Business Essays – Heineken Beer Market

Heineken Beer Market

Executive Summary

Chapter 1 analyze threats Heineken is facing and opportunities the company can get from the beer market by using two model PESTLE and Porter Five Forces. PESTLE describe what difficulties come from external environmental factors that the company is facing and Porter five force analyze the threats as well as opportunities of Heineken in suppliers, buyers, competitors, substitutes and new entrant. OT factors in SWOT analysis also use to define in chapter 1 for threats and opportunities of the company.

Chapter 2 describes strengths and weaknesses in the company operation through the analysis of internal environment such as company resources, organizational structure and culture. The resources with include tangible, intangible, management capability and marketing which used to identify what the advantages Heineken are managing for the performance of their operation. SW in SWOT also use at the same time to analyze strongly what strengths and weaknesses Heineken is taking.

Chapter 3 assesses how Heineken perform in term of effectiveness, efficiency and return to shareholders based on efficiency ratios and performance investment ratios. This assessment identifies the market share and market growth of company in the market.

Chapter 4 finding the options those are available to the company and recommendation of the most appropriate ones for future strategic direction.

Chapter 5 finding recommendations for structures, systems and policies which use to implement these strategies successfully.

Chapter 6 the outline of my assessment of the usefulness of strategic management models for Heineken analysis. How PEST, Porter Five Force, SWOT, resource-based and financial analysis use to be described for my analysis successfully.

Introduction

Today beer is widely available and enjoyed in most countries and cultures around the world. Heineken is one of the largest companies in a global network of distributors and breweries. In addition, Heineken owns and manages one of the world’s leading portfolios of beer brands in terms of sales volume and profitability. Moreover, the company has been able to remain one of the world’s leading consumer and corporate brands for more than 130 years. It became Europe’s favorite beer brand – successfully exported to every corner of the world.

Chapter 1 Analysis of the external general

• PESTLE model

• Political

Beer is a kind of drink that the government excises significantly because it contains alcohol which is addicted people. Therefore, this will affect Heineken Company in sale volume in the market. With internationalisation and globalisation, more and more brewers are hunting for new markets, governments on the other hand with and intention to gain maximum profit as well as get empathy on ethical grounds are imposing heavy taxes on liquor and beer imports.

As a result, this fact will bring threat for Heineken. For example, recently drinking alcohol is prohibited on public transport in London. This hence will impact on the beer market because people want to enjoy their beer not only at home but also at public where they can have fun time with their friends.

• Economic

Heineken has many operations in mature – mainly Western European and it is reported in Euros. Therefore, the currency fluctuations could create threat to the overall company results, especially relating to the US dollar. However, Heineken has a clear policy on hedging transactional exchange risks; this would postpone the impact on financial results.

Nowadays, unemployment has risen due to recession in the market and this will result in more people will choose some cheaper alternative. As a result, Heineken with premium price will be impacted for that. This also brings threats for company in distribution aspect.

• Social culture

Nowadays, beer is not only for men enjoy it but women also drink beer to enjoy its taste. Furthermore, life style of the new generation has become very fast and different, which result in lack of time in today life. Thus the consumption at bars is declining. This means that the beer market will be affected by this as well as Heineken Company, this will lead to go down in sale volume.

Furthermore, demographic changes would influence the company a lot. For examples, in China where the population is going up rapidly and this combined with consumer having increasing amounts of leisure time. Therefore, these would lead to consumption of beer in China grew by 33.56% between 2000 and 2006. China now has overtaken the United State to become the largest national beer market in the world. As a result Heineken Company will have significant sale volume in this market.

• Technology

Now it is hard to find a part of the company’s business that doesn’t use technology. Therefore, technology is developed will impact the company as well as beer industry. Information technology security upgraded has created opportunities for Heineken’s worldwide business operations, and connectivity in the company and with outside partners is increasing.

For example, the recent advancement in the technology has opened huge markets for organizations to access world population without any barriers. This can be taken as a chance to reach out to almost every location on the globe. Hence Heineken will open their market in many locations in the world.

• Porter’s five forces model

• The bargaining power of suppliers

The suppliers of raw materials to Heineken Company are mainly farmers. Therefore, the threat for power of supplier is high. The bottle supplier for Heineken is provided by Heye Glas Nederland which is fully supplied the green bottle for the worldwide distribution of Heineken beer.

In the past, Heineken kept only 33% its stake in Heye Glas in order to secure the supply of high quality export bottles at a lower cost to meet the needs for demand but now Heineken has kept 100% stake in 2002. Beer is produced by water, barley, hops and yeast. These ingredients are supplied by farmers. Heineken also mentioned that competition for agricultural products from the biofuels industry that is affecting their costs.

