Interbrew in Europe: A Strategic Analysis Page 2 Brussels, 6th April 2002 This work was undertaken for the course “Strategic Management”, lectured by Professor Guido Krickx. This course is part of the MBA programme of the Solvay Business School in Brussels, Belgium. We would like to thank Mr. Jo Van Biesbroek, Mr. Corneel Maes and Mr. Stéfan Descheemaeker of Interbrew, which were very helpful during the creation of this document. Authors: Thibaut Dedeurwaerder Filip Rombouts Benoit Samyn Bernard Van Steenberge The drawing of the front page comes from an advertising campaign of Interbrew. All rights belong to Interbrew.
Interbrew in Europe: A Strategic Analysis Page 3 1 Table of Contents 1 Table of Contents_________________________________________________ 3 2 Executive Summary_______________________________________________ 5 3 The Beer Products ________________________________________________ 6 4 External Environment _____________________________________________ 7 4.1 The General External Environment: A PEST-analysis __________________ 7 A. Introduction __________________________________________________________________ 7 B. Political Factors ______________________________________________________________ 7 C. Economic Factors ____________________________________________________________ 8 D. Social and Demographic Factors________________________________________________ 9 E. Technological Factors _________________________________________________________ 9 4.2 The Industry Environment Analysis: Five Forces model of Porter______ 10 A. Threat of New Entrants _______________________________________________________ 10 B. Threat of Substitute Products __________________________________________________ 11 C. Bargaining Power of Suppliers_________________________________________________ 12 D. Bargaining Power of Buyers ___________________________________________________ 12 E. Intensity of Rivalry among Competitors _________________________________________ 12 5 Internal Environment_____________________________________________ 13 5.1 Introduction _______________________________________________________ 13 5.2 Brand Portfolio ____________________________________________________ 13 5.3 Economies of scale ________________________________________________ 14 6 Competition _____________________________________________________ 15 6.1 Anheuser-Busch (USA) ____________________________________________ 15 6.2 Heineken (The Netherlands) ________________________________________ 16 6.3 Carlsberg (Denmark) _______________________________________________ 17 6.4 South African Breweries – SAB (South Africa) _______________________ 18 6.5 AmBev (Brazil) ____________________________________________________ 19 7 Key Success Factors in the Brewing Business_____________________ 20 8 The Beer-Industry and Its Globalisation ___________________________ 21 9 Volume Growth __________________________________________________ 24 10 Interbrew________________________________________________________ 26 10.1 Company History __________________________________________________ 26 10.2 General Strategy___________________________________________________ 27 10.3 Brand Portfolio ____________________________________________________ 27 10.4 Corporate Level Strategy ___________________________________________ 28 A. Vertical Integration ___________________________________________________________ 28 10.5 Business-level Strategy ____________________________________________ 30 10.6 Interbrew’s International Strategy ___________________________________ 32
Interbrew in Europe: A Strategic Analysis Page 4 A. Motives for Internationalisation_________________________________________________ 32 B. Different Ways of International Entry____________________________________________ 33 C. International Strategy of Interbrew _____________________________________________ 34 D. The Possible Future__________________________________________________________ 36 10.7 Financial analysis _________________________________________________ 37 11 Bibliography ____________________________________________________ 43 12 Appendices _____________________________________________________ 44 12.1 Appendix 1: Overview of the oligopolies_____________________________ 44 12.2 Appendix 2: Competition in Europe (2001) ___________________________ 44 12.3 Appendix 3: Volume Sales of Beer in Europe (1997 – 2006) ___________ 45 12.4 Appendix 4: Distribution of the Volume over time in Europe___________ 46 12.5 Appendix 5: Double-digit growth rates in Europe (2001 – 2006) ________ 47 12.6 Appendix 6: Global consolidation in consumer goods (1996)__________ 47 12.7 Appendix 7: Overview of Interbrew’s brands portfolio ________________ 48
Interbrew in Europe: A Strategic Analysis Page 5 2 Executive Summary The recent evolution of the beer industry, after centuries of being a local product, is a story of a few companies conquering the world. Some are doing it by acquiring leading local brands; others focus on exporting their premium brand. But all of them, although not at the same speed, are actively looking for new markets. This study focuses on the strategic evolutions of the European beer market, and tries to give, where necessary, a more global insight in order to understand the different forces that play in the market. The first part deals with the external environment by using a PEST analysis and a Five Forces model described by Porter. These models try to capture the most important elements in enabling a better understanding the dynamics of this industry and to identify ways in which to respond to the pressures and forces identified. The second part develops the internal environment of the beer industry and looks particularly at the importance of a brand portfolio and the economies of scale that firms can achieve. This is followed by a thorough analysis and comparison of the largest players in the beer market. The fourth part points out some key success factors that are critical for operating in this highly competitive environment. Consequently the beer industry, its globalisation and the evolution of beer volume growth are aspects that are being investigated. The final part deals with the Belgian brewer Interbrew. Starting 6 years ago as a relatively small regional brewery group, it became the number two of the world, surpassing Heineken. Their aggressive and risk full strategy gave it an unmatched record for growth over the past decennia. Becoming the “World’s Local Brewer” has been more than just a slogan. It became the philosophy of a company driven by the passion for its product.
Interbrew in Europe: A Strategic Analysis Page 6 3 The Beer Products Many times in this study, reference will be made to different types of beer. We therefore clarify here the distinction between the three large classes of beers, namely Standard beers, Premium beers and Speciality beers1. • Standard beers: Local core lager beers. These low-priced beers represent the bulk of sales. They represent between 70% and 97% of the volume brewed in a country: they are produced to fully utilize capacities. • Premium beers: standard beers in their home market which are sold at a higher price than local beers in foreign markets. Premium beers, which have strong appeal, are sold at a high price. A shift in consumption is expected from standard beers to premium beers as overall GDP per capita is expected to grow. • Specialty beers: beers with a very particular taste like gueuze, kriek (cherry), fruit beers, white beers, scotch beers, Christmas beers, abbey beers and trappist beers for instance. These are high-priced and have high margins. 1 Company Report Interbrew, Petercam, October 21 2000, p. 18.
Interbrew in Europe: A Strategic Analysis Page 7 4 External Environment 4.1 The General External Environment: A PEST-analysis A. Introduction Monitoring and evaluating the external environment is an important issue for companies, because changes in the external environment imply changes in strategy. A PEST-analysis (Political, Economic, Social and Technological) provides a systematic technique for analysing the business environment. The key is to identify and concentrate upon those trends likely to have the biggest impact upon the future of the firm. B. Political Factors Opening up the internal market has affected dramatically all industries in Europe with as ultimate goal the creation of a single market with a stable political environment. Now Central and Eastern European countries are waiting to be accepted to the EU. Not only will this enlarge the customer base on which European businesses operate, but these countries have also relative young populations with a desire for Western things. These countries are seen in the brewer’s industry as emerging markets, and them joining the EU will make these future consumers more easily accessible. To give an example, despite the ideas of many people, the country with the highest annual consumption is the Czech Republic (160 l/capita2). Moving towards an efficient market has many political and regulatory implications. So is the European Commission very active in keeping competition in accordance with the law and is 2 The Brewers Magazine, http://www.beerparadise.be
Interbrew in Europe: A Strategic Analysis Page 8 she a strong proponent of the harmonisation of VAT and excise duties rates across European member states3. The pressure on Europe from the WTO and GATT, with strong backing from America and Australia, to reduce agriculture subsidies could result in a change in price in the industry’s raw material. Also the upcoming enlargement will put pressure on those subsidies. C. Economic Factors The successful removal of numerous trade barriers (tariff and non-tariff barriers) in the EU has fuelled a growing trend towards cross-border mergers and acquisitions, stimulating a pan-European economy. This has led to very different patterns of industry concentration across countries, although most of them can be characterised as oligopolies. The Beer Market is a mature market in Western Europe and the US and its total size has been declining over the last 20 years. For the near future the demand for beer is expected to remain stable or decline slightly. A very important difference should be made between emerging markets and mature markets, as the demand for beer in the emerging markets, such as South America, Africa, Asia and Eastern European countries is still rising. The exports to those areas are booming, causing widespread attention from global brewers, which consequently explains the many M&A activities directed to those markets. Globally oriented players seek access to the growing number of consumers in the developing world who now, for the first time, can afford beer as they become more affluent. Affluence 3 In this context a reference can be made to the problems Interbrew faced last year with the UK competition authority as a result of taking over Bass.
