Heineken Beer CASE STUDY

Heineken N.V.:Global branding and Advertising

Presented By:Howard Cheung

Gursimmer SomulAngela Chang Amar Pamma

Key Factors for a Successful Business Model for Breweries

• Access to distribution channels– Try to minimize transportation costs

• Effective Marketing Campaigns– To distinguish brand– Brand loyalty

• Internationalization– Find growth opportunities elsewhere

History• The Heineken family entered the beer

business in 1864, when Gerard Adriaan Heineken bought a brewery in the heart of Amsterdam

• 1873: Heineken Breweries was incorporated (Gerard Heineken is appointed President)

• 1980s: Start global expansion

HistoryInternational brewing groups (over 170

countries with 61,000 employees.)

Over the past 140 years, three generations of the Heineken family have built and expanded the brand and the company in Europe and around the world

Profile• Core Businesses:

Manufacturing and Sales of beerDistribution of soft drinks and other nonalcoholic

beverages.• World’s leading brewing group• Owns over 115 breweries in over 65 countries• Owns and manages a strong portfolio of more than

120 top-selling brands

Profile• Ranks 2nd in the world beer market in

profitability• Principal area of activities:

– Europe – accounts for over ½ of Heineken’s sales

Company Structure

Company Structure• L’Arche Holding S.A., a Swiss company owned by the

Heineken family in turn holds a 50.005% interest in Heineken Holding N.V.

• Heineken Holding N.V. holds a 50.005% interest in Heineken N.V. The shares of both companies are listed on Euronext Amsterdam.

• Heineken Holding N.V. objective has been to manage or supervise the Heineken group and to provide services for Heineken N.V.

Company Structure• Heineken Holding N.V. does not engage in operational

activities itself. These have been assigned within the Heineken group and its subsidiaries.

• Heineken Holding N.V.'s income consists of dividends received on its interest in Heineken N.V.

• Every Heineken N.V. share held by Heineken Holding N.V. is matched by one share issued by Heineken Holding. The net asset value of one Heineken Holding N.V. share is therefore identical to the net asset value of one Heineken N.V. share . The dividend payable on the two shares is also identical. However, Heineken Holding N.V. shares have traded at a lower price due to technical factors that are market-specific.

Executive BoardJean-François van Boxmeer Chairman of the Executive Board/CEO (since 2005)

René Hooft Graafland Member of the Executive Board/CFO (since 2005)

Marc J. Bolland Member of the Executive Board/COO

Executive Compensation • Remuneration package of the Executive Board

includes a base salary, an annual bonus and a long-term incentive.

• Fixed salary account for 45% of the total remuneration package.

• Variable remuneration is divided equally between short-term and long-term.

Executive Compensation• Base salary of €418,000 for the Executive Board

Members and to €634,000 for the Chairman• Short-term incentive:

– Emphasis of short-term incentives based on annual operational performance.

– Organic net profit growth is the measure to assess operational performance

– Organic net profit growth is identified as growth in net profit excluding exchange rate effects, changes in consolidation, amortization of goodwill, exceptional items and changes in accounting policies

• Long Term– Performance condition is total shareholder return,

measured over a three year period.– The total shareholder return is measured relative to a

performance peer group.– Performance Peer Group

• Carlsberg• L’Oreal• LVMH/PPR• Nestlé• Unilever

Executive Compensation

Goals and StrategyThe strategy to achieve this has four

elements: Strive to reach a leading position in attractive

markets. Focus on capturing an ever-growing share of the

premium and specialty beer market segments. Work to improve efficiency and cut costs in

operations. Grow through selective acquisitions, so long as

they create shareholder value.

Acquisitions Western Europe

Company Country YearMln hl (100% sales

equivalent)Price (millions)

% stake acquired

Würzburger Brauerei Germany 2005 0.360 34 90.7

Fürstlig Fürstenbergische Brauerei Germany 2004 0.700 not disclosed 100

Hoepfner Brauerei Germany 2004 0.200 not disclosed 100

Central & Eastern Europe

Ivan Taranov Breweries Russia 2005 2.900 not disclosed 100

Baikal Brewery Russia 2005 0.557 not disclosed 100

Stepan Razin Brewery Russia 2005 1.400 not disclosed 100

Patra Brewery Russia 2005 0,715 + 0,040 softdrinks not disclosed 100

Africa

Consolidated Breweries Nigeria 2004 0.965 not disclosed 50.1

Al Ahram Beverages Company Egypt 2002 0,430 + 0,620 280 99.9

Almaza Lebanon 2002 not available not disclosed 69

Tempo Beer Industries Israel 2004 0,500 + 1,800 softdrinks EUR 11 million 40

Latin America

Floridad Ice abd Farm Company (FIFCO)

