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This paper analyses the UK operations of Heineken NV, which is one of the world's largest brewers, with a strong or market leading position in every market in which it serves, including the UK. In examining the case of Heineken NV within the UK market, this paper discusses the current developments in the industry, as well as those environmental factors that are having the most impact on production and consumption patterns. On this basis, the strategy and policies at Heineken NV are examined, with the discussion centred on whether these have been successful. The subsequent two sections examine the resource-based aspects of Heineken's position, first focusing on the resources that is can bring to bear to achieve its goals, before identifying those aspects within its value chain that provide it with the greatest advantages. Finally, some conclusions are made.
In current developments in the beer industry, what are the most important environment factors that affect the production and consumption of beer in UK?
Whilst a traditional analysis of environmental factors affecting an industry includes a focus on those that are political, economic, social, technological, environmental and legal in nature (Mintzberg et al., 1998), all of these are not of greatest importance when examining the UK beer industry. Rather, current developments in the beer industry that have affected the production and consumption of beer in the UK have been impacted upon most by political and economic factors.
From a political perspective, the smoking ban has had an adverse impact on the number of consumers drinking in pubs, affecting on-trade sales (Mesure, 2007; Guardian, 2008). However, it has been the poor management of the financial system and the economy that has had the greatest impact on the beer industry. Whilst beer consumption tends to be relatively resilient to changes in the economic climate, as has been highlighted by previous economic cycles, such economic difficulties have an impact on the nature of sales. Indeed, the beer industry witnesses an on-trade downturn as consumption shifts to off-trade consumption patterns (Heineken, 2008). Nonetheless, this does not mean that there will be no fluctuation in demand. Currently, both on-trade and off-trade sales are down by over 8% in the UK according to a report by the British Beer and Pub Association (Sky, 2009). Other economic challenges, brought about by direct government decision-making in an unprecedented rise in excise duty, which is effectively a tax increase on sales (Heineken, 2008; Quilter, 2009). Since the Chancellor, Alistair Darling, raised excise duty rates by 17% in the 2008 budget, UK alcohol sales have fallen 11%. Such rises have a very negative impact on the beer industry, despite the fact that research by Oxford Economics actually shows such increases lead to a significant drop in tax revenues (Talking Retail, 2009). Such excise rises are also likely to hit on-trade most, which already suffers during a recession (Walsh, 2009).
How has your chosen company reacted to these developments (current developments in the beer industry)? Have policies and strategies been successfully? What are the essential key factors for your company to be successful?
Heineken NV has put in place a number of significant measures in order to combat the potential challenges that it (as well as other industry players) faces as a result of these political factors and economic difficulties. First, the company has used its strong financial performance to improve its market share and cost position (through economies of scale) by acquiring Scottish & Newcastle, the largest acquisition in Heineken NV's history since Scottish & Newcastle was a big player in the European market (Heineken, 2008; Shipman, 2008). Through this acquisition and its existing activities, Heineken NV aims to realise synergies that it can capitalise upon, not only to continue innovating but also to reduce its costs significantly. This will also involve re-structuring a number of parts of its business. Another critical component of the company's strategy has been to focus on improving its pricing to increase its efficiency and profitability, whilst relying on its core brand, Heineken, which is extremely robust to near-term challenges (Heineken, 2008).
More specifically, Heineken NV has set a number of clear priorities in order to achieve such success. First, it is focusing on cash generation. As such, the targets of 500 of its senior managers are being linked directly to cash generation and cost reduction in order to reduce current debt levels, as well as restore cash conversion rates to levels in excess of 100% by 2011. Second, it aims to make new markets deliver, including acquisitions like Scottish & Newcastle, bringing their value to bear, especially in mature markets like the UK. Third, Heineken aims to reinforce its market positions. The company's strategy is based on being a market leader in every market in which it competes. The aim is therefore to increase the value of its market share, improving the efficiency and effectiveness of the investments that is has made in marketing as a result (Heineken, 2008).
What resource bases can you detect from you chosen company in beer market?