Interbrew in Europe: A Strategic Analysis Page 9 goes hand in hand with beer consumption as when plotted against real GDP growth per capita over the past five years a 93 percent correlation was shown4. D. Social and Demographic Factors On the social front, there is a growing concern about health issues caused by alcohol and driving under influence. Campaigns aiming at limiting alcohol use when driving also have a negative impact on beer consumption and lead to an increasing acceptance of low alcohol or zero-alcohol drinks. Traditionally consumers had a strong affinity with beer brewed in the own region, but in the last years there has been an increasing acceptance of pan-European brands. The growing concentration of supermarkets has increased the importance of getting shelf space for the brewers, so negotiations are expected to be harder than before, putting a downward pressure on the margins. Most developed countries have an ageing population, a trend that is not followed by the developing countries. As a consequence the group 20-29 year olds, the major consumer group of beer, is decreasing in developed countries. E. Technological Factors The technology of brewing is well established and is subject to huge economies of scale in brewing and distribution. Larger breweries can operate at lower costs and are thus more competitive. While the average size of a brewery in Europe is much smaller than breweries in Japan and the US, the evolution of the internal market ensures that the trend towards larger breweries continues. The increase of internet activities has forced every company to examine the way it operates and to look at possible opportunities. 4 THE McKINSEY QUARTERLY 1999 NUMBER 1.
Interbrew in Europe: A Strategic Analysis Page 10 4.2 The Industry Environment Analysis: Five Forces model of Porter According to Porter, whether an industry produces a commodity or a service, or whether it is global or domestic in scope, competition depends on five forces. These forces, which go beyond the immediate competitors in the industry, are: • the threat of new entrants; • the existence of substitute products or services; • the bargaining power of suppliers; • the bargaining power of customers or buyers; • existing rivalry within the industry; These five forces determine the ultimate profit potential of an industry as a whole. Within an industry, individual firms who develop particular strengths may be able to gain competitive advantage whatever the profit position of the industry as a whole is. A. Threat of New Entrants Interbrew has strong competitors5 from outside Europe, which could enter this market. As Interbrew is actively expanding out of Europe, these large breweries could retaliate by threatening its home position. For start-ups as well as established breweries entering a new market it is important to study the entry and exit barriers of the brewing market. These barriers define how easy or hard it is to enter a market. Barriers to Entry Because the technology of brewing is well understood and publicly available, small-scale entry into the brewing business is relatively easy. A large brewer could try to enter foreign markets by importing beer from its home-market. Both of them experience large cost disadvantages because of the economies of scale incumbent brewers experience. 5 The competitors are analysed in detail in a following chapter.
Interbrew in Europe: A Strategic Analysis Page 11 Investing in a new efficient scale brewery to reduce these disadvantages is very costly and involves large sunk costs, which can’t be recovered when leaving the business. Sunk costs tend to represent a barrier to entry since, in the presence of sunk costs, a potential entrant must plan on the basis that exit is costly and must take into account the response to entry of existing suppliers. Marketing Small breweries, which are very numerous, have a small marketing scale where the mouth-to- mouth effects are still very important. The large breweries have it easier to make large advertising and promotion expenditures, which tend to rise and become even more important over the last years. Building a good image is very important to achieve market share and to differentiate the products. Access to retailers Vertical integration between brewers and retailer is possible through contractual agreements, which could limit competition. Often the equipment used in pubs is owned by some brewers. Large supermarkets will play an increasing role in the future for distribution. B. Threat of Substitute Products Substitutes can take different forms i.e. product substitution, substitution of the need, generic substitution and doing without. A product to which is often referred as threatening beer is wine. Some markets have seen a switch from beer to wine consumption. As a result of anti-alcohol campaigns and drive- alcohol-free campaigns soft drinks could become a substitute. Further FAB’s6 are also becoming more and more popular and could take in the place of beer, especially attractive 6These are a mixture of alcohol or branded spirits and carbonated or non-carbonated drinks, like Bacardi Breezer, Smirnoff Ice, …
Interbrew in Europe: A Strategic Analysis Page 12 for the female population. Finally, a change in leisure activities, like going to the cinema instead of going to pubs, could influence the beer consumption negatively. C. Bargaining Power of Suppliers The basic ingredients of beer are water, malt, hops, and yeast. These ingredients are supplied by many farmers and hop-processing companies. As a result they have little power over the market. Another need of breweries is packaging the products, like casks and glass bottles. Breweries can vertically integrate this production fairly easy and switching costs to other suppliers are relatively low, so the market power of those suppliers is limited. D. Bargaining Power of Buyers Here we have to make the distinction between on-trade consumption, like in pubs and restaurants, and off-trade selling for home consumption. The latter is getting more important as more beer is sold for off-trade consumption. Together with the increased concentration of the retailers, especially supermarkets, this distribution channel is getting more difficult to manage with a downward pressure on the margins. Another way of selling beer is through the on-trade channel where beer is consumed on the premises. Contractually tied and brewery-owned public pubs were one way to increase the power in these channels. Changes in competition policy however try to reduce these limiting contracts. E. Intensity of Rivalry among Competitors Opening up the internal market in Europe caused many cross-border M&A and joint- ventures in the brewing sector. Combine this with a stable or even declining market in Western Europe, overcapacity in some countries and the huge importance of branding to influence consumers, it is obvious that the level of competition is high. A big shake-out and fight for emerging markets in the Eastern part can be expected in the next years.
Interbrew in Europe: A Strategic Analysis Page 13 5 Internal Environment 5.1 Introduction The internal environment concentrates on what a firm can do by using its unique resources, capabilities and core competencies to achieve a competitive advantage. Those resources, which are the inputs into a firm’s production process, can be divided into tangible and intangible resources. Tangible resources are assets that can be seen and quantified and include financial, organizational, physical and technological resources. The Intangible are rooted deeply in the history of the firm and have accumulated over time. They include human resources, innovation and reputation and are considered often to be of more value to the company than the tangible resources. 5.2 Brand Portfolio Table 1: Brand Portfolio of the leading brewers7 International Brands Regional Brands Brand Policy 1. Anheuser- To develop Budweiser as a Killarneys Red Lager, Around 30 brands, mostly for the Busch leading global brand. Michelob HefeWeizen, Red American market. Division between Wolf, Michelob Black & Variety of drinks. Budweiser, Michelob and Tan,… Bush families. 2. Interbrew The global brand is Stella Jupiler, Labatt Blue,… The “For every individual his own Artois and Beck, the total number of brands is brand”. The first aim is to have international specialties are over 50. strong, healthy, important local Hoegaarden, Leffe, Bass brands as the core of the business. ale and Belle-Vue. Only beer products. 3. Heineken Heineken as premium Cruzcampo,"33" Combining strong local positions brand and Amstel for Export,Moretti, Zywiec and and brands with the marketing and mainstream and Murphys. Tiger and various minority sales of the international premium participations. brand Heineken is their key competence in the beer industry. Only beer products. 4. Carlsberg Global premium brand is Tuborg; Baltika in Russia, Carlsberg has a solid portfolio of Carlsberg. Okocim in Poland, Pripps in global, regional and local brands Sweden, Ringnes in Norway, which enables it to provide Tetleys in the UK, Super individuals around the world with Bock in Portugal, the beer that is right for them. The Feldschlösschen in beer portfolio is intended to appeal Switzerland and Beer Chang to a broad diversity of tastes, in Thailand. personalities and lifestyles. Also active in the soft-drink market. 7 Table is based on the websites from the different companies and compiled by the authors.