Costa Rica and Nicaragua 2002

not available not disclosed25

Cervecerias Barú-Panama Panama 2002 0.350 not disclosed 74.8

Sales Worldwide 2004-2005

+12.3%

+3.5%

+6.2%

stable

+6.2% +8.2%

0

1

2

3

4

5

6

7

8

West Europe Central Europe USA Rest of Americas Africa Asia Pacific

2004

2005

0.0% 5.0% 10.0% 15.0% 20.0%

Beck's

Brahma

Tuborg

Foster's

Stella Artois

Amstel

Budweiser

Corona

Carlsberg

Heineken

Sales Volumes Comparison

19

Financial Statement AnalysisFinancial Statement Analysis

Financial StatementsConsolidated Income Statement December 31, 2005

Key figures 2005 (millions of €)

* Includes exceptional items before tax in 2005: -€102m and amortisation of brands (in 2005: €7m, in 2004: €8m).

** Includes exceptional items after tax in 2005: -€72m ( in 2004: €153m) and amortisation of brands (in 2005: €7m, in 2004: €8m).

EBIT*

Net Profit beia

EBIT beia

Net Profit**

1,283

319

1,392

1,369

334

1,377

-6.3%

4.6%

1.1%

840 803

18.5%761 642

Increase2005 2004 Organic growth

2.9%

7.3%

Revenues 10,796 10,062 7.3% 2.2%

Group beer volume 118.6 112.6 5.3% 1.8%

Financial Analysis• Heineken achieved organic growth in all key

business metrics in 2005: 2.2% organic growth in Revenues, driven by a

more positive price and sales mix, 2.9% organic growth in EBIT (beia) 7.3% organic growth in Net Profit (beia).

• Net Profit increased by 37 million to 840 million, despite a negative currency effect of 27 million. Net Profit of Heineken Holding N.V. increased to 381 million.

Jun-05 Jun-04 Dec-04 Dec-03 Dec-02 Dec-01 Dec-00 Dec-99AssetsIntangible fixed assets 1,935 1,810 1,720 1,151 39 13Tangible fixed assets 4,777 4,737 5,127 4,995 4,094 3,592 3,276 2,995Financial fixed assets 894 981 779 1,122 835 531 615 422Total fixed assets 7,606 7,528 7,626 7,268 4,968 4,136 3,891 3,417

Stocks 960 934 779 834 765 692 550 490Receivables 2,260 2,159 1,309 1,379 1,270 1,192 1,024 903Securities 19 26 76 76 98 29 23 42Cash 695 673 628 1,340 680 1,146 801 1,165Total Current Assets 3,934 3,792 2,792 3,629 2,813 3,059 2,398 2,600

Total Assets 11,540 11,320 10,418 10,897 7,781 7,195 6,289 6,017

EquityGroup EquityShareholder's equity 3,589 3,095 3,379 3,167 2,543 2,758 2,396 2,618Minotiry interest in other group companies 492 440 483 732 393 381 124 248Total Equity 4,081 3,535 3,862 3,899 2,936 3,139 2,520 2,866

Provisions 332 325 568 1,367 981 1,024 976 770Employee benefits 689 714 680Investment facilities equalization account 26 31

LiabilitiesLong-term borrowings 2,547 2,705 2,642 2,721 1,215 797 875 490Current liabilities 3,891 4,041 2,666 2,910 2,649 2,235 1,892 1,860Total Equity and Liabilities 11,540 11,320 10,418 10,897 7,781 7,195 6,289 6,017

Consolidated Balance Sheet (In millions of euros)

Financial Statements

Jun-05 Jun-04 Dec-04 Dec-03 Dec-02 Dec-01 Dec-00 Dec-99Cash flow from operating activitiesOperating profit 548 579 1,248 1,222 1,282 1,125 921 799Results of non-consolidated participating interest 40 48 33 30 48 45 59 51Amortization/ depreciation and value adjustments 355 345 773 644 529 476 468 428Movements in provisions 64 31 -25 95 -8 -32 -26 -27Movements in employee benefits 8 -24 -27Movements in working capital -303 -187 93 92 -223 -42 -29 -46Cash flow from operations 712 792 2,095 2,083 1,628 1,572 1,393 1,205Interest paid and received -57 -61 -192 -132 -103 -74 -67 -42Taxation paid on profits -94 -160 -383 -314 -341 -333 -291 -227Cash flow from operating activities 561 571 1,520 1,637 1,184 1,165 1,035 936Dividens paid / received 5 3 -243 -241 -187 -168 -160 -113Cash flow from operating activities less dividend paid 566 574 1,277 1,396 997 997 875 823