• The bargaining power of buyers

The buyers in this industry have many choices as there are many companies serving beer. This will increase the choice of the customer and hence the threat for power of buyers is high. For example, for serving customer at the pub, there are a lot of beer brands for them to fit their taste such as Guiness, Carlsberg, Tiger. Therefore, buyers now have a choice to choose the one they like. As a result, choosing of customer for what kind beer they want to drink will bring threats for Heineken.

• The threat of potential new entrants

Nowadays, an explosion of smaller brewers has entered the market during the past decade that making the industry much more competitive. Heineken is one of the largest brewers in the world and they have to share market with other brewer. The barrier in the beer market is low. Therefore, the threat of potential new entrants for Heineken is high. This will make Heineken considering to create innovation or uniqueness into their product that can sustain competitive advantages in the beer market.

• The threat of substitutes

Beer is a kind of beverage which contains alcohol. However, people can switch to drink wine which also is alcohol drink. Customer’s taste is not similar so that they have right to choose what they want to enjoy, so this will affect the beer market as well as Heineken Company. As a result, the threat of substitute for beer market is high.

• The extent of competitive rivalry

Heineken has achieved the economy of scale in the market especially in Europe. It holds about 30% of market share in European beer market. Since the beer market is growing, so the competitors will try to attain their growth targets. The large brewer like Heineken tends to enforce their own strategies to the beer industry and due the economies of scale they will produce higher quality and unique products which can make their own place in the market, hence keep themselves growing to achieve their target.

Chapter 2 Internal analysis of the company

• Analysis the resources

Tangible: Since Heineken know that their plant and equipment is a key for company production, they invest so much in the infrastructure to make sure that their operation is working efficiently. For example, Heineken have four breweries in Russia, all those use KHS Till plant technology. This equipment at Heineken’s packaging can processes 50 liter kegs in addition to 30 liter at an output of up to 140 kegs an hour. As a result, the two-lane machine can operate with one racking, six washing and sterilizing stations.

Intangible: brand name is most valuable asset of the Heineken Company, they has built this name Heineken with premium brand. The company recognizes that brand is very important key for them to develop a strong presence globally in the beer market so that Heineken have a lot of marketing activities for its brand name. Furthermore, branding is also a highly defensible competitive advantage for Heineken; this would bring strength to company expansion. Hence Heineken Company can stretch their production internationally and add more money for company.

Management capability: Heineken implemented a number of new initiatives in the area of leadership development in 2004. One is a new leadership competency model that defines behavior expectations from all senior managers at Heineken. The model takes Heineken company ambitions and values as a starting point and translates these into the leadership behavior required from senior managers.

With marketing differentiation using different message within normal media advertising can also have differentiating effect. This differentiation will bring strengths for Heineken. When most advertisers are pursuing essentially the beer market with the same message like showing gregarious groups of males in public houses having an enjoyable night out. In the other hand, Heineken managed to differentiate its beer by using a series of advertisements employing humour and the caption Heineken refreshed the parts other beers can not reach.

• Organizational structure

In 2005 Heineken announced that it was created a new top management structure, this would drive and support growth as a global organization. In order to connect functions, operation and finance in a more effective way, the company create a new more streamlines Executive Board. Hence change would lead to create strengths for operating regions and global functions. Furthermore, Heineken has grown substantially over the past four years. The new structure is better suited to the present organization and ensures faster decision-making. In the beer market where the consolidation process is accelerating and rapid introduction of innovations is essential, this is crucial to the achievement of Heineken’s long term ambitions.

• Culture

Heineken is proud of they are one of the world’s great beer companies. Hence their culture will reflect the company view and values. These values create so many strengths for company to develop their environment within the company. Heineken based on the value that they respect their employees, business partners, customers, shareholders and all others who are connected to the company. Furthermore, Heineken make life more enjoyable by bring enjoyment to life, they also encourage this core value within the working places and atmosphere within the company. In addition, company has a fundamental belief in the concept and delivery of quality, it is also reflected in their other activities such as their social and employment policies. This will create benefit and value both for Heineken and their reputation. As a result, these values define Heineken corporate culture and working methods which help company to do the business successfully.

Chapter 3 Evaluation of the company’s financial performance

Return on investment of Heineken changed from 2005 to 2007. In 2006 return on investment have a significant improvement compared to 2005. The increasing of ROI show the efficiency which Heineken got profit from its technology investment.

The reason for increasing ROI is that the company deployed Windows Mobile 5.0 in 2006 and has experienced significant business benefits. Company has improves account development by offering its sales representatives instant access to pricing, promotions, availability and accounts receivable data. Window mobile led to an average sales increase after deployment.