Interbrew in Europe: A Strategic Analysis Page 14 5. SAB No truly global premium. Own a lot of brands in SAB has a portfolio of strong Eastern Europe(Pilsner brands, including Castle, the leading Urquell), Africa and Asia. Eg. beer brand in Africa, as well as Castle, Lion,… leading beer brands in the majority of the countries in which it has brewing operations. Also soft drinks. According to Heineken, their success is based on strong beer brands. Heineken, the companys flagship brand, occupies a leading position internationally in the premium segment. Amstel, which is positioned in the mainstream segment, is the companys second international beer brand8. The Brands portfolio is one of Interbrew’s most important assets to achieve a competitive advantage and a key part in the strategy. The domestic brands are at the heart of the portfolio in each country and are promoted in each market. The global brand is Stella Artois, the international specialties are Hoegaarden, Leffe, Bass ale and Belle-Vue, and than follow a whole list of local brands such as Jupiler, Labatt Blue, etc. The total number of brands is 59 and the intention is to keep on investing heavily in maintaining and enhancing the brands. 5.3 Economies of scale Larger markets mean a bigger production. This can lead to favourable economies of scale. Most companies in the beer-industry are still far from their most efficient size. Through growth, they can also apply their knowledge more effectively and spread their R&D costs. But physical scale in brewing is no longer the only basis for sustainable competitive advantage. As even relatively smaller facilities can achieve economies of scale if they produce more than 500,000 hectolitres a year. Brewers producing 1 million hectolitres of beer annually could achieve sufficient economies of scale to compete cost-effectively with larger companies. 8 www.heikenencorp.com
Interbrew in Europe: A Strategic Analysis Page 15 6 Competition Table 2: The Worlds Top 6 Breweries in 20019 Beer Net Volume Turnover EBITDA EBITDA income Equity EPS Name Country (mill. hl) (mill. €) (mill. €) margin (mill. €) (mill. €) (€) ROE 1 Anheuser- USA 145 17.086 4.059 24% 1.944 4.634 2,2 41,9% Busch 2 Interbrew Belgium 90 7.303 1.533 21% 537 4.818 1,44 11,4% 3 Heineken Nether- 81 9.163 1.125 12% 767 2.758 1,82 27,8% lands 4 Carlsberg Denmark 68 6.321 451 7% 202 1.684 3,1 12% 5 SAB S-Africa 62 4.774 854 18% 379 2.100 0,51 18% 6 Ambev Brazil 59 3.165 965 30% 380 1.631 9,9 23,3% The volume figures are an impressive indication of the fact that the international beer giants with their output of around 500 million hectolitres account for almost one-third of the worlds beer production which is around 1.500 million hectolitres. 6.1 Anheuser-Busch (USA) Although this American brewery group is undisputable the biggest producer of beer in the world, it has only a limited international exposure and is concentrated mainly in the NAFTA-region10. Its huge volume of 145 million hectolitres is mainly sold in the United States (93%), where it has around 50% market share. The partnership with the biggest player in Mexico, Grupo Modelo (55% market share in Mexico) with its Corona Extra brand, allows the group to make use of the distribution network already present. Excellent marketing campaigns have given the brand Budweiser the number one spot of worldwide volume. The group now wants to exploit this by expanding the brand globally. The group also receives revenues through the packaging and entertainment operations, mainly theme parks, which enhances the corporate image and explains the high turnover. 9 The figures come from the annual reports of the different companies and compiled by the authors. The sales volumes indicate sales in beer only. Some of the other numbers include operations different from beer operations. 10 Mainly USA, Mexico and Canada
Interbrew in Europe: A Strategic Analysis Page 16 The strategy of the group in the future is set to make significant marketing investments to build the Budweiser brand recognition globally and increase the profitability of the domestic operations. The company has a very large home-market, which allowed it to reach the number one position in sales volume. Having missed the first train of consolidation in the beer sector due to conservative management and its current focus on South-America (Chile, Brazil…), the group is at present not very strong on the European market, mainly limited to the UK and Ireland market. But its huge size and the possession of a worldwide brand Budweiser could make this company a threat in the future. 6.2 Heineken (The Netherlands) Heineken is the biggest competitor for Interbrew in the European Market. It is of a comparable size and very active on the international markets, having a presence in more than 170 countries. Around 67% of its sales volume is in Europe. Its Net Profits are higher than Interbrew’s. Here, EBITDA is a better figure to assess the strength, excluding depreciation and amortizations which clearly differ between them. Heineken operates with a substantially lower margin. The group has very strong international brands, Heineken for the premium and Amstel for the mainstream segment. Although historically they were more inclined to build out their presence with worldwide brands, they are now recognizing the portfolio approach and reacting accordingly, for example Cruzcampo in Spain. Its strong cash flow base form mature and stable-currency countries are partly invested in emerging markets with relatively high growth rates.
Interbrew in Europe: A Strategic Analysis Page 17 The strategy of Heineken is very strongly focused around the marketing of their products, which leads to a virtuous circle. High marketing expenses leads to higher brand awareness which leads to higher sales and margins on the higher-prices premium brands, thus enabling the high marketing expenses… Based in the Netherlands close to the home-market of Interbrew, Heineken is expected to be a significant player in the European beer market and should be watched carefully. 6.3 Carlsberg (Denmark) Operating from one of the smaller countries Denmark, the Carlsberg group is very dependent on its exports. The group has a strong presence in the Nordic regions, but lacks large market shares in the rest of Europe, which renders the brewer vulnerable. Aside from the beer market, Carlsberg is also active in the rather unattractive and highly competitive soft drink business, which distracts management from the beer sector. This puts a strong pressure on the EBITDA (margin 7%) as well as the Net Profits (ROE 12%) of the whole group in comparison with their peers. On the positive side the group has a very strong well-known brand, Carlsberg, achieved through heavy sports sponsoring. It took the opportunity to invest in the Orkla brewing division in 2000, which is active in Scandinavia, the Baltic States and Russia. Despite having a poor track record and being a non pure player, Carlsberg did very well in 2001 and will be a player in Europe to take into consideration, although less well positioned than Heineken.
Interbrew in Europe: A Strategic Analysis Page 18 6.4 South African Breweries – SAB (South Africa) South African Breweries is the national brewer of South Africa11, which is increasingly looking to expand its markets. A recent and very aggressive expansion policy is set toward the Eastern Europe countries12. This makes it a relatively new player on the European market and could threaten the European competitors in their expansion drift. With approximately 50% of sales in the home country, SAB generates a strong cash flow, which is then used to finance the acquisitions. Despite being based in South Africa, SAB has shown strong financial figures and is motivated by major expansion ambitions of its management. SAB general strategy can be defined as ‘act local, think global’. But there some weak points in their strategy. First of all the absence of a truly global premium brand, although they have the potential to position the Czech Pilsner Urquell brand as their global beer in the future. Further, SAB only has strong positions in emerging countries and it is also exposed to the unstable South African currency and economy, which could provide problems in the future13. And finally the disease aids is destroying the demographic dynamics of the country14 which consequently results in less new beer consumers. Its major involvement in soft drinks, hotels and gaming shows that SAB is not a pure beer player. 11 The brewery has almost a monopoly position in South Africa and 40% of its profit comes from the home market. 12 South African Breweries owns 85 breweries in 23 countries. De Standaard, 30/11/02, http://www.destandaard.be. 13 The South African Rand looses very fast against the U.S. Dollar and Euro. The solid profits generated in South Africa are affected by the conversion from Rand into Sterling Pound. The dive of the Rand affected the company’s results with a decline of 4.9%. The company chose the London Stock Exchange as its home basis. 14 The expected annual population growth till 2005 was recently adjusted from 1.9% to 0.6%.
