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  1. Analysis
April 8, 2003

Strategic Beer Review 2003 – Part Three

In the final instalment of our 2003 strategic beer review, just-drinks, in conjunction with leading analyst, Canadean, looks at Carlsberg and Heineken, two of the world's oldest brewing giants, with two of the world's most recognisable beer brands.

In the final instalment of our 2003 strategic beer review, just-drinks, in conjunction with leading analyst, Canadean, looks at Carlsberg and Heineken, two of the world’s oldest brewing giants, with two of the world’s most recognisable beer brands. 


In an interview earlier this year, Nils Smedegaard Andersen, CEO of the Danish-based brewing group, Carlsberg, said: “Carlsberg Breweries is of course looking at taking over other local breweries. But we feel no pressure to do something bigger like a large merger. Our way is organic growth and growth in the Carlsberg brand.”

Andersen also said size was no longer an objective in itself, a significant departure it would seem from the strategies of its nearest brewing rivals, in a market that continues to consolidate with large deals all around it. “We have no wish to be the No. 1, 2 or 3 brewer in the world,” Andersen said, adding that the company was a medium-sized player and that there was a long way from being the biggest.

In 2002, Carlsberg A/S saw a 15% rise in full-year operating profit. However, the good news was offset by a weak forecast for 2003 – the overall holding company was forecasting a fall of 10% in net profit.

This led one analyst at the time to say: “Carlsberg Group expects net income for 2003 to fall by 10%. With there being little opportunity for Carlsberg to be acquired and/or participate in the consolidation of the global beer market, there is no real value rationale for holding this stock. Our target price and recommendation is under review.”

But the company’s core business, Carlsberg Breweries, is expected to continue performing well in 2003, with a rise in operating profit of 5% to10%. Growth is forecast once more to be good in Western And Eastern Europe. And Carlsberg’s key focus will remain its international brewing operations, with its profitability focus on enlarging its global operations through acquisition and local partnerships.

In its strategic review of the company, drinks analyst, Canadean, says: “It [Carlsberg] enters new markets via a minimal holding in a brewery and increases its stake over time to gain ultimate control. On a local level, it aims to achieve strong niche markets within selected segments, as it has done with a select number of discount products in Denmark, for example. On an operational level, it seeks to operate together with a brewery that ensures ‘best practice’; thus it already excels in production, administration, logistics and marketing. Carlsberg’s strategy is directed towards a growing retail sector and a growing demand for international beer brands.”

The Carlsberg brand remains the centre of the group’s international strategy and the stated objective is to use the brand to “stimulate profitable growth worldwide, based on a strong distribution foundation and a consumer–led brand relationship”.

However, there are concerns that the Carlsberg brand alone is not enough for the company to benefit from the increasing demand for international beers. And Canadean asks whether the brewer will have to develop its other large brand, Tuborg, while of course avoiding conflict within the portfolio.

With a large acquisition or merger unlikely, future growth is also an issue. Eastern Europe has been cited as one of the key growth markets for Carlsberg. But with an increasing number of other beer companies looking to this market for growth, Carlsberg will have to devise a highly targeted campaign to obtain the maximum benefits.

Having already established a good relationship with Scottish & Newcastle (S&N) in Russia via Baltic Beverage Holding (BBH), could Carlsberg extend this co-operation into West Europe? “On the face of it, the deal could be mutually beneficial as Carlsberg would gain from S&N’s business in France, Belgium and Greece whilst the UK group would take advantage of existing links in Scandinavia, Switzerland, Italy and Germany,” says Canadean. “Both companies could use this power to enter into the high growth Spanish market.”

Meanwhile, in Asia the creation of Carlsberg Asia has boosted the company’s presence there. However, to maximise benefits Canadean says the company will need to increase its representation in China and in South Korea, two of the key markets in this important growth region.

Having faced criticism for allowing consolidation to go on without it for too long – a situation epitomised, say analysts, by its failure to win control of Carling in the UK in 2001 – Heineken awoke from its apparent slumber in 2002 to make a number of small but significant acquisitions.

Arguably the most important of these was the acquisition of the Russian brewer, Bravo International, which was finalised in April. In addition, Heineken has sealed deals in Egypt (the £287m takeover of Al Ahram (ABC) Beverages Co.), in Central America (stakes in the brewers, Florida Bebidas and Consorcio Cervecero Centroamericano, acquired for approximately US$229m) and in the Lebanon (a controlling interest in the country’s only brewer, Almaza). Most recently, at the beginning of October, Heineken made a $56m bid for the Panamanian brewer, Cervecerias Baru-Panama. 

If this were not a sufficient statement of intent, Heineken announced at the end of the year that it was setting up a separate mergers and acquisitions division as part of its corporate restructuring. It is a division that has already been busy in the first quarter of 2003, with further M&A activity in Croatia and Latin America.

Heineken had always argued that it was not going to be rushed into making over-priced acquisitions for operations with few synergies. However, at its most recent interim results, it delivered only 2% organic growth and further pressure to make acquisitions mounted, criticism it has to a large extent now diffused.

Amongst the acquisitions, Heineken’s strategy continues to be built around three core areas: efficient cost structures; high, effective advertising spend; and a focus on its premium Heineken brand, supported by strong local brands.

“These strategies have been realised through achieving economies of scale from direct acquisitions, a reduction in the total number of employees (excluding new acquisitions) and the implementation of sound supply chain improvements,” says Canadean in its strategic review of the company.

When it comes to new markets, Heineken’s brand strategy is clear. The brand muscles its way into the local market through the export market and, once significant volumes have been achieved, local production begins. However, this is not the case in the US market, as the ‘import value’ to American consumers is a key benefit.

But as 2003 develops, significant challenges still face the Dutch brewing giant. Though it is undoubtedly one of its strengths, the reliance on the Heineken brand might concern the management. And, as is the case with its European rival Carlsberg, Canadean questions whether the lack of premium brands in its portfolio means Heineken is missing market opportunities. “Should it concentrate more on those brands that are locally acceptable rather than focusing on pushing its key brand onto the market?” Canadean asks.

There are also questions to be answered in some of Heineken’s key markets. In South America, Heineken is in danger of becoming squeezed out as Ambev forms a strategic partnership with Quilmes. In addition, Molson has bought Heineken’s Brazilian partner Kaiser for £536m.

And in the UK market, Heineken recently admitted that it could see its volumes fall by half with a corresponding profit fall of €20m (US$21.4m) this year, as its licensing agreement with Interbrew ends in the country. How it manages the relaunch of the brand in the UK, at the export strength of 5%, will be keenly observed.

Finally, there are real concerns over the announcement that Heineken has reduced its marketing spend as a direct proportion of sales for the first time in five years.

“Generally, it is true that media costs are falling, but surely this decision cannot help brand awareness in a market where the product itself offers little differentiation,” says Canadean.

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