The return on equity of Heineken rose 5.9% in 2006 then declined 11.5% in 2007.The reason for going up return on equity is net profit increasing. In 2005 Heineken’s net profit is €761 millions and it was increasing to €1211 millions in 2006.The rising of return on equity shows that the company have used money from shareholders effectively in manufacturing.

However, declining return on equity indicated that the Heineken beer was getting more expensive to produce because the prices of raw materials and packaging have raised significantly, transportation, energy and pressure on labor costs were also expected in the beer market.

In 2006 net profit margin of Heineken increased so much compared with 2005 and 2007. 11.02 % show that the company got more profit from their sale. In that year, the distribution of Heineken went up with 111.9 hectoliters in consolidated beer volumes. Furthermore, the company achieved the best annual growth rate for Heineken premium brand for many years with growth of 11.8 %. With these reason Heineken achieved their performance effectively.

From the table above we can see dividend pay out ratio decrease 1.5% in 2006 and then increase so much 18.2 % in 2007.The reason of increasing is that Heineken has been changing its dividend pay-out policy at the end of 2006. This means that it would up the amount paid to shareholders from 20-25% of net profit before exceptional items and amortization to between 30% and 35%. These proposals support Heineken’s intention to preserve its independence, to maintain a healthy financial structure in order to grow the business both organically and through acquisition.

Earning per share of Heineken increased from 2005 to 2007. These figures above show the company has maintenance revenue. Distributions of company increase every year so that Heineken could earn from 1 share which investors have invested. Moreover, increasing company market share by earning per share will indicate that the profit getting from every dollar invested can satisfy both Heinekens’ stakeholders and shareholder.

Chapter 4 Recommendations on strategic options

4.1.

To face with the alcohol pressure in the market, Heineken have the strategy to produce and sell beer in the ways that have a positive impact on society at large. With this strategy, Heineken promotes awareness of the advantages and disadvantages of alcohol, this also encourage informed consumers to be accountable for their own actions. For example, in 2006 the launching of the “Enjoy Heineken Responsibly” program was finalized. Therefore nowadays company is becoming more and more engaged to promote responsible consumption in partnership with consumers. By using this strategy as purpose the company does not want beer consumers to condone in any way the abuse of alcohol, particularly Heineken Brand. As a result this will lead to the Company get positive aspect for their production in the society. I strongly recommend Heineken should use this strategy.

4.2.

For solving the problem with currency risks as the global market is unstable in exchange money, Heineken have a strategy on hedging transactional exchange risks which postpones the impact on company finance result. After deduction of dollar-denominated costs, a net cash inflow in US dollars remains.

This cash flow is hedged in advance mostly by means of forward contracts. This reduces the volatility of export results and the € cash flows due to short-term fluctuations in the value of the US dollar against the Euro. Transactions are entered into with a limited number of counterparties. I don’t recommend that the company use this strategy because the global market is unpredictable.

4.3.

To intensify the international marketing Heineken have sponsored for a lot of entertainments activities in the world. This strategy would bring the biggest strengths for Heineken brand name. For example, company is a major sponsor of tennis champion such as Wimbledon, the US Open, Australia Open and the Shanghai Open. Moreover, the music plan adopted also remains a key sponsorship area for Heineken.

For example, in Singapore has been successful that it is now used in other markets such as Malaysia and Thailand. Following with these marketing strategies on advertisement, the good thing company would show that Heineken always attend to social activities that mean they are not only bring enjoyable but also bring responsible to people around the world. I recommend Heineken should continue to pursue this strategy.

4.4.

For adapting with development of technology, Heineken has a strict information technology (IT) security strategy to ensure confidentiality, integrity and availability of information and data. Furthermore, supporting and monitoring activities towards operating IT are being strengthened for the company. Moreover, IT contingency measures with regard to the partly outsourced IT shared service centre. The benefit of this strategy on IT would help Heineken to connect with so many operations around the world. I recommend company use this strategy.

4.5.

By using brand strategy Heineken has built a strong portfolio that combines the power of local and international brands. Furthermore, the consistent growth of brand requires solid creative brand management which Heineken coordinate centrally. Company has developed and adopted brand strategy to get strengthening in the market share where there are lots of other brewers there. I recommend Heineken use this strategy.

4.6.

To sustain with strong position in the beer market, Heineken have adapted competitive strategy in its management. By offering competitively priced and quality products, Heineken want to give consumers the premium product with reasonable price compare with other brewers. The management of company recognizes that to maintain Heineken’s sales, they need to focus on what consumer needs. In addition to look at the strengths and weaknesses of the competitor in the key business segments, competitive strategy would bring advantages for Heineken to compete with it’s competitor for attracting customers.