Interbrew in Europe: A Strategic Analysis Page 19 The rapid expansion of SAB in the eastern part of Europe15 and its solid 2001 figures makes it a competitor to be reckoned with in the future. A very recent evolution16, first reported by The Wall Street Journal Europe on 3rd of April, 2002, and confirmed by both companies, is that SAB and Miller17 have exclusive merger talks. This deal, which is estimated to cost 5 million dollars, will rocket SAB to the number two position of worldwide brewers. This will improve SAB’s position by extending its reach to the mature US market. How this deal will turn out finally and the results it will have on competition, remains to be seen. 6.5 AmBev (Brazil) AmBev is the largest brewer in the Latin American market. Based in Brazil, the export of beer accounts for only 5% of its total sales. The Latin American continent can be seen as one of the emerging markets and is thus extremely lucrative. The merger between Brahma and Antarctica, which created the new company AmBev with a 70% market share, has considerably limited competition in the fourth largest beer market in the world. AmBev will likely consolidate the Latin American market and become an aggressive international player. Its aggressive pricing strategy outside Brazil, which leads to a poor profitability, is likely to continue on the short-term. In the near future AmBev will get strong competition from Anheuser-Busch, which has also plans to expand in these markets. In the short term this company will not play a large role in the European market. However, depending on the results in the next five years, this can change accordingly. 15 Last year South African Breweries (SAB) entered Rumania, Uganda and India. Also in China 3 new breweries were opened beside the 11 breweries SAB owned their already. It is expected that China will become the largest beer market in the near future, even before the US. In Africa SAB made an alliance with Pierre Castel. 16 Recent stories can be found in the Wall Street Journal Europe and www.standaard.be (3-4-5 april 2002) 17 Miller Breweries belongs to the Philip Morris Group and is the number two brewer in the USA.
Interbrew in Europe: A Strategic Analysis Page 20 7 Key Success Factors in the Brewing Business After a solid competitor analysis in the brewing business, some key success factors can be identified: • Strong position in the domestic market: A high market share results in distribution power and scale advantages. A strong brand favours a pull-marketing strategy. Moreover a product differentiation strategy allows the company to capture more profits from the market. • An optimal scale: According to McKinsey, the optimal scale per plant lies between 1 and 5 million hectolitres. • Presence in traditional and growth markets: profits from stable mature markets can thus be invested in emerging markets. • Presence in the premium beer class. • Financial strength to be able to fund the strategy. Interbrew clearly incorporates many of these factors. It has a large market share in Belgium, its domestic market. Stella-Artois is a strong brand and is marketed globally as a premium beer. Interbrew’s sound financial structure and its recent IPO, offers the necessary funds to pursue this acquisition strategy.
Interbrew in Europe: A Strategic Analysis Page 21 8 The Beer-Industry and Its Globalisation The consumer goods industry is a slow growing but very constant and predictable industry. Globalisation, investments in technology and better financial management are taking their hold on this industry. Globalisation boosted M&A activity, which is set to continue. As a consequence, we see the industry coming out of the doldrums. Nevertheless, the beer industry seems to lag behind in this process. Beer is indeed mostly a local product due to its specific characteristics as difficulties with transporting and the short shelf life. In the last decade this trend has been changing although even now, consumers in most countries continue to buy mostly locally brewed beers. In Europe, many companies and especially breweries have been producing below their minimum efficient point for long periods. Many small companies were operating in a domestic market and were not heavily interfering with companies in the same industry due to all kinds of tariff- and non-tariff barriers. This is especially the case in Europe, where the internal market is only a recent phenomenon. In 1986, a McKinsey report18 stated that European traditional industries were much less concentrated than in the US or in Japan. Looking at the three leading beer breweries, they represented only a total market share of 12% in Europe, whereas this figure was 72% in the US and 91% in Japan. This is also made clear when we see that the average production capacity in The Netherlands was about 900,000 hl, whereas in the US this was 2,340,000 hl and in Japan 1,420,000 hl. This indicates that breweries in Europe had certainly not yet reached their critical size. The introduction of the internal market with the removal of the barriers made an internationalisation movement possible. This seems however to be a rather slow process. 18 Handout Course Internal Market at Solvay Business School given by F. ILZKOVITZ and P. BUIGUES.
Interbrew in Europe: A Strategic Analysis Page 22 The beer industry today therefore still consists of a collection of tiny players. Even if some of them seem to be quite big (like Anheuser-Bush or Interbrew), the top 4 have a consolidated market share of only 20%, while in the soft-drink industry this is almost 80%19. Large price differences between countries are a characteristic of shattered marketplaces. On the contrary, national markets are often oligopolies where the top 3 often share more than 80% of the market20. They mostly own the wholesale distribution network, which makes it difficult for foreign brewers to enter the market. This difficulty can be overcome in two ways. The first is to license the production of your beer to the local brewer, which is a strategy for example adopted by Heineken in South Africa. The second is to acquire the leading local brewery and focus on the local brand, while trying to sell your international brand through the same distribution channel. This strategy has been adopted by Interbrew. According to a McKinsey report of 199921, 4 key elements show that the beer industry is gradually globalising. First, consumers and corporations have more access to each other. This is undoubtedly so when we realise that many brands of beer are widely available. Interbrew for example sells in 110 different countries and Heineken even in 170. This thanks to partnerships and acquisitions, but also to the lowering of tariff and non-tariff barriers. Second, consumer choice is converging across countries. Although it is not likely that this will result in one global beer company22 (like coca-cola as the one global soft-drink), consumers are increasingly asking the same taste, the same kind of packaging… Third, specialisation is beginning to take hold. In focusing on a single part of the value chain, brewers can achieve a sustainable competitive advantage. The rest of the value chain is outsourced to low-cost 19 See Appendix 6: Global consolidation in consumer goods (1996) 20 See Appendix 1: Overview of the oligopolies 21 The McKinsey Quarterly 1999, nr.1 22 A contrary view suggests that there could be in the near future a merger between two companies in the top 5.
Interbrew in Europe: A Strategic Analysis Page 23 suppliers. Finally, the intangible scale is becoming more and more valuable. Physical scale is not enough to achieve a competitive advantage. Nowadays, intangible assets such as brands and market knowledge are at least as important to be competitive. As is clear today, the next decade will be a transitional period for the beer industry, where the different players will be able to choose among three strategies. The first strategy is to expand geographically based on the experience achieved in the home country, thereby applying best practices in each newly penetrated country or market. The second strategy is specialisation. Specialisation is a key feature of global markets, as it is the result of high competition. In highly competitive markets, one can only be successful in specific areas where he has a competitive advantage. The last possible strategy is to make yourself attractive to be bought by a major player. In ten years, the beer industry will most probably consist of a few giant brewers, serving large parts of the world-market. The likely winners are the ones that have a high market capitalisation (less vulnerable for takeover), a well-considered strategy and the ability to develop a global brand (Heineken-Interbrew) or many local brands (Interbrew).
Interbrew in Europe: A Strategic Analysis Page 24 9 Volume Growth Beer consumption growth is unequal world wide and has big differences between regions: high growth rates in emerging markets, a low growth in North-America due to a positive demographics evolution and a declining trend of beer consumption in Western Europe. On a more technical level, correlations between beer consumption have been found with: • GDP • The evolution of the 18-30 year old segment of the population • The climate and regulatory issues In general, a higher GPD per capita lead to higher beer consumption per capita especially in poorer countries. Customers between 18 and 30 years, consume proportionally more beer than other age groups. This explains the growth difference between Western Europe and the US: while this segment is growing in the US, it is shrinking in Western Europe. A correlation between climate and beer consumption is less obvious, but studies have shown that people are more inclined to drink beer since it quenches thirst better than spirits or wine and because of the relative low alcohol content of beer. Campaigns aiming at limiting alcohol use when driving also have a negative impact on beer consumption. This paragraph will discuss the market for beer consumption, which can be found in the attachments23. The table distinguishes the Western-European and the Eastern European markets. The greatest potential for growth lies clearly in the latter, with an expected volume growth of 42%, mainly due to growing sales in Russia. Western-Europe on the other hand is a stagnating market, with expected volume drops in some countries. Substantial growth is 23 See for this discussion the following 4 appendices: “Volume Sales of Beer in Europe (1997-2006)”, “Distribution of the Volume over time in Europe”, “Double-Digit growth rates in Europe (2001-2006)” and “Competition in Europe (2001)”.
Interbrew in Europe: A Strategic Analysis Page 25 expected in the Mediterranean countries, but will be almost totally offset by dropping sales in the current established markets. The largest European markets are Germany, Russia and Poland. The prospects until 2006 predict a major growth for the Russian beer market, which will by then become larger than Germany, accounting for 23% of the total European market. Ukraine, which doesn’t represent a serious part of the total European market by now, is expected to capture 5% of this market by 2006. To sum up this research, the most interesting areas are the Mediterranean and Eastern Europe. Brewers also know these trends and we can observe a lot of acquisitions and investments already in those markets. Russia as the largest market with the highest growth rate attracts almost every brewer, so competition is going to be fierce there in the near future.