Heineken NV has a very strong resource base, reflected in its financial resources, its market leading positions, and the strength of its brand. In terms f its financial performance, in 2008 the company has a net profit that was 11% of its total sales, some â‚¬209 million, whilst its revenue also grew at a rate of 27% on the previous year, totalling â‚¬14,319m (Heineken, 2008). Not only does this highlight how Heineken NV has a strong financial resource base upon which to draw, but that such a resource base is growing, and perhaps more importantly, its growing organically. Second, Heineken has a strong leadership position that it can exploit, especially when terms of launching new brands into existing markets. This is part of the company's strategy of leading any market that they enter. On this basis, Heineken NV holds a market leadership position in 59 of the 66 markets in which it competes. Finally, the company global portfolio of local and international alcoholic brands provides Heineken NV with strong brand equity, a valuable intangible asset that can act as a powerful resource (Barnet, 2001; MST, 2007, de Swan Arons, 2007; Bold, 2008). At the heart of this is the company's core brand, Heineken, which is described as "the world's most valuable international premium beer brand" (Heineken, 2008, p.16)
It will become evident that the beer market is considered mature or even declining in certain part of the world (such as West Europe). Considering the value chain for a beer company, where does your selected company perform well? In other word, identify value chain activities where you believe you company has especially competencies. You should provide examples.
On the basis of Porter's (1980, 1985) characterisation of the value chain into primary and support activities, Heineken performs particularly well in two areas of its primary activities - operations, and sales and marketing - and two areas of its support activities - firm infrastructure and procurement - which provide it with the requisite competencies to compete strongly in every market that it enters.
In terms of primary activities, Heineken NV can draw on global operations. This helps the company to achieve considerable efficiencies in property, plant and equipment. The result has been like-for-like capital expenditures falling from â‚¬1.1bn in 2007 to â‚¬700m (which includes â‚¬230m carried over) (Heineken, 2008). Sales and marketing competences are another core aspect of Heineken NV's primary activities that provide it will particular value. This is because it owns a large number of premium beer brands, as well as its core, globally renowned premium brand, Heineken. The resources put into sales and marketing enable Heineken to not only achieve a strong brand position, but also help it to launch new brands.
In terms of support activities, Heineken NV manages to maintain a culture of innovation. For example, in 2008 alone, the DraughtKeg and BeerTender systems, and Extra Cold programmes, were introduced (Heineken, 2008). DraughtKeg is a 'go-anywhere', 5-litre draught system, which is now sold into over 100 markets, over 40% more markets than Heineken NV actually competes in (Popular Mechanics, 2007; Eden, 2008; Heineken, 2008). The Extra Cold programme, by comparison, was simply a new way of serving an existing product, rolled out across 62,000 outlets to encourage additional point-of-sale, top line growth (Heineken, 2008). Procurement advantages arise from Heineken NV's huge operations, which enable it to achieve very strong bargaining power of its suppliers (Heineken, 2008; Business Week, 2009). This can help when buffering against rising inbound logistics costs, which are particularly prevalent at the moment due to rising commodity prices and generally poor economic conditions.
Heineken is one of the leading beer brands in the world, as well as being one of the world's leading alcoholic drinks companies. In the premium beer market, it leads almost every market in which it competes. At this time, the beer industry is undergoing a number of challenges, brought about by political and economic challenges in its external environment. The smoking ban in the UK, coupled with significant excise rises, and the worst recessions since the Great Depression have had an impact on on-trade and off-trade consumption. Nonetheless, as Heineken itself highlights, the beer industry has been through such economic cycles before, and the market, despite fluctuations, has been able to weather these effectively. Heineken demonstrates its ability to cope with such economic challenges through clear strategies and policies aimed at continual innovation, whilst closely gearing its business towards achieving a strong cash position. This will help it with near-term profitability, whilst ensuring that the company succeeds over time. In fact, innovations such as the DraughtKeg in 2008 alone have not only added to the long-term survivability of the business, but also significant improved its reach to new customers and markets in the near-term. Much of this is underpinned by its continual investment in its global operations, which helps to improve efficiencies, as well as its scale, which supports a more efficient and advantageous procurement position. Added to this, the company's strong Heineken brand, as well as its brand portfolio, has helped Heineken to maintain strong growth and financial performance, even during difficult economic conditions.