Chapter 5 Recommendations on the most feasible strategic options

5.1.

Responsibility is a heart of alcohol policy. Based on the alcohol policy adopted Heineken want to stress that their operations need to sustain dialogue with government and health organizations. The objectives of policy are to prevent misuse and abuse of alcohol. Furthermore, they want to ensure that responsible consumption of beer is socially acceptable. In addition to help Heineken be a truly sustainable business. With this alcohol policy would implement for succeed of strategy.

5.2.

As consumer needs and tastes vary, Heineken must decide how much to adapt marketing strategy to local needs using a variance of standardized marketing mix & adapted marketing mix, owing to the strong brand preferences & loyalties that exist among the beer drinkers. Also, Heineken need to prioritize between global integration versus national responsiveness evident from decreasing sales in Holland, Rest of Europe, and Africa. Besides that the beer market is also attractive in terms of size and future growth, this approach would help the company differentiate Heineken beer with premium price compared with other beer brewer.

5.3.

Data synchronization provider system can manage data behind the firewall while benefiting from one point of access to the Global Data Synchronization Network. This system would help to minimal disruption to Heineken’s day-to-day operations. This integration is the first in a series of initiatives that Heineken International has been planning to accelerate its data synchronization activities through one central connection point. As a result, this system would implement highly for technology strategy to the company.

5.4.

Using the branding policy the company has built brand recognition for long-term to differentiate the brand Heineken and be sure to add value to the product in order to get the brand loyalty. The brand policy also stresses for maintenance of beer quality or creates benefits for society and culture, and also provides an emotion to its consumers. This policy would add more value for Heineken Company in successful way.

5.5.

Heineken has in place a strong competition compliance policy across the entire business and has a comprehensive code of business conduct for all employees. Furthermore, Heineken believes in the principle of fair competition. It will keep in place policies and programmes aimed at giving guidance to employees to ensure that they understand competition laws and act in compliance with them.

Chapter 6 The assessment of the usefulness of strategic management models

6.1.

To me, I find that the PEST analysis is a useful business measurement tool. It’s looking at external factors to the organization. Following the factors of the analysis, I can see the big picture of Heineken’s environment in which they are operating and the opportunities and threats that lie within it. By analyzing factors of PEST model I can understand the Heineken external environment and how the environment affects business performance of the company.

6.2.

For me, I find that The Porter’s five forces tool is a simple but powerful tool for understanding where power lies in a business situation. This model is useful because it helps me understand both the threats of Heineken current competitive position and the strength of a position company are looking to move into. Furthermore, understanding the nature of Heineken competitive environment by using Porter’s five forces model, I can analyze what are crucially important for company to build long-term business strategy and sustain competitive advantages in the market.

6.3.

SWOT analysis is a powerful model for me to understand Heineken strengths, weaknesses, opportunities and threats that company face. This model helps me to assess what Heineken can and can not do as well as its potential opportunities and threats. Therefore, I can know what may assist the firm in accomplishing Heineken’s objectives and obstacles. Moreover, the model is also useful in the way that it gives me the overall performance of Heineken. Hence I can analyze where the place the company get their position.

6.4.

Resource-based theory is useful to me in the analysis of internal factors of Heineken following these reasons. Firstly, I can find the factors that deliver sustainable competitive for the company like branding. Secondly, the physical resources can give me a look about the efficient operation of Heineken in new technology they adopted. Thirdly, by understanding resource-based I can recognize that the way company has the dominant position in the beer market compare with other breweries.

6.5.

Financial analysis method is useful for me to understand the measurement of performance of Heineken. Based on the ratio formula I can see how effectiveness and how the financial risk company was doing. Moreover, looking at the numbers which company has represented on the financial statement, I can know the market share that Heineken has positioned in the market place and the market growth company has developed. As a result of calculating for financial analysis for every year I can find how the company has operated in the effectiveness way.

Conclusion

I think that with all analysis include external and internal environments, company performance and all the strategy and policies Heineken adopted will help company to step more successful in the future. Although Heineken now have some troubles in production or distributions but the top management are considering creating flexible way to overcome them and then Heineken Company will keep their position is that one of the most largest brewers in the world.

Appendix

References

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• http://www.heinekeninternational.com/homepage.aspx

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• http://www.heinekeninternational.com/content/live/files/downloads/InvestorRelations/Operational%20review_tcm4-12788.pdf

• http://www.heinekeninternational.com/values.aspx

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