Cash flow from investing activitiesIntangible fixed assets -7 -10 -20 -26 -35 -17Tangible fixed assets -402 -377 -637 -611 -696 -578 -418 -441Consolidated participating interests 54 -890 -1,051 -1,339 -799 -148 -939 -55Non-consolidated participating interests 2 -5 -423 -74 -107 -33Result on participating interests disposed of 52 45 17 71 52Other financial fixed assets -39 -46 18 -170 -20 -18 -39 2

-342 -1,278 -1,671 -2,080 -1,973 -783 -1,503 -527

Cash flow from financing activitiesLong-term borrowings 544 82 201 1,501 484 86 480 83Repayment of long-term borrowings -653 -140 -324 -271 -56 -182 -187 -97Share issue by group companies -2 -2 3 -1 57 41 0Other financing activities -153 -140 1 1

-264 -198 -125 1,233 427 -39 335 -13Net Cash Flow -40 -902 -519 549 -549 175 -293 283

Other cash movementsChanges in the consolidation -32 -32 -88 99 -74 -74Exchange differences 1 15 -36 -14 -6 11Movement in cash -40 -902 -550 532 -673 260 -373 220

The net cash position is made up ofCash 146 702 628 1,340 680 1,146 801 1,165Securities 76 76 98 29 23 42Bank overdrafts -517 -679 -573 -297 -206 -216Position at the end of the period 106 -200 187 737 205 878 618 991

Consolidated Cash Flow Statement (In millions of euros)

Consolidated Cash Flow Statement

Consolidated Cash Flow Statement (cont’d)

• Cash flow from operations was once again strong and amounted to 2.213 billion.o cash flow increased as a result of the reduction of

networking capital by 114 million.• Cash conversion continued at a high level,

reaching 120%. • Real estate assets acquired with the BBAG

business divested, which contributed 270 million to net cash flow.

Financial Analysis

Financial Analysis

• The leverage ratio displayed by the company is the result of its continuous process of acquisitions in the industry. This process is also reflected in the increment of its long-term debt throughout time

• The profitability of the company has been decreasing over time due to the tight competition in the American market and the downside in many European economies during the last years

Key Ratios Jun-05 Dec-04 Dec-03 Dec-02 Dec-01 Dec-00 Dec-99Working capital 43 126 719 164 824 506 740Debt / Equity 1.83 1.70 1.79 1.65 1.29 1.50 1.10Long-term debt / Equity 0.62 0.68 0.70 0.41 0.25 0.35 0.17ROE 8.45% 13.90% 20.47% 27.08% 24.43% 24.64% 18.00%ROA 2.99% 5.15% 7.32% 10.22% 10.66% 9.87% 8.58%

Financial AnalysisExchange Rate Effects• Heineken hedges fluctuations in the USD/EUR

exchange rate exposure to the US dollar.• Negative impact of currencies on EBIT and Net Profit

of 48 million and 27 million respectively, primarily due to the US dollar.

Financial Analysis: Review by Region

Stock Price InformationAs of March 20, 2006

Traded on U.S. OTC Symbol: HINKYCurrent Price: $19.10

(2:1 stock split Mar 8/06)52-week HIGH: $19.4052-week LOW: $11.00Outstanding Shares: 489.975 millionMarket Cap: 9.211529 billionEPS (ttm): $1.01P/E ratio (ttm): $30.60Dividend Yield: 0.730

Stock Analysis (5 years)

Splits:05-May-98 [25:4], 01-May-01 [5:4], 17-May-04 [5:4], 08-Mar-06 [2:1]

Stock Price InformationHeineken also listed on the Euronext Amsterdam Exchange

3 year stock performance

Stock AnalysisGordon’s Growth Model• This model can be used to valuate a company in a

mature industry. Heineken’s dividend growth is likely to be steady, therefore:

Value of stock = DPS1/(k-g)

and DPS1 = DPS0(1+g)

k = (DPS1/P0)+g

Where: DPS1 = expected dividend paid out in one year

k = required rate of return on investment g = the assumed constant growth rate for

dividend

P0 = current stock price

Stock Analysis• In this case g = 0.05 (the average of the last 5 years dividend

growth on the stock)Dividend: €0.40 = $0.484 $1= €1.21DPS1 = $0.484(1+0.05) k = (DPS1/P0) + g

DPS1 = $0.5082 k = ($0.5082/$19.10) + 0.05

k = 0.076607 Value of stock = DPS1/(k-g)

= (0.5082) / (0.076607 – 0.05) = $19.10

Recommendation• The actual price of the stock is US$19.10 which is in

line with the value obtained• Expected growth in the beer industry minimum or

flat, declining sales in Europe, and the continuous process of consolidation in the industry.

• HOLD

Visit www.hptv.com.vn

Industry Outlook

Bigger brewers acquiring smaller brewers all over the world

“The era of global brands is coming.” – Alan Clark, SABMiller

Market for premium beer will expand 84% by 2012


Value Chain Analysis(Primary Activities)

Inbound logistics

Heineken is distributed

globally, stored in warehouses strategically

placed throughout to

minimize shipping costs to

stores.

Outbound logistics

Heineken has brewers

throughout the world so that it

can ship its finished products to local areas to

minimize shipping costs.

Marketing and sales

Heineken is the 5th most

recognized brand of beer in the

world. By acquiring smaller

brewers in the world they

spread their label even more.

Service

Heineken has recently ventured out in the fields of nonalcoholic malts and fruit

flavored drinks as an avenue into other customer

areas.


Value Chain Analysis(Secondary Activities)

General Administration •Heineken was the leading premium brand of beer for decades. Was the best selling imported beer in the US until Corona took over. So, at the same time Heineken pushed on other brands that would reduce is reliance on it core brand. Introducing Amstel Light, which has become the leading imported light beer in the US.

Human Resource Management: •Heineken created management positions that be responsible for five different operating regions and nine different functional areas. The new stricture encouraged more risk taking and boosted the level of energy within the firm.

Technology Development: •Heineken uses their technology to keep detailed documents of shipping, in their warehouses to make beer more efficiently and for shipping purposes.


Porter’s 5 Forces of competition

Industry competitors

++

Rivalry among existing firms

Suppliers

+ / -

Substitutes

+

Buyers

+

New entry

-


Threats of substitutes Threats of new entry

very little technical composition of beers

Growing appreciation for wine

$250 million needed to build 4 million barrel brewery

Entry is risky since not many alternative uses for breweries

No new entrant in beer industry has cracked the top 3 sellers since WWII.

Porter’s 5 Forces of competition


Bargaining Power of Buyers

Bargaining Power of Suppliers

No loyalty to any particular brand

Demand “beer” is inelastic: E=-0.7

Demand “Budweiser” is elastic: E=-5.0

fewer brewers and Larger plants

170 Horizontal mergers between 1950-1983

Rising cost of key commodities like grain, glass and aluminum

Many Buying supplier of inputs (wheat field)

Porter’s Five Forces of competition(cont’d)


Porter’s Five Forces of competition (cont’d)

Rivalry between established competitors

1947: Top 5 firms -19% of market in the U.S.

2001: Top 5 generate 87% of the market in the U.S.

Highly competitive industry, many brewers leave the industry losing $

Lost of advertising for product differentiation


SWOT Analysis

Strength

Brands in over 13 marketsVery Differentiated

Global brand/pioneer of international strategyHas made many acquisitions with national breweries

Bottle Recognition and different dispensing instrumentsGreen BottleMini keg


SWOT Analysis

Weakness

Conservative/”Play it safe” cultureStruggle to obtain large breweries

Not drank by younger beer drinkersAlthough consumption age has dropped from 40 to 30

Price when compared to U.S. domestic beers$10 per six pack—Heineken$7 per six pack--Domestic


SWOT Analysis

Threats

Increase in Drunk-driving laws Competitors increasing market share

U.S. Industry Mergers and acquisitions of other breweries

Other Breweries are becoming much larger than Heineken’s Brewery

“In danger of becoming a tired, reliable, but unexciting brand”

John A. Quelch


SWOT Analysis

Opportunity

Low calorie beerSociety is pushing for a “healthy” beer

Russia/AsiaPopulation increasing dramaticallyHave greater market share

Hispanic consumer’s are growing rapidly U.S. Industry

Heineken Beer CASE STUDY

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