Interbrew in Europe: A Strategic Analysis Page 26 10 Interbrew 10.1 Company History Interbrew, a Belgian success story and currently the number 2 world player is one of the oldest beer companies in the world. Interbrew can trace its origins back to 1366 to a brewery called Den Hoorn, located in Leuven, Belgium. The Den Hoorn brewery changed its name into Artois when it was bought by its master brewer Sebastiaan Artois in 1717.24 Artois prospered over the next two centuries, and became the major brewer of the Napoleonic Empire. The brewery really laid the basis for its modern success in 1926, when an exceptionally clear golden beer was brewed for Christmas. Stella Artois was born. The next stage was one of expansion, first in Belgium and then abroad. Artois acquired a major interest in Leffe in 1954, in the Dommelsch Brewery in the Netherlands in 1968, and in Brasserie du Nord in France in 1970. Meanwhile Jean-Theodore Piedboeuf started brewing in 1853 and used the cellar of an old castle in Jupille to mature his beer. Jupiler, now Belgium’s favourite beer, came on the scene in 1966. Piedboeuf had built up a strong position by 1987, when the merger between Artois and Piedboeuf took place, creating Interbrew.25 The choice of the Interbrew name in 1987 was truly fit. The company’s whole purpose is to brew beer on an international scale. The name contains the two most important characteristics of the company.26 24 http://www.beerworldmonopoly.com/english/groups/interbrew.htm. 25 http://www.labatt.com/comp/our_int3.html. 26 http://www.labatt.com/comp/our_int3.html.
Interbrew in Europe: A Strategic Analysis Page 27 Interbrew soon acquired other Belgian speciality brewers, including Hoegaarden in 1989 and Belle-Vue in 1990. In 1991, Interbrew entered a phase of rapid expansion, and have since then completed 30 acquisitions and strategic joint ventures, the largest of which were Labatt (Canada), Oriental Breweries (South-Korea), SUN Interbrew (Russia), Bass Brewers, Whitbread Beer Company (United Kingdom) and Diebels and Beck & Co (Germany).27 Today Interbrew counts world wide around 34.000 employees. 10.2 General Strategy The 5 key components of Interbrew’s strategy: (1) a strong focus on marketing efforts of the leading local brands, (2) growing Stella Artois, the international flagship brand, (3) acquiring leading brewers, (4) implementing best practices and (5) investment in innovation28. The Financial Analysis of the 2001 results stated that ‘The World’s Local Brewer’ Vision was realised through parallel execution of four strategic themes, namely building and leveraging local platforms to drive profitable growth29, a broad brand portfolio allowing access to all segments30, superior risk return profile with a balance of mature and emerging markets31, and market consolidation in order to secure position and to create value32. 10.3 Brand Portfolio As was mentioned before, Interbrew acquired an impressive brand portfolio over the last years. This is driven by the specifics of the industry. As beer is a business of local brands, 27 http://www.interbrew.com/index2b.html. 28 http://www.interbrew.com/index2b.html. 29 Local brands and access to economic scale in distribution are key value drivers in most geographical markets. 30 A broad portfolio of brands can be tailored to local needs, which enables value capture in all segments of the beer market. 31 Stability of mature market cash-flows allows flexibility for investment in higher-risk but higher growth areas. 32 Consolidation is a major driver of value creation through scale economies and market leadership.
Interbrew in Europe: A Strategic Analysis Page 28 brewers need to be big in local brands and culturally adapted at being local. This is also the basis of Interbrew’s strategy33. “Being the World’s local brewer” means for Interbrew a double strategy of local brands and international brands. As Interbrew stated: “We consider our brand portfolio to be our key asset. Brand image is a critical factor in a consumers choice of beer. Brand promotion and advertising are essential tools to build brand image, market share and turnover. We strive to grow and maintain our market share by positioning and promoting our brands clearly and consistently as core, premium or speciality brands across all their markets, although internationally we may position a brand that is a core brand in its home market as premium or speciality“. The total number of brands owned by Interbrew goes up to 59. For an overview of Interbrew’s leading brands in each segment see the appendix. 10.4 Corporate Level Strategy A. Vertical Integration Until recently, most of the pubs were bound by a contract to one brewer.34 The reason for this was twofold. First, this was due to the large consumption of beer in hotels, restaurants and cafés. So, the breweries were very interested in contracting those distribution channels. Second, banks are not eager to grant loans to pub-owners who are starting out, so the owners are pushed into the arms of wholesalers. But although wholesalers are willing to invest, they demand something in return. Café-owners are required to buy all beer and soft drinks exclusively from a specific wholesaler at high fixed prices. Interbrew is pursuing a forceful vertical integration. By keeping the distance between producer and consumer as small as possible, distribution costs are kept to a minimum. Interbrews integration strategy leaves little room for the traditional independent wholesaler. 33 Year report Interbrew 2001 p.12 on http://www.interbrew.com. 34 In Belgium, it concerns 70% of the cafés; Interbrew established exclusivity contracts with 12.000 cafés.
Interbrew in Europe: A Strategic Analysis Page 29 The Leuven beer giant strengthened this strategy by taking over recently an impressive series of wholesalers and integrated them into its distribution network.35 This situation had to change due to a European regulation36. Suppliers with a more than 30 per cent market share are forbidden from imposing exclusive purchasing obligations. Suppliers with a market share between 10 and 30 per cent must respect some restrictions. Companies with less than 10 per cent may contract as many exclusive purchasing obligations as they want.37 The regulation is applicable to all contracts signed since 1 June 2000. For contracts signed earlier, there is a grace period until 31 December 2001. However, Interbrew refused to accept this statute without modifications and has requested an exception to the regulation, because “there is a high demand for starting capital”. Interbrew has already made some concessions to the European Commission. Most of the cafés who are linked to the brewer one way or the other, for example through a loan, can drop the exclusivity. From the 1st of January 2002, Interbrew pubs, such as Leffe cafés, are allowed to offer up to 25% of beer from other breweries. This does not count for the cafés that are property of Interbrew. If you have a café in a building that is property of Interbrew, or of which Interbrew is the tenant, the exclusivity contract has to be respected. It is for those situations, that Interbrew requested an exception.38 No one knows when a decision and which decision can be expected. But the European rules put an increased pressure on the sector of beer wholesalers. If Interbrew is no longer allowed to bind its customers contractually, the brewery will have to give customers serious price reductions to keep them. In addition, Interbrew will aim its 35 http://international.trends.be/english/archief/TI0128/BBEERQQQ.DFU.HTM. 36 Directive 2790/1999/CEE, which came into effect in June 2000. 37 De Standaard, Wouter Masschelein, 21/11/2001, http://www.destandaard.be. 38 De Standaard, Wouter Masschelein, 21/11/2001, http://www.destandaard.be.
Interbrew in Europe: A Strategic Analysis Page 30 arrows to cafés not bound by exclusive purchasing agreements. If a price war breaks out, the small independent beer wholesalers will probably suffer the most.39 10.5 Business-level Strategy The philosophy of Interbrew is to be a low cost producer. This strategy feeds three important requirements. Firstly, it gives them the ability to sustain profit growth, particularly in mature markets. Secondly, it is the lifeblood for the investment in brands and distribution growth needed for the long term. Finally, it allows them to offer a good price to the consumer.40 Interbrew tries to lower cost through his consolidation strategy. In search of scale effects, synergies are developed between all its acquisitions which create efficiencies in production, distribution and marketing. The question is why this consolidation-strategy is a truly cost-saving activity for Interbrew. On the one hand, much time and money is needed to build a new brand in a new country41. It is therefore easier and less costly for a global player as Interbrew to take over a leading local player than building up a brand, reputation and customer base from scratch. In addition, these target companies may have already made the necessary investments in production, distribution and marketing. Interbrew can therefore leverage the existing asset base by rationalizing (closing inefficient breweries to generate a higher profitability over time), renegotiating partnerships with retailers and investing in marketing to support the generally lower-priced existing local brands as well as its own premium brands. On the other 39 http://international.trends.be/english/archief/TI0128/BBEERQQQ.DFU.HTM. 40 Annual report 2000, p. 49, available on http://www.interbrew.com/index2b.html. 41 Building beer brands needs money and time as it may take up to 20 years to reach the top in terms of volume and market share. Company Report Interbrew, Petercam, October 21 2000, p. 14.
