted for only 13% of the group beer volume.

In the past the company had taken only small steps to diversify its geographic exposure. Under Ruys, Heineken NV had acquired a 40% stake in Jiangsu DaFuHao Breweries Co, Ltd for EUR 10.2 million. The entire transaction was funded with cash. China is the largest market for beer in the world with sales volume of 291 million hectoliters and growth rate of 15%. This transaction should enable to strengthen the position of HAPBC (Heineken –APB (China) Pte Ltd) in the adjacent provinces of Jiangsu and Shangai with higher population density and growth rates. However, DaFuHao sales volumes represent only 1.4 million hectoliters for a total market size of 291 million hectoliters. As of 2004, the new Asia-Pacific region accounted for 8% of group beer volume.

In conclusion, with very limited presence in emerging market and stiff competition in its core European market, a geographical diversification would have to be considered by Heineken if it is to keep its dominant position in the beer market.

Karen Street and S Jain

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