Heineken beer: history, marketing, and global market position

Heineken NV is one of the world's largest brewing companies, with 125 breweries producing over 200 brands in over 70 countries (2008 Annual Report). The company was founded in 1864 in Amsterdam and remained relatively small for the next several decades. The brewery first shipped to the U.S. In 1933, making them one of the first imported beers of the modern era. They opened their first international brewery in 1937, kicking off decades-long growth phase with constant international expansion.

While the company still expands greenfield, the preferred method of international expansion in the past twenty years has been through acquisition. The company's 2008 performance figures showed strong volume and revenue growth as a result of their acquisition of Scottish & Newcastle, a major UK brewer. The company also exhibited strong organic growth as well, with 11% organic net profit growth. The global beer industry has been subject to consecutive waves of consolidation, of which Heineken has been a significant participant. As a consequence, the industry is still in a state of flux. The core markets in Europe and North America are mature, but there is substantial room for growth in emerging markets. For example, of the BRIC markets, only India is not considered to be a major growth market for beer.

External Environment -- Opportunities

China is the world's largest beer market (Tiverton-Brown, 2008)…Heineken's current operations are minimal, with a couple of regional breweries…the market is hypercompetitive but there are a lot of regional breweries Heineken can acquire to build a better presence (Ibid).

Smaller markets…small and medium-sized markets have become the new battleground in the global beer wars as the largest markets have become saturated and competitive positions established. Heineken can continue to build share in these markets.

US growth…the U.S. is Heineken's largest market, but there is still much room for growth, as the brand has awareness levels on par with the mainstream domestics but not the market share to match.

Competition in the beer industry is global in nature, with brewers waging battle on a country-by-country basis. Most breweries with a strong U.S. presence do not have the growth potential that Heineken has, because they have saturated their positions and are now on the decline. In China, Heineken' situation is similar. They have a weak position, with some regional breweries in the south (Aoke, Kingway) and a strong presence in Shanghai (Reeb). These positions pale compared to the strong national presence of SABMiller, Anheuser-Busch and Carlsberg. Instead of focusing on these major markets, Heineken has put considerable emphasis on the lesser markets. Among the countries in which Heineken opened breweries last year were Mongolia, Laos, Tunisia and Burundi, for example (2008 Annual Report). By filling in these markets, Heineken has adopted a saturation strategy for the world market. Yet with operations in just 70 countries, there is substantial growth opportunity within this strategy as well.

Threats

Competition in the global beer market is intense, driving down margins as breweries fight for market share. For example, as competition heats up in Eastern Europe, established players like Heineken cannot maintain historic profit levels.

The global economy is a threat, particularly in markets where Heineken competes as a premium product, such as the U.S., were the recession cut sales 3% last year (2008 Annual Report).

Regulations and taxes are a constant threat. The brewing industry is a high-volume, low-margin business with strong price elasticity for poorly differentiated but premium-positioned products like Heineken. When taxes or regulations increase, sales drop, as happened in the UK last year (2008 Annual Report).

Access to inputs is a risk to profitability. The rising cost of glass, grain, hops and aluminum is hurting the profitability of brewers worldwide, in part spurring the latest round of consolidation (Singer & Kesmodel, 2007).

There are many macro-level threats that characterize the brewing industry today. Each of these contributes to the overarching strategy that Heineken is undertaking, with respect to establishing market position around the world. Such geographic diversification reduces legal and economic risk, but increases the problems with respect to inputs and competition.

Internal Environment -- Strengths

Heineken has a strong brand that is recognized the world over. They are able to extract premium pricing for what is otherwise an undifferentiated product, evidence of the brand's strength

The company is consistently profitable and has maintained a steady growth trajectory, including organic profit growth

Strong management has successfully negotiated Heineken through rapid consolidation and industry maturation, taking the company from a regional Dutch brewery to a global powerhouse in a few decades.

Heineken is a strong company, as evidenced by their track record of success. They have built a simple core of strengths by focusing on the beer business, refusing to be sidetracked by any distractions. This has allowed them to develop a relatively simple growth strategy and maintain it. The core of Heineken's strength is its ability to execute simple strategies very well.

Weaknesses

Overleveraged…Heineken's expansions have left it with a balance sheet more suitable for a growth firm with high R&D costs, as opposed to a firm that derives the bulk of its profits from cash cow positioning in mature markets. This will hinder the company's ability to grow further through acquisition (Thomson Financial, 2008)

Minimal presence in the world's major growth markets. Heineken is strong in minor markets and the U.S., but has weakness in the world's best markets, with 3rd tier brands in China and Russia.

Heineken is the #3 global brewer. They are substantially smaller than the two larger companies, however, which puts them in a vulnerable position in terms of being a takeover target (Ibid).

Heineken's strength has been diminished by its acquisition and greenfield activities. The company is therefore relatively unable to grow further. This makes it more vulnerable and also more susceptible to adverse changes in the industry environment. Given its areas of geographic weakness, Heineken is probably not set up where it wants to be in terms of global strategic positioning. However, it may not have the financial capability to get there either.

Conclusion & Options

Heineken is the world's #3 brewer, and has built its success on the execution of simple plans. It has developed its core brands to extract premium pricing; it has saturated world markets; and it has been an aggressive player in terms of global consolidation. This has resulted in a consistently profitable company with both strong growth history and strong growth prospects.