Interbrew in Europe: A Strategic Analysis Page 31 hand, by using those local platforms, Interbrew can save in infrastructure costs for its international brands.42 Interbrew uses different methods to improve the scale effects. a) Implement best practices. Interbrew identifies and implements best practices world- wide in production, marketing and distribution to lower their delivered cost, improve product quality and increase sales volumes. “Best practice” was the theme of the first Interbrew World Management Convention for the top 2OO in August 2000. “Best practice” is also a theme in the development of Interbrew’s markets across the world. A benchmark database on brand health is being built, to ensure that Interbrew is doing the right things in each market. Marketing people are now exposed to the School of Fine Brewing, as well as workshops on key aspects of their responsibilities, this to make sure that everybody shares Interbrew’s insights on challenges like “knowing how leading brands should behave”. Networks of marketers are established to define and circulate best practice on brand positioning, portfolio optimization, and consumer understanding. Interbrew captures those insights, packages them and trains them in order to raise the marketing IQ of the company. b) Invest in innovation. Investing in innovation is important to improve Interbrew’s technology and marketing skills in all markets. Their research and development is focused both on new products and on brewing and packaging technologies with a view to increasing turnover, improving quality and reducing delivered cost. 42 Company Report Interbrew, Petercam, October 21 2000, p. 13.
Interbrew in Europe: A Strategic Analysis Page 32 c) Procurement front. Interbrew focuses on procurement to manage their relationships with external suppliers. Interbrew first identifies the total costs along the entire supply chain and then partners with the suppliers to reduce these costs. E.g., breweries in Central Europe focused on more cost effective buying.43 To make its foreign forays efficient and profitable, the company counts on its information technology organization to introduce resources where they are lacking; consolidate and globally manage them where they are too plentiful.44 10.6 Interbrew’s International Strategy In a world where globalisation and international trade is increasing, it seems obvious that breweries and therefore also Interbrew should follow the same trend. Still, one can wonder if there really is a consolidation movement in the brewery-industry, what the real motives behind this globalisation are and how the internationalisation is implemented. First, we’ll discuss some internationalisation motives for Interbrew. Then we will briefly look at the different possibilities of international entry with their respective advantages and disadvantages. And finally an attempt to predict the possible future is undertaken. A. Motives for Internationalisation Market Expansion Even if Belgium is well-known for its beer production and consumption, the domestic market for a company like Interbrew is far too small to be a competitive player in the beer- industry. Furthermore, beer consumption in Belgium and Western-Europe is decreasing. Therefore, Interbrew has to look for emerging markets and try to reach them. 43 http://www.interbrew.com/index2b.html. 44 http://www.labatt.com/comp/our_int.html.
Interbrew in Europe: A Strategic Analysis Page 33 Economies of scale Larger markets mean a bigger production. This can lead to favourable economies of scale. Most companies in the beer-industry are still far from their most efficient size. Through growth, they can also apply their knowledge more effectively and spread their R&D costs. Marketing Brand-names are an important asset for a company. Interbrew has some strong brands, and can take advantage of this by setting up an international structure. It can also apply its marketing strategies globally and so reduce the costs. Risk-avoidance Through internationalisation, Interbrew tries to diversify its supply-and-demand markets and also to reduce the pressure of competing breweries. Global perspective An international company has better insight about market trends all over the world. Accordingly, it can react faster and in a more appropriate way. B. Different Ways of International Entry The different modes of international entry are exporting, licensing, strategic alliances, acquisitions or greenfield ventures. Exporting is quite attractive, as the company only has to invest in its distribution network. It facilitates entry in small markets. However, it misses the advantages of internalisation and location in other countries and also involves high transportation costs. Exporting is a major way of internationalisation for Interbrew, given the fact that production takes place only in 26 countries, while Interbrew sells its products in 110 countries. Licensing facilitates the entry of foreign markets, where the distribution channel is often owned by the major local brewer. However, it has the disadvantage of reduced control on product quality… It is a strategy used for example by Guinness, which produces a flavour concentrate in Ireland, and then exports it to its license partners around the world. Heineken
Interbrew in Europe: A Strategic Analysis Page 35 venture with Oriental brewery, which was complemented in 1999 by a second acquisition46, and recently talks were conducted between Interbrew and the North Korean Minister of Trade Ri Gwan Gun. Also Thailand is already on Interbrew’s map47. In 2000, Interbrew penetrated the UK market with its acquisitions of Bass and Whitbread48 and bought a participation of 12.6% in Damm, a middle Spanish brewer, in order to enter Spain, the 3rd largest West European beer market49. With Diebels50 and Beck&Co Interbrew entered the closed German market. Beck’s produces 5.5 million hectolitres a year, and exports 60% of his beer production to 120 countries51. Interbrew dedicates its resources to their leading brands in each market. This way, the company tries to build its overall market position and to increase its proportion of higher margin brands. At the same time, Interbrew tries to accelerate the growth of the international flagship brand, Stella Artois all over the world by using local marketing expertise and distribution networks. Twenty-one workgroups have to find out country by country which brand, Stella Artois or Beck’s, is best positioned. On this basis one of the two will become the leading brand for that country. Beck’s is also a premium beer and has a strong position in the US and Italy52. This is the most important difference between Interbrew and Heineken. While the first builds strong local platforms, focusing on a portfolio of leading local brands, the latter until now focuses primarily on one single 46 South Korea is for Interbrew since some time, measured in volume, as important as Belgium. De Standaard, 09/03/02 on http://www.destandaard.be. 47 The Thais beer market is larger than the Belgian one. De Standaard, 07/03/02, http://www.destandaard.be. 48 Interbrew paid € 3.5 bn for Whitebread and Bass. 49 De Standaard, 01/03/02 on http://www.destandaard.be. 50 This brewer from Nordhrein-Westfalen produces annually 1.5 million hectolitres and is market leader in Germany for the speciality beer ‘Altbier’. De Standaard, 01/02/02 on http://www.destandaard.be. 51 To integrate Beck’s and Diebels Interbrew has established 21 work groups which focus on the different aspects and specific requirements in the different markets and to look for sources of synergy. 52 De Standaard, 01/02/02, on http://www.destandaard.be.
Interbrew in Europe: A Strategic Analysis Page 36 premium brand. Experience has demonstrated that a portfolio strategy can beat focus on single brand53. To penetrate new markets, Interbrew intends to continue to make acquisitions or form strategic alliances with leading brewers in the world, thus leveraging on the scale effects. D. The Possible Future The beer sector has the particularity to be concentrated at the regional level but still to be fragmented at the world level. Local consolidation has reached its limits with the exception of Germany, China and Russia. In France 2 brewers have 80% of the market, in Australia two, in the US three, in the Netherlands three54. On world level, according to analysts, the beer sector is on the eve of a worldwide consolidation. There are still a lot of M&A opportunities in Europe as the 5 largest brewers not even posses half of the market55. A merger between the 3 largest European brewers (Heineken, Interbrew and Carlsberg) is unlikely as the three companies are still largely family-owned what protects them from a hostile takeover, moreover it would create competition problems. Very recently The Financial Times wrote about a possible offer of Interbrew on South African Breweries. Afterwards, it became clear that the news came from forged documents, although it was true that Interbrew was investigating this opportunity. This would make Interbrew the largest brewer in the world56. However more recent news reported merger 53 Company Report Interbrew, Petercam, October 21 2000, p. 10. 54 B. LAUWERS, ‘Misschien heeft Interbrew wel een vijand nodig.’ Financieel Economische Tijd, 2/01/02. 55 In the United States the 5 largest companies have 90% of the market in their hands. De Standaard, Wim DE PRETER, ‘Het broeit bij de brouwers’, 19-20/01/02. http://www.destandaard.be. 56 W. MASSCHELEIN, ‘Zulu, Ice en het lek’, De Standaard, 30/11/02 on http://www.destandaard.be.
