Within the brewing industry all talk in the last couple of years has centred on the merger of ABI and SABMiller, and to be honest, rightly so. This deal has created an industry behemoth and will define the brewery landscape for years to come. It has also shifted all their competitors up one in the size table, with Dutch brewer, Heineken, now sitting in second place. Can they continue to grow and carve out their own path despite these shifting sands?
Heineken is a family controlled business and, maybe as a result, comes with a colourful past. Founded in Amsterdam in 1873, Heineken was the first European beer to be imported into the United States and, by the mid twentieth century, had become one of the powerhouses of continental brewing. The key man in the later half of the century was Freddy Heineken. Before he entered the service of the company in 1941 the family had lost control of the company. However, over time he managed to buy back stock and ultimately ensured the family controlled the company again.
A more famous story about Mr. Heineken is that one morning, in 1983, he was walking out of his office in Amsterdam when, along with his chauffeur, he was bundled into the back of a minivan and kidnapped. After 21 days the police were tipped off concerning Heineken’s whereabouts and he was found in a warehouse in the north of the city. Asked if he was tortured he quipped, “Yes, they made me drink Carlsberg.”
 
The current holding structure of the company is important to understand. The holding company was created in 1952 and its objective was to protect Heineken’s continuity and objectivity, which is code for: it is impossible to take over Heineken without the consent of the family. The primary shareholders are the following:

  • L’Arche Green (primarily the Heineken family): this group owns 51% of the holding company which owns just over 50% of Heineken. This gives L’Arche Green an effective ownership of Heineken NV of only 26%. However, given the cascade nature of the entities, the family have control. Within L’Arche Green the Heineken family hold 88.7% and the Hoyer family hold 11.3%.
  • FEMSA: They have an effective 20% ownership of Heineken NV through a 12.5% direct holding and a 15% holding in Heineken NV. FEMSA became a major shareholder in 2010 when they sold their beer activities to Heineken.


The holding company trades at a discount to Heineken NV due to less liquidity.
The company operates through four main regional segments: Europe, The Americas, Africa and Asia Pacific.
 



Europe

As the above shows, Heineken are largest in Europe. Their top 8 markets account for 75% of their volumes and these markets are: Austria, Poland, Romania, UK, Spain, Italy, France and the Netherlands. They are the number 1 or 2 market player in 19 European countries.
The European market has been tough for many years with the competitive landscape being fierce and retailers providing additional competition. Furthermore, demographics are not in their favour. This leads to an estimated flat beer market for the coming years. However, Heineken expect to be better than this as premium and cider volume CAGRs are around 1% which they hope to take advantage of.
The company are aso reorganising their brewery footprint (multiple closures), trying to improve their efficiencies, and are using improved data quality more to influence their strategic decisions.
 
The Americas
Mexico is their largest market in The Americas region and accounts for 15% of group operating profit (28mhl). They entered the market in 2010 through M&A and have done well since then, growing at high single digits. The key now for them is whether they can grow their premium brands, primarily Sol. At present premium is 5% for them versus 30% in Europe. This, they hope, will provide the next leg of growth. On the flip side, foreign exchange was a big negative for the company in 2016, with the Peso being under pressure pre-Trump and significantly post his election.
Brazil is a beer market that is in decline as the political situation there continues to hamper consumer confidence. This is a significantly more premium market that Mexico and Heineken have a 9-10% market share in the premium segment.
In the US Heineken do not have any breweries and so they import their products from Mexico and the Netherlands, and they distribute via partnerships. The focus in the US is wholly on premium and they have around 5% market share.
 
Africa
Nigeria is the group’s third largest market, making up around 10% of operating profit. It makes up half the profits in the region. Nigeria has been a problem for Heineken, mainly due to the collapse of oil which the country is very reliant on. Purchasing power has been compromised and as a result we have seen the consumer down trading. This has caused a significant fall off in sales. That said Heineken are still in the market with their full portfolio which will allow them to profit from an economic recovery, if and when that happens.
South Africa is an exciting market for Heineken and they have invested a lot there. They currently hold a 10% market share and have a focus on the premium segment. However, profits are still low.
The region as a whole has been tough, mainly thanks to geopolitical problems in each of the regions. However the long-term tailwinds of Africa still stand:

  • Young, growing population;
  • Current low beer consumption and therefore a large available market;
  • Low, growing GDP;
  • Urbanisation.

 
Asia Pacific
Vietnam makes up half the profits in the region and is the number two contributor in the group at around 10%. It is a market that they entered 25 years ago and has been a success story for the group. They now have 26% market share and around 70% market share in the premium category. The success is built around positive consumer confidence and a good diversification of brands.
Indonesia is “meaningful” and they see this as a growth market with a high population and low per capita consumption.
In India they have access to the market through a joint venture with United Breweries. They see positive trends here with the consumer becoming increasingly more affluent. However, they see this as very long term, for the “CEO’s successor’s successor”. Obviously Modi’s cash policy is damaging short term.
 
Valuation
The current return on equity for Heineken is 10.2%. However, we believe a more normalised level going forward is 16%. As a result we get a 2017 valuation of €71.60, compared to the current price of €69.60, so limited upside from here.