Heineken Beer Company Beer Market

Heineken Beer Company

Beer market and Heineken's development from 2004 to 2009

The development of Heineken during the period from 2004 to 2009 was marked by the company's strategy to continue the development of a global brand and the increase of its presence internationally. With that in mind, 2009 marked the strengthening of Heineken's partnership with United Breweries Limited and the contribution that the company can bring to increasing governance on the Indian market. With that in mind, the company continued throughout the analyzed period to strengthen some of its partnerships in Asia and other markets, for example, through the transfer of Heineken's controlling interest in different local breweries to the Asia Pacific Breweries, a joint venture with Fraser & Neave.

One of the company's objectives in this period of time included the integration of newly acquired businesses in the overall structure of the conglomerate and the consolidation of processes aimed to make them more competitive. With that in mind, Heineken's management also focused on cost reduction, aimed to balance the development of new markets and increasing revenues with economies of scale and better technologies.

Part of the analyzed period was marked by the global economic recession, although the effects on the beer market and beer consumption were less obvious and negative as in other industries and, in general, only showed a slowing down rather than an actual recession. The global beer market grew by 1.6% in 2008 and reached a total value of $453.9 billion

. With this general trend, some of the strategic actions that Heineken undertook were aimed at minimizing the potential effect of a decrease in consumption.

2. Comments on the 2009 Annual Report

First of all, Heineken's revenues increased from 14,319 million euros in 2008 to 14,701 million euros in 2009, a 2.66% increase that surpassed the general increase of the beer market in 2008. The increase in revenue could have also been a result of the company diversification and growth policies and the targeting of new, emerging markets where beer consumption has gradually increased in the last years.

Concomitant with the increase in revenues, the company better managed expenses and this translated into a slight increase of total company expenses from 13,169 to 13,112. The most important contribution to this was the decrease in personnel expenses. Most likely, this can be associated to new production units in countries where the labor costs are significantly lower than in some of the Western countries.

The two combined elements (increase in revenues and decrease in expenses) were translated in a significant growth, both in terms of the operating income (37.9% from 2008 to 2009) and in the company's profit (229%). Other contributions to the significant increase in the yearly profit were given by the decrease in net finance expenses, as well as by the decrease in the share of profit of associates and joint ventures and impairments thereof.

The balance sheet offers some interesting information both in terms of the company's financial situation, its liquidity and its asset management and profitability. The first noticeable element is the very small value of the company's current assets, 34 million euros in 2008 and 24 million euros in 2009. To this, one needs to parallel the significant increase in the company's current liabilities, from 109 million euros in 2008 to 685 million euros in 2009. The calculation of the current ratio shows a 0.31 value in 2008 (relatively low, given the fact that 1 is usually the acceptable value for this financial ratio), but only 0.035 in 2009, a value that reflects the 500 million in short-term loans and borrowings contracted in 2009.

There are however several explanations that will tend to limit the negative interpretation that one can give to the low values of the current ratios that are reflected here. On one hand, a beer company and the market in general have their own particularities, one of these being the fact that it lacks inventories: beer is produced for immediate sale. It is more difficult to explain the 500 million short-term loan contracted in 2009 and the company's capacity to cover it from its short-term current assets, but one could assume that Heineken could sell some of its investment in participating interests and use the respective amount for that purpose.

At the same time, loans and borrowings have decreased in value from 2008 to 2009 with 14%. The decrease is explained in the note 40 to the Heineken N.V. balance sheet: the most important contribution to this is given by the repayment of some of the company's unsecured bank loans: the value of the unsecured bank loans in 2009 was 47.4% lower than in 2008. The approach that Heineken has taken towards its medium and long-term loans shows a prudent strategy aimed at reducing its debt-financed activity in favor of an increase in the shareholders' equity. The latter is accounted for mostly by the company's net profit in 2009, a net increase of 387% as compared to 2008.

Some of the profitability ratios are useful in evaluating the company's performance at the 2009 moment. The net profit margin will be calculated by dividing the net profit value by the total revenue value for 2009. The resulting net profit margin is equal to 7.77% in 2009, compared to a net profit margin of 2.42% in 2008. The difference, translated in a higher value for the shareholders, is given by the lower operating expenses, as shown previously, but also by several financial expenses that are explained in notes 12 and 16 to the consolidated financial statements. In 2009, the company has obtained a net financial income of 214 million euros, as well as a 12 million euros gain from disposal of available-for-sale investments. At the same time, the share of profit of associates and joint ventures and impairments thereof is 127 million in 2009, compared to a negative 102 million euros in 2008.

The return on equity is a financial ratio that reports the net income to the total shareholders' equity. In 2009, this figure amounted to 30.46%, while in 2008, this was 26.43%. Several of the arguments previously presented also account for this increase in the return on equity.

The analysis of the relevant elements of the income statement, the balance sheet and the cash flow statement shows several conclusions that reflect the state of Heineken in 2009. First of all, most of the financial indicators and financial ratios that have been used show an increase of the company's profitability, as well as increases in net income. Overall, the company seems to have decreased its expenses and reduced its costs in order to become more efficient and produce increase value for its shareholders (fact which is also reflected in the increase of shareholders' equity). At the same time, there is a pronounced tren-d of decreasing the company's medium and long-term debt, while at the same time, however, increasing the short-term liabilities.