Interbrew in Europe: A Strategic Analysis Page 37 talks between SAB and Miller. According to Mr. G. Rijk, analyst at ING Barings, between now and two years, a merger between 2 large players of the beer sector is 100 percent57. And what about South-America? Especially Heineken has strong interest in that market and it is expected that it could be the future battle field of the world players. Forecasts state that the beer consumption could grow 5 times faster than in Europe. Also Argentina, with its current economic disastrous situation, seems to offer some very good deals58. Another example is Chile’s Cervecerias Unidas in which Anheuser-Bush has already a participation of 20% and Heineken wanting to obtain 15% participation. The ambition of Interbrew? To become number 1 in the next 4 years. As the Chairman of the Board, Baron Paul de Keersmaeker finished his letter to shareholders about the performance in 2000:”the real story is still ahead of us”. 10.7 Financial analysis Interbrew has grown a lot in the past years. Volumes increased from 37m hectolitres in 1996 to 90m hectolitres in 2001. This is due to both organic growth and acquisitions. In 2000, Interbrew acquired Bass Brewers in the UK. Because Bass is a large brewery in itself, this acquisition substantially affects the numbers in the financial statements. To be as transparent as possible, Interbrew provides two different statements: one statement including the Bass activities in the UK, and one excluding these59. Both statements are useful to differentiate between organic growth and external growth through acquisitions. In Interbrew’s opinion, organic growth is achieved through external growth by the implementation of best practices. 57 Interview with G. Rijk, from De Standaard, W. MASSCHELEIN, ‘Analyse, South African Breweries, de gedroomde partner van Interbrew?’, 30/11/2001 on http://www.destandaard.be. 58 The quotation of Quilmes Industrial(Quinsa), quoted on the Luxembourg Stock Exchange, halved the last 6 months and its capitalisation is only half a billion Dollar. The company has already strong ties with Interbrew. 59 This was also a result of the uncertainties around the taking over as a result of protest from the UK competition authority.
Interbrew in Europe: A Strategic Analysis Page 38 In the graphs below, the green line shows values excluding Bass in the UK, while the blue one shows values including Bass in the UK. Volumes 100 90 80 70 Volumes (mio hl) 60 50 40 30 20 10 0 1996 1997 1998 1999 2000 2001 Year This 100% increase in volume (140% with Bass in UK) in only 6 years time was accompanied by a 150 % increase in turnover (220% with Bass in UK). Realising that many of the latest acquisitions have been made in emerging markets where the price per hectolitre is rather low, we can conclude that the value of a hectolitre in other parts of the world has increased. Net turnover 8000 7000 6000 Net Turnover (mio euro) 5000 4000 3000 2000 1000 0 1996 1997 1998 1999 2000 2001 Year EBITDA is the most useful yardstick of underlying performance as it puts aside differences related to depreciation rates, financial structure and tax position. With this figure, Interbrew
Interbrew in Europe: A Strategic Analysis Page 39 can compare its performances with its main competitors, like Heineken, which has virtually no debt and has not carried major acquisitions so far. In the period from 1996 to 2001, EBITDA went up by 125% (190% with Bass in UK). EBITDA 1800 1600 1400 EBITDA (mio euro) 1200 1000 800 600 400 200 0 1996 1997 1998 1999 2000 2001 Year Net profit has been steadily increasing since 1996, as can be seen in the figure below. However, in 2000, there was a net loss of -910 million euro. This is due to the exceptional write-off on the Bass goodwill, amounting to 1,234.7 million euro, as the result of the decision of the UK secretary of State for Trade and Industry regarding the Bass acquisition60. Normally, the goodwill is amortised over 40 years. In 2001, the for Interbrew positive decision in the Bass-case meant a recalculation of this write-off into a surplus of 161 mill. €. When we make abstraction of this exceptional write-off, we obtain the blue and the green line, respectively representing the net profit with the Bass operations in the UK and without them. Net profit has increased with 384% (437% with Bass in the UK). With the increases in volume and turnover in mind, this means that Interbrew has been able to improve its 60 The UK competition authority did not accept the acquisition of Bass by Interbrew as it would give the company a too strong position on the market. Due to the acquisition of Whitebread and Bass Interbrew’s market share became 32% of the UK market. A settlement was agreed upon by which Interbrew could keep Bass, but had to sell a part of Carling to a third party. End December 2001 the American Adolph Coors Company bought Carling for 1.94 Bn €. Interbrew’s market share in the UK is now 16%. See De Standaard, ‘Britse regering geeft groen licht aan regeling Interbrew’, 23/01/02 on http://www.destandaard.be.
Interbrew in Europe: A Strategic Analysis Page 40 returns, resulting in a good top line and an even better bottom line. The results of 2001 published half March were excellent61. Net profit rose with 65% to 537 million € and the turnover rose with 29.1% to 7303 million €. Net Profit 800 600 400 Net Profit (mio euro) 200 0 1996 1997 1998 c 1999 2000 2001 -200 -400 -600 -800 -1000 Year Regarding the many acquisitions done, the return on invested capital is a very important figure for Interbrew. Managers are rewarded with bonuses if they achieve to increase ROIC. Overall ROIC 16 14 12 10 ROIC (%) 8 6 4 2 0 1996 1997 1998 1999 2000 2001 Year The ROIC of 1999 is a bit low, but this is mostly due to the recent acquisitions in Korea and Eastern Europe, where only marginal returns have been achieved in the initial phase. These 61 De Standaard, 13/03/2002, http://www.destandaard.be.
Interbrew in Europe: A Strategic Analysis Page 41 are however expected to increase during the coming years. ROIC is the highest in the countries where Interbrew has been the longest. ROIC (geograph. breakdown) 40 35 30 25 ROIC (%) Americas 20 Emerging Markets Western Europe 15 10 5 0 1996 1997 1998 1999 2000 Year In order to help financing the UK acquisitions and to preserve financial flexibility for further expansion and fully taking part in the consolidation process the company went public in November 2000 and listed on the Euronext Brussels Stock Exchange62 with an introduction price of €3363. It has since then not reached this introduction price anymore64. Table 3: Some Ratios from Interbrews Performance 2001 2000 IAS 2000 1999 1998 1997 1996 Adjusted net profit per share (€) 1.44 1.04 1.21 0.82 0.69 0.51 0.46 Dividend per share (€) 0.29 0.21 0.21 0.18 0.15 0.12 0.10 Payout Ratio 23.0% N/A 27.7% 25.6% 25.2% 30.2% 33.3% Cash interest Coverage 5.4 2.8 2.7 4.1 4.8 5.6 3.4 Debt Equity Ratio 0.55 0.71 0.75 1.34 1.53 1.13 1.38 This table shows clearly that Interbrew has improved its financial position over the last 5 years. Its Debt-Equity ratio has been very high, but has decreased dramatically to a very comfortable position. Moreover Interbrew has a Cash Interest Coverage of 5.4, which means 62 The shares were 4.5 times oversubscribed. 63 http://www.stockexchange.be/ 64 This to date 22/03/2002.
Interbrew in Europe: A Strategic Analysis Page 42 it is in a safe position to accommodate its interest payments. The dividends issued were also increasing year after year, so the shareholders are getting a steady return on their investments. All in all, Interbrew is now operating in a very solid financial position, which is needed to deal with the future challenges and the increasing competition from other brewers. Having already reached the number two spot of global brewers, it is certain that this brewer will have a serious impact on the beer market in the future.
Interbrew in Europe: A Strategic Analysis Page 43 11 Bibliography Books, Magazines and Report Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management: Competitiveness and Globalization, 4th Edition, 2001, South Western College Publishing The Financial Times, http://www.ft.com The Wall Street Journal Europe, http://www.wsje.com De Standaard, http://www.standaard.be The McKinsey Quarterly, 1999 Number 1, pp. 110–121 Company Report of Interbrew, Petercam, October 21 2000, http://www.petercam.be Begian Business News, http://international.trends.be/ Websites Interbrew Corporate Website, http://www.interbrew.com Heineken Corporate Website, http://www.heinekencorp.com Carlsberg Corporate Website, http://www.carlsberg.com/info/ Anheuser-Busch Website, http://www.anheuser-busch.com SAB website, http://www.sab.co.za Beverage World, http://www.beverageworld.com/ Birkner’s Beverage World, http://www.beverage-world.com/ebwjour4.htm Belgian Brewers Organisation, http://www.beerparadise.be UK Competition Commission, http://www.competition-commission.org.uk/reports/interb5014.htm The Brewers of Europe, http://www.cbmc.org/ukpages/index.html The Global Market Information Database, http://www.euromonitor.com Labatt website, http://www.labatt.com/ And numerous other sources…
Interbrew in Europe: A Strategic Analysis Page 44 12 Appendices 12.1 Appendix 1: Overview of the oligopolies65 12.2 Appendix 2: Competition in Europe (2001) Carlsberg Heineken Interbrew Finland 39.5% Greece 85% Belgium 58% Sweden 23.5% Macedonia 75% UK 32% Norway 66% The Netherlands Czech Rep. 13% Lithuania 75% 51% Hungary Russia 25% Poland 37% Russia 36% Poland 7% Spain 24% Ukraine Denmark 71% Bulgaria 20% UK 13% Italy 27% France 37% SAB Hungary Romania 16 % Slovakia 14% Carlsberg Russia Portugal 56.3% Poland 19% Czech Republic 65 The McKinsey Quarterly, 1999 Number 1, pp. 110–121
Interbrew in Europe: A Strategic Analysis Page 45 12.3 Appendix 3: Volume Sales of Beer in Europe (1997 – 2006)66 Change over Change over Change over Change over the period the period the period the period Region Country 1997 1998 1999 2000 2001 2002p 2003p 2004p 2005p 2006p 1997 - 2001 1997 - 2001 2001 - 2006 2001 - 2006 Bulgaria 222,1 258,6 267,4 275,0 287,6 300,9 313,6 326,1 338,9 348,9 29,49% 65,5 21,31% 61,3 Czech Republic 909,2 908,3 888,0 888,8 881,1 888,1 883,0 873,2 865,7 866,7 -3,09% -28,1 -1,63% -14,4 Hungary 462,6 459,2 459,3 480,8 492,6 497,1 503,1 511,3 518,9 523,3 6,49% 30,0 6,23% 30,7 Poland 1.510,8 1.621,9 1.801,1 1.918,8 2.031,5 2.144,6 2.253,3 2.358,5 2.462,1 2.564,7 34,47% 520,7 26,25% 533,2 Romania 589,7 685,2 757,9 844,6 898,5 945,0 1.002,0 1.062,1 1.119,5 1.179,1 52,37% 308,8 31,23% 280,6 Russia 2.183,4 2.474,7 2.960,3 3.681,9 4.287,2 4.772,6 5.290,0 5.808,7 6.351,1 6.920,5 96,35% 2.103,8 61,42% 2.633,3 Eastern Europe Slovakia 274,9 277,9 267,8 275,4 284,7 292,6 302,3 312,0 320,9 328,7 3,56% 9,8 15,45% 44 Ukraine 479,2 511,7 613,6 721,2 871,3 989,2 1.118,2 1.258,6 1.409,7 1.569,6 81,82% 392,1 80,14% 698,3 Austria 563,7 542,7 544,6 537,0 538,5 539,4 540,5 542,1 543,2 544,1 -4,47% -25,2 1,04% 5,6 Belgium 388,6 386,7 402,7 407,8 412,4 415,8 416,6 416,1 414,4 411,6 6,12% 23,8 -0,19% -0,8 Denmark 427,8 399,6 385,5 377,8 373,9 370,5 367,4 364,8 362,9 362,3 -12,60% -53,9 -3,10% -11,6 Finland 292,1 286,1 292,8 291,6 293,8 295,8 294,7 305,9 314,8 322,5 0,58% 1,7 9,77% 28,7 France 1.630,8 1.623,0 1.625,9 1.621,5 1.617,5 1.609,5 1.615,2 1.623,4 1.620,8 1.618,9 -0,82% -13,3 0,09% 1,4 Germany 6.212,9 6.185,4 6.237,8 6.160,4 6.050,8 5.972,9 5.922,2 5.906,3 5.896,3 5.867,2 -2,61% -162,1 -3,03% -183,6 Greece 133,4 136,4 139,6 143,1 146,7 150,5 154,5 158,7 162,9 167,2 9,97% 13,3 13,97% 20,5 Ireland 52,4 52,9 53,3 53,1 52,8 52,6 52,6 52,8 53,1 53,5 0,76% 0,4 1,33% 0,7 Italy 871,4 933,8 938,5 969,2 982,2 1.002,9 1.028,5 1.057,6 1.093,5 1.129,8 12,72% 110,8 15,03% 147,6 Netherlands 833,0 850,3 851,7 837,5 831,5 820,9 813,3 804,9 795,6 787,3 -0,18% -1,5 -5,32% -44,2 Western Europe Norway 179,9 172,5 182,7 187,2 191,4 195,9 201,3 206,0 210,1 213,8 6,39% 11,5 11,70% 22,4 Portugal 240,7 251,9 248,7 247,8 252,5 255,6 260,3 269,3 270,4 271,3 4,90% 11,8 7,45% 18,8 Spain 748,6 794,4 826,8 854,5 880,5 905,6 929,4 951,9 972,8 991,9 17,62% 131,9 12,65% 111,4 Sweden 401,2 389,4 390,0 390,1 390,2 389,3 388,6 389,4 388,6 386,7 -2,74% -11,0 -0,90% -3,5 Switzerland 190,1 191,8 188,8 186,6 187,9 187,0 186,6 186,2 186,6 187,4 -1,16% -2,2 -0,27% -0,5 United Kingdom 1.690,0 1.698,6 1.834,4 1.850,5 1.884,5 1.907,4 1.934,0 1.953,0 1.970,9 1.980,8 11,51% 194,5 5,11% 96,3 Eastern Europe 6632 7198 8015 9087 10035 10830 11666 12511 13387 14302 51,31% 3.402,6 42,52% 4267 Western Europe 14857 14896 15144 15116 15087 15072 15106 15188 15257 15296 1,55% 230,5 1,39% 209,2 Totals Total Europe 21489 22093 23159 24202 25122 25902 26771 27699 28644 29598 16,91% 3.633,1 17,82% 4476,2 66Raw data comes from the Global Market Information Database from Euromonitor.com and processed by the authors. All figures are in million litres unless indicated otherwise. From 2002 on the figures are predictions.
Interbrew in Europe: A Strategic Analysis Page 46 12.4 Appendix 4: Distribution of the Volume over time in Europe67 2001 Czech Republic 4% Spain Other 4% Romania 17% 4% Italy 4% France 7% United Kingdom 8% Germany 25% Poland 9% Russia 18% 2006 Spain Italy 3% 4% Romania Other 4% 20% Ukraine 5% France 5% United Kingdom 7% Russia 23% Poland 9% Germany 20% 67 Data compiled from appendix 3.
Interbrew in Europe: A Strategic Analysis Page 47 12.5 Appendix 5: Double-digit growth rates in Europe (2001 – 2006)68 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Norway Spain Greece Italy Slovakia Bulgaria Poland Romania Russia Ukraine Change 97-01 Change 01-06 12.6 Appendix 6: Global consolidation in consumer goods (1996)69 68 Data compiled from appendix 3. 69 The McKinsey Quarterly, 1999 Number 1, pp. 110–121
Interbrew in Europe: A Strategic Analysis Page 48 12.7 Appendix 7: Overview of Interbrew’s brands portfolio70 International Premium Lager Stella Artois (Belgium) Beck’s (Germany) International Specialities Hoegaarden (White Beer) Leffe (Abbey Beer) Bass (UK Ale) Belle Vue (Fruit flavoured beers) Local Premium Specialities Keith’s (Canada) Kokanee (Canada) Rolling Rock (USA) Hertog Jan (Netherlands) Caffrey’s (UK) Boddingstons (UK) Local Core Lagers Jupiler (Belgium) Labatt Blue (Canada) OB Lager (Korea) Ozujsko (Croatia) Borsodi (Hungary) Kamenitza (Bulgaria) Siberian Crown (Russia) Interbrew has a strong brand portfolio with leading brands in each segment. 70 This table is compiled by the authors based on Interbrew’s website and the Petercam report.